TEST BANK FOR Financial Accounting, 12e William Thomas, Wendy Tietz, Walter Harrison by StudyGuide

Financial Accounting, 12e William Thomas, Wendy Tietz, Walter Harrison (Test Bank All Chapters, 100% Original Verified, A+ Grade) Financial Accounting, 12e (Thomas/Tietz/Harrison) Chapter 1 The Financial Statements Learning Objective 1-1 1) Accounting is an information system that measures business activities. Answer: TRUE Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 2) Bookkeeping is a mechanical part of accounting. Answer: TRUE Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 3) Accounting is often called the language of business. Answer: TRUE Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 4) Accounting produces financial statements, which report information about a business. Answer: TRUE Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 5) The accounting process begins and ends with people making decisions. Answer: TRUE Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

6) Accounting information is used by investors and creditors, but not by regulatory bodies. Answer: FALSE Explanation: It is used by individuals, investors, creditors, nonprofits, and regulatory bodies. Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Industry Sector, Legal/Regulatory AICPA Functional: Measurement, Reporting 7) Since Habitat for Humanity is not concerned about making a profit, the entity does not need to use accounting information. Answer: FALSE Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Industry Sector, Legal/Regulatory AICPA Functional: Measurement, Reporting 8) The business records of a sole proprietorship should include the proprietor's personal finances. Answer: FALSE Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 9) A partnership is a taxpaying entity. Answer: FALSE Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 10) Stockholders have no personal obligation for the corporation's debts. Answer: TRUE Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

11) Accounting: A) measures business activities. B) processes data into reports and communicates the data to decision makers. C) is often called the language of business. D) is all of the above. Answer: D Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 12) A disadvantage of general partnerships is: A) double taxation of distributed profits. B) the partnership's assets are commingled with each partner's personal assets. C) only individuals can be partners. D) each partner may conduct business in the name of the entity and make agreements that legally bind all partners. Answer: D Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 13) Which of the following statements is TRUE for a limited liability company? A) Members have unlimited liability for the debts of the business. B) Members have limited liability for debts only up to the extent of their investment in the LLC. C) Only the limited partners have limited liability for the debts of the business. D) Members are not taxed like members of a partnership. Answer: B Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

14) Which of the following statements is TRUE for a limited liability partnership? A) All partners have limited liability for the debts of the partnership. B) All partners have limited liability for the acts of the other partners. C) The general partner has unlimited liability for the debts of the partnership. D) The limited partners have unlimited liability for the debts of the partnership. Answer: C Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 15) Which of the following statements is TRUE for a proprietorship? A) Legally, a proprietorship is separate from the proprietor. B) For accounting purposes, a proprietorship is separate from the proprietor. C) The business records include the proprietor's personal finances. D) All statements are correct. Answer: B Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 16) Federal income taxes are paid by ________ in a limited liability company. A) the company B) limited partners only C) general partners only D) members Answer: D Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

17) Which of the following statements is TRUE for a limited liability partnership? A) The partnership pays no federal income taxes. B) Only the limited partners pay federal income taxes on their shares of the partnership's profits. C) Only the general partner pays federal income taxes on his or her share of the partnership's profits. D) Only the members pay federal income taxes on their shares of the partnership's profits. Answer: A Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 18) Which statement is TRUE about partnerships? A) A partnership is a taxpaying entity. B) General partnerships have mutual agency and limited liability. C) Individuals, corporations, partnerships, or other types of entities can be partners. D) A written partnership contract must exist. Answer: C Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 19) Which of the following have unlimited liability for a company's debts? A) owners of a corporation B) members of a limited liability company C) limited partners in a limited liability partnership D) general partner in a limited liability partnership Answer: D Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

20) Which of the following entities pay federal income taxes? A) limited liability partnership B) general partnership C) limited liability company D) corporation Answer: D Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 21) The two types of accounting are: A) profit and nonprofit. B) financial and managerial. C) internal and external. D) bookkeeping and decision-oriented. Answer: B Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 22) Decision makers who use accounting information include: A) creditors. B) the Internal Revenue Service. C) the Securities and Exchange Commission. D) all of the above. Answer: D Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

23) Which type of business organization transacts much more business and is larger in terms of assets, income, and number of employees? A) proprietorship B) partnership C) limited-liability company D) corporation Answer: D Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 24) The owner of a ________ is personally liable for all the business's debts. A) proprietorship B) corporation C) limited-liability company D) All of the above are correct. Answer: A Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 25) Which of the following is a TRUE statement about the characteristics of partnerships? A) In a limited liability partnership, all partners have limited liability for the partnership's debts. B) General partners in a general partnership have mutual agency and limited liability for the partnership's debts. C) Income and losses of the partnership "flow through" to the partners. D) The partnership agreement must be in writing. Answer: C Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

26) Owners of an LLC are called: A) partners. B) proprietors. C) members. D) stockholders. Answer: C Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 27) Advantages of a corporation include: A) difficulty in raising large sums of capital. B) double taxation of distributed profits. C) limited liability of the stockholders for the corporation's debts. D) each stockholder can conduct business in the name of the corporation. Answer: C Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 28) Shareholders of a corporation: A) have limited liability for the corporation's debts. B) can only be individuals. C) have a personal obligation for the corporation's debts. D) receive dividends from the corporation without having to pay tax on the distribution. Answer: A Diff: 2 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 29) An important factor to consider when determining how to organize a business is that: A) members of an LLC have unlimited liability and are taxed like members of a partnership. B) for accounting purposes, a proprietorship is a distinct entity, separate from the proprietor. C) partnerships are subject to double taxation. D) a corporation is not legally distinct from its owners. Answer: B Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 8 Copyright © 2019 Pearson Education, Inc.

30) Accounting can be defined as: Answer: Accounting is the information system that measures business activities, processes that information into reports and financial statements, and communicates the results to decision makers. Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 31) Four ways a business can be organized include: Answer: Proprietorship, Partnership, Limited-liability company, and Corporation Diff: 1 LO: 1-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement Learning Objective 1-2 1) Generally accepted accounting principles (GAAP) are the accounting guidelines formulated by the Securities and Exchange Commission. Answer: FALSE Explanation: The Financial Accounting Standards Board (FASB) formulates the standards for U.S. GAAP. Diff: 2 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 2) The SEC establishes International Financial Reporting Standards. Answer: FALSE Explanation: The International Accounting Standards Board (IASB) sets IFRS (International Financial Reporting Standards). Diff: 1 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: International/Global AICPA Functional: Measurement, Reporting

3) The fundamental qualitative characteristics of accounting information are relevance and reliability. Answer: FALSE Explanation: Relevance and faithful representation. Diff: 2 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 4) Another name for the continuity assumption is the going-concern assumption. Answer: TRUE Diff: 1 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 5) The historical cost principle is not used widely in the United States to value assets. Answer: FALSE Diff: 2 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 6) Accounting is moving in the direction of reporting more and more assets and liabilities at their fair values. Answer: TRUE Diff: 1 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 7) Relevance is one of the four enhancing qualitative characteristics. Answer: FALSE Diff: 1 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

8) Which of the following characteristics does NOT apply to verifiability? A) completeness B) reliability C) accuracy D) faithful representation Answer: D Diff: 1 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 9) Enhancing qualitative characteristics of accounting information do NOT include: A) comparability. B) verifiability. C) timeliness. D) materiality. Answer: D Explanation: The forth one is understandability. Diff: 1 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 10) The conceptual foundation of accounting does NOT include: A) accounting objectives. B) fundamental qualitative characteristics. C) enhancing qualitative characteristics. D) decision making. Answer: D Explanation: The fourth one is constraint. Diff: 1 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

11) Information must be sufficiently transparent so that it makes sense to reasonably informed users of the financial statements, such as creditors. This qualitative characteristic of information is called: A) verifiability. B) faithful representative. C) relevant. D) understandability. Answer: D Diff: 1 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 12) The fair value of a plant asset is equal to: A) the amount the business could sell the asset for. B) the amount of cash paid plus the dollar value of noncash consideration given in exchange for the plant asset at acquisition. C) the amount of cash paid plus the loan taken out to finance the purchase of the plant asset. D) the amount a company can receive for the asset when sold in order to go out of business. Answer: A Diff: 1 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 13) In 1990, Johnson Company purchased a building for $170,000. In 2020, a real estate professional says the building has a fair value of $1,000,000. In 2020, a similar building down the street recently sold for $900,000. What value, before consideration of accumulated depreciation, is reported for the building on the balance sheet at December 31, 2020? A) $170,000 B) $585,000 C) $900,000 D) $1,000,000 Answer: A Explanation: The building is recorded at the actual cost on the date of purchase of $170,000. Diff: 1 LO: 1-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

14) Which statement is FALSE? A) International Financial Reporting Standards are used by most countries around the world. B) U.S. Generally Accepted Accounting Principles are used by many countries around the world. C) The most commonly used accounting practices are essentially the same under both U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards. D) For many years, U.S. Generally Accepted Accounting Principles were considered to be the strongest single set of accounting standards in the world. Answer: B Diff: 1 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: International/Global AICPA Functional: Measurement, Reporting 15) In order to compare the financial statements of Toyota Corporation to the financial statements of General Motors, it would be preferable to use: A) U.S. Generally Accepted Accounting Principles for General Motors and International Financial Reporting Standards for Toyota. B) U.S. Generally Accepted Accounting Principles for both companies. C) International Financial Reporting Standards for both companies. D) U.S. Generally Accepted Accounting Principles for Toyota Corporation and International Financial Reporting Standards for General Motors. Answer: C Diff: 1 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: International/Global AICPA Functional: Measurement, Reporting 16) The International Accounting Standards Board is responsible for establishing: A) the code of professional conduct for accountants. B) an international Securities and Exchange Commission. C) U. S. Generally Accepted Accounting Principles. D) International Financial Reporting Standards. Answer: D Diff: 2 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: International/Global AICPA Functional: Measurement, Reporting

17) Which of the following statements is FALSE? A) The application of U.S. GAAP for public companies in the Unites States has been overseen by SEC. B) The advantage of a uniform set of global accounting standards is that financial statements from a U.S. company will be comparable to those of a foreign company. C) In the long run, a uniform set of global accounting standards should significantly reduce the costs of doing business globally. D) IFRS has been adapted in the United States. Answer: D Diff: 2 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: International/Global AICPA Functional: Measurement, Reporting 18) To be useful, accounting information must have the fundamental qualitative characteristics of: A) comparability and relevance. B) relevance and faithful representation. C) materiality and understandability. D) faithful representation and timeliness. Answer: B Diff: 2 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 19) All of the following are true statements about the entity assumption EXCEPT for: A) a sharp boundary is drawn around each entity. B) the transactions of the business cannot be combined with the transactions of the owner. C) business operations cannot be divided into segments. D) the entity is any organization that stands apart as a separate economic unit. Answer: C Diff: 2 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

20) Verifiability means that the accounting information: A) is timely and understandable. B) is understandable. C) must be capable of being checked for accuracy, completeness and reliability. D) is material and relevant. Answer: C Diff: 2 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 21) The accounting assumption that states that the business, rather than its owners, is the reporting unit is the: A) entity assumption. B) going concern assumption. C) stable-monetary-unit assumption. D) historical cost assumption. Answer: A Diff: 2 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 22) The stable-monetary-unit assumption: A) ensures that accounting records and statements are based on the most reliable data available. B) requires all countries to record transactions in U.S. dollars. C) maintains that each organization or section of an organization stands apart from other organizations and individuals. D) enables accountants to ignore the effect of inflation on the accounting records. Answer: D Diff: 2 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

23) Historical cost: A) is used in the U.S. to value all business assets. B) is equal to the amount of cash paid minus the dollar value of all noncash considerations also given in the exchange. C) is a verifiable measure that is relatively free from bias. D) is the amount that the business could sell an asset for. Answer: C Diff: 2 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 24) The principle stating that assets acquired by the business should be recorded at their actual cost on the date of purchase is: A) historical cost. B) objectivity. C) reliability. D) stable-monetary-unit. Answer: A Diff: 1 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 25) The relevant measure of the value of the assets of a company that is going out of business is the: A) liquidating value. B) inflation-adjusted book value. C) historical cost. D) carrying value. Answer: A Diff: 1 LO: 1-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

26) The CEO of Clarkson Company owns a vacation home in Hawaii. Clarkson Company owns a factory in Detroit where it is headquartered. Which of these properties is considered to be asset(s) of the business? A) only the vacation home in Hawaii B) only the factory in Detroit C) both the vacation home in Hawaii and the factory in Detroit D) neither the vacation home in Hawaii nor the factory in Detroit Answer: B Diff: 2 LO: 1-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking, Legal/Regulatory AICPA Functional: Measurement, Reporting 27) A construction company paid $82,000 cash for land used in the business. At the time of purchase, the land had a list price of $90,000. When the balance sheet was prepared, the fair value of the land was $85,000. At what amount should the land be reported on the balance sheet of the company? A) $82,000 B) $85,000 C) $86,000 D) $90,000 Answer: A Explanation: Based on the historical cost principle, the land should be recorded at its cost of $82,000. Diff: 2 LO: 1-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 28) If a company prepares its financial statements three years after the end of its accounting period, it has violated the qualitative characteristic of: A) understandability. B) timeliness. C) verifiability. D) materiality. Answer: B Diff: 2 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

29) Below is a list of qualitative characteristics of accounting. Following the list is a series of descriptive phrases. Required: Match each characteristic with the appropriate phrase. A) faithful representation B) timeliness C) relevance D) comparability E) verifiability F) understandability ________ 1. Information must be sufficiently transparent, so it makes sense to reasonably informed users. ________ 2. Accounting information must be complete, neutral, and accurate. ________ 3. The information must be capable of being checked for accuracy, reliability and completeness. ________ 4. Information must be made available early enough to users to help them make decisions. ________ 5. Accounting information must be prepared in such a way that it can be compared with information from other companies in the same period. ________ 6. Information must be capable of making a difference in a decision. Answer: 1. F, 2. A, 3. E, 4. B, 5. D, 6. C Diff: 3 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

30) Provide an explanation of each of the following: Entity Assumption Historical Cost Principle Continuity Assumption Stable-Monetary-Unit Assumption Answer: Entity Assumption — The entity is any organization or person that stands apart as a separate economic unit. Sharp boundaries are drawn around each entity so as not to confuse its affairs with those of others. Historical Cost Principle — For accounting purposes, assets are recorded at their actual cost. This amount is relevant and faithfully represents a reliable figure for the price the company paid. Continuity Assumption — For accounting purposes, accountants assume that the entity will continue to operate long enough to sell its inventories, convert any receivables to cash, use other existing assets for their intended purposes, and settle its obligations in the normal course of business. Stable-Monetary-Unit Assumption — Accountants assume that the dollar's purchasing power is stable over time. Diff: 3 LO: 1-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting Learning Objective 1-3 1) The word "payable" always signifies a liability. Answer: TRUE Diff: 2 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 2) The accounting equation must always be in balance. Answer: TRUE Diff: 1 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 3) Owners' equity is called stockholders' equity for a corporation. Answer: TRUE Diff: 1 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 19 Copyright © 2019 Pearson Education, Inc.

4) Stockholders' equity is the stockholders' interest in the assets of the corporation. Answer: TRUE Diff: 2 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 5) The accounting equation shows the relationship among assets, liabilities and net income. Answer: FALSE Explanation: It is the relationship among assets, liabilities, and equity. Diff: 2 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 6) Revenues are cash distributions to the stockholders. Answer: FALSE Explanation: Revenues are inflows of resources that increase retained earnings as a result of a company delivering goods or services to a customer. Diff: 2 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 7) Expenses are decreases in retained earnings that result from operations. Answer: TRUE Diff: 2 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 8) The basic component of paid-in capital is common stock. Answer: TRUE Diff: 2 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

9) The calculation of ending retained earnings considers the beginning retained earnings, current period net income or net loss, and stockholders' equity. Answer: FALSE Explanation: The calculation of ending retained earnings considers the beginning retained earnings, current period net income or net loss, and subtracts dividends. Diff: 2 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) The two main components of stockholders' equity are paid-in capital and dividends. Answer: FALSE Explanation: Two main components of stockholders' equity are paid-in capital and retained earnings. Diff: 2 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 11) Long-term debt is a liability that is payable beyond one year from the date of the financial statements. Answer: TRUE Diff: 2 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) David Company has total assets of $500,000 and total liabilities of $180,000. David Company's stockholders' equity must therefore be $680,000. Answer: FALSE Explanation: Stockholders' equity = $500,000 - $180,000 = $320,000 Diff: 2 LO: 1-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

13) The Clarke Company had beginning retained earnings of $20,000 and net income of $5,000. Clarke declared and paid dividends of $1,000. Therefore, the ending retained earnings is $25,000. Answer: FALSE Explanation: Beginning Retained Earnings $20,000 + Net Income $5,000 -Dividends $1,000 = Ending Retained Earnings $24,000 Diff: 2 LO: 1-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 14) All of the following are expenses EXCEPT for: A) Cost of products and services. B) Depreciation Expense. C) Salary Expense. D) Dividends. Answer: D Diff: 2 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 15) Which of the following statements is TRUE? A) Dividends are expenses of a business. B) Dividends reduce retained earnings. C) Dividends increase retained earnings. D) Dividends reduce net income. Answer: B Diff: 2 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 16) The accounting equation can be stated as: A) Assets + Stockholders' Equity = Liabilities. B) Assets -Liabilities = Stockholders' Equity. C) Assets = Liabilities - Stockholders' Equity. D) Assets - Stockholders' Equity + Liabilities = Zero. Answer: B Diff: 2 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 22 Copyright © 2019 Pearson Education, Inc.

17) The accounting equation can be stated as: A) Assets = Liabilities + Paid-in Capital - Common Stock. B) Assets + Liabilities = Stockholders' Equity. C) Assets = Liabilities + Paid-in Capital + Retained Earnings. D) Assets = Liabilities - Paid-in Capital - Dividends. Answer: C Diff: 2 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 18) Liabilities are: A) a form of paid-in capital. B) future economic benefits to which a company is entitled. C) debts payable to outsiders called creditors. D) the outflow of resources that decrease common stock. Answer: C Diff: 1 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 19) Examples of liabilities include: A) accounts payable and dividends. B) accounts payable and common stock. C) investments and note payable. D) accounts payable and long-term debt. Answer: D Diff: 2 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

20) What is an account payable? A) It is a liability for goods or services purchased on credit and supported by a written agreement. B) It is a liability for goods or services purchased on credit and supported by the credit standing of the purchaser. C) It is an amount of money to be received from a supplier. D) It is an asset arising from the sale of goods or services on credit. Answer: B Diff: 2 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 21) The assets of a company: A) must equal the liabilities of the company. B) include property, plant, and equipment and accounts payable. C) represent economic resources that are expected to produce a future benefit. D) include short-term investments and notes payable. Answer: C Diff: 1 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 22) The owners' equity of a business is equal to: A) revenues minus expenses. B) assets minus liabilities. C) assets plus liabilities. D) paid-in capital plus assets. Answer: B Diff: 2 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

23) The major types of transactions that affect retained earnings are: A) paid-in capital and common stock. B) assets and liabilities. C) revenues, expenses, and dividends. D) revenues and liabilities. Answer: C Diff: 2 LO: 1-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 24) Which of the following increases retained earnings? A) net loss B) net income C) expenses D) dividends Answer: B Diff: 2 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 25) Receivables are classified as: A) increases in earnings. B) decreases in earnings. C) liabilities. D) assets. Answer: D Diff: 2 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 26) Net income: A) is calculated by subtracting total expenses and total dividends from total revenues. B) occurs when total revenues are less than total expenses. C) is often referred to as the "bottom line" on an income statement. D) decreases total stockholders' equity. Answer: C Diff: 2 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 25 Copyright © 2019 Pearson Education, Inc.

27) Revenues are: A) decreases in assets resulting from delivering goods or services to customers. B) increases in liabilities resulting from delivering goods or services to customers. C) increases in retained earnings resulting from delivering goods or services to customers. D) decreases in retained earnings resulting from delivering goods or services to customers. Answer: C Diff: 2 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 28) Expenses of a business include: A) sales and cash equivalents. B) common stock and rent expense. C) cost of products and services sold and salaries expense. D) retained earnings and utilities expense. Answer: C Diff: 2 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 29) Net income is computed as: A) revenues - expenses - dividends. B) revenues + expenses. C) revenues - expenses. D) revenues - expenses + dividends. Answer: C Diff: 2 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

30) When total expenses exceed total revenues, the result is: A) a net profit. B) a net loss. C) a dividend. D) an increase to retained earnings. Answer: B Diff: 2 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 31) Owners' equity consists of two accounts, Amy Jones, Capital, and Mindy Lenz, Capital. This indicates the entity is a: A) proprietorship. B) corporation. C) not-for-profit. D) partnership. Answer: D Diff: 2 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 32) Which of the following must be added to beginning Retained Earnings to compute ending Retained Earnings? A) net income B) expenses C) dividends D) all of the above Answer: A Diff: 2 LO: 1-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

33) At the end of the current accounting period, account balances were as follows: Cash, $29,000; Accounts Receivable, $44,000; Common Stock, $18,000; Retained Earnings, $14,000. Liabilities for the period were: A) $73,000. B) $55,000. C) $59,000. D) $41,000. Answer: D Explanation: Cash $29,000 + Accounts Receivable $44,000 - Common Stock $18,000 Retained Earnings $14,000 = $41,000 Diff: 2 LO: 1-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 34) On January 1, 2019, total assets for Wininger Technologies were $136,000; on December 31, 2019, total assets were $157,000. On January 1, 2019, total liabilities were $110,000; on December 31, 2019, total liabilities were $118,000. What is the amount of the change and the direction of the change in Wininger Technologies' stockholders' equity for 2019? A) decrease of $13,000 B) increase of $13,000 C) increase of $29,000 D) decrease of $29,000 Answer: B Explanation: Assets - liabilities = stockholders' equity Beginning of year: $136,000 - $110,000 = $26,000 End of year: $157,000 - $118,000 = $39,000 Increase of $13,000, which equals $26,000 - $39,000 Diff: 3 LO: 1-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

35) Revenues were $150,000, expenses were $144,000, and cash dividends declared and paid were $3,000. What were the net income and the change in retained earnings for the period? A) Net income was $6,000; the change in retained earnings was $6,000. B) Net income was $150,000; the change in retained earnings was $9,000. C) Net income was $6,000; the change in retained earnings was $3,000. D) Net income was $150,000; the change in retained earnings was $147,000. Answer: C Explanation: Net income = $150,000 - $144,000 = $6,000 Retained earnings increased by $6,000 for net income, and decreased by $3,000 for dividends declared for a net change of $3,000. Diff: 2 LO: 1-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 36) Golden Company had the following accounts and balances at the end of the year. What are total assets at the end of the year? Cash $79,000 Accounts Payable $20,000 Common Stock $21,000 Dividends $12,000 Operating Expenses $12,000 Accounts Receivable $54,000 Inventory $44,000 Long-term Notes Payable $33,000 Revenues $110,000 Salaries Payable $30,000 A) $79,000 B) $123,000 C) $133,000 D) $177,000 Answer: D Explanation: Cash $79,000 + Accounts Receivable $54,000 + Inventory $44,000 = $177,000 Diff: 2 LO: 1-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking, Legal/Regulatory AICPA Functional: Measurement, Reporting

37) Census Company had the following accounts and balances at the end of the year. What are total liabilities at the end of the year? Cash $78,000 Accounts Payable $13,000 Common Stock $21,000 Dividends $12,000 Operating Expenses $12,000 Accounts Receivable $54,000 Inventory $46,000 Long-term Notes Payable $35,000 Revenues $115,000 Salaries Payable $27,000 A) $13,000 B) $48,000 C) $40,000 D) $75,000 Answer: D Explanation: Accounts Payable $13,000 + Long-term Notes Payable $35,000 + Salaries Payable $27,000 = $75,000 Diff: 3 LO: 1-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

38) Beck Company had the following accounts and balances at the end of the year. What is net income or net loss for the year? Cash $79,000 Accounts Payable $12,000 Common Stock $21,000 Dividends $12,000 Operating Expenses $15,000 Accounts Receivable $50,000 Inventory $45,000 Long-term Notes Payable $33,000 Revenues $94,000 Salaries Payable $28,000 A) net income of $94,000 B) net income of $79,000 C) net loss of $10,000 D) net income of $5,000 Answer: B Explanation: Revenues $94,000 - Operating Expenses $15,000 = Net Income $79,000 Diff: 2 LO: 1-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

39) Seidner Company had the following account balances at the end of the first year of operations: Revenues Salaries Expense Dividends Utilities Expense Advertising Expense Short-term Investments Cash Land Common Stock

$103,000 $16,000 $11,000 $15,000 $9,000 $20,000 $37,000 $50,000 $50,000

What is the amount of net income or net loss for the year? A) $22,000 B) $31,000 C) $63,000 D) $72,000 Answer: C Explanation: Revenues $103,000 - Salaries Expense $16,000 - Utilities Expense $15,000 Advertising Expense $9,000 = Net Income $63,000 Diff: 2 LO: 1-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

40) Lorna Company is a new company with a beginning retained earnings balance of zero. It has the following account balances at the end of the first year of operations: Accounts Payable Revenues Salaries Expense Dividends Utilities Expense Advertising Expense Short-term Investments Cash Land Common Stock

$37,000 $106,000 $14,000 $8,000 $12,000 $10,000 $20,000 $33,000 $50,000 $53,000

What is the ending balance in Retained Earnings? A) $22,000 B) $32,000 C) $30,000 D) $40,000 Answer: A Explanation: Beginning Retained Earnings $0 + Net Income $30,000 - Dividends $8,000 = $22,000 To calculate net income for above: Revenues $106,000 - Salaries Expense $14,000 - Utilities Expense $12,000 - Advertising Expense $10,000 = $30,000 Net Income Diff: 2 LO: 1-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

41) Gerald Company has the following account balances at the end of the first year of operations: Revenues Salaries Expense Dividends Utilities Expense Advertising Expense Cash Land Common Stock

$100,000 $13,000 $9,000 $11,000 $9,000 $38,000 $53,000 $56,000

What are total assets at the end of the first year? A) $38,000 B) $91,000 C) $114,000 D) $214,000 Answer: B Explanation: Cash $38,000 + Land $53,000 = $91,000 Diff: 2 LO: 1-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 42) Michael Company reports Total Assets of $254,000, Common Stock of $50,000, and Retained Earnings of $94,000. What are total liabilities at the end of the first year? A) $110,000 B) $210,000 C) $160,000 D) $204,000 Answer: A Explanation: Total Assets $254,000 — (Common Stock $50,000 + Retained Earnings $94,000) = $110,000 Diff: 2 LO: 1-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

43) At the end of the current fiscal year, ABC Corporation had the following balances: Assets Common Stock Dividends Expenses Liabilities Revenues

$50,000 $30,000 $ 5,000 $75,000 $20,000 $90,000

What is the increase (or decrease) to Retained Earnings? Support your answer with well labeled computations. Answer: The following accounts affect Retained Earnings: Revenues $90,000 Expenses (75,000) Dividends (5,000) Increase in Retained Earnings $10,000 Diff: 2 LO: 1-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

44) At the end of the current fiscal year, Smith Corporation had the following balances: Assets Common Stock Dividends Expenses Liabilities Revenues

$ 100,000 $ 25,000 $ 10,000 $ 80,000 $ 30,000 $120,000

The beginning balance of Retained Earnings was $15,000. a. What is the ending balance of Retained Earnings? Support your answer with well labeled computations. b. Prepare an accounting equation that shows assets, liabilities, and components of stockholders' equity. Answer: a. Computation of the ending balance of Retained Earnings Beginning Retained Earnings Balance: Add: Revenues 120,000 Expenses (80,000) Net Income 40,000 Less: Dividends (10,000) Ending Retained Earnings Balance

$15,000

$45,000

b. Accounting Equation: Assets = Liabilities + Stockholders' Equity Assets = Liabilities + (Common Stock + Retained Earnings) $100,000 = $30,000 + ($25,000 + $45,000) $100,000 - $100,000 Diff: 3 LO: 1-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

Learning Objective 1-4 1) Net income is the profit left over after subtracting expenses and dividends from revenues and gains. Answer: FALSE Explanation: Net income is the profit left over after subtracting expenses from revenues and gains. Diff: 1 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 2) The balance sheet is also called the statement of financial position. Answer: TRUE Diff: 1 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 3) Every corporation must pay dividends every year. Answer: FALSE Diff: 1 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) The balance sheet is organized in terms of the organization's operating, investing, and financing activities. Answer: FALSE Explanation: A statement of cash flows has operating, investing, and financing activities. Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

5) The amount of cash received on the sale of the company's stock in excess of par value is called retained earnings. Answer: FALSE Explanation: It is called additional paid-in capital, or paid-in capital in excess of par. Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 6) The statement of cash flows measures operating performance. Answer: FALSE Diff: 1 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 7) A balance sheet reports the company's financial position over a period of time. Answer: FALSE Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 8) Revenues and expenses are reported on both the income statement and the statement of retained earnings. Answer: FALSE Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 9) The statement of retained earnings shows both the beginning and ending balances of retained earnings. Answer: TRUE Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

10) Each category of activities on the statement of cash flows results in net cash provided or net cash used. Answer: TRUE Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 11) Which financial statement answers the following question: What is the company's financial position at fiscal year end? A) statement of cash flows B) income statement C) statement of retained earnings D) balance sheet Answer: D Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 12) Which financial statement answers the following question: How well did the company perform during the year? A) statement of cash flows B) income statement C) statement of retained earnings D) balance sheet Answer: B Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 13) Which financial statement reports cash payments and cash receipts over a period of time? A) statement of retained earnings B) income statement C) balance sheet D) statement of cash flows Answer: D Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 39 Copyright © 2019 Pearson Education, Inc.

14) A company reports the purchase of equipment for $1,000,000 in cash. On a statement of cash flows, this is a(n) example of: A) cash outflow from financing activity. B) cash outflow from operating activity. C) cash outflow from investing activity. D) noncash activity. Answer: C Diff: 2 LO: 1-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 15) All of the following will appear on the income statement EXCEPT for: A) assets. B) expenses. C) gains. D) revenues. Answer: A Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 16) The cost of products sold: A) is considered a selling expense. B) is the direct cost of the products sold. C) is classified as revenue on the income statement. D) is the same as total revenues. Answer: B Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

17) A company issues common stock for $100,000. On a statement of cash flows, this will be reported as a(n): A) financing cash flow. B) investing cash flow. C) operating cash flow. D) noncash activity. Answer: A Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 18) A company's interest expense for the period is reported on the: A) balance sheet. B) income statement. C) statement of cash flows. D) statement of retained earnings. Answer: B Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 19) The CORRECT data flow from one financial statement to the next is: A) statement of retained earnings, income statement, balance sheet, statement of cash flows. B) balance sheet, statement of retained earnings, income statement, statement of cash flows. C) statement of retained earnings, income statement, statement of cash flows, balance sheet. D) income statement, statement of retained earnings, balance sheet, statement of cash flows. Answer: D Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

20) If an investor wants to know a company's cash balance at the end of the year, this balance is reported on the: A) balance sheet. B) statement of cash flows. C) income statement. D) A and B. Answer: D Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 21) Cash dividends declared: A) decrease revenue on the income statement. B) decrease retained earnings on the statement of retained earnings. C) increase expenses on the income statement. D) decrease operating activities on the statement of cash flows. Answer: B Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 22) When analyzing a company's income statement, a fact to remember is that: A) the cost of products sold is another term for gross profit. B) operating expenses are the costs of everyday operations such as selling expenses. C) companies are not allowed to offset items such as interest income and interest expense against each other. D) all expenses will have the word expense after their titles. Answer: B Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

23) An investor, wishing to assess the reasons for a change in retained earnings over a period of a year, would probably examine the: A) statement of cash flows and the income statement. B) income statement only. C) balance sheet. D) statement of retained earnings. Answer: D Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 24) A potential investor, interested in predicting the earnings of a company in the future, should examine the: A) Balance Sheet only. B) Income Statement only. C) Statement of Retained Earnings. D) Statement of Retained Earnings and Balance Sheet. Answer: B Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 25) Which statement(s) reports the revenues, gains, expenses, and losses of an entity? A) Balance Sheet B) Statement of Cash Flows and Income Statement C) Statement of Retained Earnings and Statement of Operations D) Income Statement Answer: D Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

26) Which financial statement is dated at the moment in time when the accounting period ends? A) Balance Sheet B) Income Statement C) Statement of Retained Earnings and Income Statement D) Statement of Cash Flows Answer: A Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 27) The income statement: A) is not dated. B) must cover only a month in time. C) covers a defined period of time. D) reports the results of operations since the inception of the business. Answer: C Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 28) An example of an operating expense is: A) cost of products sold. B) sales returns. C) sales commissions paid to employees. D) interest expense. Answer: C Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 29) Which is the CORRECT order for items to appear on the income statement? A) revenues, operating expenses, net income B) cost of goods sold, revenues, net income C) revenues, net income, operating expenses D) interest expense, revenues, income from operations Answer: A Diff: 3 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 44 Copyright © 2019 Pearson Education, Inc.

30) The portion of net income that the company has kept over a period of years and not used for dividends is called: A) common stock. B) retained earnings. C) revenue. D) gross profit. Answer: B Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 31) A company sells travel mugs online for $10. They purchase the mugs for $6 and charge the customers $2 for shipping and handling. The cost of product sold per mug is: A) $4. B) $2. C) $6. D) $8. Answer: C Diff: 2 LO: 1-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 32) A net loss occurs when: A) not enough cash exists. B) total revenues exceed total expenses. C) total expenses and losses exceed total revenues and gains. D) total revenues and dividends exceed total expenses and losses. Answer: C Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

33) The balance sheet is also known as the: A) statement of profit and loss. B) operating statement. C) assets statement. D) statement of financial position. Answer: D Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 34) The balance sheet reports information about: A) revenues, expenses, and equity. B) liabilities, equity, and expenses. C) assets, revenues, and liabilities. D) assets, liabilities, and equity. Answer: D Diff: 1 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 35) On the statement of retained earnings: A) a net loss decreases retained earnings. B) net income decreases retained earnings. C) dividends declared increase retained earnings. D) a deficit ending balance in retained earnings is not allowed. Answer: A Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 36) The net income shown on the income statement also appears on the: A) balance sheet and statement of operations. B) statement of retained earnings. C) statement of cash flows, if the indirect method is used. D) B and C. Answer: D Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 46 Copyright © 2019 Pearson Education, Inc.

37) The balance sheet includes the: A) amount of net income or net loss. B) beginning balance in retained earnings. C) ending balance in retained earnings. D) amount of cash dividends paid to stockholders. Answer: C Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 38) With regard to cash dividends: A) they must be paid on a yearly basis. B) the Board of Directors of the corporation determines if a dividend will be paid. C) developmental-stage companies will pay large dividends to their shareholders. D) a corporation must have enough additional paid-in capital and cash to pay dividends. Answer: B Diff: 3 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 39) Which financial statement must be prepared before the others? A) statement of cash flows B) income statement C) balance sheet D) statement of retained earnings Answer: B Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

40) A company's balance sheet: A) is dated for a period of time. B) has three main categories of assets. C) has two main categories of liabilities. D) lists liabilities before assets. Answer: C Explanation: Liabilities have two categories of current and long-term liabilities. Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 41) Current assets are assets expected to be converted to cash, sold, or consumed during the next: A) 12 months or within the business's operating cycle if longer than a year. B) 12 months or within the business's operating cycle if less than a year. C) 6 months. D) 24 months. Answer: A Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 42) Equipment would appear on the: A) balance sheet with long-term assets. B) income statement with revenues. C) income statement with operating expenses. D) balance sheet with current assets. Answer: A Diff: 1 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

43) Accumulated depreciation is normally associated with which asset on the Balance Sheet? A) inventory B) accounts receivable C) intangible assets D) fixed assets Answer: D Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 44) The order in which current assets are typically listed is: A) accounts receivable, inventory, cash and cash equivalents,prepaid expenses. B) cash and cash equivalents, accounts receivable, prepaid expenses, inventory. C) cash and cash equivalents, accounts receivable, inventory, prepaid expenses. D) prepaid expenses, cash and cash equivalents, accounts receivable, inventory. Answer: C Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 45) Notes payable (due in 60 days) would appear on the balance sheet as a: A) current liability. B) current asset. C) long-term asset. D) long-term liability. Answer: A Diff: 1 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 46) Which statement below is FALSE? A) Income taxes payable is an accrued liability. B) Accrued liabilities can include liabilities for salaries. C) Assets are divided into current and long-term categories. D) Prepaid expenses include accrued interest payable. Answer: D Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 49 Copyright © 2019 Pearson Education, Inc.

47) The current portion of a long-term note payable is classified on the balance sheet as a: A) current asset. B) current liability. C) long-term asset. D) long-term liability. Answer: B Diff: 1 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 48) Which of the following is a CORRECT statement about long-term assets? A) Accumulated depreciation increases the cost of fixed assets on the balance sheet. B) Intangible assets are long-term assets with no physical substance. C) Long-term investments can never be sold by the company. D) Other long-term assets include supplies. Answer: B Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 49) Which statement about the statement of cash flows is FALSE? A) Operating activities should be the company's main source of cash. B) Purchases and sales of long-term assets are financing cash flows. C) The payment of a dividend is a financing cash flow. D) The payment of a note payable is a financing activity. Answer: B Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

50) What is the proper order for the different categories of cash flows reported on the statement of cash flows? A) financing activities, investing activities, and operating activities B) operating activities, investing activities, and financing activities C) operating activities, financing activities, and investing activities D) investing activities, financing activities, and operating activities Answer: B Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 51) All of the following would be considered investing activities on the statement of cash flows EXCEPT for: A) purchase of land for cash. B) the sale of equipment for cash. C) the payment of cash dividends. D) the purchase of equipment for cash. Answer: C Diff: 3 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 52) Examples of financing activities on the statement of cash flows do NOT include: A) payment of note payable. B) payment of dividends. C) repurchase of company's own stock. D) sale of a piece of equipment for cash. Answer: D Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

53) Which of the following would be considered a financing activity that decreases cash on the statement of cash flows? A) The company pays a long-term loan. B) The company sells common stock. C) The company purchases a building. D) The company pays its monthly utility bill. Answer: A Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 54) A company's main source of cash should be: A) operating activities. B) financing activities. C) investing activities. D) all of the above. Answer: A Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 55) On a statement of cash flows, cash receipts are reported as: A) positive amounts. B) negative amounts. C) in parenthesis. D) operating activities only. Answer: A Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

56) All of the following line items are found on the income statement EXCEPT for: A) cost of product sold. B) interest expense. C) operating expense. D) dividends declared. Answer: D Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 57) All of the following line items are found on the balance sheet EXCEPT for: A) current portion of long-term borrowings. B) accounts payable. C) treasury stock. D) dividends declared. Answer: D Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 58) All of the following line items are found on the statement of cash flows EXCEPT for: A) net cash used in investing activities. B) net cash provided in operating activities. C) net cash used in financing activities. D) total stockholders' equity. Answer: D Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 59) Current assets as reported on the balance sheet do NOT include: A) cash equivalents. B) inventory. C) prepaid insurance. D) long-term investments. Answer: D Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 53 Copyright © 2019 Pearson Education, Inc.

60) Current liabilities as reported on the balance sheet do NOT include: A) current maturities of long-term debt. B) income taxes payable. C) salaries payable. D) treasury stock. Answer: D Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 61) Stockholders' equity as reported on the balance sheet does NOT include: A) short-term investments. B) common stock. C) retained earnings. D) additional paid-in capital. Answer: A Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 62) The ending balance of Retained Earnings is reported on the: A) Balance Sheet. B) Statement of Retained Earnings. C) Income Statement. D) A and B. Answer: D Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

63) The ending balance of Cash and Cash Equivalents is reported on the: A) Balance Sheet. B) Statement of Retained Earnings. C) Statement of Cash Flows. D) A and C. Answer: D Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 64) The Income Statement is used to prepare the: A) Statement of Retained Earnings only. B) Statement of Cash Flows only. C) Balance Sheet only. D) Statement of Retained Earnings and Statement of Cash Flows. Answer: D Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 65) The Statement of Retained Earnings is used to prepare the: A) Income Statement. B) Statement of Assets. C) Statement of Cash Flows. D) Balance Sheet. Answer: D Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

66) The ending balance of cash and cash equivalents is found on the Statement of Cash Flows and the: A) Statement of Retained Earnings. B) Balance Sheet. C) Income Statement. D) Statement of Stockholders' Equity. Answer: B Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 67) The Statement of Retained Earnings is used to prepare the: A) Income Statement. B) Statement of Earnings and Distributions. C) Statement of Cash Flows. D) Balance Sheet. Answer: D Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 68) The Balance Sheet is used to prepare the: A) Income Statement. B) Statement of Retained Earnings. C) Statement of Cash Flows. D) Statement of Stockholders' Equity. Answer: C Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

69) Dividends declared are reported on the: A) Income Statement. B) Statement of Retained Earnings. C) Balance Sheet. D) Statement of Assets. Answer: B Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 70) The net loss for a company is reported on the: A) Statement of Cash Flows. B) Statement of Retained Earnings. C) Income Statement. D) all of the above. Answer: D Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

71) Potter Company reports the following line items: Long-Term Notes Payable Accounts Receivable Accounts Payable Building Cash and Cash Equivalents Salaries Expense Common Stock Interest Payable Land Short-term Investments Income Taxes Payable Equipment Supplies Service Revenue Supplies Expense Utilities Expense Income Tax Expense

$50,000 $28,000 $37,000 $55,000 $80,000 $21,500 $27,000 $1,500 $40,000 $5,000 $10,000 $59,500 $5,000 $106,000 $18,000 $8,500 $12,000

What is net income? A) $27,000 B) $46,000 C) $67,500 D) $106,000 Answer: B Explanation: Service Revenue $106,000 - Supplies Expense $18,000 - Utilities Expense $8,500 - Income Tax Expense $12,000 - Salaries Expense $21,500 = $46,000 Diff: 2 LO: 1-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

72) Connar Company reports the following accounts and balances at year end: Long-Term Notes Payable Accounts Receivable Accounts Payable Building Cash and Cash Equivalents Salaries Expense Common Stock Interest Payable Land Short-term Investments Income Taxes Payable Equipment Supplies Service Revenue Supplies Expense Utilities Expense Income Tax Expense

$150,000 $28,000 $37,000 $55,000 $83,000 $20,500 $22,000 $1,500 $40,000 $9,000 $12,000 $59,500 $9,000 $99,000 $18,000 $8,500 $10,000

What is the total amount of current assets at the end of the year? A) $83,000 B) $111,000 C) $129,000 D) $141,000 Answer: C Explanation: Cash and Cash Equivalents $83,000 + Short-term Investments $9,000 + Accounts Receivable $28,000 + Supplies $9,000 = $129,000 Diff: 2 LO: 1-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

73) Wetzel Company has the following accounts and balances at the end of the fiscal year: Long-Term Notes Payable Accounts Receivable Accounts Payable Building Cash and Cash Equivalents Salaries Expense Common Stock Interest Payable Land Short-term Investments Income Taxes Payable Equipment Supplies Service Revenue Supplies Expense Utilities Expense Income Tax Expense

$150,000 $30,000 $41,000 $55,000 $38,000 $20,500 $22,000 $4,500 $43,000 $30,000 $10,000 $59,500 $25,000 $99,000 $38,000 $28,500 $25,000

What is the total amount of liabilities at the end of the year? A) $55,500 B) $110,500 C) $205,500 D) $176,000 Answer: C Explanation: Accounts Payable $41,000 + Interest Payable $4,500 + Income Taxes Payable $10,000 + Long-term Note Payable $150,000 = $205,500 Diff: 2 LO: 1-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

74) Kolander Company has the following accounts and balances at the end of the year: Long-Term Notes Payable Accounts Receivable Accounts Payable Building Cash and Cash Equivalents Common Stock Interest Payable Land Short-term Investments Income Taxes Payable Equipment Supplies

$59,000 $28,000 $42,000 $59,000 $85,000 $126,000 $5,500 $41,000 $8,000 $11,000 $61,500 $6,000

What is the amount of Retained Earnings at the end of the year? A) $45,000 B) $117,500 C) $162,500 D) $171,000 Answer: A Explanation: Total Assets = $288,500 Total Assets = Accounts Receivable $28,000 + Building $59,000 + Cash and Cash Equivalents $85,000 + Land $41,000 + Short-Term Investments $8,000 + Equipment $61,500 + Supplies $6,000 = $288,500 Total Liabilities = Note Payable $59,000 + Accounts Payable $42,000 + Interest Payable $5,500 + Income Taxes Payable $11,000 = $117,500 Retained Earnings =Total Assets $288,500 - Total Liabilities $117,500 - Common Stock $126,000 = $45,000 Diff: 2 LO: 1-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

75) Baker Corporation operates retail stores and has decided to expand its operations. The company must decide where to locate and how to finance the expansion. Identify the financial statement where the decision makers can find the following information about Baker. Information requested Current liabilities Repayments of borrowed funds Receivables Cost of goods sold Prepaid expenses Net increase (decrease) in cash Answer: Information requested Current liabilities Repayments of borrowed funds Receivables Cost of goods sold Prepaid expenses Net increase (decrease) in cash

Financial statement

Financial statement Balance sheet Statement of cash flows Balance sheet Income statement Balance sheet Statement of cash flows

Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 76) List the required financial statements and state what each measures. Answer: Income Statement measures operating performance. Statement of Retained Earnings measures what was done with net income. Balance Sheet measures financial position. Statement of Cash Flows measures cash receipts and cash payments. Diff: 2 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

77) Wetzel Company has the following accounts and balances at the end of the fiscal year: Retained Earnings (Beginning Balance) Cash Receivables Dividends Declared Accounts Payable Common Stock Long-term Investments Service Revenue Supplies Expense

$54,000 $10,000 $12,000 $10,000 $15,000 $60,000 $108,500 $99,000 $38,000

Prepare the Income Statement, Statement of Retained Earnings, and Balance Sheet. Income Statement

Statement of Retained Earnings

Balance Sheet

Answer: Income Statement Service Revenue Expenses: Supplies Expense Utilities Expense Total Expenses Income Before Taxes Income Tax Expense Net Income

$99,000 38,000 28,500 66,500 32,500 21,000 $11,500

Statement of Retained Earnings Retained Earnings (Beginning) Add: Net Income Subtotal Dividends declared Retained Earnings (Ending)

$54,000 11,500 $65,500 (10,000) $55,500

Balance Sheet ASSETS Current Assets Cash Receivables Total Current Assets Long-term Investments Total Assets LIABILITIES Current Liabilities Accounts Payable STOCKHOLDERS’ EQUITY Common Stock Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity Diff: 3 LO: 1-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

$10,000 12,000 $22,000 108,500 $130,500

$15,000 $60,000 55,500 $115,500 $130,500

Learning Objective 1-5 1) The three factors that influence business and accounting decisions are economic, legal, and financial. Answer: FALSE Explanation: The three factors are economic, legal, and ethical. Diff: 1 LO: 1-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Decision Modeling 2) The decision framework for making ethical judgments provides general guidance for everyone, regardless of profession or industry. Answer: TRUE Diff: 1 LO: 1-5 AACSB: Ethical Understanding and Reasoning AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Decision Modeling 3) The American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct contains basic principles that can only be applied to CPAs. Answer: FALSE Diff: 1 LO: 1-5 AACSB: Ethical Understanding and Reasoning AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Decision Modeling 4) The American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct contains basic principles that provide guidance to all of its members in the performance of their professional duties. Answer: TRUE Diff: 1 LO: 1-5 AACSB: Ethical Understanding and Reasoning AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Decision Modeling

5) The three factors that influence business and accounting decisions are: A) judgment, cost/benefit analysis, and cultural backgrounds. B) minimizing costs, maximizing profits and cost/benefit tradeoff. C) economic, legal, and ethical. D) legal implications, socioeconomic backgrounds, profit maximization. Answer: C Diff: 2 LO: 1-5 AACSB: Ethical Understanding and Reasoning AICPA Bus Persp: Strategic/Critical Thinking, Legal/Regulatory AICPA Functional: Decision Modeling 6) The ________ factor recognizes that while certain actions might be both economically profitable and legal, they still may not be right. A) economic B) legal C) profitability D) ethical Answer: D Diff: 2 LO: 1-5 AACSB: Ethical Understanding and Reasoning AICPA Bus Persp: Strategic/Critical Thinking, Legal/Regulatory AICPA Functional: Decision Modeling 7) Complicating factors for a global business include: A) what is legal in one country may not be legal in another country. B) what is ethical in one country may not be ethical in another country. C) a foreign government threatening to take over the company's plant. D) all of the above. Answer: D Diff: 2 LO: 1-5 AACSB: Ethical Understanding and Reasoning AICPA Bus Persp: International/Global AICPA Functional: Decision Modeling

8) The economic factor in decision making requires the decision maker to: A) maximize the economic benefit to the decision maker. B) maximize the economic benefit to the corporation or nonprofit entity. C) maximize the corporation's profits. D) minimize the corporation's costs. Answer: A Diff: 2 LO: 1-5 AACSB: Ethical Understanding and Reasoning AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Decision Modeling 9) Regarding the decision framework for making ethical accounting judgments, state the guidelines for each of the following decisions. 1. What is the issue? 2. Who are the stakeholders, and what are the consequences of the decision to each? Answer: 1. What is the issue? The issue will usually deal with making a judgment about an accounting measurement or disclosure that results in economic consequences, often to numerous parties. 2. Who are the stakeholders, and what are the consequences of the decision to each? Stakeholders are anyone who might be impacted by the decision — you, your company, and potential users of the information (investors, creditors, and regulatory agencies). Consequences can be economic, legal, or ethical in nature. Diff: 3 LO: 1-5 AACSB: Ethical Understanding and Reasoning AICPA Bus Persp: Strategic/Critical Thinking, Legal/Regulatory AICPA Functional: Measurement, Reporting

10) The American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct contains basic principles that provide guidance to all members in the performance of their professional duties. List three of these principles. Briefly discuss how each of these three principles affects AICPA members. Answer: Responsibilities principle — In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities. Public interest principle — Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate a commitment to professionalism. Integrity principle — To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity. Objectivity and independence principle — A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. Due care principle — A member should observe the profession's technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member's ability. Diff: 3 LO: 1-5 AACSB: Ethical Understanding and Reasoning AICPA Bus Persp: Strategic/Critical Thinking, Legal/Regulatory AICPA Functional: Measurement, Reporting

Financial Accounting, 12e (Thomas/Tietz/Harrison) Chapter 2 Transaction Analysis Learning Objective 2-1 1) A transaction is any event that has a financial impact on the business and that can be measured reliably. Answer: TRUE Diff: 1 LO: 2-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 2) Business events are recorded even if the financial impact cannot be measured. Answer: FALSE Diff: 1 LO: 2-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 3) Transactions provide objective information about the financial impact of an exchange on an entity. Answer: TRUE Diff: 1 LO: 2-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 4) The account is the basic summary device of accounting. Answer: TRUE Diff: 1 LO: 2-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 5) An account receivable represents the promise of the business to pay a debt. Answer: FALSE Diff: 2 LO: 2-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 1 Copyright © 2019 Pearson Education, Inc.

6) Prepaid rent is an expense because the payment provides a future benefit of the company. Answer: FALSE Diff: 2 LO: 2-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 7) Assets include cash, land, and accounts payable. Answer: FALSE Diff: 2 LO: 2-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 8) Cost of goods sold is an example of a revenue account. Answer: FALSE Diff: 2 LO: 2-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 9) An accrued liability is a liability for an expense that has not yet been paid. Answer: TRUE Diff: 2 LO: 2-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 10) A prepaid expense is an asset. Answer: TRUE Diff: 2 LO: 2-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

11) Which of the following is NOT a business transaction? A) A company buys goods on account. B) A company sells land for cash. C) A company fired 10 percent of the employees due to lackluster sales. D) A company borrows money from the bank. Answer: C Diff: 2 LO: 2-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) Which of the following is a business transaction? A) A company signs a contract for services to be provided during the first quarter of the next fiscal year. B) A company pays its employees a year-end bonus. C) A company hires a new marketing manager. D) A company applies for a mortgage that will be used to purchase a new office building. Answer: B Diff: 2 LO: 2-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13) A record of all the changes in a particular asset during a period of time is found in a(n): A) transaction. B) trial balance. C) prior period's balance sheet. D) account. Answer: D Diff: 1 LO: 2-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

14) All of the following accounts would be considered assets EXCEPT for: A) Cash. B) Retained Earnings. C) Prepaid Expenses. D) Notes Receivable. Answer: B Diff: 2 LO: 2-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 15) Which account includes balances in multiple checking accounts? A) Accounts Receivable B) Notes Receivable C) Cash D) Prepaid Expenses Answer: C Diff: 1 LO: 2-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 16) Which of the following is a CORRECT statement? A) Shareholders' equity is also called proprietorship equity. B) A proprietorship has more than one capital account. C) A partnership has a separate owner's equity account for each partner. D) Retained earnings is the owner's investment in the corporation. Answer: C Diff: 2 LO: 2-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 17) Interest payable, income tax payable and salary payable are all examples of: A) accrued liabilities. B) prepaid expenses. C) expenses of future periods. D) retained earnings. Answer: A Diff: 1 LO: 2-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 4 Copyright © 2019 Pearson Education, Inc.

18) Which transaction increases stockholders' equity? A) sale of common stock B) dividends that are declared and paid C) expenses greater than revenues for the period D) payment of operating expenses Answer: A Diff: 1 LO: 2-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 19) Which transaction decreases stockholders' equity? A) sale of common stock B) cash purchase of land C) total revenues greater than total expenses for the period D) total expenses greater than total revenues for the period Answer: D Diff: 1 LO: 2-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 20) Which transaction decreases stockholders' equity? A) Inventory was purchased on account. B) Services were performed on account. C) Services were performed and cash was immediately received from the customers. D) Employees worked one week and were paid at the end of the week. Answer: D Diff: 1 LO: 2-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

21) List and briefly discuss the three major components of stockholders' equity. Answer: 1. Common stock — This shows the owners' investment in the corporation. 2. Retained earnings — This shows the cumulative net income earned by a company over its lifetime minus its cumulative net losses and dividends. 3. Dividends — This includes dividends declared by the board of directors during the accounting period. Diff: 2 LO: 2-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 22) Define and provide an example of each of the following. Account Asset

Definition

Example

Revenue Liability

Answer: Account Asset

Revenue

Liability

Definition

Example (Only one example is needed.) Answers include: Economic resources that Cash, Accounts Receivable, provide a future benefit for a Inventory, Prepaid Expenses, business. Investments, Buildings The increase in stockholders' Sales Revenue, Legal Service equity from delivery of goods Revenue, Rental Revenue, Interest or services to customers Revenue Debts owed by the business. Accounts Payable, Notes Payable, Accrued Liabilities

Diff: 2 LO: 2-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

Learning Objective 2-2 1) If a company declares and pays a dividend to its stockholders, both cash and expenses will decrease. Answer: FALSE Explanation: Cash and stockholder's equity decreases. Diff: 2 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 2) Each transaction has either an equal effect on both the left- and right-sides of the accounting equation, or an offsetting effect (both positive and negative) on the same side of the equation. Answer: TRUE Diff: 2 LO: 2-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) If a company performs services on account, the revenue is not earned until the cash is collected. Answer: FALSE Diff: 2 LO: 2-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) An account payable is recorded when a formal promissory note is signed. Answer: FALSE Diff: 2 LO: 2-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

5) As a practical matter most companies prepare financial statements: A) after every transaction. B) only when both the balance sheet and income statement are affected. C) at the end of the accounting period. D) at the close of every business day. Answer: C Diff: 1 LO: 2-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 6) When services are performed on account: A) cash is increased. B) revenue will not be recorded until the cash is received from the customer. C) accounts receivable is increased. D) accounts payable is increased. Answer: C Diff: 2 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 7) A company received cash in exchange for issuing stock. This transaction increased assets and: A) increased expenses. B) increased revenues. C) increased liabilities. D) increased stockholders' equity. Answer: D Diff: 2 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 8) When a business purchases land with a note payable: A) both assets and stockholders' equity are increased. B) assets are decreased and stockholder's equity is increased. C) both assets and liabilities are increased. D) assets are increased and liabilities are decreased. Answer: C Diff: 2 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 8 Copyright © 2019 Pearson Education, Inc.

9) The debt created by a business when it makes a purchase of inventory on account is a(n): A) revenue. B) account receivable. C) note payable. D) account payable. Answer: D Diff: 2 LO: 2-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 10) Which of the following transactions will increase stockholders' equity? A) The company pays a dividend to its shareholders. B) The company issues common stock to new shareholders. C) The company purchases equipment. D) The company makes a payment on account. Answer: B Diff: 2 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 11) Which of the following transactions will increase one asset and decrease another asset? A) the purchase of office supplies on account B) the performance of services on account C) the purchase of equipment for cash D) the performance of services for cash Answer: C Diff: 2 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

12) A company performed services for a customer for cash. This transaction increased assets and: A) decreased stockholders' equity. B) increased liabilities. C) increased expenses. D) increased revenues. Answer: D Diff: 2 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13) A company receives an utility bill and immediately pays it. With this transaction: A) stockholders' equity is decreased. B) expenses are decreased. C) assets are increased. D) liabilities are increased. Answer: A Diff: 2 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 14) Company Z sells land for cash for the same amount it paid for it three years ago. When the company records this transaction: A) assets and stockholders' equity are increased. B) one asset is increased and another asset is decreased. C) one liability is increased and another liability is decreased. D) assets are increased and liabilities are decreased. Answer: B Diff: 2 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking, Legal/Regulatory AICPA Functional: Measurement

15) When a company borrows money (cash) from the bank, which type of account(s) is(are) increased? A) asset account only B) retained earnings only C) liability account only D) both asset and liability accounts Answer: D Diff: 2 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 16) A company performs services for a client on account. When the company receives the cash from the customer one month later: A) a revenue account is increased. B) a liability account is decreased. C) there is no change in total assets. D) an expense account is decreased. Answer: C Diff: 2 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 17) When a company repays cash that is borrowed from the bank: A) total assets remain the same. B) liabilities are decreased. C) retained earnings is decreased. D) total liabilities remain the same. Answer: B Diff: 2 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

18) When a company pays an amount it owes a creditor: A) assets are decreased and net income is decreased. B) assets are decreased and liabilities are increased. C) liabilities are decreased and net income is increased. D) assets are decreased and liabilities are decreased. Answer: D Diff: 2 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 19) Muddle Company performs a service for one of its customers and immediately collects the cash. This transaction will: A) have no effect on liabilities. B) decrease net income. C) decrease Retained Earnings. D) increase Accounts Receivable. Answer: A Diff: 2 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 20) Purchasing supplies on account would: A) increase total assets and decrease total liabilities. B) increase total liabilities and decrease total assets. C) increase total assets and increase total liabilities. D) increase total liabilities and increase stockholders' equity. Answer: C Diff: 2 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

21) Paying a repair bill as soon as it was received would: A) increase expenses. B) increase liabilities. C) increase stockholders' equity. D) decrease revenues. Answer: A Diff: 2 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 22) If a company buys inventory on account: A) cash decreases. B) accounts payable increases. C) net income increases. D) total assets remain the same. Answer: B Diff: 2 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 23) Receiving a payment from a customer on account: A) increases stockholders' equity. B) has no effect on total assets. C) decreases stockholders' equity. D) decreases liabilities. Answer: B Diff: 2 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

24) Which of the following transactions would decrease an asset and decrease stockholders' equity? A) payment of an accounts payable B) performance of a service for a client on account C) borrowing money from the bank for thirty days D) declaration and payment of a dividend to the shareholders Answer: D Diff: 3 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 25) Performing services on account: A) decreases both assets and liabilities. B) increases assets and decreases stockholders' equity. C) decreases revenues and decreases stockholders' equity. D) increases both net income and stockholders' equity. Answer: D Diff: 3 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 26) To compute the ending balance of retained earnings: A) the beginning balance in retained earnings will be negative for a new business. B) net loss for the period is subtracted from the beginning balance of retained earnings. C) dividends are added to the beginning balance of retained earnings. D) common stock sold during the period is added to the beginning balance of retained earnings. Answer: B Diff: 3 LO: 2-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

27) To compute ending balance of retained earnings on the statement of retained earnings: A) net loss is added to the beginning balance of retained earnings and dividends that were declared and paid are subtracted from the beginning balance of retained earnings. B) net income and dividends are both added to the beginning balance of retained earnings. C) net loss and dividends are both added to the beginning balance of retained earnings. D) net income is added to the beginning balance of retained earnings. Answer: D Diff: 2 LO: 2-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 28) For a new business, the beginning balance of retained earnings equals: A) cash invested by the stockholders. B) beginning balance of the common stock account. C) zero. D) budgeted net income for the first year. Answer: C Diff: 2 LO: 2-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 29) When preparing the financial statements from a spreadsheet that shows the results of a transaction analysis: A) a statement of retained earnings is not required. B) the balance sheet reports the beginning balance of retained earnings. C) assets, liabilities, and stockholders' equity are reported on the balance sheet. D) revenues, expenses, and dividends are reported on the income statement. Answer: C Diff: 2 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

30) Lori Nichols started an engineering firm, Engineering Enterprises P.C. During its first month of operations, the following transactions were completed: I. Lori invested $33,000 in the business, which in turn issued common stock to her. II. The business purchased equipment on account for $6,000. III. The business provided engineering services on account, $12,000. IV. The business paid salaries to the receptionist, $4,000. V. The business received cash from a customer as payment on account $7,000. VI. The business borrowed $9,000 from the bank, issuing a note payable. At the end of the month, cash equals: A) $33,000. B) $38,000. C) $45,000. D) $71,000. Answer: C Explanation: Investment $33,000 - Salaries Paid $4,000 + Customer Collection $7,000 + Cash from Loan $9,000 = $45,000 Diff: 3 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 31) Linda Keller opened a consulting firm, Keller Consulting P.C. During its first month of operations, the following transactions were completed: I. Linda invested $30,000 in the business, which in turn issued common stock to her. II. The business purchased equipment on account for $64,000. III. The business provided consulting services on account, $13,000. IV. The business paid cash salaries to the receptionist, $2,000. V. The business received cash from a customer as payment on account $6,000. VI. The business borrowed $9,000 from the bank, issuing a note payable. At the end of the month, total liabilities are: A) $9,000. B) $64,000. C) $73,000. D) $77,000. Answer: C Explanation: Accounts Payable $64,000 + Note Payable $9,000 = $73,000 Diff: 3 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

32) A company completed the following transactions during the month of October: I. Purchased office supplies on account, $5,400. II. Provided services for cash, $21,000. III. Provided services on account, $36,000. IV. Collected cash from a customer on account, $29,000. V. Paid the monthly rent of $4,600. What was the company's total revenue for the month? A) $21,000 B) $36,000 C) $57,000 D) $86,000 Answer: C Explanation: Service Revenue $21,000 + Service Revenue $36,000 = $57,000 Diff: 3 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 33) A company completed the following transactions during the month of October: I. Purchased office supplies on account, $4,400. II. Provided services for cash, $22,000. III. Provided services on account, $13,000. IV. Collected cash from a customer on account, $8,800. V. Paid the monthly rent of $16,000. What was the company's net income for the month? A) $13,000 B) $19,000 C) $35,000 D) $51,000 Answer: B Explanation: Service Revenue $22,000 + Service Revenue $13,000 - Rent Expense $16,000 = $19,000 Diff: 3 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

34) A company had credit sales of $33,000 and cash sales of $25,000 during the month of May. Also during May, the company paid wages of $22,000 and utilities of $8,000. It also received payments from customers on account totaling $5,800. What was the company's net income for the month? A) $25,000 B) $28,000 C) $58,000 D) $88,000 Answer: B Explanation: Sales Revenue $33,000 + Sales Revenue $25,000 - Wage Expense $22,000 Utilities Expense $8,000 = $28,000 Diff: 2 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 35) A company had credit sales of $40,000 and cash sales of $14,000 during the month of May. Also during May, the company paid wages of $13,000 and utilities of $2,800. It also received payments from customers on account totaling $8,000. At the beginning of May, the company had a cash balance of $25,000. What is the company's cash balance at the end of May? A) $23,200 B) $31,200 C) $39,000 D) $47,000 Answer: B Explanation: Beginning Balance Cash $25,000 + Cash Sales $14,000 - Wages paid $13,000 Utilities paid $2,800 + Cash Collected from Customers $8,000 = $31,200 Diff: 2 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

36) Jenkins Company began business in June when stockholders invested $85,000 in the business, which in turn issued its common stock to them. Jenkins Company then purchased a building for $43,000 cash and inventory for $24,000 cash, performed services for clients for $15,000 cash, purchased supplies for $7,000 cash, and paid utilities of $4,000 cash. What is the amount of cash at the end of June? A) $18,000 B) $22,000 C) $33,000 D) $46,000 Answer: B Explanation: Issue Stock $85,000 - Buy Building $43,000 - Buy Inventory $24,000 + Service Revenue $15,000 - Supplies paid $7,000 - Utilities paid $4,000 = $22,000 Diff: 3 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 37) A company received $35,000 cash and issued common stock in exchange. How does this transaction affect the accounting equation? A) Add $35,000 to Cash and add $35,000 to Retained Earnings. B) Add $35,000 to Cash and add $35,000 to Revenue. C) Add $35,000 to Dividends and subtract $35,000 from Retained Earnings. D) Add $35,000 to Cash and add $35,000 to Common Stock. Answer: D Diff: 3 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 38) A company purchased supplies of $2,000 on account. How does this transaction affect the accounting equation? A) Add $2,000 to Supplies and add $2,000 to Notes Payable. B) Add $2,000 to Supplies and subtract $2,000 from Cash. C) Add $2,000 to Supplies Expense and add $2,000 to Notes Payable. D) Add $2,000 to Supplies and add $2,000 to Accounts Payable. Answer: D Diff: 3 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

39) A company performed tax services for a client on account. The amount billed to the client was $7,000. How does this transaction affect the accounting equation? A) Add $7,000 to Cash and add $7,000 to Service Revenue. B) Add $7,000 to Cash and add $7,000 to Retained Earnings. C) Add $7,000 to Accounts Receivable and add $7,000 to Retained Earnings. D) Add $7,000 to Accounts Payable and add $7,000 to Service Revenue. Answer: C Diff: 3 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 40) On May 1, a company provided legal services for a new client. The legal fee was $2,000 and the client paid, by check, before leaving the office that day. How does this transaction affect the accounting equation? A) Add $2,000 to Cash and subtract $2,000 from Service Revenue. B) Add $2,000 to Cash and add $2,000 to Retained Earnings. C) Add $2,000 to Cash and subtract $2,000 from Accounts Receivable. D) Add $2,000 to Cash and subtract $2,000 from Accounts Payable. Answer: B Diff: 3 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 41) A company paid $3,000 for supplies that were purchased earlier in the month on account. How does this transaction affect the accounting equation? A) Add $3,000 to Supplies and add $3,000 to Supplies Expense. B) Add $3,000 to Supplies Expense and subtract $3,000 from Cash. C) Add $3,000 to Supplies Expense and add $3,000 to Cash. D) Subtract $3,000 from Accounts Payable and subtract $3,000 from Cash. Answer: D Diff: 3 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

42) On August 15, a customer paid $5,000 for services provided a month earlier. The customer was billed on August 1. How does this transaction affect the accounting equation? A) Add $5,000 to Cash and add $5,000 to Service Revenue. B) Add $5,000 to Cash and add $5,000 to Retained Earnings. C) Add $5,000 to Cash and subtract $5,000 from Accounts Receivable. D) Add $5,000 to Accounts Payable and add $5,000 to Cash. Answer: C Diff: 3 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 43) A company received a utility bill for $2,300 and decided to pay it next month due to a shortage of cash. How does this transaction affect the accounting equation? A) Add $2,300 to Utilities Expense and add $2,300 to Cash. B) Subtract $2,300 from Cash and add $2,300 to Accounts Payable. C) Add $2,300 to Accounts Receivable and subtract $2,300 from Retained Earnings. D) Add $2,300 to Accounts Payable and subtract $2,300 from Retained Earnings. Answer: D Diff: 3 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 44) A company borrowed $15,000 from the bank by signing a long-term note. How does this transaction affect the accounting equation? A) Add $15,000 to Cash and add $15,000 to Accounts Payable. B) Add $15,000 to Cash and add $15,000 to Notes Payable. C) Add $15,000 to Cash and add $15,000 to Retained Earnings. D) Add $15,000 to Accounts Receivable and add $15,000 to Accounts Payable. Answer: B Diff: 3 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

45) A receptionist worked one month and was paid $3,800 on the last day of the month. How does this transaction affect the accounting equation? A) Add $3,800 to Cash and add $3,800 to Accounts Payable. B) Add $3,800 to Accounts Receivable and subtract $3,800 from Cash. C) Add $3,800 to Salary Expense and subtract $3,800 from Retained Earnings. D) Subtract $3,800 from Cash and subtract $3,800 from Retained Earnings. Answer: D Diff: 3 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 46) A company declared and paid dividends of $1,300. How does this transaction affect the accounting equation? A) Add $1,300 to Revenue and add $1,300 to Cash. B) Add $1,300 to Dividends and add $1,300 to Accounts Receivable. C) Subtract $1,300 from Retained Earnings and subtract $1,300 from Cash. D) Add $1,300 to Dividend Expense and subtract $1,300 from Cash. Answer: C Diff: 3 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 47) In transaction analysis, revenues and expenses that arise in different transactions are recorded in the ________ column of the accounting equation. A) Multistep B) Common Stock C) Dividends D) Retained Earnings Answer: D Diff: 3 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

48) In transaction analysis, the declaration and payment of dividends is recorded in the ________ and ________ columns of the accounting equation. A) Dividends; Cash B) Expenses; Accounts Receivable C) Expenses; Accounts Payable D) Retained Earnings; Cash Answer: D Diff: 3 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 49) Transaction analysis and the accounting equation have been used to record several transactions for a company. The transactions are now recorded on a multi-column spreadsheet. When preparing an income statement with this spreadsheet, which column would be used? A) Cash B) Accounts Payable C) Dividends D) Retained Earnings Answer: D Diff: 3 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 50) Transaction analysis and the accounting equation have been used to record several transactions for a company. The transactions are now recorded on a multi-column spreadsheet. When preparing a statement of retained earnings with this spreadsheet, which column would be used? A) Cash B) Accounts Receivable C) Retained Earnings D) Revenue Answer: C Diff: 3 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

51) Transaction analysis and the accounting equation have been used to record several transactions for a company. The transactions are now recorded on a multi-column spreadsheet. When preparing a balance sheet with this spreadsheet, which column(s) would be used? A) final balances of asset columns only B) final balances of liability columns only C) final balances of stockholders' equity columns only D) all of the above Answer: D Diff: 3 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 52) A single-step income statement reports different types of revenue that include: A) sales revenue and service revenue. B) income tax expense, utilities expense, rent expense. C) operating income, income before income taxes, and net income. D) cost of goods sold and operating expenses. Answer: A Diff: 3 LO: 2-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

53) Beckowsik Company began business in June and completed the following transactions: A) Received $50,000 cash and issued common stock to the stockholders. B) Purchased supplies for $5,000 on account. C) Received and paid utilities bill of $2,000 for the month. D) Performed services for a customer and billed the customer $6,000. E) Received $3,000 from the customer on account. F) Paid for the supplies purchased on account. G) Purchased equipment for $10,000 on account. H) Declared and paid dividends of $2,200. Required: 1. Record the effects of the above transactions on the accounting equation. 2. Prove the accounting equation using the final balances in the accounts. Answer: 1. Accts. Equip- Accts. Common Retained Trans. Cash Rec. Supplies ment Pay. Stock Earnings A +50,000 +50,000 B +5,000 +5,000 C

(2,000)

D + 6,000 +6,000 E +3,000 (3,000) F (5,000) (5,000) G +10,000 +10,000 H (2,200) _______ _______ _______ _______ _______ (2,200) Totals 43,800 3,000 5,000 10,000 10,000 50,000 1,800

Utilities Expense Service Revenue

Dividends

2. Accounting Equation: Cash $43,800 + Accounts Receivable $3,000 + Supplies $5,000 + Equipment $10,000 = Accounts Payable $10,000 + Common Stock $50,000 + Retained Earnings $1,800 = $61,800 Diff: 3 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

54) Indicate whether the account is an asset (A), liability (L), stockholders' equity (SE), revenue (R) or expense (E) account. Also indicate if the account would appear on the Balance Sheet (BS), Income Statement (IS), Statement of Cash Flows (CF) or the Statement of Retained Earnings (SRE).

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

ACCOUNT Equipment Common Stock Accounts Payable Service Revenue Salary Expense Inventory Accounts Receivable Retained Earnings Notes Payable Prepaid Insurance Dividends Cash

TYPE OF ACCOUNT

FINANCIAL STATEMENT

TYPE OF ACCOUNT A SE L R E A A SE L A SE A

FINANCIAL STATEMENT BS BS BS IS IS BS BS BS, SRE BS BS SRE, CF BS, CF

Answer: ACCOUNT Equipment Common Stock Accounts Payable Service Revenue Salary Expense Inventory Accounts Receivable Retained Earnings Notes Payable Prepaid Insurance Dividends Cash

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. Diff: 2 LO: 2-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

Learning Objective 2-3 1) The double-entry system of accounting records the dual effects of transactions on the entity. Answer: TRUE Diff: 1 LO: 2-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 2) When using the double-entry system of accounting each transaction affects only two accounts. Answer: FALSE Diff: 1 LO: 2-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 3) When using T-accounts, the difference between the total credits and the total debits is the balance in the account. Answer: TRUE Diff: 1 LO: 2-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 4) The left-hand side of a T account is the debit side and the right-hand side is the credit side. Answer: TRUE Diff: 1 LO: 2-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 5) Accounts Receivable is increased with a credit. Answer: FALSE Diff: 2 LO: 2-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

6) Every business transaction involves at least one debit and at least one credit. Answer: TRUE Diff: 1 LO: 2-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 7) Assets, revenues, and dividends are all increased with debits. Answer: FALSE Diff: 2 LO: 2-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 8) Common stock and retained earnings are increased with debits. Answer: FALSE Diff: 2 LO: 2-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 9) If the sum of the credits to an account exceed the sum of the debits to the account, the account will have a credit balance. Answer: TRUE Diff: 1 LO: 2-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 10) The left side of a T-account is always the: A) increase side. B) decrease side. C) debit side. D) credit side. Answer: C Diff: 1 LO: 2-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

11) When working with T accounts, an important rule to remember is: A) when an account is debited, an amount is entered on the right-hand side on the T account. B) an increase to accounts payable will be recorded as a debit. C) to credit an account means to enter an amount on the right-hand side of the T account. D) the debit side of a T account is on the right-hand side of the T account for assets and expenses. Answer: C Diff: 2 LO: 2-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) Which of the following statements, regarding the rules of debits and credits, is CORRECT? A) An asset is increased by a credit. B) Common stock is increased by a debit. C) A liability is increased by a debit. D) Revenue is increased by a credit. Answer: D Diff: 3 LO: 2-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13) Decreases in stockholders' equity that result from the cost of operating the business are: A) assets. B) revenues. C) expenses. D) liabilities. Answer: C Diff: 2 LO: 2-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

14) An important rule of debits and credits is: A) credits increase revenue accounts. B) debits decrease asset accounts. C) debits increase liability accounts. D) credits increase asset accounts. Answer: A Diff: 2 LO: 2-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 15) Which accounts are increased by debits? A) Cash and Accounts Payable. B) Salaries Expense and Common Stock. C) Accounts Receivable and Utilities Expense. D) Accounts Payable and Service Revenue. Answer: C Diff: 3 LO: 2-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 16) Company A received cash and issued stock to a new stockholder. In recording this transaction: A) Cash would be debited. B) Common Stock would be debited. C) Cash would be credited. D) Retained Earnings would be credited. Answer: A Diff: 2 LO: 2-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

17) Complete the following chart indicating if the account is increased with a debit or a credit. ACCOUNT INCREASED WITH A: Accounts Receivable Accounts Payable Common Stock Dividends Service Revenue Interest Expense Interest Revenue Note Payable Retained Earnings Inventory Short-term Investments Answer: ACCOUNT INCREASED WITH A: Accounts Receivable Debit Accounts Payable Credit Common Stock Credit Dividends Debit Service Revenue Credit Interest Expense Debit Interest Revenue Credit Note Payable Credit Retained Earnings Credit Inventory Debit Short-term Investments Debit Diff: 2 LO: 2-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

18) Indicate whether the account is increased with a debit or a credit. Also indicate if the account would appear on the Balance Sheet (BS), Income Statement (IS), or the Statement of Retained Earnings (SRE). ACCOUNT:

INCREASED WITH A:

FINANCIAL STATEMENT:

Prepaid Rent Interest Payable Retained Earnings Dividends Common Stock Cost of Goods Sold Answer: ACCOUNT:

INCREASED FINANCIAL WITH A: STATEMENT: Prepaid Rent Debit BS Interest Payable Credit BS Retained Earnings Credit BS, SRE Dividends Debit SRE Common Stock Credit BS Cost of Goods Sold Debit IS Diff: 2 LO: 2-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting Learning Objective 2-4 1) In the journalizing process, the credit side is entered on the left margin, and the debit side is indented to the right. Answer: FALSE Diff: 1 LO: 2-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 2) The journal is the book of original entry. Answer: TRUE Diff: 1 LO: 2-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 32 Copyright © 2019 Pearson Education, Inc.

3) Posting is the process of copying data from the ledger to the journal. Answer: FALSE Diff: 2 LO: 2-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 4) The total debits to an account must equal the total credits to the account. Answer: FALSE Diff: 2 LO: 2-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 5) In a journal entry, the sum of the debits must always equal the sum of the credits. Answer: TRUE Diff: 1 LO: 2-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 6) Journal entries can have more than two accounts as long as the total debits equal the total credits. Answer: TRUE Diff: 2 LO: 2-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 7) Each journal entry should contain a brief description of the transaction. Answer: TRUE Diff: 1 LO: 2-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

8) The balance of an account is the difference between the account's total debits and total credits. Answer: TRUE Diff: 1 LO: 2-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 9) Entering a transaction in the journal is also known as booking the journal entry. Answer: TRUE Diff: 1 LO: 2-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 10) The journal is a grouping of all the T-accounts, with their balances. Answer: FALSE Diff: 1 LO: 2-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 11) Posting accounting transactions avoids the necessity of journalizing transactions. Answer: FALSE Diff: 1 LO: 2-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 12) Accounting transactions are initially recorded in the: A) T-account. B) ledger. C) journal. D) financial statements. Answer: C Diff: 2 LO: 2-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

13) The first step in recording a transaction in the journal is: A) determining whether each account is increased or decreased by the transaction. B) copying the information from the journal to the ledger. C) entering the debit side of the journal entry on the left margin and the credit side, which is indented to the right. D) specifying each account affected by the transaction and classifying the account by type. Answer: D Diff: 2 LO: 2-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 14) The process of copying the information from the journal to the trial balance is: A) called posting. B) not part of the accounting process. C) called journalizing. D) used to prepare the financial statements. Answer: B Diff: 2 LO: 2-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 15) In order to see a complete transaction in one place, you would need to look at the: A) trial balance. B) ledger. C) journal. D) financial statements. Answer: C Diff: 2 LO: 2-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

16) Entries are listed in the journal: A) alphabetically. B) chronologically. C) with income statement accounts first and then balance sheet accounts. D) in order of importance. Answer: B Diff: 2 LO: 2-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 17) An account will have a debit balance if: A) the amount of the credits exceeds the amount of the debits. B) the amount of the debits exceeds the amount of the credits. C) the account has more debit entries than credit entries. D) it is a liability account. Answer: B Diff: 2 LO: 2-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 18) What is the last step in the journalizing process? A) Record the transaction in the journal. B) Post the journal entry to the ledger. C) Determine whether each account is increased or decreased by the transaction. D) Specify each account affected by the transaction and classify each account by type. Answer: A Diff: 2 LO: 2-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 19) Which of the following items would NOT be included in the journal entry for a transaction? A) the names of the employees involved in recording the transaction B) the date the transaction occurred C) the titles of the accounts debited D) the dollar amount of the transaction Answer: A Diff: 2 LO: 2-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 36 Copyright © 2019 Pearson Education, Inc.

20) The proper order for the accounting process is: A) posting, transaction occurs, journalizing. B) transaction occurs, posting, journalizing. C) transaction occurs, transaction analyzed, journalizing, and posting. D) transaction occurs, posting, transaction analyzed, journalizing. Answer: C Diff: 2 LO: 2-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 21) The ledger: A) is a grouping of all of the balance sheet accounts only. B) is a grouping of all the income statement accounts only. C) contains all the accounts used by a business. D) contains only the permanent accounts used by a business. Answer: C Diff: 2 LO: 2-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 22) Posting is: A) copying the information from the journal to the trial balance. B) entering the data into the journal. C) copying the information from the journal to the ledger. D) copying the information from the ledger to the financial statements. Answer: C Diff: 2 LO: 2-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

23) Every journal entry: A) must increase at least one account and decrease at least one account. B) must debit at least one account and credit at least one account. C) is recorded in either the journal or the ledger. D) affects both an income statement account and a balance sheet account. Answer: B Diff: 2 LO: 2-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 24) In order to determine the balance in an account, you must look at the: A) source documents. B) journals. C) ledger. D) book of original entry. Answer: C Diff: 2 LO: 2-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 25) When an expense account is increased: A) an amount is entered on the credit side of the expense account. B) an amount is entered on the debit side of the expense account. C) cash must always be credited. D) stockholders' equity is not affected. Answer: B Diff: 2 LO: 2-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 26) The entry to record the purchase of supplies on account includes a credit to: A) Supplies. B) Accounts Payable. C) Supplies Expense. D) Cash. Answer: B Diff: 2 LO: 2-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 38 Copyright © 2019 Pearson Education, Inc.

27) Which of the following transactions includes a credit to cash? A) the purchase of supplies on account B) the payment of an accounts payable C) the collection of cash from an accounts receivable D) receipt of cash from a customer when service is provided Answer: B Diff: 2 LO: 2-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 28) If a journal entry includes a debit to Accounts Payable and a credit to Cash: A) Cash will have a credit balance. B) Accounts Payable is increased. C) Cash is increased. D) Accounts Payable is decreased. Answer: D Diff: 2 LO: 2-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 29) On March 31, Baker Company received a bill and paid for advertising costs for the current month. This payment results in a: A) debit to Cash. B) debit to Prepaid Advertising. C) debit to Advertising Expense. D) credit to Advertising Revenue. Answer: C Diff: 2 LO: 2-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

30) A journal entry that debits Cash and credits Accounts Receivable indicates that: A) payment was received on account. B) payment was made on account. C) revenue increased. D) revenue decreased. Answer: A Diff: 2 LO: 2-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 31) An owner makes an investment of cash into the business and receives shares of stock. This transaction is recorded as a: A) debit to Common Stock and a credit to Cash. B) debit to Cash and a credit to Common Stock. C) debit to Cash and a credit to Retained Earnings. D) debit to Cash and a credit to Stockholder Revenue. Answer: B Diff: 2 LO: 2-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 32) A transaction that includes a debit to an expense and a credit to a liability indicates that: A) revenues increased. B) expenses decreased. C) liabilities increased. D) liabilities decreased. Answer: C Diff: 3 LO: 2-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

33) The purchase of equipment, involving a cash down payment and a promise to pay the balance in the future, includes: A) a debit to Cash and a credit to Equipment. B) a debit to Note Payable and a credit to Cash. C) a credit to Cash and a credit to Accounts Payable. D) a debit to Cash and a debit to Note Payable. Answer: C Diff: 2 LO: 2-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 34) The purchase of office computers for cash includes a debit to: A) Cash and a credit to Office Equipment. B) Office Equipment and a credit to Accounts Payable. C) Accounts Receivable and credit to Office Equipment. D) Office Equipment and a credit to Cash. Answer: D Diff: 2 LO: 2-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 35) A company sold land for the same price that they paid for it last year. When entering this transaction in the journal, there will be a: A) credit to Land. B) debit to Land. C) debit to Accounts Payable. D) credit to Accounts Receivable. Answer: A Diff: 2 LO: 2-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

36) A partner in Sturm Company purchased a new yacht, for personal use, with his own funds. Sturm Company would: A) debit an asset account. B) credit a revenue account. C) credit a liability account. D) not record the transaction in its books. Answer: D Diff: 2 LO: 2-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 37) Jaye Company purchased a new building by signing a note for $25,000. The entry to record the transaction is: A) Cash 25,000 Note Payable 25,000 B) Building Cash

25,000

C) Note Payable Cash

25,000

D) Building 25,000 Notes Payable 25,000 Answer: D Diff: 3 LO: 2-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

38) When posting a journal entry to the ledger, transfer: A) the dollar amount of debits in the journal entry to the appropriate accounts. B) the dollar amounts of credits in the journal entry to the appropriate accounts. C) the name of the person who prepared the journal entry. D) A and B. Answer: D Diff: 2 LO: 2-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 39) A business paid $50,000 cash to purchase equipment. The business would: A) debit Equipment for $50,000 and credit Accounts Payable for $50,000. B) debit Equipment for $50,000 and credit Cash for $50,000. C) debit Cash for $50,000 and credit Notes Payable for $50,000. D) debit Accounts Payable for $50,000 and credit Cash for $50,000. Answer: B Diff: 2 LO: 2-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 40) A business purchased office supplies of $23,000 by signing a note. The business would: A) debit Supplies for $23,000 and credit Accounts Payable for $23,000. B) debit Supplies for $23,000 and credit Notes Payable for $23,000. C) debit Notes Receivable for $23,000 and credit Supplies for $23,000. D) debit Notes Payable for $23,000 and credit Supplies Expense for $23,000. Answer: B Diff: 2 LO: 2-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 41) A business purchased office supplies of $28,000 on account. The business would: A) debit Accounts Receivable for $28,000 and credit Supplies for $28,000. B) debit Supplies for $28,000 and credit Cash for $28,000. C) debit Accounts Payable for $28,000 and credit Supplies for $28,000. D) debit Supplies for $28,000 and credit Accounts Payable for $28,000. Answer: D Diff: 2 LO: 2-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 43 Copyright © 2019 Pearson Education, Inc.

42) A business paid $2,500 on account. The journal entry would: A) debit Accounts Receivable for $2,500 and credit Revenue for $2,500. B) debit Accounts Payable for $2,500 and credit Cash for $2,500. C) debit Cash for $2,500 and credit Retained Earnings for $2,500. D) debit Cash for $2,500 and credit Accounts Payable for $2,500. Answer: B Diff: 2 LO: 2-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 43) Two employees worked one week and were paid salaries of $2,500. The journal entry would: A) debit Cash for $2,500 and credit Salaries Payable for $2,500. B) debit Cash for $2,500 and credit Salary Expense for $2,500. C) debit Accounts Payable for $2,500 and credit Salary Payable for $2,500. D) debit Salary Expense for $2,500 and credit Cash for $2,500. Answer: D Diff: 2 LO: 2-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 44) A business sold equipment for $44,900 cash. The equipment was purchased one month earlier for $44,900 but the plans for the equipment changed. A) Debit Equipment for $44,900 and credit Cash for $44,900. B) Debit Equipment for $44,900 and credit Retained Earnings for $44,900. C) Debit Cash for $44,900 and credit Equipment for $44,900. D) Debit Retained Earnings for $44,900 and credit Equipment for $44,900. Answer: C Diff: 2 LO: 2-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

45) On May 1, a business provided legal services to a client and billed the client $4,000. The client promised to pay the business in one month. Which journal entry should the business record on May 1? A) Debit Cash for $4,000 and credit Service Revenue for $4,000. B) Debit Cash for $4,000 and credit Retained Earnings for $4,000. C) Debit Accounts Receivable for $4,000 and credit Service Revenue for $4,000. D) Debit Accounts Payable for $4,000 and credit Service Revenue for $4,000. Answer: C Diff: 2 LO: 2-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 46) On May 10, a business collected $4,200 on account. What journal entry is needed on that date? A) Debit Cash for $4,200 and credit Revenue for $4,200. B) Debit Accounts Receivable for $4,200 and credit Revenue for $4,200. C) Debit Cash for $4,200 and credit Accounts Receivable for $4,200. D) Debit Accounts Payable for $4,200 and credit Revenue for $4,200. Answer: C Diff: 2 LO: 2-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 47) A business received the current month's utility bill for $2,125, and immediately paid it. Which journal entry is prepared? A) Debit Accounts Payable for $2,125 and credit Cash for $2,125. B) Debit Utilities Payable for $2,125 and credit Cash for $2,125. C) Debit Utilities Expense for $2,125 and credit Cash for $2,125. D) Debit Operating Expense for $2,125 and credit Accounts Payable for $2,125. Answer: C Diff: 2 LO: 2-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

48) Prepare the journal entry for the following transaction: The business acquired land by paying $50,000 in cash and signing a promissory note for $250,000. Accounts and Explanation

Debit

Credit

Answer: Accounts and Explanation Debit Credit Land 300,000 Cash 50,000 Notes Payable 250,000 Acquired land; paid cash and signed a note payable. Diff: 2 LO: 2-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 49) Prepare the journal entry for the following transaction: The Board of Directors of XYZ Corporation declared dividends of $6,000. These dividends were paid to the stockholders on the same date. Accounts and Explanation

Answer: Accounts and Explanation Dividends Cash Declared and paid dividends.

Debit

Credit

Debit

Credit 6,000 6,000

Diff: 2 LO: 2-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

50) Prepare the journal entry(ies) for the following transactions: May 2, 2019: Main Street Enterprises purchased office supplies, for $2,000, on account. June 2, 2019: Main Street paid for the supplies. Date

Accounts and Explanation

Debit

Answer: Date Accounts and Explanation May 2 Office Supplies Accounts Payable Purchased office supplies on account. June 2

Accounts Payable Cash Paid for supplies purchased on May 2nd

Credit

Debit Credit 2,000 2,000

2,000 2,000

Diff: 2 LO: 2-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

51) Prepare the necessary journal entry(ies) for the following transactions: Feb 10, 2019: Jones Consulting performed services for clients. These clients were billed $2,500. March 8, 2019: Jones received full payment from these clients. Date

Accounts and Explanation

Answer: Date Accounts and Explanation Feb 10 Accounts Receivable Service Revenue Performed services on account.

Debit

Credit

Debit Credit 2,500 2,500

March 8 Cash Accounts Receivable Received cash from clients billed Feb 10th

2,500 2,500

Diff: 2 LO: 2-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

52) Prepare the journal entry for the following transaction: On June 12, the business paid $4,500 for the following expenses: employee salary, $3,000; utilities, $1,000, and repairs, $500. Date

Accounts and Explanation

Answer: Date Accounts and Explanation June 12 Salary Expense Utilities Expense Repairs Expense Cash Paid expenses

Debit

Credit

Debit Credit 3,000 1,000 500 4,500

Diff: 2 LO: 2-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

53) Latinovich Legal Services had the following transactions during its first month of operations: May 1 Latinovich Legal Services received $20,000 cash and issued common stock to the stockholders. May 1 Paid the May rent, $5,000. May 3 Purchased equipment on account for $3,000. May 5 Purchased supplies for $2,000 on account. May 8 Performed services for a client and received cash of $11,800. May 12 Performed services for a client and billed the client $12,200. The client promised to pay within 10 days. May 15 Paid for the equipment purchased May 3 on account. May 22 Received payment from a client on account, $12,200. May 28 Borrowed $10,000, by signing a promissory note, from First National Bank for use in the business. May 31 Employees were paid $3,000 for working during the current month. May 31 Received and paid the utility bill of $1,800. Required: Record the transactions of the business in a journal. Include an explanation for each entry. Answer: Date Account Dr Cr May 1

Cash Common Stock Issued common stock.

20,000

Rent expense Cash Paid May rent.

5,000

Equipment Accounts Payable Purchased equipment on account.

3,000

Supplies Accounts payable Purchased supplies on account.

2,000

Cash Service Revenue Performed services for cash.

11,800

Accounts Receivable Service Revenue Performed services on account.

12,200

20,000

5,000

3,000

2,000

11,800

12,200

Accounts payable Cash Paid cash on account.

3,000

Cash Accounts Receivable Collected cash on account.

12,200

Cash Note Payable Borrowed from bank.

10,000

Salary Expense Cash Paid salaries for month.

3,000

Utility Expense Cash Paid utility expense.

1,800

3,000

12,200

10,000

3,000

Diff: 2 LO: 2-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement Learning Objective 2-5 1) Accounts are listed in random order in a trial balance. Answer: FALSE Diff: 1 LO: 2-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 2) A trial balance is a required financial statement. Answer: FALSE Diff: 1 LO: 2-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

1,800

3) Although a trial balance can be prepared at any time, the most common time is at the end of the accounting period. Answer: TRUE Diff: 2 LO: 2-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 4) The trial balance summarizes all the account balances for the financial statements and shows whether total debits equal total credits. Answer: TRUE Diff: 2 LO: 2-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 5) The trial balance for James Corporation shows that the total debits equal the total credits. This indicates that all of the accounts are free from errors. Answer: FALSE Diff: 2 LO: 2-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 6) When a trial balance is out of balance due to a transposition error, the difference between total debits and total credits will be evenly divisible by 2. Answer: FALSE Diff: 2 LO: 2-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 7) When a trial balance is out of balance due to a slide-type error, the difference between total debits and total credits will be evenly divisible by 9. Answer: TRUE Diff: 2 LO: 2-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

8) A bookkeeper posted the same journal entry twice. This will cause the trial balance to be out of balance. Answer: FALSE Diff: 2 LO: 2-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 9) The financial statements can be prepared from the trial balance. Answer: TRUE Diff: 2 LO: 2-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 10) An account with a normal debit balance is most often an asset or revenue account. Answer: FALSE Diff: 2 LO: 2-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 11) The normal balance of an expense account is a ________ because expenses decrease ________. A) debit; assets B) debit; expenses C) debit; retained earnings D) credit; retained earnings Answer: C Diff: 2 LO: 2-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

12) The normal balance of an account: A) falls on the side where decreases are recorded. B) falls on the side where increases are recorded. C) must be computed after every transaction. D) cannot be computed in a manual accounting system. Answer: B Diff: 2 LO: 2-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 13) The normal balance of a revenue account is a ________ because revenues increase ________. A) credit; assets B) debit; expenses C) debit; retained earnings D) credit; retained earnings Answer: D Diff: 2 LO: 2-5 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 14) When computing the normal balance of an account: A) salaries expense should have a credit balance. B) accounts payable should have a credit balance. C) equipment should have a credit balance. D) notes payable should have a debit balance. Answer: B Diff: 2 LO: 2-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

15) Which error will be uncovered by a trial balance? A) The bookkeeper recorded the same journal entry three times. B) The bookkeeper forgot to record a journal entry for a large amount. C) The bookkeeper recorded both the debit and credit of a journal entry as $200 instead of $700. D) The bookkeeper recorded a journal entry with a debit of $400 and a credit of $400, as a debit of $400 and a credit of $40. Answer: D Diff: 2 LO: 2-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 16) The trial balance is used to determine if: A) total assets equal total liabilities. B) total debits of all the accounts equal total credits of all the accounts. C) total debits of the income statement accounts equal the total credits of the income statement accounts. D) total debits of the balance sheet accounts equal the total credits of the balance sheet accounts. Answer: B Diff: 2 LO: 2-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 17) A bookkeeper forgot to post a credit to Accounts Receivable, but did post the debit part of the journal entry correctly. Then: A) the trial balance would still balance. B) total debits would exceed total credits on the trial balance. C) total credits would exceed total debits on the trial balance. D) total debits and total credits would both be incorrect on the trial balance. Answer: B Diff: 3 LO: 2-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

18) If a posting error has occurred whereby a debit is treated as a credit, then the out-of-balance amount on the trial balance will be evenly divisible by: A) 11. B) 9. C) 2. D) 5. Answer: C Diff: 2 LO: 2-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 19) If the trial balance does not balance, several steps can be taken to find the error. Which step will probably NOT help you find the error? A) Tracing each account back and forth from the journal to the ledger. B) Divide the out-of-balance amount by 2. C) Divide the out-of-balance amount by 9. D) Divide the out-of-balance amount by 5. Answer: D Diff: 2 LO: 2-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 20) A chart of accounts: A) is used by an organization to determine the balance in all of their accounts. B) lists all of the accounts of an organization in alphabetical order. C) must be the same for all organizations. D) lists all of an organization's accounts and account numbers. Answer: D Diff: 2 LO: 2-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

21) Which of the following statements regarding a trial balance is TRUE? A) A trial balance may be prepared at any time during the accounting period. B) A trial balance is a list of all accounts used in a business with their balances. C) A trial balance shows whether total debits equal total credits. D) All of the above are true. Answer: D Diff: 2 LO: 2-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 22) A trial balance has which of the following features? A) Totals for balance sheet accounts only. B) Totals for income statement accounts only. C) Totals for all accounts listed in the ledger. D) Accounts are listed in alphabetical order. Answer: C Diff: 1 LO: 2-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 23) Which of the following is a CORRECT statement about a chart of accounts? A) It lists the income statement accounts first. B) It can be used to determine the balance in an account. C) It is a tool used by accountants to help prepare the financial statements. D) It lists the balance sheet accounts first. Answer: D Diff: 2 LO: 2-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 24) Which account has a normal debit balance? A) Salaries Payable B) Common Stock C) Advertising Expense D) Service Revenue Answer: C Diff: 2 LO: 2-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 57 Copyright © 2019 Pearson Education, Inc.

25) The normal balance of the Accounts Receivable account is a ________ because it is a(n) ________ account. A) credit; liability B) debit; stockholders' equity C) credit; expense D) debit; asset Answer: D Diff: 2 LO: 2-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 26) Accounts with normal debit balances include: A) Cash, Accounts Receivable, and Accounts Payable. B) Cash, Supplies, and Accounts Payable. C) Cash, Accounts Receivable, and Supplies. D) Cash, Supplies, and Notes Payable. Answer: C Diff: 2 LO: 2-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 27) Andy Company had a cash balance on May 1 of $27,000. At the end of May, the cash balance has increased to $31,000. During the month of May, Andy received cash of $48,000 from various sources. Based on this information, cash payments for the month of May were: A) $27,000. B) $31,000. C) $44,000. D) $75,000. Answer: C Explanation: $27,000 + $48,000 - $31,000 = $44,000 Diff: 3 LO: 2-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

28) Yellow Company had a balance of $31,000 in Accounts Payable at the beginning of June, and purchased $104,000 of merchandise on account during the month. At the end of June, Yellow's Accounts Payable balance was $29,000. What amount did Yellow pay on account during June? A) $44,000 B) $75,000 C) $104,000 D) $106,000 Answer: D Explanation: $31,000 + $104,000 - $29,000 = $106,000 Diff: 3 LO: 2-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 29) The Accounts Receivable account for Johnny's Mechanic Shop had a beginning balance of $36,000. During the month, Johnny made sales on account of $46,000. The ending balance in the Accounts Receivable account is $32,000. What are cash collections for the month? A) $36,000 B) $46,000 C) $50,000 D) $82,000 Answer: C Explanation: $36,000 + $46,000 - $32,000 = $50,000 Diff: 3 LO: 2-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 30) The Diamond Store began business on June 1. During the month of June, Diamond had cash payments of $8,000. At the end of June, it had a $20,000 cash balance. Based on this information, the cash receipts for the month of June were: A) $12,000. B) $20,000. C) $28,000. D) $36,000. Answer: C Explanation: 0 + x - $8,000 = $20,000; x = $28,000 Diff: 3 LO: 2-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

31) Simmons Company began the month with a balance of $84,000 in Accounts Receivable. An analysis of the account determined that sales on account for the month totaled $113,000. At the end of the month, the balance in Accounts Receivable was $86,000. From this information, it can be determined that Simmons Company had collections from customers on account of: A) $29,000. B) $57,000. C) $115,000. D) $111,000. Answer: D Explanation: $84,000 + $113,000 - $86,000 = $111,000 Diff: 3 LO: 2-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 32) The accounts of Local Company at May 31, 2019 are as follows: Account Accounts Payable Accounts Receivable Cash Common Stock Dividends Insurance Expense Retained Earnings Salary Expense Sales Revenue Supplies

Balance $23,500 $15,600 $68,000 $32,000 $3,000 $2,100 $25,800 $1,100 $10,000 $1,500

What are the first four lines, in proper order, on the trial balance at May 31, 2019? A) Accounts Payable, Accounts Receivable, Cash, Common Stock B) Sales Revenue, Salary Expense, Insurance Expense, Supplies C) Cash, Accounts Receivable, Supplies, Accounts Payable D) Accounts Payable, Dividends, Common Stock, Retained Earnings Answer: C Diff: 3 LO: 2-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

33) The accounts of Yardy Company are as follows on November 30, 2019: Account Accounts Payable Accounts Receivable Cash Common Stock Dividends Insurance Expense Retained Earnings Salary Expense Sales Revenue Supplies

Balance $26,500 $16,600 $73,000 $37,000 $8,000 $4,100 $28,800 $14,000 $11,000 $1,500

What is the total of the debit column in the trial balance at November 30, 2019? A) $100,300 B) $109,200 C) $117,200 D) $220,500 Answer: C Explanation: Cash $73,000 + Accounts Receivable $16,600 + Supplies $1,500 + Dividends $8,000 + Insurance Expense $4,100 + Salary Expense $14,000 = $117,200 Diff: 3 LO: 2-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 34) When listing the accounts on the trial balance, list the ________ accounts first and then the ________ accounts. A) income statement; cash flow statement B) asset; liability C) income statement; balance sheet D) revenues; stockholders' equity Answer: B Diff: 3 LO: 2-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

35) An example of a transposition error is writing: A) $500 as $50. B) $2,000 as $4,000. C) $300 as $600. D) $1,400 as $4,100. Answer: D Diff: 3 LO: 2-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 36) An example of a slide-type error is writing: A) $1,300 as $3,100. B) $300 as $600. C) $5,000 as $10,000. D) $500 as $50. Answer: D Diff: 3 LO: 2-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 37) A company did not record the receipt and payment of an utility bill for $2,500. Is the trial balance out of balance? A) No. B) Yes, by $2,500. C) Yes, by $5,000. D) Yes, by an indeterminate amount. Answer: A Explanation: The trial balance will still balance as no entry was written for debit or credit. Diff: 3 LO: 2-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

38) A company posted a $8,000 debit to Cash as $800. The credit of $8,000 to Service Revenue in the entry was posted correctly. Is the trial balance out of balance? A) No. B) Yes, by $800. C) Yes, by $7,200. D) Yes, by $8,000. Answer: C Explanation: $8,000 - $800 = $7,200 Diff: 3 LO: 2-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 39) A company omitted a journal entry to record service revenue of $12,000 on account. Is the trial balance out of balance? A) No. B) Yes, by $12,000. C) Yes, by $24,000. D) Yes, by an indeterminate amount. Answer: A Explanation: The trial balance will still balance as no entry was written for debit or credit. Diff: 3 LO: 2-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 40) A company incorrectly recorded a receipt of cash on account. Accounts Receivable was debited for $1,400 and Cash was credited for $1,400. Is the trial balance out of balance? A) No. B) Yes, by $1,400. C) Yes, by $2,800. D) Yes, by $4,200. Answer: A Explanation: The debit and credit amounts are the same in the journal entry, so the trial balance will balance. Diff: 3 LO: 2-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

41) When listing the assets in the trial balance, the balance for Accounts Receivable was transposed. The correct balance is $4,100 and the amount was written as $1,400. Is the trial balance out of balance? A) No. B) Yes, by $1,400. C) Yes, by $2,700. D) Yes, by $4,100. Answer: C Explanation: $4,100 - $1,400 = $2,700 Diff: 3 LO: 2-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 42) A company recorded a cash payment incorrectly. Accounts Receivable was debited for $1,900 and Cash was credited for $1,900. The correct entry would debit Accounts Payable for $1,900 and credit Cash for $1,900. Is the trial balance out of balance? A) No. B) Yes, by $1,900. C) Yes, by $3,800. D) Yes, by an indeterminate amount. Answer: A Explanation: The debit and credit amounts are the same in the journal entry, so the trial balance will balance. Diff: 3 LO: 2-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 43) When listing the accounts on the trial balance, where is the dividends account listed? A) It is not listed on the trial balance. B) After Retained Earnings. C) After Service Revenue or Sales Revenue. D) As part of the expense accounts. Answer: B Diff: 3 LO: 2-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

44) Information for the trial balance is obtained from the: A) journal. B) ledger. C) balance sheet. D) income statement. Answer: B Diff: 3 LO: 2-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 45) The dollar amounts listed on the trial balance are obtained from the: A) beginning balances in the ledger accounts. B) ending balances in the ledger accounts. C) last period's balance sheet and income statement. D) this period's balance sheet and income statement. Answer: B Diff: 3 LO: 2-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 46) The trial balance is used to prepare the: A) balance sheet only. B) income statement only. C) statement of retained earnings only. D) all of the above. Answer: D Diff: 3 LO: 2-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

47) Put an "X" in the appropriate box to indicate if the normal balance of an account is a debit or a credit balance. NORMAL BALANCE NORMAL BALANCE IS A DEBIT IS A CREDIT ACCOUNTS Cash Service Revenue Accounts Receivable Accounts Payable Utilities Expense Common Stock Notes Payable Land Retained Earnings Dividends Rent Expense Answer: NORMAL BALANCE NORMAL BALANCE IS A DEBIT IS A CREDIT ACCOUNTS Cash X Service Revenue Accounts Receivable X Accounts Payable Utilities Expense X Common Stock Notes Payable Land X Retained Earnings Dividends X Rent Expense X Diff: 2 LO: 2-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

X X X X X

48) Wrobell Company has the following incorrect trial balance available on December 31, 2019: Account Cash Accounts Receivable Inventory Supplies Land Accounts Payable Common Stock Sales Revenue Salary Expense Rent Expense Utility Expense Totals

Debit

Credit $27,900 $12,800 $17,300 $400 $41,000 $21,600 $47,100 $33,800

$2,200 $1,000 $1,000 $103,600

$102,500

The following errors in the trial balance were made: 1. Recorded $200 cash revenue received by debiting Accounts Receivable for $200 and crediting Sales Revenue for $200. 2. Posted a $1,000 credit to Accounts Payable as $100. 3. Understated Common Stock by $200. 4. Omitted a journal entry that debits Insurance Expense for $3,700 and credits Cash for $3,700. Prepare a corrected trial balance at December 31, 2019. A proper heading is not required. Answer: Account Debit Credit Cash $24,400 Accounts Receivable $12,600 Inventory $17,300 Supplies $400 Land $41,000 Accounts Payable $22,500 Common Stock $47,300 Sales Revenue $33,800 Salary Expense $2,200 Rent Expense $1,000 Utility Expense $1,000 Insurance Expense $3,700 Totals $103,600 $103,600 Diff: 3 LO: 2-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

49) Timothy Company has the following trial balance at December 31, 2019: Account Cash Accounts Receivable Supplies Land Accounts Payable Short-term Notes Payable Common Stock Retained Earnings Dividends Service Revenue Salary Expense Rent Expense Interest Expense Utilities Expense Totals

Debit

Credit $31,200 4,000 300 40,000 1,300 45,000 10,000 18,500 1,800 7,600 3,000 1,500 400 200 $82,400

________ $82,400

Prepare a balance sheet at December 31, 2019. Include a proper heading.

Answer:

Timothy Company Balance Sheet December 31, 2019

Assets: Current Assets: Cash Accounts Receivable Supplies Total Current Assets Long-term Assets: Land Total Assets

$31,200 4,000 300 $35,500 40,000 $75,500

Liabilities and Stockholders' Equity: Current Liabilities: Accounts Payable $1,300 Short-term Notes Payable 45,000 Total Current Liabilities $46,300 Stockholders' Equity: Common Stock 10,000 Retained Earnings* 19,200 Total Stockholders' Equity 29,200 Total Liabilities & Stockholders' Equity $75,500 *Retained Earnings = Beginning Balance Retained Earnings $18,500 - Dividends $1,800 + Service Revenue $7,600 - Salary Expense $3,000 - Rent Expense $1,500 - Interest Expense $400 - Utilities Expense $200 = $19,200 Diff: 3 LO: 2-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting

50) Martin Company had the following transactions during its first month of operations: June1 The company received cash of $35,000 and issued common stock to the shareholders. 2 Borrowed $20,000 from the bank and signed a long-term note payable. 8 Purchased equipment with a short-term note payable for $10,000. 9 Performed services billed at $3,000 and received cash of $3,000. 10 Performed services for a client on account, $6,500. 12 Employees worked two weeks and were paid salaries of $1,000. 15 Paid the short-term note payable from the June 8 purchase. 22 Purchased office supplies on account for $7,000. 30 Paid amount due for office supplies. 30 Paid June's monthly rent of $500. 30 Paid the monthly income taxes of $2,200. 30 The Board of Directors declared and paid dividends of $1,000. Required: 1. Journalize the entries. Omit the explanations. 2. Prepare a single-step income statement for the first month of operations. Include a proper heading. 3. Prepare a statement of retained earnings for the first month of operations. Include a proper heading.

Answer: 1. June 1 Cash Common Stock June 2

35,000 35,000

Cash Long-Term Note Payable

20,000

Equipment Short-Term Note Payable

10,000

Cash Service Revenue

3,000

June 10 Accounts Receivable Service Revenue

6,500

June 12 Salary Expense Cash

1,000

June 15 Short-Term Note Payable Cash

10,000

June 22 Supplies Accounts Payable

7,000

June 30 Accounts Payable Cash

7,000

June 30 Rent Expense Cash

500

June 30 Income Tax Expense Cash

2,200

June 30 Dividends Cash

1,000

June 8

June 9

20,000

10,000

3,000

6,500

1,000

10,000

7,000

500

2,200

1,000

Martin Company Income Statement For the Month Ended June 30

Service Revenue Expenses: Salary Expense Rent Expense Total Expenses Income Before Taxes Income Tax Expense Net Income

$9,500 1,000 500 1,500 8,000 2,200 $5,800

Martin Company Statement of Retained Earnings For the Month Ended June 30 Retained Earnings, June 1 $0 Add: Net Income 5,800 Subtotal 5,800 Less: Dividends Declared 1,000 Retained Earnings, June 30 $4,800 Diff: 3 LO: 2-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

Financial Accounting, 12e (Thomas/Tietz/Harrison) Chapter 3 Accrual Accounting & Income Learning Objective 3-1 1) Under cash-basis accounting, accounts receivable is increased when a company makes a sale on account. Answer: FALSE Diff: 2 LO: 3-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 2) The journal entry to record a cash sale will be the same under the accrual and cash-basis of accounting. Answer: TRUE Diff: 3 LO: 3-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) Under cash-basis accounting, no journal entry is recorded when a sale is made on account. Answer: TRUE Diff: 2 LO: 3-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) Generally Accepted Accounting Principles (GAAP) require the use of accrual accounting. Answer: TRUE Diff: 1 LO: 3-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 5) Accrual accounting records the impact of both cash and noncash business transactions as they occur. Answer: TRUE Diff: 2 LO: 3-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 1 Copyright © 2019 Pearson Education, Inc.

6) Under cash-basis accounting, income statements and balance sheets may be misstated. Answer: TRUE Diff: 2 LO: 3-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 7) The basic defect of cash-basis accounting is that the cash basis ignores important information. Answer: TRUE Diff: 2 LO: 3-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 8) Cash-basis accounting is a better representation of the time-period concept and the revenue principle. Answer: FALSE Diff: 2 LO: 3-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 9) The time-period concept ensures that the accounting information is reported in the financial statements on a monthly basis. Answer: FALSE Diff: 2 LO: 3-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 10) The only way for a business to know for certain how well it performed is to shut down, sell the assets, pay the liabilities, and return any leftover cash to the owners. Answer: TRUE Diff: 2 LO: 3-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

11) A doctor performed surgery in March and did not receive cash from the patient until July. Under accrual accounting, the doctor recognizes revenue: A) in March. B) in July. C) in either March or July. D) at a time that cannot be determined from the facts. Answer: A Diff: 2 LO: 3-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) A doctor performed surgery in April and did not receive cash payment from the patient until August. Under cash-basis accounting, the doctor recognizes revenue: A) in April. B) in August. C) in April or August. D) at a time that cannot be determined from the facts. Answer: B Diff: 2 LO: 3-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 13) Under accrual accounting, revenue is recorded: A) when the cash is received, regardless of when the services are performed. B) when the services are performed, regardless of when the cash is received. C) at the end of every month. D) only if the cash is received at the same time the services are performed. Answer: B Diff: 2 LO: 3-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

14) Which of the following transactions would be recorded under accrual accounting but NOT under cash-basis accounting? A) collecting cash from customers B) borrowing money from the bank C) purchasing of inventory on account D) issuing stock for cash Answer: C Diff: 2 LO: 3-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 15) Which of the following is a CORRECT statement about the two bases of accounting? A) Cash-basis accounting records revenues when they are earned. B) Cash-basis accounting records expenses only at the end of the month. C) GAAP requires accrual accounting. D) Only the largest companies in the United States use accrual accounting. Answer: C Diff: 2 LO: 3-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 16) The ________ basis of accounting records revenues ONLY when cash is received. A) deferral B) cash C) accrual D) hybrid Answer: B Diff: 1 LO: 3-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

17) When cash-basis accounting is used, and services are provided on account: A) only the income statement will be incorrect. B) only the balance sheet will be incorrect. C) both the income statement and the balance sheet will be incorrect. D) either the income statement or the balance sheet will be incorrect. Answer: C Diff: 2 LO: 3-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 18) An expense occurred in 2018, but it is not paid until 2019. Using accrual accounting, the expense should appear on: A) the 2018 income statement. B) the 2019 income statement. C) whichever income statement the business prefers. D) both the 2018 and 2019 income statements. Answer: A Diff: 3 LO: 3-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 19) An expense occurred in 2018, and it is not paid until 2019. Using cash-basis accounting, the expense should appear on: A) the 2018 income statement. B) the 2019 income statement. C) whichever income statement the business prefers. D) both the 2018 and 2019 income statements. Answer: B Diff: 3 LO: 3-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

20) Under accrual-basis accounting, if a company fails to record a sale on account: A) revenue will be understated. B) assets will be understated. C) net income will still be correct. D) A and B. Answer: D Diff: 3 LO: 3-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 21) An interim period used for reporting purposes is generally: A) more than one year, but less than the life of the company. B) more than one year. C) less than one year. D) the same as the fiscal year. Answer: C Diff: 1 LO: 3-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 22) The requirement to report accounting information at regular intervals is known as the: A) interim reporting concept. B) revenue principle. C) time-period concept. D) expense recognition principle. Answer: C Diff: 2 LO: 3-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 23) Which of the following statements regarding the time-period concept is NOT correct? A) Interim financial reports are rarely prepared. B) Accountants prepare financial statements for specific periods of time. C) The basic accounting period is one year. D) Most large companies use a calendar year for financial reporting. Answer: A Diff: 1 LO: 3-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 6 Copyright © 2019 Pearson Education, Inc.

24) Wilde Company earned revenues of $170,000 in cash and $230,000 on account during 2018. Of the $230,000 on account, $79,000 was collected in cash in 2018 and the rest in 2019. The company incurred expenses of $145,000 on account in 2018 and made cash payments of $100,000 towards the expenses in 2018. What is net income in 2018 under cash-basis accounting? A) $130,000 B) $70,000 C) $149,000 D) $255,000 Answer: C Explanation: Revenue $170,000 + Revenue $79,000 - Expenses $100,000 = $149,000 Diff: 1 LO: 3-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 25) Winter Company earned revenues of $150,000 in cash and $200,000 on account during 2018. Of the $200,000 on account, $63,000 was collected in cash in 2018 and the rest in 2019. The company incurred expenses of $115,000 in 2018 and made payments of $70,000 towards the expenses in 2018. What is net income in 2018 under accrual accounting? A) $85,000 B) $235,000 C) $280,000 D) $350,000 Answer: B Explanation: Revenue $150,000 + Revenue $200,000 - Expenses $115,000 = $235,000 Diff: 1 LO: 3-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 26) Accrual accounting records all of the following transactions EXCEPT: A) earning of unearned revenue received in advance. B) expiration of prepaid insurance. C) accrual of expenses incurred but not paid. D) receipt of Award for Service to the Community of Naperville, Illinois. Answer: D Diff: 1 LO: 3-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

27) Cash-basis accounting does NOT record: A) receipt of cash from interest earned on note receivable. B) payment of salaries to employees. C) expiration of prepaid rent. D) borrowing money from the local bank. Answer: C Diff: 1 LO: 3-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 28) Cash-basis accounting does NOT record: A) purchase of supplies with cash. B) sale of common stock. C) payment of note payable. D) depreciation expense. Answer: D Diff: 1 LO: 3-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 29) Under cash-basis accounting, cash receipts are treated as ________ and cash payments are treated as ________. A) retained earnings; dividends B) retained earnings; income C) revenues; expenses D) gains; losses Answer: C Diff: 1 LO: 3-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement Learning Objective 3-2 1) The revenue principle determines when to record revenue and the amount of revenue to record. Answer: TRUE Diff: 1 LO: 3-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 8 Copyright © 2019 Pearson Education, Inc.

2) The revenue principle states that revenue should be recorded in the same period as the cash is received. Answer: FALSE Diff: 2 LO: 3-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 3) Under the revenue recognition principle, you can recognize revenue before you earn it. Answer: FALSE Diff: 2 LO: 3-2 AACSB: Diverse and Multicultural Work Environments AICPA Bus Persp: International/Global AICPA Functional: Measurement 4) The expense recognition principle states that expenses have future benefit to the company. Answer: FALSE Diff: 2 LO: 3-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 5) Expenses have a future benefit to the company. Answer: FALSE Diff: 2 LO: 3-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 6) The expense recognition principle recognizes expenses in the period they are paid. Answer: FALSE Diff: 2 LO: 3-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

7) The amount of revenue to record is the amount of cash or its equivalent that is transferred from the customer to the seller. Answer: TRUE Diff: 2 LO: 3-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 8) Expenses are the costs of assets used up and liabilities created in earning revenue. Answer: TRUE Diff: 2 LO: 3-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 9) Since accrual accounting follows the revenue principle and the expense recognition principle, all ethical challenges are avoided. Answer: FALSE Diff: 2 LO: 3-2 AACSB: Ethical Understanding and Reasoning AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 10) On December 15, 2019, a company receives an order from a customer for services to be performed on December 28, 2019. Due to a backlog of orders, the company does not perform the services until January 3, 2020. The customer pays for the services on January 6, 2020. The revenue principle requires the revenue to be recorded by the company on: A) December 15, 2019. B) January 3, 2020. C) December 28, 2019. D) January 6, 2020. Answer: B Diff: 2 LO: 3-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

11) On July 25, Henry Company's accountant prepared a check to prepay for the August through December monthly rent payments. Henry Company mailed the check on July 27 to the landlord. The landlord received the check on July 31 and cashed it on August 2. When should Henry Company record the rent expense for August associated with this transaction? Henry Company uses accrual accounting. A) July 25 B) July 27 C) August 31 D) August 2 Answer: C Diff: 3 LO: 3-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) The revenue principle deals with the following: A) when to record revenue and where to record this revenue. B) where to record revenue and the amount of revenue to record. C) when to record revenue and the amount of revenue to record. D) when to record revenue and when to record related expenses. Answer: C Diff: 2 LO: 3-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13) Under accrual accounting, the event that triggers revenue recognition for the sale of goods is the: A) date a contract is signed. B) date the customer pays for the goods. C) date the customer orders the goods. D) delivery of goods to customer. Answer: D Diff: 2 LO: 3-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

14) To obtain a new customer, a business sells merchandise to the customer for $130. Normally, the merchandise sells for $260. For this sale, the business should record revenue of: A) $130. B) $260. C) either amount. D) an average of the two amounts. Answer: A Diff: 2 LO: 3-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 15) Which of the following is a TRUE statement regarding expenses? A) Expenses represent future benefit to the company. B) The expense recognition principle recognizes expenses in the same period in which the related revenues are earned. C) Expenses will never result in the creation of a liability account. D) The critical event for recording salary expense is the payment of cash. Answer: B Diff: 2 LO: 3-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 16) The revenue principle requires that a business record revenue when the business: A) receives an order from a customer. B) prepares the invoice for the customer. C) it has been earned and not before. D) receives payment from a customer. Answer: C Diff: 2 LO: 3-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

17) On November 1, 2018, a company using accrual accounting, pays $900,000 for a television advertising campaign. Commercials will run evenly over six months beginning on November 1, 2018. How much Advertising Expense will be reported on an income statement prepared for the year ended December 31, 2018? A) $300,000 B) $450,000 C) $600,000 D) $900,000 Answer: C Explanation: ($900,000 ÷ 6) × 4 = $600,000 (Note: 2 months of advertising expense will occur in 2018 for November and December; 4 months will occur in 2019 for January through April) Diff: 3 LO: 3-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 18) A CPA prepares tax returns for clients and bills them after the work is completed. It usually takes two weeks of work to prepare the tax returns. It takes 30 days on average to receive payment from the clients. The CPA uses cash-basis accounting. The revenue should be recorded when the CPA: A) starts working on the tax returns. B) completes working on the tax returns. C) bills the clients. D) receives payments from the clients. Answer: D Diff: 3 LO: 3-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 19) The expense recognition principle requires the recognition of expenses: A) in the same period in which the related revenues are earned. B) in the period they are paid. C) in the period assets are created. D) in the period in which future benefit for the company occurs. Answer: A Diff: 3 LO: 3-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

20) The Financial Accounting Standards Board(FASB) and the International Accounting Standards Board (IASB) are working together to develop similar standards. Which of the following statements is FALSE? A) The FASB and IASB have recently issued a joint new standard that provides a globally consistent, converged, and simplified way to recognize revenue. B) The new revenue standard has five steps. C) The first step in the new revenue standard is to allocate the transaction price to the performance obligations. D) The joint new revenue recognition standard is based on the idea that all business transactions involve contracts that exchange goods or services for cash or claims to receive cash. Answer: C Diff: 3 LO: 3-2 AACSB: Reflective Thinking AICPA Bus Persp: International/Global AICPA Functional: Measurement, Reporting 21) According to the joint new standard for revenue recognition, issued by FASB and IASB, which item below is NOT necessary? A) Identify the contract with the customer. B) Identify the separate performance obligations in the contract. C) Allocate the transaction price to the separate performance obligations in the contract. D) Recognize expenses as the entity satisfies the performance obligations. Answer: D Diff: 3 LO: 3-2 AACSB: Reflective Thinking AICPA Bus Persp: International/Global AICPA Functional: Measurement, Reporting 22) Following the expense recognition principle, to recognize expenses along with the related revenues, means to: A) add expenses and revenues together to compute net income or net loss. B) recognize the expense of a period against the cash revenues of another period. C) abandon the matching principle. D) subtract expenses from the related revenues to compute net income or net loss. Answer: D Diff: 3 LO: 3-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

23) On June 1, 2019, Starbucks paid the rent of $66,000 for 40 of its stores in Washington and California. The rent covers the period, June 1, 2019 through November 30, 2019. On June 1, Starbucks will record ________. On June 30, Starbucks will record ________. A) Rent Expense of $66,000; nothing B) nothing; Rent Expense of $66,000 C) nothing; Rent Expense of $11,000 D) Prepaid Rent of $66,000; Rent Expense of $11,000 Answer: D Explanation: On June 1, the entire amount of $66,000 is recorded as prepaid rent. At the end of June, one of the six months that was prepaid ( $66,000 / 6 months = $11,000) is recorded as rent expense. Diff: 3 LO: 3-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 24) On January 1, 2019, a customer places an order for a new customized vehicle. The contract price is $42,000. The vehicle is delivered to the dealer and customer on April 1, 2019. What amount of revenue does the dealer record on January 1, 2019 and April 1, 2019? A) $42,000; $0 B) $21,000; $21,000 C) $14,000; $14,000 D) $0; $42,000 Answer: D Diff: 3 LO: 3-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

25) Define the following terms: Term Accrual Accounting

Definition

Revenue Principle Expense Recognition Principle

Answer: Term Accrual Accounting

Revenue Principle Expense Recognition Principle

Definition Accounting that records the impact of a business event as it occurs, regardless of whether the transaction affected cash. The basis for recording revenues: tells accountants when to record revenue and the amount of revenue to record. The basis for recording expenses. Directs accountants to measure the expenses, and to match them against the revenues earned during that same period.

Diff: 2 LO: 3-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

26) Fiscal year 2018 (April 1, 2018 - March 31, 2019) has been great for Murphy Incorporated. Net income is higher than expected. Management believes that fiscal year 2019 will not be as profitable. On December 31, 2018, Murphy signed a one-year contract for monthly advertising for $2,400,000. The advertising began on January 1, 2019. The CEO has asked the accountant to expense the $2,400,000 during fiscal year 2018. You are the accountant. Comment on each of the following: What is the proper accounting treatment? State and briefly discuss which accounting principle(s) is (are) involved? Why would the CEO make this request? What is your response to the CEO?

Answer: What is the proper accounting On 1/1/2019, $2,400,000 should be recorded as prepaid treatment? advertising. $200,000 ($2,400,000/12 months) should be recorded as an expense each month from January 2019 until December 2019. Fiscal year 4/1/2018-3/31/2019: Advertising Expense $600,000 ($200,000 × 3). Fiscal year 4/1/2019-3/31/2020: Advertising Expense $1,800,000 ($200,000 × 9). State and briefly discuss The expense recognition principle states that expenses must which accounting principle(s) be recognized in the same period in which any related is (are) involved? revenues are earned. Why would the CEO make The CEO wants to record all of the $2,400,000 as expense in this request? fiscal year 2018. This would make net income in fiscal year 2019 look better. This unethical action would keep $1,800,000 ($200,000 per month for 9 months) off of the 2019 fiscal year income statement. What is your response to the I would explain that our business must follow GAAP and in CEO? this case, the expense recognition principle. An expense of $200,000 must be recorded each month from January 1 until December 31, 2019. All business decisions must be evaluated ethically. A violation of the expense recognition principle is unethical and would mislead stockholders, creditors and other users of the financial statements. I would also remind the CEO of the AICPA Code of Professional Conduct and state that I am unable to comply with his request. Diff: 3 LO: 3-2 AACSB: Diverse and Multicultural Work Environments AICPA Bus Persp: Strategic/Critical Thinking, Legal/Regulatory AICPA Functional: Measurement, Reporting Learning Objective 3-3 1) In an unadjusted trial balance, the accounts are not yet ready for the preparation of the company's financial statements. Answer: TRUE Diff: 2 LO: 3-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 18 Copyright © 2019 Pearson Education, Inc.

2) Prepaid Rent and Unearned Service Revenue are examples of accounts that do not need to be adjusted at the end of the accounting period. Answer: FALSE Diff: 2 LO: 3-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) Some accounts do not need to be adjusted at the end of the period, since the day-to-day transactions provide all the data for these accounts. Answer: TRUE Diff: 2 LO: 3-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) An accrual is an adjustment for the receipt of cash in advance of providing services. Answer: FALSE Diff: 2 LO: 3-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 5) Depreciation allocates the cost of land to expense over the useful life of the land. Answer: FALSE Diff: 2 LO: 3-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 6) An accrual adjustment is made for payment of an item in advance of use. Answer: FALSE Diff: 2 LO: 3-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

7) The accumulated depreciation account decreases over the life of the asset. Answer: FALSE Diff: 2 LO: 3-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 8) The amount of prepaid insurance that is used up during a period of time is recorded as Insurance Expense. Answer: TRUE Diff: 2 LO: 3-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 9) If deferred revenue has been earned by the end of the current period but no adjustment is recorded, net income for the current period will be understated. Answer: TRUE Diff: 3 LO: 3-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) The adjusted trial balance lists only the balance sheet accounts and their final balances in a single place. Answer: FALSE Diff: 2 LO: 3-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 11) Unearned Service Revenue is a revenue account. Answer: FALSE Diff: 2 LO: 3-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

12) The adjusting entry, to recognize salaries that are owed to employees, increases net income and increases liabilities. Answer: FALSE Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13) Every adjusting entry must affect both the income statement and the balance sheet. Answer: TRUE Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 14) Income tax expense and the related income tax payable are typically accrued as the final adjusting entry of the period. Answer: TRUE Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 15) One company's prepaid expense is another company's unearned revenue. Answer: TRUE Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 16) The following accounts are up-to-date and need no adjustment at the end of the period: A) Cash, Common Stock and Prepaid Rent. B) Prepaid Rent, Supplies and Unearned Rent Revenue. C) Cash, Land and Common Stock. D) Cash, Dividends and Unearned Rent Revenue. Answer: C Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

17) Adjusting entries: A) close the revenue accounts. B) close the expense accounts. C) adjust Cash. D) adjust Unearned Revenue. Answer: D Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 18) Adjusting entries: A) are needed for all balance sheet accounts. B) must be made on a daily basis to record supplies used during that day. C) are needed because errors have been made in previous journal entries. D) are made before the financial statements can be prepared. Answer: D Diff: 3 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 19) Prepaid expenses will become ________ when their future benefits expire. A) expenses B) revenues C) liabilities D) assets Answer: A Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 20) ________ is the allocation of the cost of an asset over the asset's useful life. A) Accrual B) Deferral C) Depreciation D) Expiration Answer: C Diff: 1 LO: 3-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 22 Copyright © 2019 Pearson Education, Inc.

21) ________ will be increased when a company receives cash before performing the services. A) Service Revenue B) Accumulated Depreciation C) Unearned Service Revenue D) Accrued Salaries Payable Answer: C Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 22) The book value of a plant asset is the: A) accumulated depreciation less the cost of the asset. B) cost of the asset. C) balance in the accumulated depreciation account. D) cost of the asset less the accumulated depreciation. Answer: D Diff: 2 LO: 3-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 23) With an accrual of revenue: A) the cash is received after the revenue is recorded. B) the cash is received before the revenue is recorded. C) plant assets can create an accrual adjustment. D) prepaid expenses can create an accrual adjustment. Answer: A Diff: 3 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

24) When an adjustment is made for prepaid rent: A) an asset increases and an expense decreases. B) one asset increases and another decreases. C) an asset decreases and an expense increases. D) a liability decreases and an expense decreases. Answer: C Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 25) Which account is credited in the adjusting entry to allocate the cost of equipment? A) Equipment Expense B) Depreciation Expense–Equipment C) Accumulated Equipment D) Accumulated Depreciation–Equipment Answer: D Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 26) Which accounts are used in the adjusting entry to record salaries owed to employees, but not paid until the next accounting period? A) Salaries Expense and Salaries Payable B) Unearned Salaries and Salaries Payable C) Salaries Payable and Deferred Salaries Expense D) Deferred Salaries Payable and Salaries Receivable Answer: A Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

27) At the end of the accounting period, a company has accrued interest revenue that will not be received until the next accounting period. The adjusting entry would include a: A) debit to Interest Expense. B) debit to Interest Payable. C) debit to Interest Revenue. D) debit to Interest Receivable. Answer: D Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 28) The Houston Mavericks basketball team receives $6,500 for season tickets on August 1. By December 31, $3,900 of the revenue has been earned. The adjusting entry to be made on December 31 includes a: A) credit to Unearned Revenue of $3,900. B) debit to Unearned Revenue of $3,900. C) debit to Ticket Revenue of $3,900. D) credit to Prepaid Revenue of $2,600. Answer: B Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 29) On December 31, 2019, salaries owed to employees total $4,050. These will be paid on January 4, 2020. An adjusted trial balance prepared on December 31, 2019, includes which of the following? A) Salaries Expense, $4,050 and Salaries Payable, $4,050 B) Salaries Payable, $4,050 and Unearned Salaries Revenue, $4,050 C) Unearned Salaries, $4,050 D) Unearned Salaries, $4,050 and Salaries Payable, $4,050 Answer: A Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

30) The Accumulated Depreciation account: A) is another term for depreciation expense. B) represents the original cost of a plant asset. C) is a contra asset account. D) has a normal balance which is the same as its companion account. Answer: C Diff: 2 LO: 3-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 31) A journal entry contains a debit to a liability account and a credit to a revenue account. This is an example of a(n): A) accrued expense. B) deferred expense. C) unearned revenue. D) accrued revenue. Answer: C Diff: 3 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 32) An adjusting journal entry contains a debit to an expense account and a credit to a contra account. This is an example of a(n): A) accrued revenue. B) deferred revenue. C) depreciation expense. D) accrued expense. Answer: C Diff: 3 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

33) The adjusted trial balance is used to prepare: A) the balance sheet and the income statement only. B) balance sheet, income statement, and statement of retained earnings. C) the balance sheet only. D) the income statement only. Answer: B Diff: 1 LO: 3-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 34) An accountant failed to record the adjusting entry for accrued revenues. How does this error affect the balance sheet? A) The assets at the end of the period will be overstated. B) The assets at the end of the period will be understated. C) The liabilities at the end of the period will be overstated. D) The liabilities at the end of the period will be understated. Answer: B Diff: 3 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 35) Which of the following is NOT a correct statement about adjusting entries? A) Every adjusting entry affects cash. B) Every adjusting entry affects the balance sheet. C) Every adjusting entry affects net income. D) Adjusting entries are posted before the adjusted trial balance is prepared. Answer: A Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

36) The adjustment for an accrued expense: A) increases expenses and decreases assets. B) increases expenses and increases liabilities. C) decreases expenses and increases liabilities. D) decreases expenses and increases assets. Answer: B Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 37) The adjustment for an accrued revenue: A) is necessary because a business often earns revenue before they receive the cash. B) increases a payable account. C) decreases a receivable account. D) is necessary because a business often receives cash before it performs the service. Answer: A Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 38) In an adjusting entry, the debit to the Unearned Revenue account represents the: A) value of services owed to customers. B) amount of cash to be paid for future services. C) amount of cash to be collected from customers. D) value of services performed in the current period. Answer: D Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 39) The adjusting entry to record the accrual of income tax expense includes a: A) debit to Income Tax Payable. B) credit to Income Tax Expense. C) credit to Accounts Payable. D) credit to Income Tax Payable. Answer: D Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 28 Copyright © 2019 Pearson Education, Inc.

40) When using a worksheet to prepare the adjusted trial balance: A) the unadjusted trial balance columns represent amounts from last period's financial statements. B) four columns are needed for the adjustments. C) the adjusted trial balance columns give the final account balances. D) the sum of the debits do not have to equal the sum of the credits in the side-by-side columns. Answer: C Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 41) On December 1 of the current year, Prepaid Rent was debited $10,200 for three months of rent, to cover the period December 1 to February 28. The amount of the adjusting entry on December 31 is: A) $0. B) $3,400. C) $6,800. D) $10,200. Answer: B Explanation: $10,200 ÷ 3 = $3,400 Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 42) A construction company purchased a new bulldozer for $108,000 on January 1, 2019. The company estimates that the bulldozer will have a useful life of nine years and then be worthless. Using the straight-line depreciation method, yearly depreciation expense will be: A) $0. B) $12,000. C) $54,000. D) $108,000. Answer: B Explanation: $108,000/9 = $12,000 Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

43) On October 1, 2018, Golde Company paid $22,200 for one year of insurance for the period, October 1, 2018 through September 30, 2019. Which of the following will be part of the adjusting entry on December 31, 2018? A) Debit Prepaid Insurance for $5,550 B) Debit Prepaid Insurance for $16,650 C) Debit Insurance Expense for $5,550 D) Debit Insurance Expense for $16,650 Answer: C Explanation: $22,200 ÷ 12 = $1,850 insurance per month. $1,850 × 3 months used = $5,550 insurance expense Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 44) On August 1 of the current year, Trevor Beck received $7,800 for legal services to be performed evenly throughout the next six months. The adjusting entry on December 31 of the current year would include a: A) credit to Unearned Service Revenue of $6,500. B) debit to Unearned Service Revenue of $1,300. C) debit to Service Revenue of $1,300. D) credit to Service Revenue of $6,500. Answer: D Explanation: $7,800 ÷ 6 = $1,300 revenue per month. $1,300 × 5 months earned = $6,500 revenue earned Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 45) On October 1 of the current year, a company received $9,600 for services to be performed evenly over the next six months. If no adjusting entry was made on December 31 of the current year: A) net income would be understated by $9,600. B) net income would be understated by $4,800. C) net income would be overstated by $2,400. D) net income would be overstated by $4,800. Answer: B Explanation: $9,600 ÷ 6 = $1,600 revenue per month. $1,600 × 3 months earned = $4,800 revenue earned which would increase net income Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 30 Copyright © 2019 Pearson Education, Inc.

46) On August 1, 2018, Brian Quinn received $8,400 for legal services to be performed evenly throughout the next twelve months, beginning August 1, 2018. An adjusted trial balance prepared on December 31, 2018 will show a credit balance in Unearned Revenue in the amount of: A) $0. B) $700. C) $3,500. D) $4,900. Answer: D Explanation: $8,400 ÷ 12 = $700 revenue per month. $700 × 5 months earned = $3,500 earned $8,400 - $3,500 = $4,900 unearned Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 47) A company started the year with $200 of supplies. During the year, the company purchased an additional $1,400 of supplies. There were $600 of supplies on hand at the end of the year. An adjusting entry prepared at the end of the accounting period includes a: A) debit to Supplies for $1,200. B) debit to Supplies for $600. C) debit to Supplies Expense for $1,000. D) debit to Supplies Expense for $400. Answer: C Explanation: $200 + $1,400 - $600 = $1,000 Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

48) A company started the year with $300 of supplies. During the year the company purchased additional supplies costing $1,300. There were $1,100 of supplies on hand at the end of the year. An adjusted trial balance, prepared at the end of the accounting period, will show the following balance in Supplies Expense: A) $800. B) $1,100. C) $500. D) $1,300. Answer: C Explanation: $300 + $1,300 - $1,100 = $500 Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 49) A company purchased medical equipment for $130,000 on January 1, 2018. The company determined that the yearly depreciation expense is $13,000. What will be the ending balance in the Accumulated Depreciation—Medical Equipment at December 31, 2020? A) $13,000 B) $39,000 C) $78,000 D) $130,000 Answer: B Explanation: $13,000 depreciation per year × 3 years = $39,000 accumulated depreciation Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 50) A company purchased supplies during the year totaling $21,000. At the end of the year, they made an adjusting entry to record $16,000 of supplies that had been used during the year. The ending balance in the Supplies account after the adjustment was $12,000. The beginning balance in the Supplies account was: A) $5,000. B) $7,000. C) $9,000. D) $12,000. Answer: B Explanation: x + 21,000 - 16,000 = 12,000; x = 7,000 Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 32 Copyright © 2019 Pearson Education, Inc.

51) On October 1, McReady Company paid six months' insurance in advance totaling $3,600. The policy begins on October 1. An adjusted trial balance prepared on December 31 would include a balance in the Prepaid Insurance account of: A) $0. B) $1,200. C) $1,800. D) $3,600. Answer: C Explanation: $3,600 ÷ 6 = $600 insurance expense per month $600 × 3 months = $1,800 insurance expense $3,600 - $1,800 = $1,800 left in Prepaid Insurance Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 52) Doorglam paid $35,000 for office furniture. The furniture is depreciated using the straightline method and has an estimated service life of 7 years and no residual value. After three years of use, the accumulated depreciation of the furniture will be: A) $15,000. B) $20,000. C) $30,000. D) $35,000. Answer: A Explanation: $35,000 ÷ 7 = $5,000 per year × 3 years = $15,000 Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 53) A company has $800 in Prepaid Advertising before any adjustments. At the end of the year, an adjusting entry is made to debit Advertising Expense for $60. The ending balance in the Prepaid Advertising account will be: A) $0. B) $60. C) $740. D) $800 Answer: C Explanation: $800 - $60 = $740 Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 33 Copyright © 2019 Pearson Education, Inc.

54) On December 1, 2019, Carrie's Day Care receives $4,200 in advance for an agreement to care for Susan's children for the months of December, January, and February. Carrie's Day Care will make an adjusting entry on December 31, 2019 to: A) credit Revenue for $4,200. B) debit Unearned Revenue for $1,400. C) credit Revenue for $2,800. D) credit Prepaid Revenue for $2,800. Answer: B Explanation: $4,200 ÷ 3 = $1,400 revenue per month × 1 month = $1,400 revenue earned (and the entry would be debit Unearned Revenue for $1,400 and a credit to Service Revenue for $1,400). Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 55) At December 31, the NBC Company owes an employee for four days of work that will not be paid until January 5th. The weekly rate of pay for a five-day workweek is $500. The adjusting entry to record the accrued wages on December 31 will include a: A) debit to Salaries Payable for $500. B) debit to Salaries Expense for $500. C) debit to Salaries Payable for $400. D) debit to Salaries Expense for $400. Answer: D Explanation: $500 ÷ 5 = $100 wage expense per day × 4 days = $400 Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 56) Deere Company holds a $14,400 note receivable dated July 1, 2019, with 10% interest. What adjusting entry is needed on December 31, 2019? A) No entry is needed. B) Debit Interest Receivable for $144 and credit Interest Revenue for $144 C) Debit Interest Receivable for $720 and credit Interest Revenue for $720 D) Debit Interest Receivable for $1,440 and credit Interest Revenue for $1,440 Answer: C Explanation: $14,400 × 10% × 1/2 = $720 Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

57) Why are adjusting entries prepared? A) Because some accounts are not up to date. B) Because some day to day transactions have not been recorded. C) Because the unadjusted trial balance is not quite ready for preparing the financial statements. D) A and C Answer: D Diff: 2 LO: 3-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 58) If adjusting entries are NOT prepared, which financial statements are misstated? A) income statement only B) balance sheet only C) statement of retained earnings only D) income statement, balance sheet and statement of retained earnings Answer: D Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 59) The Trial Balance Worksheet does NOT have columns for: A) adjusting journal entries. B) closing journal entries. C) unadjusted trial balance. D) adjusted trial balance. Answer: B Diff: 2 LO: 3-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

60) If a Trial Balance Worksheet is prepared, which columns are used to prepare the financial statements? A) unadjusted trial balance columns B) adjustments columns C) adjusted trial balance columns D) none of the above Answer: C Diff: 2 LO: 3-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 61) A Trial Balance Worksheet can be used to prepare: A) balance sheet. B) income statement. C) statement of retained earnings. D) all of the above. Answer: D Diff: 2 LO: 3-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 62) The adjustments columns of the Trial Balance Worksheet summarize the: A) day-to-day journal entries. B) closing journal entries. C) adjusting journal entries. D) cash-basis journal entries. Answer: C Diff: 2 LO: 3-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

63) The dollar amount for Accounts Receivable in the Adjusted Trial Balance Debit column of a Trial Balance Worksheet is obtained by taking the: A) Unadjusted Trial Balance Debit column plus the Debit Adjustments column minus the Credit Adjustments column. B) Unadjusted Trial Balance Debit column. C) Unadjusted Trial Balance Credit column. D) Unadjusted Trial Balance Credit column plus closing entries. Answer: A Diff: 2 LO: 3-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 64) In lieu of using the Trial Balance Worksheet to prepare the financial statements, an accountant can use the: A) journal. B) ledger. C) prior period financial statements. D) prior period audit report. Answer: B Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 65) A Trial Balance Worksheet lists: A) balance sheet accounts only. B) income statement accounts only. C) Retained earnings at the beginning of the accounting period and dividends declared. D) all of the above. Answer: D Diff: 2 LO: 3-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

66) The Schauer Company had the following adjustments at December 31, 2019, the end of the accounting period: A. The Schauer Company uses straight-line depreciation for its equipment. The cost of the equipment is $105,000 and the useful life is 5 years. The equipment was purchased on January 1, 2019 and has no residual value. B. Accrued interest of $10,000 on a note receivable will be received in January. C. On November 1, 2019, the Schauer Company paid $3,000 for six months of rent in advance. The rental period is November 1, 2019 through April 30, 2020. D. On August 1, 2019, the company collected $24,000 in advance for a consulting contract, which is to be earned evenly over the next 24 months. E. Employees are owed salaries for 3 days of a 5-day workweek; weekly payroll is $30,000. F. The unadjusted balance of the supplies account is $2,750. Based on a physical count, the cost of supplies on hand is $1,000. G. The company has incurred interest expense of $1,000 that will be paid in January. Required: 1. Journalize the adjusting entries. Explanations are not required. 2. Assuming the adjustments were not made, calculate the net overstatement or understatement this would have on net income. Would the company appear to be more or less profitable if the adjustments were not made?

Answer: 1. Date

Accounts

Debit

A. Dec. 31 Depreciation Expense - Equipment Accumulated Depreciation—Equipment $105,000 ÷ 5 = $21,000

21,000

B. Dec. 31 Interest Receivable Interest Revenue

10,000

C. Dec. 31 Rent Expense Prepaid Rent $3,000 ÷ 6 = $500 × 2 = $1,000

1,000

D. Dec. 31 Unearned Service Revenue Service Revenue $24,000 ÷ 24 = $1,000 per month × 5 = $5,000

5,000

E. Dec. 31 Salary Expense Salary Payable $30,000 ÷ 5 = $6,000 per day × 3 = $18,000

18,000

F. Dec. 31 Supplies Expense Supplies $2,750 - $1,000 = $1,750

1,750

G. Dec. 31 Interest Expense Interest Payable

1,000

Credit

21,000

10,000

1,000

5,000

18,000

1,750

1,000

2. Net income would be overstated by $27,750. If the adjustments were not made, the company would appear to be more profitable than it really is. Depreciation Expense

($21,000)

Interest Revenue 10,000 Rent Expense (1,000) Service Revenue 5,000 Salary Expense (18,000) Supplies Expense (1,750) Interest Expense (1,000) Total ($27,750) Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

67) Journalize the adjusting entries needed on December 31, 2019 for Kaimann Industries using the following data. Explanations are not required. A. The balance in the Supplies account before adjustment is $5,000. A physical count reveals $2,750 of supplies on hand at December 31. B. A computer was purchased on January 1, 2019 for $15,000. The computer has a useful life of 3 years and is depreciated using the straight-line method. The computer has no residual value. C. A one-year insurance policy costing $6,000 was purchased on November 1, 2019. The insurance begins on November 1. D. Employee salaries are owed for 4 days of a regular 5-day work week. Weekly payroll is $15,000. E. Unearned Maintenance Revenue has a balance of $22,000 before adjustment. Records show that $14,000 of that amount has been earned by December 31. Answer: Date Account Debit Credit Adjusting Entries A. Dec. 31 Supplies Expense Supplies $5,000 - $2,750 = $2,250

2,250

B. Dec. 31 Depreciation Expense—Computer Accumulated Depreciation— Computer 15,000 ÷ 3 = 5,000

5,000

C. Dec. 31 Insurance Expense Prepaid Insurance $6,000 ÷ 12 = 500 × 2 = $1,000

1,000

D. Dec. 31 Salaries Expense Salaries Payable $15,000 ÷ 5 = $3,000 × 4 = $12,000

12,000

E. Dec. 31 Unearned Maintenance Revenue Maintenance Revenue

14,000

2,250

5,000

1,000

12,000

Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

14,000

68) For the year ended, December 31, 2019, the Aldrich Chemical Company omitted the following adjusting journal entries in error. For each entry, indicate if net income will be overstated or understated by placing an "X" in the appropriate box. JOURNAL ENTRY OMITTED

NET INCOME NET INCOME OVERSTATED UNDERSTATED

1. Revenue previously recorded as unearned has now been earned. 2. Revenue has been earned but not yet billed. 3. Wages have been earned by the employees but have not yet been paid. 4. Supplies have now been used. 5. Prepaid Insurance has expired 6. Depreciation expense for the year. 7. Interest earned on a note receivable has not been recorded since it has not yet been received Answer: JOURNAL ENTRY OMITTED

NET INCOME NET INCOME OVERSTATED UNDERSTATED

X X X X X X

69) Complete the following chart to show the required adjusting entries for the following situations: Account Debited in the Type of Adjusting Entry Adjusting Entry

Account Credited in the Adjusting Entry

Prepaid Insurance Depreciation Expense Accrued Salaries Accrued Interest Revenue Unearned Service Revenue Accrued Interest Expense Supplies Prepaid Rent Answer: Account Debited in the Type of Adjusting Entry Adjusting Entry Prepaid Insurance

Insurance Expense

Depreciation Expense Depreciation Expense Accrued Salaries Salary Expense Accrued Interest Revenue Interest Receivable Unearned Service Unearned Service Revenue Revenue Accrued Interest Expense Interest Expense Supplies Supplies Expense Prepaid Rent Rent Expense Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

Account Credited in the Adjusting Entry Prepaid Insurance Accumulated Depreciation Salary Payable Interest Revenue Service Revenue Interest Payable Supplies Prepaid Rent

70) In the following table, indicate the effects of failing to recognize each of the indicated adjustments by writing "O" for overstated and "U" for understated. If there is no effect, write "NE."

Failure to Record: Depreciation on building Use of supplies on hand Earning of interest on bank account Salaries owed but not paid Earning of service revenue received in advance Accrual of service revenue

Effect on Effect on Net Effect on Effect on Stockholders' Income Assets Liabilities Equity

Answer: Effect on Net Income O O

Effect on Effect on Effect on Stockholders' Assets Liabilities Equity O NE O O NE O

Failure to Record: Depreciation on building Use of supplies on hand Earning of interest on bank account U U Salaries owed but not paid O NE Earning of service revenue received in advance U NE Accrual of service revenue U U Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

NE U

U O

O NE

U U

71) On September 1, Barnes Enterprises prepaid $18,000 for six months' rent. The rental period begins on September 1. Barnes adjusts the accounts only at December 31, the end of this fiscal year. Prepare the journal entry for September 1 and the adjusting entry for December 31. Omit explanations. Date

Accounts

Answer: Date Accounts 9/1 Cash 12/31

Debit

Credit

Debit Credit Prepaid Rent 18,000 18,000

Rent Expense Prepaid Rent $18,000 ÷ 6 = $3,000 per month $3,000 × 4 months = $12,000

12,000 12,000

Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

72) Fisher Accounting's fiscal year ends on July 31. Accounts are adjusted only on the last day of the fiscal year. On July 31, before adjusting journal entries were prepared, the balance of Supplies was $1,250. A physical count revealed $800 of supplies on hand. Prepare the July 31 adjusting journal entry. Omit explanations. Date

Accounts

Answer: Date Accounts 7/31 Supplies Expense Supplies

Debit

Credit

Debit

Credit 450 450

$1,250 - $800 = $450 Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 73) Jackson Company holds a $50,000 note receivable dated July 1, 2019, with 10% interest. What adjusting entry is needed on December 31, 2019? Date

Accounts

Debit

Answer: Date Accounts 12/31/16 Interest Receivable Interest Revenue

Credit

Debit Credit 2,500 2,500

$50,000 × .10 × 6/12 = $2,500 Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 46 Copyright © 2019 Pearson Education, Inc.

74) Barker Enterprises paid $30,000 cash for a new auto on January 1, 2018, the first day of its fiscal year. The auto is expected to remain useful for six years. At the end of six years, the auto's value is expected to be zero. Accounts are adjusted only on the last day of the fiscal year. Make the journal entries for January 1, 2018 and for December 31, 2018. Omit explanations. Date

Accounts

Debit

Answer: Date: 2018 Accounts 1/1 Auto Cash

Credit

Debit Credit 30,000 30,000

12/31 Depreciation Expense, Auto Accumulated Depreciation, Auto $30,000 ÷ 6 years = $5,000 per year Diff: 2 LO: 3-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

5,000 5,000

Learning Objective 3-4 1) The beginning balance of retained earnings appears on the balance sheet and the statement of retained earnings. Answer: FALSE Explanation: Only the ending retained earnings appears on the balance sheet. Diff: 2 LO: 3-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

2) The financial statements can be prepared from the adjusted trial balance. Answer: TRUE Diff: 1 LO: 3-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 3) In what order are the financial statements generally prepared? A) balance sheet, income statement, and statement of retained earnings B) income statement, statement of retained earnings, and balance sheet C) income statement, balance sheet, and statement of retained earnings D) statement of retained earnings, balance sheet, and income statement Answer: B Diff: 2 LO: 3-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 4) The net income or loss is calculated on which financial statement? A) statement of retained earnings B) income statement C) balance sheet D) dividends statement Answer: B Diff: 2 LO: 3-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 5) The beginning retained earnings balance is found on the: A) statement of retained earnings. B) income statement. C) balance sheet. D) both the statement of retained earnings and the balance sheet. Answer: A Diff: 3 LO: 3-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

6) The financial statements are prepared from which columns of the trial balance worksheet? A) unadjusted trial balance columns. B) adjusted trial balance columns. C) adjustment columns. D) closing entries columns. Answer: B Diff: 2 LO: 3-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 7) When preparing the balance sheet, the final balancing element of the balance sheet is: A) Cash. B) Net income. C) Retained earnings. D) Dividends. Answer: C Diff: 3 LO: 3-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 8) The balance sheet reports: A) assets, liabilities and stockholders' equity. B) the changes in retained earnings. C) assets, liabilities, revenues and expenses. D) revenues and expenses. Answer: A Diff: 2 LO: 3-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 9) ________ will not be found on the statement of retained earnings. A) Net income B) Dividends C) Cash D) Net loss Answer: C Diff: 2 LO: 3-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 49 Copyright © 2019 Pearson Education, Inc.

10) When preparing the financial statements, why is the income statement prepared first? A) The income statement is used to prepare the balance sheet. B) The income statement is the easiest statement to prepare. C) The income statement is the most important statement to investors and creditors. D) Net income or net loss from the income statement is used for the statement of retained earnings. Answer: D Diff: 2 LO: 3-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 11) When using the trial balance worksheet to prepare the statement of retained earnings, what information is used from the trial balance worksheet? A) net income or net loss B) revenues and expenses C) beginning balance of retained earnings and dividends D) cash balance Answer: C Diff: 2 LO: 3-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 12) The balance sheet reports the retained earnings balance at the end of a fiscal year. What is the source of this ending balance of retained earnings? A) Trial Balance Worksheet B) Adjusted Trial Balance C) Unadjusted Trial Balance D) Statement of Retained Earnings Answer: D Diff: 2 LO: 3-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

13) The statement of retained earnings reports a company's net income or net loss for a period of time. What is the source of the amount of net income or net loss? A) Balance Sheet B) Cash Dividend Statement C) Trial Balance Worksheet D) Income Statement Answer: D Diff: 2 LO: 3-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 14) The statement of retained earnings reports the amount of dividends declared over a period of time. What is the source of the amount of dividends declared? A) Balance Sheet B) Income Statement C) Adjusted Trial Balance D) Cash Dividend Statement Answer: C Diff: 2 LO: 3-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 15) Dolhune Company has a balance of $20,000 in Retained Earnings as of January 1, 2019. For the year ended December 31, 2019, Dolhune had a net loss of $16,400. $3,000 was declared and paid in dividends for the year. Prepare the Statement of Retained Earnings for the year ended December 31, 2019. Include a proper heading. Answer: Dolhune Company Statement of Retained Earnings For the Year Ended December 31, 2019 Retained earnings, January 1, 2019 $20,000 Less: Net loss (16,400) Subtotal 3,600 Less: Dividends declared (3,000) Retained earnings, December 31, 2019 $600 Diff: 2 LO: 3-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

16) A company has the following information available for the year ending December 31, 2019: Service Revenue Operating Expenses Gain on Sale of Land Loss on Sale of Equipment Retained Earnings, 12/31/2019 Dividends declared in 2019

$91,300 $52,900 $32,000 ($2,000) $100,000 $22,000

Required: Calculate the company's (A) net income or loss for the year ending December 31, 2019 and (B) the balance in Retained earnings on January 1, 2019, the beginning of the fiscal year. Answer: A. Revenues + Gain - Operating Expenses - Loss = Net Income $91,300 + $32,000 - $52,900 - $2,000 = $68,400 B. Beginning retained earnings + Net income - Dividends declared = Ending retained earnings x = Beginning Retained Earnings x + $68,400 - $22,000 = $100,000 x = $53,600 Diff: 3 LO: 3-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 17) Shelby, Inc.'s fiscal year ended June 30, 2019 and the company is preparing annual financial statements. List the financial statements in the order in which they are prepared. For each statement, include a proper heading. Do not include the statement of cash flows. Answer: Shelby, Inc. Income Statement Year ended June 30, 2019 Shelby, Inc. Statement of Retained Earnings Year ended June 30, 2019 Shelby, Inc. Balance Sheet June 30, 2019 Diff: 2 LO: 3-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting

18) Why is the income statement prepared first and the balance sheet prepared last? Answer: The income statement reports net income or net loss, the result of revenues minus expenses. Revenues and expenses affect stockholders' equity, thus net income is then transferred to retained earnings. The ending balance of retained earnings is the final balancing element of the balance sheet. The amount is taken from the statement of retained earnings. Diff: 2 LO: 3-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting Learning Objective 3-5 1) The books need to be closed in order to prepare the accounts for the next period's transactions. Answer: TRUE Diff: 2 LO: 3-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 2) Temporary accounts are closed at the end of the accounting period. Answer: TRUE Diff: 2 LO: 3-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 3) During the closing process, each revenue account is credited for the amount of its balance. Answer: FALSE Diff: 2 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) The dividends account is a permanent account. Answer: FALSE Diff: 2 LO: 3-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 53 Copyright © 2019 Pearson Education, Inc.

5) Liquidity measures how quickly an item can be converted into cash. Answer: TRUE Diff: 2 LO: 3-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 6) Inventory is more liquid than accounts receivable because the company must first sell the goods. Answer: FALSE Diff: 2 LO: 3-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 7) A classified balance sheet separates current assets from long-term assets and current liabilities from long-term liabilities. Answer: TRUE Diff: 2 LO: 3-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 8) A multistep income statement reports a number of subtotals to highlight important relationships between assets and liabilities. Answer: FALSE Diff: 2 LO: 3-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 9) Operating income reflects the earnings from the company's core business. Answer: TRUE Diff: 2 LO: 3-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

10) All companies must conform to either a pure single-step format or a pure multistep income statement format. Answer: FALSE Diff: 2 LO: 3-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 11) Assume the balance in the Retained Earnings account at January 1, 2019 is zero, and no dividends are declared in 2019. If a debit balance of $5,000 exists in Retained Earnings after closing out revenues and expenses at the end of 2019, this indicates: A) that the company had net income of $5,000. B) an increase in cash of $5,000. C) the company had a net loss of $5,000. D) a decrease in cash of $5,000. Answer: C Diff: 2 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) All of the following accounts are closed EXCEPT for: A) Cash. B) Service Revenue. C) Dividends. D) Utilities Expense. Answer: A Diff: 2 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13) Closing entries: A) are made at the beginning of each accounting period. B) prepare the accounts for the next period's transactions. C) brings all asset account balances to zero. D) are the same as adjusting entries. Answer: B Diff: 2 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 55 Copyright © 2019 Pearson Education, Inc.

14) After the closing entries are prepared and posted: A) all asset accounts will have a zero balance. B) the Retained Earnings account will have the correct ending balance. C) the temporary accounts will have debit balances. D) all liability accounts will have a zero balance. Answer: B Diff: 2 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 15) Accounts that relate to a limited period of time are called: A) asset and liability accounts. B) permanent accounts. C) real accounts. D) temporary accounts. Answer: D Diff: 2 LO: 3-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 16) Which of the following accounts are considered permanent accounts? A) Inventory and Cost of Goods Sold B) Land and Accounts Receivable C) Accounts Payable and Service Revenue D) Common Stock and Salary Expense Answer: B Diff: 2 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 17) The entry to close expense account(s) includes a: A) debit to the expense accounts. B) credit to the expense accounts. C) credit to Retained Earnings. D) debit to the revenue accounts. Answer: B Diff: 2 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 56 Copyright © 2019 Pearson Education, Inc.

18) The entry to close Service Revenue includes a debit to: A) Retained Earnings and a credit to Service Revenue. B) Service Revenue and a credit to Retained Earnings. C) Service Revenue and a credit to Stockholders' Equity. D) Service Revenue and a credit to Net Income. Answer: B Diff: 2 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 19) The closing entry for the Salaries Expense account includes a debit to: A) Salaries Expense and a credit to Retained Earnings. B) Salaries Expense and a credit to Net Income. C) Retained Earnings and a credit to Salaries Expense. D) Net Income and a credit to Salaries Expense. Answer: C Diff: 2 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 20) On a classified balance sheet: A) Accounts Receivable is a current liability. B) Salaries Payable is a long-term liability. C) Notes Payable due in one year is a current liability. D) Dividends is a current asset. Answer: C Diff: 2 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

21) When preparing the financial statements for a company: A) the report format of the income statement lists liabilities before assets. B) the account format for the balance sheet lists the assets on the left and liabilities and stockholders' equity on the right. C) the multistep balance sheet lists assets in order of their liquidity. D) the single-step income statement reports more subtotals than a multistep income statement. Answer: B Diff: 2 LO: 3-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 22) Which of the following is CORRECT regarding liquidity? A) Liquidity measures how quickly revenue can be earned. B) Accounts receivable is not a liquid asset. C) A balance sheet lists assets and liabilities in the order of relative liquidity. D) Equipment is a highly liquid asset. Answer: C Diff: 2 LO: 3-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 23) Which of the following lists the accounts in order of liquidity? A) Cash, Inventory, Accounts Receivable, Furniture B) Cash, Accounts Receivable, Inventory, Furniture C) Furniture, Cash, Accounts Receivable, Inventory D) Furniture, Cash, Inventory, Accounts Receivable Answer: B Diff: 2 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

24) When classifying assets and liabilities on the balance sheet: A) assets are classified as liquid and non-liquid. B) for most businesses the operating cycle is two years. C) furniture and fixtures are long-term assets. D) current liabilities include accounts receivable. Answer: C Diff: 2 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 25) When preparing the financial statements of a company: A) liabilities are not classified on the balance sheet. B) current assets are the most liquid assets. C) the balance sheet must be prepared using the account format. D) the income statement can be prepared using the multistep or report format. Answer: B Diff: 2 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 26) Kincaid Company's Retained Earnings balance on January 1 was $9,000. During the current year, Kincaid earned $3,100 in revenues and incurred $4,300 in expenses. Kincaid declared and paid $3,000 in dividends, all in cash. After the closing entries are made, Kincaid's Retained Earnings balance on December 31 will be: A) $7,800. B) $9,100. C) $9,000. D) $4,800. Answer: D Explanation: $9,000 + $3,100 - $4,300 - $3,000 = $4,800 Diff: 2 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

27) The following accounts and balances are taken from Evan Company's adjusted trial balance: Accounts Payable Accounts Receivable Accumulated Depreciation Depreciation Expense Dividends Insurance Expense Interest Revenue Prepaid Insurance Retained Earnings Salary Expense Service Revenue

$10,000 3,000 1,400 1,500 2,400 2,300 1,240 2,320 10,500 24,100 37,800

In the closing process, which accounts are credited? A) Accounts Receivable, Prepaid Insurance, Salary Expense B) Depreciation Expense, Dividends, Insurance Expense, Salary Expense C) Depreciation Expense, Insurance Expense, Salary Expense, Prepaid Insurance D) Interest Revenue, Service Revenue Answer: B Diff: 2 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

28) The following accounts and balances are taken from Jenny Company's adjusted trial balance: Accounts Payable Accounts Receivable Accumulated Depreciation Depreciation Expense Dividends Insurance Expense Interest Revenue Prepaid Insurance Retained Earnings Salary Expense Service Revenue

$10,000 3,000 1,400 1,500 2,400 2,300 1,240 2,320 10,500 24,100 37,800

In the closing process, which accounts are debited? A) Accounts Payable, Retained Earnings B) Service Revenue, Interest Revenue C) Depreciation Expense, Insurance Expense, Salary Expense D) Depreciation Expense, Insurance Expense, Salary Expense, Dividends Answer: B Diff: 2 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

29) The following accounts and balances are taken from Martin Company's adjusted trial balance: Accounts Payable Accounts Receivable Accumulated Depreciation Depreciation Expense Dividends Insurance Expense Interest Revenue Prepaid Insurance Retained Earnings Salary Expense Service Revenue

$10,000 3,000 1,400 1,500 2,400 2,300 1,240 2,320 10,500 24,100 37,800

In the closing process, which accounts are credited? A) Accounts Payable, Prepaid Insurance B) Service Revenue, Interest Revenue C) Depreciation Expense, Insurance Expense, Salary Expense D) Accumulated Depreciation, Insurance Expense, Salary Expense, Dividends Answer: C Diff: 2 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

30) The following accounts and balances are taken from Moore Company's adjusted trial balance: Accounts Payable Accounts Receivable Accumulated Depreciation Depreciation Expense Dividends Insurance Expense Interest Revenue Prepaid Insurance Retained Earnings Salary Expense Service Revenue

$10,000 3,000 1,800 1,600 2,000 2,300 1,340 2,320 10,100 25,100 37,800

What is the ending balance in Retained Earnings after the closing entries are completed? A) $8,140 B) $10,140 C) $18,240 D) $39,140 Answer: C Explanation: Interest Revenue $1,340 + Service Revenue $37,800 -Depr. Expense $1,600 Insurance Expense $2,300 -Salary Expense $25,100 - Dividends $2,000 + Beg. Bal. Retained Earnings $10,100= $18,240 Diff: 2 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

31) The McCarthy Company has the following adjusted trial balance as of December 31, 2019: Account Cash Accounts Receivable Inventory Supplies Prepaid Rent Land Building Accumulated Depreciation— Building Accounts Payable Unearned Revenue Notes Payable, due 2020 Common Stock Retained Earnings Service Revenue Rent Expense Supplies Expense Salaries Expense Depreciation Expense— Building Utilities Expense Totals

Debit $700 1,200 2,200 2,000 600 6,400 39,100

Credit

$8,500 7,500 4,100 2,300 6,600 3,100 33,000 2,300 1,200 6,400 1,400 1,600 $65,100

$65,100

What are total current assets at December 31, 2019? A) $6,700 B) $4,700 C) $45,800 D) $4,100 Answer: A Explanation: Cash $700 + Accounts Rec. $1,200 + Inventory $2,200 + Supplies $2,000 + Prepaid Rent $600 = $6,700 Diff: 2 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

32) The Shepherd Company has the following information available at December 31, 2019: Account Cash Accounts Receivable Inventory Supplies Prepaid Rent Land Building Accumulated Depreciation— Building Accounts Payable Unearned Revenue Notes Payable, due 2020 Common Stock Retained Earnings Service Revenue Rent Expense Supplies Expense Salaries Expense Depreciation Expense— Building Utilities Expense Totals

Debit $1,000 800 1,800 2,000 700 5,900 40,000

Credit

$8,500 7,500 4,100 2,300 6,600 3,100 33,000 2,300 1,200 6,400 1,400 1,600 $65,100

$65,100

What are the total long-term assets at December 31, 2019? A) $37,400 B) $40,000 C) $45,900 D) $49,500 Answer: A Explanation: Land $5,900 + Building $40,000 - Accum. Depr. $8,300 = $37,400 Diff: 2 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

33) The Sally Company has the following data available at December 31, 2019: Account Cash Accounts Receivable Inventory Supplies Prepaid Rent Land Building Accumulated Depreciation— Building Accounts Payable Unearned Revenue Notes Payable, due 2020 Common Stock Retained Earnings Service Revenue Rent Expense Supplies Expense Salaries Expense Depreciation Expense— Building Utilities Expense Totals

Debit $1,100 1,200 2,000 2,100 600 5,700 39,500

Credit

$9,000 7,300 4,300 2,200 6,500 3,300 32,500 2,300 1,200 6,400 1,400 1,600 $65,100

$65,100

At December 31, 2019, what are the total current liabilities? A) $7,300 B) $11,600 C) $13,800 D) $17,100 Answer: C Explanation: Accounts Payable $7,300 + Unearned Revenue $4,300 + Notes Payable 2,200 = $13,800 Diff: 2 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

34) Trevor Company has the following adjusted trial balance at December 31, 2019: Account Cash Accounts Receivable Inventory Supplies Prepaid Rent Land Building Accumulated Depreciation— Building Accounts Payable Unearned Revenue Notes Payable, due 2020 Common Stock Retained Earnings Dividends Service Revenue Rent Expense Supplies Expense Salaries Expense Depreciation Expense— Building Utilities Expense Totals

Debit $700 1,000 2,000 1,800 600 6,500 39,400

Credit

$8,200 7,300 4,500 2,200 6,400 2,700 800 33,800 1,200 1,200 6,700 1,400 1,800 $65,100

$65,100

What is the Retained Earnings balance at December 31, 2019? A) $20,700 B) $23,400 C) $24,200 D) $21,500 Answer: B Explanation: Beg. Bal. Retained Earnings $2,700 + Service Revenue $33,800 - Rent Expense $1,200 - Supplies Expense $1,200 - Salaries Expense $6,700 - Depr. Expense $1,400 - Utilities Expense $1,800 - Dividends $800 = $23,400 Diff: 2 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

35) A company has the following adjusted trial balance: Account Cash Accounts Receivable Inventory Supplies Prepaid Rent Land Building Accumulated Depreciation— Building Accounts Payable Unearned Revenue Notes Payable, due 2020 Common Stock Retained Earnings Dividends Service Revenue Rent Expense Supplies Expense Salaries Expense Depreciation Expense— Building Utilities Expense Totals

Debit $1,100 900 1,800 2,000 400 6,500 39,800

Credit

$8,000 7,600 4,300 2,300 6,400 2,700 800 33,800 1,300 1,100 6,200 1,300 1,900 $65,100

$65,100

Which closing entry is needed? A) Debit Service Revenue for $33,800 and credit Retained Earnings for $33,800 B) Debit Rent Expense for $1,300 and credit Retained Earnings for $1,300 C) Credit Retained Earnings for $1,900 and debit Cash for $1,900 D) Debit Dividends for $800 and credit Retained Earnings for $800 Answer: A Diff: 2 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

36) A company has the following adjusted trial balance: Account Cash Accounts Receivable Inventory Supplies Prepaid Rent Land Building Accumulated Depreciation— Building Accounts Payable Unearned Revenue Notes Payable, due 2020 Common Stock Retained Earnings Dividends Service Revenue Rent Expense Supplies Expense Salaries Expense Depreciation ExpensevBuilding Utilities Expense Totals

Debit $1,100 1,000 1,900 1,800 400 5,800 40,500

Credit

$8,900 7,800 4,000 2,400 6,600 3,200 900 32,200 1,500 1,200 6,100 1,000 1,900 $65,100

$65,100

Which closing entry is needed? A) Debit Retained Earnings for $900 and credit Dividends $900 B) Debit Retained Earnings for $2,700, credit Rent Expense for $1,500 and credit Supplies Expense for $1,200 C) Debit Retained Earnings for $9,000, credit Salaries Expense for $6,100, credit Depreciation Expense for $1,000 and credit Utilities Expense for $1,900 D) all of the above Answer: D Diff: 2 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

37) Revenues and expenses are closed to: A) Cash. B) Net Income. C) Dividends. D) Retained Earnings. Answer: D Diff: 2 LO: 3-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 38) Operating income reflects: A) income from a company's main and secondary business activities. B) earnings from a company's core business activities. C) earnings from a company 's core business activities which includes interest income. D) an important measure that investors to use to evaluate the liquidity of the business. Answer: B Diff: 2 LO: 3-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 39) On a multistep income statement, "Other income (expenses), net": A) includes sales returns and depreciation expense. B) includes interest income and other investment income. C) is seldom used because investors do not understand what is included. D) includes dividend expense. Answer: B Diff: 2 LO: 3-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 40) On a multistep income statement, a common subtotal is: A) Income from Nonoperating Activities. B) Gross Profit. C) Interest Expense minus Interest Income. D) none of the above. Answer: B Diff: 2 LO: 3-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 70 Copyright © 2019 Pearson Education, Inc.

41) Regarding income statement formats, which of the following statements is INCORRECT? A) A single-step income statement lists all the revenues and gains together under a heading such as Revenues and Gains. B) A single-step income statement lists income tax expense separately from all other expenses. C) A multistep income statement reports a number of subtotals to highlight important relationships between revenues and expenses. D) A multistep income statement is the only format that allows users to evaluate the profitability of the business. Answer: D Diff: 2 LO: 3-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

42) Indicate if the account is a current asset (CA), long-term asset (LTA), current liability (CL), long-term liability (LTL), or stockholders' equity(SE): 1. Long-term Investments ________ 2. Equipment ________ 3. Building ________ 4. Prepaid Rent ________ 5. Notes Payable due in 6 months ________ 6. Salary Payable ________ 7. Notes Payable due in 3 years ________ 8. Goodwill ________ 9. Interest Payable ________ 10. Accounts Receivable ________ 11. Current Portion of Long-term Debt ________ 12. Additional Paid-in Capital ________ 13. Retained Earnings ________ Answer: Long-term Investments LTA Equipment LTA Building LTA Prepaid Rent CA Notes Payable due in 6 months CL Salary Payable CL Notes Payable due in 3 years LTL Goodwill LTA Interest Payable CL Accounts Receivable CA Current Portion of Long-term Debt CL Additional Paid-in Capital SE Retained Earnings SE Diff: 2 LO: 3-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

43) Complete the chart below by putting an "X" in the appropriate box:

Account

Closed with a debit to the account

Closed with a credit to the account

Not closed

Closed with a debit to the account

Closed with a credit to the account

Not closed

Notes Payable Prepaid Rent Common Stock Long-term Investment Depreciation Expense Dividends Advertising Expense Interest Revenue Rent Revenue Cost of Goods Sold Selling Expense Gain on Sale of Land Unearned Revenue Income Tax Expense Answer:

Account

Notes Payable Prepaid Rent Common Stock Long-term Investment Depreciation Expense Dividends Advertising Expense Interest Revenue X Rent Revenue X Cost of Goods Sold Selling Expense Gain on Sale of Land X Unearned Revenue Income Tax Expense Diff: 2 LO: 3-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

X X X X X X X

X X X X

44) Christine's Cleaning Services, Inc. has the following adjusted trial balance as of March 31, 2017. Prepare a classified balance sheet as of that date. Account Debit Credit Cash $600 Short-Term Investments 1,800 Inventory 2,000 Prepaid Rent 2,900 Prepaid Insurance 1,500 Land $27,500 Building 50,000 Accumulated Depreciation— Building $7,500 Long-Term Investments 23,000 Accounts Payable 6,000 Current Portion of Long-term Note Payable 2,500 Income Tax Payable 15,630 Long-term Notes Payable 8,000 Common Stock 1,650 Additional Paid-in Capital 30,000 Retained Earnings 2,520 Service Revenue 41,000 Rent Expense 1,000 Insurance Expense 2,000 Salaries Expense 1,000 Depreciation Expense—Building 1,500 ________ Totals $114,800 $114,800

Answer: Christine Cleaning Services, Inc. Balance Sheet March 31, 2019 Assets: Current Assets: Cash Short-Term Investments Inventory Prepaid Rent Prepaid Insurance Total Current Assets Long-Term Assets: Long-Term Investments Land Building Less: Accumulated Depreciation Building, Net Total Long-Term Assets Total Assets Liabilities and Stockholders' Equity: Current Liabilities: Accounts Payable Current Portion of LongTerm Note Payable Income Tax Payable Total Current Liabilities Long-Term Liabilities: Long-Term Notes Payable Total Liabilities Stockholders' Equity: Common Stock Additional Paid-in Capital Retained Earnings* Total Stockholders' Equity Total Liabilities and Stockholders' Equity

$600 1,800 2,000 2,900 1,500 $8,800

$23,000 $27,500 $50,000 7,500 $42,500 93,000 $101,800

$6,000 2,500 15,630 $24,130 8,000 $32,130 1,650 30,000 38,020 69,670 $101,800

*Retained Earnings needs to be calculated first = Retained Earnings beginning $2,520 + Service Revenue $41,000 - Rent Expense $1,000 - Insurance Expense $2,000 -Salaries Expense $1,000 Dep. Expense $1,500 = $38,020 Diff: 3 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 45) Why is it necessary to close the books at the end of the accounting period? Answer: Temporary accounts — revenues, expenses and dividends - hold amounts for the current accounting period. It is necessary to bring these balances to zero to prepare the accounts for the next period's transactions. The closing process brings the temporary account balances to zero and updates the balance of the Retained Earnings account. Diff: 2 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 46) Describe the process of closing the books at the end of the accounting period. Answer: Closing the books is the process of preparing the accounts to begin recording the next period's transactions. Closing the accounts consists of journalizing and posting the closing entries to set the balances of the revenue, expense, and dividends accounts to zero. Closing entries transfer the revenue, expense, and dividends balances from these respective accounts to the Retained Earnings account. Diff: 2 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

47) The following accounts and balances are taken from Brown Company's adjusted trial balance: Accounts Payable Accounts Receivable Accumulated Depreciation Depreciation Expense Dividends Insurance Expense Interest Revenue Prepaid Insurance Retained Earnings Salary Expense Service Revenue

$10,000 3,000 1,400 1,500 2,400 2,300 1,240 2,320 10,500 24,100 37,800

Prepare the closing entries. Closing Entries

Debit

Answer: Closing Entries Service Revenue Interest Revenue Retained Earnings

Debit Credit 37,800 1,240 39,040

Retained Earnings Depreciation Expense Insurance Expense Salary Expense

Credit

27,900 1,500 2,300 24,100

Retained Earnings 2,400 Dividends 2,400 Diff: 2 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 77 Copyright © 2019 Pearson Education, Inc.

48) The following accounts and balances are taken from Brown Company's adjusted trial balance: Accounts Payable Accounts Receivable Accumulated Depreciation Depreciation Expense Dividends Insurance Expense Interest Revenue Prepaid Insurance Retained Earnings Salary Expense Service Revenue

$10,000 3,000 1,400 1,500 2,400 2,300 1,240 2,320 10,500 24,100 37,800

After the closing entries are posted, what is the balance of Retained Earnings? Show your computations. Answer: Retained earnings, beginning balance $ 10,500 Add: Net income 11,140 Subtotal 21640 Less: Dividends 2,400 Retained earnings, ending balance $ 19,240

Net income: Revenue: Service revenue $ 37,800 Interest revenue 1,240 $ 39,040 Less Expenses: Depreciation Expense 1,500 Insurance Expense 2,300 Salary Expense 24,100 27,900 Net income $ 11,140 Diff: 2 LO: 3-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

Learning Objective 3-6 1) To analyze a company's financial position, decision makers use data and ratios computed from various items in the financial statements. Answer: TRUE Diff: 2 LO: 3-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Decision Modeling 2) A current ratio of less than 1.0 means that current assets exceed current liabilities. Answer: FALSE Diff: 2 LO: 3-6 AACSB: Analytical Thinking AICPA Bus Persp: Industry Sector AICPA Functional: Risk Analysis 3) A low debt ratio is safer than a high debt ratio because a company with few liabilities has low required debt payments. Answer: TRUE Diff: 2 LO: 3-6 AACSB: Analytical Thinking AICPA Bus Persp: Industry Sector AICPA Functional: Risk Analysis 4) The managers of a company are concerned about how certain transactions will affect ratios used in loan agreements. Answer: TRUE Diff: 2 LO: 3-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Decision Modeling 5) Generally to be considered sufficiently liquid, entities should have a sufficient excess of current liabilities over current assets. Answer: FALSE Diff: 2 LO: 3-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Decision Modeling

6) A loan agreement may require that a company's current ratio not fall below a certain level and/or that the company's debt ratio may not rise above a threshold. Answer: TRUE Diff: 2 LO: 3-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Decision Modeling 7) Net working capital: A) represents the company's ability to pay its long-term debts. B) is computed by subtracting total current liabilities from total current assets. C) should be a negative number to ensure the profitability of the company. D) should be the same for all companies. Answer: B Diff: 2 LO: 3-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 8) As a rule of thumb, a strong current ratio is: A) 1.0. B) .50. C) 1.5. D) none of the above. Answer: C Diff: 2 LO: 3-6 AACSB: Analytical Thinking AICPA Bus Persp: Industry Sector AICPA Functional: Decision Modeling 9) A measure of a company's ability to pay current liabilities with current assets is the: A) liability ratio. B) current ratio. C) debt ratio. D) asset ratio. Answer: B Diff: 2 LO: 3-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

10) When analyzing a company's current ratio: A) the current ratio measures the company's ability to pay all liabilities (current and long-term) with current assets. B) most successful businesses operate with current ratios between 0.1 and 0.5. C) a current ratio of less than 1.00 means that current liabilities exceed current assets. D) the industry in which the company operates should not be considered. Answer: C Diff: 2 LO: 3-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Risk Analysis 11) When analyzing a company's debt ratio: A) the ratio measures a company's ability to pay its total liabilities. B) the ratio indicates the proportion of a company's assets that are financed with stockholders' equity. C) a high debt ratio is better than a low debt ratio. D) the norm for debt ratios ranges from 80% to 90%. Answer: A Diff: 2 LO: 3-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Risk Analysis 12) The debt ratio is computed by dividing: A) total liabilities by total assets. B) current liabilities by total assets. C) total assets by total liabilities. D) total assets by current liabilities. Answer: A Diff: 2 LO: 3-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

13) Which of the following combinations of ratios is preferable? A) a low current ratio and a high debt ratio B) a high current ratio and a low debt ratio C) a low current ratio and a low debt ratio D) a high current ratio and a high debt ratio Answer: B Diff: 2 LO: 3-6 AACSB: Analytical Thinking AICPA Bus Persp: Industry Sector AICPA Functional: Decision Modeling 14) To help keep debt ratios within normal limits, companies might adopt the following strategy: A) decrease revenues. B) sell stock. C) choose to borrow more money. D) increase costs. Answer: B Diff: 2 LO: 3-6 AACSB: Analytical Thinking AICPA Bus Persp: Industry Sector AICPA Functional: Decision Modeling 15) A company has current assets of $77,000, long-term assets of $150,000, current liabilities of $44,000, and long-term liabilities of $35,000. The current ratio is: A) 0.81. B) 3.46. C) 1.75. D) 2.20. Answer: C Explanation: $77,000 ÷ $44,000 = 1.75 Diff: 2 LO: 3-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

16) Brankov Company has current assets of $115,000 and current liabilities of $140,000. The company decides to issue stock and receives cash of $150,000. After this transaction, the company's current ratio will be: (Round your final answer to two decimal places.) A) 0.82. B) 1.07. C) 1.82. D) 1.89. Answer: D Explanation: ($115,000 + $150,000) ÷ $140,000 = 1.89 Diff: 2 LO: 3-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 17) At the beginning of the year, Butters Company's balance sheet showed current assets of $36,000 and current liabilities of $19,000. During the current year, Butters issued common stock for $5,000 for cash and purchased $3,400 of inventory on account. After these transactions were recorded, Butter's current ratio was: (Round your final answer to two decimal places.) A) 1.38. B) 1.83. C) 1.98. D) 1.89. Answer: C Explanation: ($36,000 + $5,000 + $3,400) ÷ ($19,000 + $3,400) = 1.98 Diff: 3 LO: 3-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 18) A company has current assets of $105,000 and current liabilities of $35,000. A $6,000 sale on account was made. After this transaction, its current ratio will be: (Round your final answer to two decimal places.) A) 0.33. B) 2.83. C) 3.00. D) 3.17. Answer: D Explanation: ($105,000 + $6,000) ÷ $35,000 = 3.17 Diff: 2 LO: 3-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

19) Rosewood Company had current assets of $612, current liabilities of $393, total assets of $722, and long-term liabilities of $200. What is Rosewood's debt ratio? (Round your final answer to two decimal places.) A) 0.54 B) 1.56 C) 0.82 D) 0.28 Answer: C Explanation: ($393 + $200) ÷ $722 = 0.82 Diff: 2 LO: 3-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 20) Dooley Company had current assets of $1,552, current liabilities of $1,413, total assets of $1,742, and long-term liabilities of $1,210. If Dooley acquires inventory by executing a sixmonth note for $1,550, what is the new current ratio? (Round your final answer to two decimal places.) A) 1.10 B) 1.05 C) 0.96 D) 2.20 Answer: B Explanation: ($1,552 + $1,550) ÷ ($1,413 + $1,550) = 1.05 Diff: 3 LO: 3-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 21) Flanders Company has total assets of $400,000 and total liabilities of $280,000. The company collects an account receivable of $20,000. After this transaction, the company's debt ratio will be: (Round your final answer to two decimal places.) A) 0.67. B) 0.70. C) 0.65. D) 1.43. Answer: B Explanation: $280,000 ÷ $400,000 = 0.70 Diff: 2 LO: 3-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

22) A company's current ratio is decreasing every year and currently stands at 1.00. This indicates: A) an improving financial position. B) an improving liquidity position. C) a declining ability to pay current liabilities. D) an increase in profitability. Answer: C Diff: 2 LO: 3-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 23) A company's debt ratio is increasing every year and currently stands at 90%. This indicates: A) an improving financial position. B) an increase in financial risk. C) a greater ability to pay current and long-term liabilities. D) a company that is going bankrupt. Answer: B Diff: 2 LO: 3-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

24) Sendik's Food Store has the following Adjusted Trial Balance as of March 31, 2019. Determine the current ratio. Round your answer to two decimal places. Account Debit Credit Cash $5,000 Short-Term Investments 5,500 Accounts Receivable 3,800 Inventory 3,000 Supplies 3,400 Land 28,000 Building 50,000 Accumulated Depreciation — Building $10,000 Store Equipment 27,000 Accumulated Depreciation — Store Equipment 15,625 Accounts Payable 9,000 Notes Payable due in one year 4,500 Salaries Payable 1,000 Income Tax Payable 12,000 Common Stock 31,655 Retained Earnings 4,920 Revenue 63,000 Rent Expense 7,000 Salaries Expense 14,000 Depreciation Expense — Building 3,500 Depreciation Expense — Store Equipment 1,500 ________ TOTALS $151,700 $151,700 Answer: Current Ratio =

= Current Assets /Current Liabilities

= = 20,700 ÷ 26,500 = 0.78 Diff: 2 LO: 3-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

25) Lori's Bath Supplies has the following Adjusted Trial Balance as of March 31, 2019. Determine the debt ratio. Round your answer to four decimal places. Account Cash Accounts Receivable Inventory Store Supplies Prepaid Insurance Land Building Accumulated Depreciation—Building Store Equipment Accumulated Depreciation—Store Equipment Accounts Payable Notes Payable due in one year

Debit Credit $10,500 3,800 3,000 1,900 1,500 28,000 50,000 $10,000 27,000 15,625 9,000 4,500

Salaries Payable 1,000 Income Tax Payable 12,000 Common Stock 31,655 Retained Earnings 4,920 Revenue 63,000 Rent Expense 7,000 Salaries Expense 14,000 Depreciation Expense—Building 3,500 Depreciation Expense—Store Equipment 1,500 ________ TOTALS $151,700 $151,700 Answer: Debt Ratio = =

Total Liabilities ÷ Total Assets

= = 26,500 ÷ 100,075 = 0.2648 Diff: 2 LO: 3-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

26) List three groups of financial statement users and comment on how each group uses net working capital and the current ratio for decision making. Answer: 1. Lenders and other creditors must predict whether a borrower can pay its current liabilities. 2. Stockholders know that a company that cannot pay its debts is not a good investment because it may go bankrupt. 3. Managers who must have enough cash to pay the company's current liabilities. Diff: 3 LO: 3-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 27) Selected information for Greene, Inc., as of December 31, 2019, follows: Total current assets Total assets Total current liabilities Total liabilities

$80,000 $175,000 $60,000 $125,000

Compute (show all computations and round final answers to two decimal places): a. Net working capital b. Current ratio c. Debt ratio Answer: a. Net working capital = Total current assets - Total current liabilities $80,000 - $60,000 = $20,000 Net working capital = $20,000 b. Current ratio = = Current ratio = 1.33 c. Debt ratio = = Debt ratio = .7143 or 71.43% Diff: 3 LO: 3-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

28) State whether each of the following transactions improves, hurts, or has no effect on the current ratio and debt ratio.

Transaction Issued stock and received cash. Paid cash to purchase equipment. Recorded depreciation. Collected accounts receivable

Effect on current ratio

Effect on debt ratio

Answer: Effect on Effect on current ratio debt ratio improves improves hurts no effect no effect hurts no effect no effect

Transaction Issued stock and received cash. Paid cash to purchase equipment. Recorded depreciation. Collected accounts receivable Diff: 3 LO: 3-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

Financial Accounting, 12e (Thomas/Tietz/Harrison) Chapter 4 Internal Control & Cash Learning Objective 4-1 1) One of the elements of the fraud triangle is opportunity. Answer: TRUE Diff: 2 LO: 4-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 2) Perpetrators of fraud usually commit fraud for their own short-term economic gain. Answer: TRUE Diff: 2 LO: 4-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 3) Fraud is a major problem in many businesses throughout the world. Answer: TRUE Diff: 1 LO: 4-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 4) One of the most common types of fraud that impacts the financial statements is the misappropriation of assets. Answer: TRUE Diff: 2 LO: 4-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 5) Internal control is a plan of organization and a system of procedures designed to prevent fraud. Answer: TRUE Diff: 1 LO: 4-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 1 Copyright © 2019 Pearson Education, Inc.

6) A weak control environment might allow top management to have the opportunity to commit fraud. Answer: TRUE Diff: 1 LO: 4-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 7) The longer a perpetrator has worked for an organization, the lower the fraud losses tend to be. Answer: FALSE Diff: 1 LO: 4-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 8) Fraudulent financial reporting is the only type of fraud that involves making false or misleading entries in the books of the company. Answer: FALSE Diff: 1 LO: 4-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 9) The type of fraud committed by company managers, who make false and misleading entries in the books in order to improve a company's financial statements, is called: A) misappropriation of assets. B) fraudulent financial reporting. C) embezzlement. D) collusion. Answer: B Diff: 2 LO: 4-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

10) The type of fraud committed by employees of an entity, who steal money from the company and cover it up through erroneous entries in the books, is called: A) misappropriation of assets. B) fraudulent financial reporting. C) phishing. D) collusion. Answer: A Diff: 2 LO: 4-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 11) The two most common types of fraud impacting the financial statements are: A) fraudulent financial reporting and e-commerce fraud. B) misappropriation of assets and embezzlement. C) fraudulent financial reporting and misappropriation of assets. D) cooking the books and fraudulent financial reporting. Answer: C Diff: 2 LO: 4-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 12) ________ is the most common fraud, but ________ is the most expensive fraud. A) Fraudulent financial reporting; misappropriation of assets B) Misappropriation of assets; fraudulent financial reporting C) Misappropriation of assets; cooking the books D) Cooking the books; misappropriation of assets Answer: B Diff: 2 LO: 4-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis

13) ________ is the element in the fraud triangle that results from weak internal controls. A) Motive B) Opportunity C) Rationalization D) Reasoning Answer: B Diff: 1 LO: 4-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 14) The three main components of the fraud triangle are: A) rationalization, opportunity and greed. B) opportunity, motive and lack of ethics. C) motive, opportunity and rationalization. D) none of the above. Answer: C Diff: 2 LO: 4-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 15) Fraudulent financial reporting: A) involves employee overstatement of expense reimbursement requests. B) involves bribes and kickbacks. C) involves stealing assets from the company. D) deceives investors into investing. Answer: D Diff: 2 LO: 4-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis

16) An employee claims that he overstated expense reimbursement requests to have extra money for his wife and children because "Everyone is doing it." This is an example of: A) opportunity. B) motive. C) rationalization. D) understanding. Answer: C Diff: 2 LO: 4-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 17) Opportunity in the fraud triangle arises from: A) weak control environment. B) improper segregation of duties. C) improper access to assets. D) all of the above. Answer: D Diff: 2 LO: 4-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Decision Modeling 18) All of the following are examples of a weak control environment EXCEPT: A) a domineering CEO. B) a weak or conflicted Board of Directors. C) lax ethical practices. D) proper segregation of duties. Answer: D Diff: 2 LO: 4-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis

19) In most reported fraud cases, fraudsters exhibit one or more behavioral red flags. Which of the following is NOT one of these behavioral red flags? A) financial difficulties B) unusually close associations with vendors C) unusually close associations with customers D) living within one's means Answer: D Diff: 2 LO: 4-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 20) What is fraud? A) Fraud is the intentional misrepresentation of facts made for the purpose of persuading another individual to act in a way that causes injury or damage to that individual. B) Fraud is the misappropriation of assets. C) Fraud is untruthful financial reporting. D) all of the above Answer: D Diff: 2 LO: 4-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 21) Which of the following statements regarding fraud is INCORRECT? A) Fraud violates the rights of many for the temporary betterment of a few and for the ultimate betterment of no one. B) Motive, opportunity, and rationalization are elements that make up virtually every fraud. C) The perpetrators of fraud usually do so for their own short-term economic gain. D) Misappropriation of assets is a type of fraud that is committed by company managers who make false and misleading entries in the books in order to improve a company's financial results. Answer: D Diff: 2 LO: 4-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

22) Fraudulent financial reporting is also called: A) the fraud triangle. B) a misappropriation of assets. C) cooking the books. D) investigative reporting. Answer: C Diff: 2 LO: 4-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 23) Which of the following are examples of the misappropriation of assets? A) An employee overstates an expense reimbursement request after a company trip. B) an employee theft of inventory C) a kickback scheme in the purchasing function D) all of the above Answer: D Diff: 2 LO: 4-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 24) Enron Corporation committed fraudulent financial reporting by: A) reporting expenses as plant assets. B) overstating profits through bogus sales of nonexistent assets with inflated values. C) bribing employees of the Securities and Exchange Commission. D) all of the above Answer: B Diff: 2 LO: 4-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 25) What is the purpose of fraudulent financial reporting? A) Net income and total assets are understated so managers can receive their bonuses. B) Net income and total assets are overstated so managers can receive their bonuses. C) A company can borrow money that would not otherwise be available. D) B and C Answer: D Diff: 2 LO: 4-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 7 Copyright © 2019 Pearson Education, Inc.

Learning Objective 4-2 1) The primary way that fraud and unintentional errors in financial statements are prevented is by external auditors. Answer: FALSE Explanation: Fraud is primarily prevented through a proper system of internal controls. Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 2) Outside auditors are responsible for establishing and maintaining adequate internal controls for each company they audit. Answer: FALSE Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 3) Background checks should be conducted only for employees who will handle cash. Answer: FALSE Explanation: Background checks should be conducted on all job candidates prior to being hired. Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 4) Small companies cannot have internal controls since they do not have enough employees to segregate duties. Answer: FALSE Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis

5) The Sarbanes-Oxley Act created the American Institute of Certified Public Accountants to oversee the audits of public companies. Answer: FALSE Explanation: The Sarbanes-Oxley Act was created by the U.S. Congress. The Sarbanes-Oxley Act did not create the American Institute of Certified Public Accountants. Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Risk Analysis 6) In order to maximize profits, a proper system of internal controls provides clear policies that result in fair treatment that applies to customers only. Answer: FALSE Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Risk Analysis 7) Access to sensitive data files in a business should be protected by using either passwords or data encryption. Answer: FALSE Explanation: Access to sensitive data files should be secured by user identification and password. Diff: 2 LO: 4-2 AACSB: Information Technology AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Risk Analysis 8) Collusion is the method used to defeat an internal controls system. Answer: TRUE Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 9) Smart hiring practices and separation of duties are part of the control environment. Answer: FALSE Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 9 Copyright © 2019 Pearson Education, Inc.

10) Which is NOT an objective of an internal control system? A) safeguarding of assets B) compliance with company policies C) compliance with legal requirements D) risk assessment Answer: D Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Risk Analysis 11) The objectives of internal control do NOT include: A) compliance with standards of social responsibility. B) safeguarding assets. C) promoting operational efficiency. D) compliance with legal requirements. Answer: A Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 12) The Sarbanes-Oxley Act of 2002: A) requires public companies to issue in writing that financial reports are accurate and that internal controls are adequate. B) has stiff penalties and prison time for violators of financial statement fraud. C) allows public companies to avoid a review of internal controls. D) A and B Answer: D Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis

13) A company can limit employees' access to assets by: A) keeping the supply of unused checks under lock and key. B) processing the company's cash payments through one employee who handles the bookkeeping and the check preparation. C) allowing persons who have record-keeping responsibilities be part of the mailroom function. D) all of the above. Answer: A Diff: 2 LO: 4-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 14) The primary way that fraud is prevented, detected, or corrected is through a proper system of: A) ethical standards and a code of ethics. B) policies developed by upper management. C) internal control. D) internal and external audits. Answer: C Diff: 2 LO: 4-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Risk Analysis 15) Internal control is a plan of organization and system of procedures, implemented by company ________ and the ________, designed to accomplish five objectives. A) internal auditors, employees B) external auditors, management C) management, board of directors D) external auditors, board of directors Answer: C Diff: 2 LO: 4-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis

16) Internal controls are designed to accomplish five objectives that include compliance with legal requirements, promote operational efficiency, safeguard assets, encourage employees to follow company policy and: A) prevent misappropriation of assets. B) prevent collusion. C) prevent fraud. D) ensure accurate, reliable accounting records. Answer: D Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 17) Internal controls to safeguard assets means the company must safeguard assets against all EXCEPT: A) waste. B) inefficiency. C) audits. D) fraud. Answer: C Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 18) A fidelity bond is a(n): A) employment contract for a specified period of time. B) insurance policy that reimburses a company for any losses due to employee theft. C) contract prohibiting former employees from working for a competitor. D) promise by a company to safeguard customers' personal information. Answer: B Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis

19) The "tone at the top" refers to: A) a component of the control environment. B) a concept that applies only to large corporations. C) owners and top managers behaving honorably to set a good example for employees. D) A and C. Answer: D Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 20) Smart hiring practices include: A) background checks. B) clear job descriptions. C) proper training and supervision. D) all of the above. Answer: D Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 21) Three key duties that must always be separated under a good system of internal controls are: A) asset handling, record keeping and transaction approval. B) asset handling, hiring and safeguarding of assets. C) asset handling, recordkeeping and safeguarding of assets. D) record keeping, transaction analysis and transaction approval. Answer: A Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 22) Which is NOT a component of comparisons and compliance monitoring? A) control environment B) budgets C) audits D) all of the above Answer: A Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 13 Copyright © 2019 Pearson Education, Inc.

23) The general rule that all major groups of transactions should be supported by either hard copy documents or electronic records is part of the control procedure of: A) limited access. B) segregation of duties. C) adequate records. D) proper approvals. Answer: C Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 24) A company has a policy that all checks over $5,000 need to have the signature of the owner in addition to the signature of the bookkeeper. This is an example of: A) limited access. B) proper approvals. C) adequate records. D) encryption. Answer: B Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 25) For companies that are too small to hire enough employees to properly separate duties, the key to good internal control is getting the owner to perform which of the following duties: A) approving all small transactions. B) reconciling the monthly bank account or making bank deposits. C) reconciling the monthly bank account and making bank deposits. D) The owner should not perform any of the above duties. Answer: B Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis

26) Malware is short for: A) malicious device. B) phishing expedition. C) malicious software. D) phishing software. Answer: C Diff: 2 LO: 4-2 AACSB: Information Technology AICPA Bus Persp: Leverage Technology AICPA Functional: Risk Analysis 27) E-commerce pitfalls include all of the following EXCEPT: A) stolen credit card numbers. B) phishing expedition. C) encryption. D) malware. Answer: C Diff: 2 LO: 4-2 AACSB: Information Technology AICPA Bus Persp: Leverage Technology AICPA Functional: Risk Analysis 28) Creating bogus websites for the purpose of stealing unauthorized data is a(n): A) encryption device. B) phishing expedition. C) computer virus. D) Trojan horse. Answer: B Diff: 2 LO: 4-2 AACSB: Information Technology AICPA Bus Persp: Leverage Technology AICPA Functional: Risk Analysis

29) ________ rearranges messages by a mathematical formula making the message impossible to read by someone who does not know the code. A) Encryption B) Firewall C) Security wall D) Access device Answer: A Diff: 2 LO: 4-2 AACSB: Information Technology AICPA Bus Persp: Leverage Technology AICPA Functional: Risk Analysis 30) An internal control system can be circumvented by: A) collusion, encryption and management override. B) collusion, management override and segregation of duties. C) collusion, management override and human limitations. D) nothing, if it is a good internal control system. Answer: C Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 31) Internal control procedures do NOT include: A) smart hiring practices. B) adequate records. C) limited access. D) control environment. Answer: D Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Industry Sector AICPA Functional: Risk Analysis

32) The objectives of internal control do NOT include: A) safeguard assets. B) encourage employees to follow company policy. C) ensure accurate, reliable accounting records. D) strong control environment. Answer: D Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Decision Modeling 33) Which law or regulation requires that public companies must maintain strong internal control systems? A) Dodd-Frank Act B) Securities and Exchange Act of 1933 C) Internal Control Act D) Sarbanes-Oxley Act Answer: D Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 34) The components of internal control do NOT include: A) control environment. B) risk assessment. C) control procedures. D) safeguard assets. Answer: D Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

35) The control environment does NOT include: A) a corporation's code of ethics. B) prohibition of bribes and kickbacks. C) risk assessment. D) prohibition of transactions that involve a conflict of interest. Answer: C Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 36) Examples of internal control procedures do NOT include: A) proper segregation of duties. B) adequate records. C) proper approvals. D) risk assessment. Answer: D Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 37) Which statement is FALSE? A) The bookkeeper should not handle incoming checks from customers. B) Cashiers should not have access to the accounting records. C) The treasurer's department should be in charge of cash handling as well as signing and approving checks. D) The accounting department should be in charge of record keeping and depositing customers' checks. Answer: D Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

38) Which statement is FALSE? A) Sales to customers should be approved by a separate credit department. B) Purchases on credit should be approved by a separate purchasing department. C) Transactions with a large dollar amount should be approved by the Board of Directors or top management. D) The firing of employees should be handled by the department where the employee works. Answer: D Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 39) Which of the following is NOT a way to safeguard controls? A) purchasing a fidelity bond B) rotating employees into different job position C) mandatory vacations D) keeping accurate financial records Answer: D Diff: 2 LO: 4-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

40) For each of the following situations, indicate which internal control procedure Johnson Company has violated: 1. Since they are costly, background checks are not done for the employees. 2. Purchases of items on credit do not need the approval of the purchasing department. 3. All hard copies of documents are shredded after one month and electronic records are deleted after two months. 4. The company does not prepare operating or cash budgets. 5. The accountant receives the checks from customers in payment of amounts due and records the cash receipts. 6. There are no locks in the area where inventory is stored. 7. The hiring, firing and pay adjustments are made by the foremen in the manufacturing area. Answer: 1. Smart hiring practices and segregation of duties. 2. Proper approvals. 3. Adequate records. 4. Comparisons and compliance monitoring. 5. Smart hiring practices and segregation of duties. 6. Limited access. 7. Proper approvals Diff: 2 LO: 4-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Risk Analysis 41) List and briefly discuss the five objectives of internal control. Answer: Safeguard assets — A company must safeguard its assets against waste, inefficiency, and fraud. Employees should be encouraged to follow company policies — Everyone in an organization should work toward the same goals. A proper system of controls provides clear policies that result in fair treatment of both customers and employees. Promote operational efficiency — Effective controls minimize waste, which lowers costs and increases profits. Ensure accurate, reliable accounting records — Without proper controls, records may be unreliable, making it impossible to tell which part of the business is profitable and which part needs improvement. A business could be losing money on every product it sells — unless it keeps accurate records for the costs of its products. Comply with legal requirements — When companies disobey the law, they are subject to fines, or in extreme cases, their top executives may even go to jail. Effective internal controls help ensure compliance with the law and avoidance of legal difficulties. Diff: 2 LO: 4-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Risk Analysis

42) List the five internal control procedures. Answer: Smart hiring and separation of duties Comparisons and compliance monitoring Adequate records Limited access to assets and records Proper approvals for each class of transaction Diff: 2 LO: 4-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Risk Analysis Learning Objective 4-3 1) Internal controls for cash receipts over the counter and for cash receipts by mail are identical. Answer: FALSE Diff: 2 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 2) The duties of purchasing goods and receiving the goods should be given to the same employee. Answer: FALSE Diff: 2 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 3) A receiving report informs a vendor of the amount of goods received by the purchaser. Answer: FALSE Diff: 1 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 4) The treasurer is solely responsible for the petty cash fund. Answer: FALSE Diff: 1 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 21 Copyright © 2019 Pearson Education, Inc.

5) Managers can use records produced by point-of-sale terminals to check inventory levels. Answer: TRUE Diff: 1 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 6) The sum of the cash in the petty cash fund and the total of the paid vouchers should equal the opening balance in the petty cash account at all times. Answer: TRUE Diff: 2 LO: 4-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 7) The company should split duties of purchasing goods, receiving goods, preparing payment, and approving payment. Answer: TRUE Diff: 1 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 8) The treasurer conducts the final step for the receipt of cash by mail. This step includes comparing bank deposit amounts from the treasurer and the debit to Cash. Answer: FALSE Diff: 1 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 9) To further prevent the theft of cash, many companies accept electronic funds transfers from their customers. Answer: TRUE Diff: 1 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

10) Debit cards cannot be used to make purchases of relatively small amounts because of the high risk of fraud. Answer: FALSE Diff: 1 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 11) Payments by check or EFT represent an important internal control. Answer: TRUE Diff: 1 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 12) When a company receives customers' checks by mail: A) all incoming mail containing checks from customers should be opened by the mailroom. B) the mailroom sends all customer checks to the accounting department. C) the remittance advices go to the treasurer for deposit. D) the bank deposit is prepared by the mailroom. Answer: A Diff: 2 LO: 4-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 13) When a company receives customers' checks by mail: A) the mailroom sends all customer checks to the treasurer, who has the cashier deposit the checks in the bank. B) the treasurer prepares the journal entries. C) the mailroom employee prepares the journal entries. D) the treasury department cashier prepares the journal entries. Answer: A Diff: 2 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

14) Payment by check is an important internal control because: A) the check provides a record of the payment. B) the check must be signed by an authorized official who should study the evidence supporting the payment. C) all checks must be approved by the bank's internal audit department before they are paid. D) A and B Answer: D Diff: 2 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 15) For good internal control: A) the purchasing agent should also receive the goods. B) the purchasing agent should also approve the invoice for payment. C) the purchasing agent should not receive the goods or approve the invoice for payment. D) the purchasing agent should prepare an EFT for payment. Answer: C Diff: 2 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 16) The final step when receiving cash by mail is for the ________ to compare to two different records for the day. A) treasurer B) controller C) purchasing agent D) receiving agent Answer: B Diff: 2 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis

17) A receiving report: A) identifies the need for merchandise and begins the purchasing process. B) identifies that the merchandise has been received and ends the purchasing process. C) is sent by the purchasing department to the customer who purchases the item. D) includes the invoice, receiving report, purchase order and purchase request. Answer: B Diff: 2 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 18) Once the company receives newly purchased inventory, it prepares a(n) ________ to list the goods received. A) invoice B) purchase approval form C) receiving report D) EFT transfer Answer: C Diff: 2 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 19) A payment packet of documents: A) reports the arrival of items purchased. B) is sent by the purchasing department to the vendor selling the item. C) identifies the need for merchandise and begins the purchasing process. D) includes the invoice, receiving report and purchase order. Answer: D Diff: 2 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

20) After approving an invoice for payment: A) the receiving department should examine the payment packet to make sure all the documents agree. B) payment is made and the payment packet should then be stamped "paid" by the person in the treasurer's department who has authorized the disbursement. C) checks should be returned to and then mailed by the department who prepared them. D) the person who ordered the goods should examine the payment package to make sure all the documents agree. Answer: B Diff: 1 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 21) A company's petty cash fund: A) cannot be replaced by the use of debit cards. B) is kept by two or more employees to ensure that disbursements can readily be made. C) is opened with a particular amount of cash. D) balance equals the cash left in the petty cash fund minus the total of the paid vouchers in the cash box. Answer: C Diff: 2 LO: 4-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 22) A petty cash fund: A) is established to pay large nonrecurring expenses. B) is established to pay for minor purchases. C) should have a least two custodians. D) should issue checks for certain purchases. Answer: B Diff: 2 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

23) Which of the following is a CORRECT statement about the petty cash fund? A) To set up the petty cash fund, a check is issued to the chief financial officer. B) The custodian of the fund has sole responsibility for accounting for the fund. C) The cash in the fund must always equal the opening balance of the fund. D) The petty cash fund must be maintained at a bank. Answer: B Diff: 1 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 24) Payments by EFT are an important internal control for all of the following reasons EXCEPT for: A) the EFTs provide a record of the payments. B) the EFT must be approved by an authorized official. C) all EFT payments are made by the cashier in the Accounting Department. D) the authorizing official should study the evidence supporting the payment before approving the EFT. Answer: C Diff: 2 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 25) Seidner Store sells expensive watches. An inventory at the beginning of the day showed 47 watches in the store. 9 new watches were added to the inventory during the day. The point-ofsale terminal recorded 5 watches sold. An inventory taken at the end of the day should show how many watches still in the store? A) 56 B) 51 C) 47 D) Cannot be determined from the data Answer: B Explanation: 47 + 9 - 5 = 51 Diff: 2 LO: 4-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

26) An imprest petty cash fund of $700 was established for minor disbursements. At the end of the month, the fund included petty cash tickets for the purchase of $202 in supplies, $77 for meals, $82 for fuel, and $71 for taxi fare. How much cash should be left in the fund? A) $339 B) $268 C) $1,132 D) $700 Answer: B Explanation: 700 - 202 - 77 - 82 -71 = 268 Diff: 2 LO: 4-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 27) An imprest petty cash fund of $600 was established for minor disbursements. At the end of the month the fund included petty cash tickets for the purchase of $185 in supplies, $48 for postage, $83 for fuel and a delivery charge of $65. How much cash should left in the fund? A) $219 B) $284 C) $367 D) $415 Answer: A Explanation: 600 - 185 - 48 - 83 - 65 = 219 Diff: 2 LO: 4-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 28) Examples of items purchased with petty cash are: A) delivery cost for package. B) taxi fare for executive of company. C) box of name tags for convention. D) all of the above. Answer: D Diff: 2 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

29) Debit cards are being used: A) in place of petty cash funds. B) for small purchases. C) for package delivery fees. D) all of the above. Answer: D Diff: 2 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 30) Hill Company established a petty cash fund of $500. The first transaction was the purchase of stamps for $46. Which of the following statements is CORRECT? A) The petty cash custodian prepares a petty cash voucher to list the item purchased. B) The amount of cash on hand should equal $454. C) The amount of cash on hand and the paid petty cash voucher should be maintained in a cash box or other secure device. D) All of the statements are correct. Answer: D Diff: 2 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 31) When customer checks are received in the mail, which employees are involved in processing the checks? A) mailroom employee, treasurer, cashier in the treasurer's department B) mailroom employee, accounting department employee, controller C) mailroom employee, accounting department employee, controller, treasurer D) mailroom employee, accounting department employee, controller, treasurer, cashier in the treasurer's department Answer: D Diff: 2 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

32) With regard to customer checks received by mail, which statement is TRUE? A) The debit to Cash by the accounting department should equal the amount deposited in the bank by the mailroom employee. B) The customers' Accounts Receivable accounts should be adjusted by the cashier in the treasury department for the payments received. C) The controller compares the customers' checks to the remittance advices sent from the mailroom. D) The accounting department debits Cash and credits Accounts Receivable. The cashier in the treasurer's department deposits the checks in the bank. Answer: D Diff: 2 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 33) The New Jewelry Store sells mostly costume jewelry, but it also sells an expensive watch brand. The owner of the store is concerned about monitoring sales and inventory of the watches. He decided to perform a quick inventory count of the watches on a daily basis as a control procedure. The owner counts 59 watches at the end of business on Thursday. On Friday, a shipment of 27 watches is received. The point-of-sale terminal for Friday indicates that 7 watches were sold that day. A quick inventory of watches at the end of business on Friday indicates that 71 watches are on hand. How many, if any, watches are probably stolen? A) 0 B) 7 C) 8 D) 12 Answer: C Explanation: 59 + 27 - 7 = 79; 79 - 71 = 8 Diff: 2 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 34) When companies use debit cards for purchases of relatively small amounts: A) employees who need to make the purchases must turn in receipts for purchases. B) supervisors do not require receipts for the small purchases because prior approval was given. C) must use a imprest system D) the employee who used the debit card compares the receipts to the EFT amounts on the bank statement. Answer: A Diff: 2 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 30 Copyright © 2019 Pearson Education, Inc.

35) Internal controls: A) can never be beat. B) can be circumvented. C) are not subject to collusion. D) are never affected by fatigue and negligence. Answer: B Diff: 2 LO: 4-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting Learning Objective 4-4 1) The person to whom a check is paid is referred to as the maker. Answer: FALSE Diff: 2 LO: 4-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 2) The person performing the bank reconciliation should have no other cash duties. Answer: TRUE Diff: 2 LO: 4-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 3) Outstanding checks are checks that have been paid by the bank, but are not yet recorded on the company's books. Answer: FALSE Diff: 2 LO: 4-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

4) All items on the bank side of the bank reconciliation need to be recorded in the company's books. Answer: FALSE Diff: 2 LO: 4-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 5) Differences between the bank statement and the company's Cash account are primarily the result of a time lag in recording transactions. Answer: TRUE Diff: 1 LO: 4-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 6) The bank reconciliation can be used to control cash in a bank account. Answer: TRUE Diff: 1 LO: 4-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 7) Alpha Company has an account at First Bank. Alpha writes a check payable to Beta Company. In this transaction, Beta Company is the: A) payee. B) payer. C) drawer. D) maker. Answer: A Diff: 2 LO: 4-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

8) There are three parties to a check. The person who signs the check is the: A) maker. B) payee. C) draftee. D) promisee. Answer: A Diff: 2 LO: 4-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 9) When preparing a bank reconciliation, which of the following items should be added to the book balance? A) EFT receipts B) deposits in transit C) collection of note receivable by bank D) both EFT receipts and collection of a note receivable by the bank Answer: D Diff: 2 LO: 4-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) Deposits that have been recorded on the company's books, but have not yet been recorded by the bank are: A) nonsufficient funds deposits. B) outstanding deposits. C) deposits in transit. D) electronic funds deposits. Answer: C Diff: 2 LO: 4-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

11) All of the following will appear on the bank statement EXCEPT for: A) checks paid and deposits made before the cutoff date on the bank statement. B) book errors. C) checks paid and deposits made after the cutoff date on the bank statement. D) B and C. Answer: D Diff: 2 LO: 4-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 12) When preparing a bank reconciliation: A) deposits in transit are added to the bank balance. B) service charges are subtracted from the bank balance. C) outstanding checks are subtracted from the book balance. D) book errors are subtracted from the bank balance. Answer: A Diff: 2 LO: 4-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13) Johnny Company deposited $25,000 in its bank on the same day as, but after the bank prepared Johnny Company's bank statement. The deposit should appear on the bank reconciliation as a(n) ________ and is called a(n): A) addition to the bank balance; outstanding deposit B) addition to the bank balance; deposit in transit C) subtraction from the bank balance; deposit in transit D) subtraction from the bank balance; outstanding deposit Answer: B Diff: 2 LO: 4-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

14) Which of the following items can be added to or subtracted from the bank balance when preparing the bank reconciliation? A) book errors B) bank errors C) EFT payments by bank D) EFT receipts by bank Answer: B Diff: 2 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 15) In a bank reconciliation, a NSF check is: A) added to the bank balance. B) added to the book balance. C) subtracted from the book balance. D) subtracted from the bank balance. Answer: C Diff: 2 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 16) In a bank reconciliation, an EFT cash payment is: A) added to the bank balance. B) added to the book balance. C) subtracted from the book balance. D) subtracted from the bank balance. Answer: C Diff: 2 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

17) In a bank reconciliation, a bank service charge for printing checks is: A) added to the bank balance. B) added to the book balance. C) subtracted from the book balance. D) subtracted from the bank balance. Answer: C Diff: 2 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 18) All of the following will appear on the book side of the bank reconciliation EXCEPT for: A) service charges. B) electronic funds transfers. C) deposits in transit. D) book errors. Answer: C Diff: 2 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 19) Another term for a "hot check" is: A) electronic check. B) outstanding check. C) nonsufficient funds (NSF) check. D) cleared checks. Answer: C Diff: 2 LO: 4-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

20) In a bank reconciliation, items recorded by the bank, but not yet recorded by the company, include: A) deposits in transit. B) bank collections of accounts receivable. C) outstanding checks. D) both deposits in transit and outstanding checks. Answer: B Diff: 2 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 21) The person who prepares the bank reconciliation: A) should also be responsible for cash receipts. B) should also be responsible for cash disbursements. C) should be responsible for both cash receipts and cash disbursements. D) should have no other cash duties. Answer: D Diff: 2 LO: 4-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 22) The bookkeeper recorded a deposit of $100 as $10. On the bank reconciliation, this will be a(n): A) addition of $90 to the balance per bank. B) subtraction of $90 from the balance per bank. C) addition of $90 to the balance per books. D) subtraction of $90 to the balance per books. Answer: C Diff: 2 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

23) If a bookkeeper mistakenly records a disbursement as $69 instead of the correct amount of $96, the error should be shown on the bank reconciliation as a: A) $27 addition to the balance per books. B) $27 deduction from the balance per books. C) $165 addition to the balance per books. D) $165 deduction from the balance per books. Answer: B Diff: 2 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 24) A check received from a customer for which there are not sufficient funds in the bank to cover the amount of the check is a(n): A) service charge. B) error. C) nonsufficient funds check. D) blank check. Answer: C Diff: 2 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 25) If the bank records a deposit of $130 as $1,300, the error should be shown on a bank reconciliation as a: A) subtraction from the book balance of $1,430. B) subtraction from the bank balance of $1,430. C) subtraction from the bank balance of $1,170. D) subtraction from the book balance of $1,170. Answer: C Diff: 2 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

26) Which of the following is a CORRECT statement regarding the bank reconciliation? A) The bank reconciliation is part of the general ledger. B) Journal entries need to be made for all transactions on the bank side to get the accounts up-todate. C) Journal entries need to be made for all transactions on the book side to get the accounts up-todate. D) The bank reconciliation is part of the journal. Answer: C Diff: 2 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 27) A bank reconciliation included an outstanding check of $850 for the payment of salaries. The journal entry to record this reconciling item: A) should debit Salaries Expense and credit Cash for $850. B) should debit Cash and credit Salaries Expense for $850. C) should debit Accounts Payable and credit Cash for $850. D) is not required. Answer: D Diff: 2 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 28) A bank statement included a NSF check from customer Kim Fields for $2,100. The journal entry to record this reconciling item should: A) debit NSF and credit Cash for $2,100. B) debit Cash and credit Accounts Receivable for $2,100. C) debit Accounts Receivable and credit Cash for $2,100. D) debit Cash and credit NSF for $2,100. Answer: C Diff: 2 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

29) If a bank statement included a bank collection of a note receivable and the related interest revenue, the journal entry to record this item should include a: A) debit to Note Receivable and a credit to Cash. B) debit to Cash and a credit to Note Receivable. C) debit to Cash, credit to Note Receivable, and credit to Interest Revenue. D) debit to Note Payable, credit to Cash and credit to Interest Revenue. Answer: C Diff: 2 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 30) If a bank statement includes an EFT receipt of $200 for interest, the journal entry to record this reconciling item should include a: A) debit to Cash for $200 and a credit to Interest Revenue for $200. B) debit to Accounts Receivable for $200 and a credit to Interest Revenue for $200. C) debit to Interest Revenue for $200 and credit to Cash for $200. D) debit to Interest Expense for $200 and credit to Prepaid Interest for $200. Answer: A Diff: 2 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 31) The book side of a bank reconciliation includes: A) deposits in transit, bank collections and NSF checks. B) NSF checks, bank collections of notes receivable and interest earned on the checking account. C) outstanding checks and deposits in transit. D) outstanding checks, NSF checks and cost of printed checks. Answer: B Diff: 2 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

32) Which of the following items from the bank reconciliation require a journal entry? A) bank errors B) deposits in transit C) outstanding checks D) service charge by bank for printing of checks Answer: D Diff: 2 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 33) The ending bank statement balance at November 30 is $7,150. The bank statement shows a service charge of $65, electronic funds receipts of $500, and a NSF check for $350. Deposits in transit total $2,550 and outstanding checks are $1,735. The balance per books at November 30 is $7,880. What is the adjusted bank balance at November 30? A) $7,150 B) $7,235 C) $7,965 D) $8,695 Answer: C Explanation: $7,150 + $2,550 - $1,735 = $7,965 Diff: 3 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 34) The ending bank statement balance at November 30 is $7,070. The bank statement shows a service charge of $95, electronic funds receipts of $800 and a NSF check for $350. Deposits in transit total $2,050 and outstanding checks are $1,835. The balance per books at November 30 is $6,930. What is the adjusted book balance at November 30? A) $7,425 B) $7,145 C) $7,285 D) $8,675 Answer: C Explanation: $6,930 + $800 - $95 - $350 = $7,285 Diff: 3 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

35) Marjorie Company's cash balance per the books at the end of the month was $8,600. After comparing the company's records with the monthly bank statement, Marjorie's accountant identified the following reconciling items: outstanding checks, $800; deposits in transit, $700; bank service charge, $10; and NSF check, $200. The bank collection of a note receivable was $1,000 plus interest of $100. There also was an EFT payment of $160. What is the adjusted book balance at the end of the month? A) $9,490 B) $9,390 C) $8,500 D) $9,330 Answer: D Explanation: $8,600 - Service Charge $10 - NSF Check $200 + Note $1,000 + Interest $100 EFT payment $160 = $9,330 Diff: 3 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 36) When preparing the bank reconciliation, if the adjusted book balance and the adjusted bank balance disagree, this may indicate: A) a math error made in preparing the bank reconciliation. B) a book error went undetected. C) fraudulent financial reporting. D) A and B. Answer: D Diff: 3 LO: 4-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

37) New Store has the following information at August 31: ∙ Two deposits made on August 31 were not on the bank statement, totaling $5,700. ∙ The bank collected an EFT payment on a note receivable for $2,750. Of this amount, $150 represented interest on the note. ∙ August 31 balance in Cash was $12,677. ∙ The bookkeeper forgot to record check #1578 for $843 which was cashed by the bank on August 15th. ∙ The balance on the bank statement as of August 31 was $11,100. ∙ A check printing service fee of $40 was shown on the bank statement. ∙ A NSF check of $100. ∙ Checks #1572, 1606, and 1548, totaling $2,356, were not shown on the bank statement, even though the company had sent the checks. What is the adjusted bank balance at August 31? A) $13,710 B) $16,021 C) $14,444 D) $16,660 Answer: C Explanation: Bank statement balance of $11,100 + Deposits in transit $5,700 - Outstanding Checks $2,356 = $14,444 Diff: 3 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

38) Olde Shoppe has the following information at August 31: ∙ Two deposits made on August 31 were not on the bank statement, totaling $5,300. ∙ The bank collected an EFT payment on a note receivable for $2,820. Of this amount, $250 represented interest on the note. ∙ August 31 balance in Cash was $11,667. ∙ The bookkeeper forgot to record check #1578 for $343 which was cashed by the bank on August 15th. ∙ The balance on the bank statement as of August 31 was $10,860. ∙ A check printing service fee of $40 was shown on the bank statement. ∙ A NSF check of $300. ∙ Checks #1572, 1606, and 1548, totaling $2,356, were not shown on the bank statement, even though the company had sent the checks. What is the adjusted book balance at August 31? A) $11,667 B) $13,804 C) $13,554 D) $8,164 Answer: B Explanation: Cash balance of $11,667 + Note $2,570 + Interest $250 - Book error $343 - Check printing fee $40 - NSF check $300 = $13,804 Diff: 3 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 39) On a bank reconciliation, electronic fund transfers are: A) additions or subtractions to the bank balance. B) additions or subtractions to the book balance. C) not put on the bank reconciliation. D) only used for journal entries. Answer: B Diff: 3 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

40) Which journal entry is prepared for a NSF check returned by the bank? A) No entry is prepared. B) Debit Cash and credit Accounts Payable. C) Debit Cash and credit Notes Payable. D) Debit Accounts Receivable and credit Cash. Answer: D Diff: 3 LO: 4-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 41) Which of the following transactions requires a journal entry? A) The bank charged $50 for a stop payment on a check. B) The bank deducted $50 from your account in error which they will fix. C) The bank collected a note receivable with interest on your behalf. D) A and C Answer: D Diff: 3 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 42) The bookkeeper recorded a payment on account as $150 instead of the correct amount of $510. What journal entry is required? A) Debit Accounts Payable for $510 and credit Cash for $510. B) Debit Accounts Receivable for $510 and credit Cash for $510. C) Debit Accounts Payable for $360 and credit Cash for $360. D) Debit Cash for $360 and credit Accounts Payable for $360. Answer: C Diff: 3 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

43) Dooley Company sent a deposit of $7,000 to the bank. The bank credited Dooley Company's checking account for a deposit of $700. In reconciling the bank statement, the bookkeeper saw the deposit of $700 instead of the bank recording it at $7,000. Which journal entry should Dooley Company prepare? A) Debit Cash for $6,300 and credit Deposits fo $6,300. B) Debit Cash for $6,300 and credit Revenue for $6,300. C) Debit Cash for $6,300 and credit Accounts Receivable for $6,300. D) No journal entry is required. Answer: D Explanation: No entry is required for a bank error. Diff: 3 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 44) Corbin Company was charged $25 for a check printing service fee associated with its checking account. Which journal entry is required? A) Debit Miscellaneous Expense for $25 and credit Accounts Payable for $25. B) Debit Miscellaneous Expense for $25 and credit Accounts Receivable for $25. C) Debit Miscellaneous Expense for $25 and credit Cash for $25. D) No journal entry is required. Answer: C Diff: 3 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

45) The following information is available for Golden Image, Inc.: ∙ The bank statement indicated a monthly service charge of $200. ∙ Golden Image made a deposit of $2,660 on June 30, but this deposit did not appear on the bank statement until July 6. ∙ The bank collected an account receivable of $900 from one of Golden Image's customers. ∙ The bank also collected interest revenue for Golden Image of $99. ∙ The bank also returned a nonsufficient funds check for $378 from John Able, one of Golden Image's customers. ∙ Checks #1874 for $1,140, #1898 for $609, and #1899 for $875 were written by Golden Image and sent to the respective companies, but these checks do not appear on the bank statement. ∙ The balance on the bank statement as of June 30 was $16,711. ∙ On June 30, the Cash account from Golden Image's books showed an amount of $16,326. Required: 1. Prepare the bank reconciliation at June 30 for Golden Image, Inc. 2. Prepare the necessary journal entries by Golden Image, Inc., at June 30. Answer: 1. Golden Image, Inc. Bank Reconciliation June 30 Balance per bank $16,711 Balance per books $16,326 Add: Add: Deposits in transit 2,660 Account receivable $900 Less: Interest revenue 99 999 Outstanding checks Less: 1874 $1,140 NSF check 378 Monthly service 1898 609 charge 200 (578) 1899 875 (2,624) Adjusted bank Adjusted book balance $16,747 balance $16,747

2. Journal entries Date June 30

June 30

Account

Debit

Cash Account Receivable

900

Cash Interest Revenue

Accounts Receivable Cash

378

Miscellaneous Expense Cash

200

Credit

900

378

Diff: 2 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

200

46) The following information is available for George Company at March 31: ∙ Adjusted bank balance as of March 31 was $6,450. ∙ Outstanding checks totaled $850. ∙ A customer's check for $260 was returned due to nonsufficient funds. ∙ March's service charge was $25. ∙ The bank collected an account receivable of $1,550. ∙ A new bookkeeper made the following errors: # 930 for Rent Expense written for $900, recorded as $90 #1207 for Office Equipment written for $8,450, recorded as $4,850. Forgot to record a cash sale of $1,000. ∙ A deposit was shown on the bank statement as $965, when the deposit ticket was correctly totaled to be $695. ∙ Deposits made at month-end totaled $4,516; these were not shown on bank statement. Prepare a bank reconciliation to determine: (1) the balance per bank at March 31 before any reconciling items, (2) the balance in the Cash account at March 31 before any reconciling items. Answer: Balance per bank x Balance per books y Add: Add: Accounts receivable, Deposits in transit 4,516 collected $1,550 Less: Book error—cash sale 1,000 2,550 Outstanding checks $850 Less: Bank error 270 (1,120) NSF Check $260 Adjusted bank balance $6,450 Bank service charge 25 Book error—check 930 810 x + 4,516 - 1,120 = 6,450 Book error—check 1207 3,600 (4,695) x = 3,054 Adjusted book balance $6,450 x = balance per bank y + 2,550 - 4,695 = 6,450 y = 8,595 = balance per books Diff: 3 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

47) The information below was used to prepare a bank reconciliation for Lorena Company at October 31: ∙ According to the bank statement, the bank balance as of October 31 was $8,765. According to the books, the cash balance as of October 31 is $9,557. ∙ Outstanding checks totaled $1,433. ∙ A customer's check for $999 was returned for NSF. ∙ October's service charge was $100. ∙ The bank collected $1,600 from a customer of Lorena Company in payment of a note receivable, including interest of $100. ∙ A new bookkeeper had errors in posting checks and recording cash receipts: 1. Check #930 for Salaries Expense written for $930, recorded as $430. 2. A cash sale for $2,300 on October 15 was not recorded by the bookkeeper since she was in a hurry to go to lunch. Ignore Cost of Goods Sold. ∙ A deposit was made by the company for $900. This was the correct amount, however, the bank made a mistake and recorded the deposit as $890. ∙ Deposits made at month-end totaled $4,516; these were not shown on the bank statement. Required: 1. Prepare the bank reconciliation at October 31. 2. Prepare the journal entries at October 31.

Answer: 1. Balance per bank Add: Deposits in transit Bank error Less: Outstanding checks

$8,765 Balance per books Add: $4,516 Note rec. collected 10 4,526 Interest revenue Book error—cash sale (1,433) Less: Bank service charge Book error—check 930 NSF check Adjusted bank balance $11,858 Adjusted book balance

2. Date October 31

October 31

Account

Debit

Accounts Receivable Cash

999

Miscellaneous Expense Cash

100

Cash Notes Receivable Interest Revenue

1,600

$9,557 $1,500 100 2,300

$3,900

100 500 999 (1,599) $11,858

Credit

999

100

1,500 100

Salaries Expense Cash

500

Cash Sales Revenue

2,300

500

Diff: 2 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

2,300

48) Use the information below to prepare a bank reconciliation for Martindale Company for the month of January. ∙ Outstanding checks as of January 31 amounted to $2,223. ∙ Deposits in transit as of January 31 amounted to $1,879. ∙ The ending balance per the January bank statement is $36,482. ∙ The bank statement shows that Martindale earned $150 of interest on its bank balance for the month of January. ∙ The bank mistakenly recorded a deposit of $2,800 as $280 on January 15. ∙ The company pays its insurance of $986 by EFT. ∙ The bank collected rent for the company, $3,000. The bank statement shows an EFT receipt from a Martindale customer of $481. ∙ There was a NSF check on the bank statement for $368. ∙ The ending cash balance per the books for January before any adjustments was $36,381. Answer: Balance per bank $36,482 ADD: Deposits in transit $1,879 Bank error ($2,800 $280) 2,520 4,399 LESS: Outstanding checks

(2,223)

Balance per books ADD: Rent receipt EFT receipt Interest revenue LESS: NSF check EFT payment Adjusted book balance

Adjusted bank balance $38,658 Diff: 2 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

$36,381 $3,000 481 150

3,631

368 986

(1,354) $38,658

49) The owner of Samuelson Inc. has reason to believe that an employee has been stealing cash from the company. The employee receives cash from clients, makes the bank deposit, and also prepares the monthly bank reconciliation. To check up on the employee, the owner prepares the following bank reconciliation: Samuelson Inc. Bank Reconciliation September 30 Balance per bank $4,300 Balance per books $3,820 Add: Add: Deposits in transit 1,400 Bank collections 1,800 Less: Interest revenue 10 Outstanding checks (2,100) Less: Service charge (30) NSF check (1,000) Adjusted balance per bank $3,600 Adjusted balance per books $4,600 1. Does it appear the employee has stolen from the company? If so, how much? Explain your answer. 2. Which side of the bank reconciliation shows the company's TRUE cash balance? Answer: 1. Yes, it appears the employee has stolen $1,000 from the company. This is the difference between the bank and book reconciled balances, $3,600 vs. $4,600. 2. The bank side represents the true cash balance and is $1,000 less than the reconciled book balance. Since the bank statement is prepared by the bank, the employee does not have access to and cannot manipulate the bank statement. Diff: 2 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

50) The following pertains to Carlisle Company: 1. Balance per bank statement, dated March 31, $4,450. 2. Balance of Cash account on company's books at March 31, $4,459. 3. The $1,300 deposit of March 31 was not included in the bank statement. 4. Of the checks recorded as cash disbursements in March, checks totaling $1,050 have not cleared the bank. 5. Service charges for the month, $10. 6. The bank erroneously charged the company's account for a $200 check of another company with a similar name. 7. The bank credited the company's account with the $1,000 proceeds of a noninterest-bearing note that it collected for the company. 8. NSF check of $75 was returned with the bank statement. 9. The bank paid and charged to the company's account a $507 EFT insurance premium for the company. The payment has not been recorded by the company. 10. The bookkeeper recorded a customer's check of $148 as $135. 11. The bank credited the company's account for $20 interest earned. Prepare the bank reconciliation as of March 31. Answer: Bal. per bank $4,450 Bal. per books Add: Add: Deposit in transit 1,300 Note collected Bank error 200 1,500 Interest earned Less: Book error Outstanding checks (1,050) Less: Service charge NSF check EFT Insurance paid Adjusted bank Adjusted book balance $4,900 balance Diff: 2 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

$4,459 1,000 20 13

1,033

10 75 507

(592) $4,900

51) The following are examples of items that appear on a bank reconciliation. Classify each item as (a) an addition to the bank balance, (b) a subtraction from the bank balance, (c) an addition to the book balance, or (d) a subtraction from the book balance. 1. NSF check 2. Deposits in transit 3. Interest revenue on checking account 4. Bank error - the bank credited the company's account for a deposit made by another customer 5. EFT rent collection 6. Service charge 7. Book error - the company credited cash for $100 when the correct amount was $1,000 8. Outstanding checks 9. Bank collection of a note receivable on behalf of the company Answer: 1. d, 2. a, 3. c, 4. b, 5. c, 6. d, 7. d, 8. b, 9. c Diff: 2 LO: 4-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement Learning Objective 4-5 1) Because cash equivalents are less liquid than cash, they cannot be reported along with cash. Answer: FALSE Diff: 1 LO: 4-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 2) Most companies have numerous bank accounts, but they usually combine all cash amounts into a single total called "Cash and Cash Equivalents." Answer: TRUE Diff: 1 LO: 4-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 3) Cash and cash equivalents include accounts receivable expected to be collected within 90 days or less. Answer: FALSE Diff: 1 LO: 4-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 55 Copyright © 2019 Pearson Education, Inc.

4) Most public companies include additional information about cash and cash equivalents in the footnotes to their financial statements. Answer: TRUE Diff: 1 LO: 4-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 5) Accounts payable would be an example of a cash equivalent. Answer: FALSE Diff: 1 LO: 4-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 6) Cash and Cash equivalents are assets. Answer: TRUE Diff: 2 LO: 4-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 7) Which of the following statements regarding cash equivalents is INCORRECT? A) Cash equivalents are sufficiently similar to cash and thus can be reported along with cash on the balance sheet. B) Cash equivalents include high-grade U.S. or foreign government securities that are very close to maturity (three months or less at the time of purchase). C) Most companies include additional information about cash and cash equivalents in the footnotes to their financial statements. D) Because cash equivalents are less liquid than cash, they must be reported separately from the Cash account. Answer: D Diff: 2 LO: 4-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

8) Cash equivalents include: A) certificates of deposit. B) inventory held for sale. C) accounts receivable. D) high-grade U.S. or foreign government securities that are very close to maturity (three months or less from the balance sheet date). Answer: A Diff: 2 LO: 4-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 9) When reporting cash on the balance sheet, companies: A) show each bank account separately. B) combine cash with accounts receivable. C) combine cash with long-term investments. D) combine cash and cash equivalents. Answer: D Diff: 2 LO: 4-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 10) Lori's Company has the following items: cash in a checking account, $7,000; cash in a savings account, $10,000; high-grade government securities due in one month (purchased last month), $3,586; accounts receivable, $3,000. How much should appear as Cash and Cash Equivalents on the balance sheet? A) $10,000 B) $20,586 C) $23,586 D) $23,786 Answer: B Explanation: $7,000 + $10,000 + $3,586 = $20,586 Diff: 2 LO: 4-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

11) Cash and cash equivalents do NOT include: A) time deposits. B) petty cash. C) bank checking account. D) high-grade U.S. government securities maturing in 5 years. Answer: D Diff: 2 LO: 4-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 12) Gia Company has the following information available: Cash pledged as collateral U.S. Treasury bill due in one month (purchased six months ago) U.S. Treasury bill due in one year (purchased yesterday) Cash in checking account

$3,000,000 $3,000,000 $2,500,000 $400,000

What is the amount of Cash and Cash Equivalents to be reported on the balance sheet? A) $0 B) $400,000 C) $3,400,000 D) $5,900,000 Answer: C Explanation: Cash in checking account $400,000 + Cash in savings account $3,000,000 =$3,400,000. U.S. Treasury bill due in one month is not included because it was purchased six months ago (cutoff is three months). Diff: 2 LO: 4-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

Financial Accounting, 12e (Thomas/Tietz/Harrison) Chapter 5 Receivables and Revenue Learning Objective 5-1 1) A trade discount is not considered in the transaction price. Answer: FALSE Diff: 2 LO: 5-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 2) Revenue should be recognized when it is earned, and not before. Answer: TRUE Diff: 2 LO: 5-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 3) The shipping terms in the sales contract determine when ownership of goods changes hands between the buyer and the seller. Answer: TRUE Diff: 2 LO: 5-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 4) Large customers with excellent credit histories and cash flows often get trade discounts for making large purchases. Answer: TRUE Diff: 2 LO: 5-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 5) When goods are shipped FOB destination, revenue is recognized by the seller when the goods leave the seller's shipping dock. Answer: FALSE Diff: 2 LO: 5-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 1 Copyright © 2019 Pearson Education, Inc.

6) Nichols Company has shipped goods to one of its customers FOB shipping point. Nichols Company will recognize sales revenue when: A) their customer has received the goods. B) the goods leave Nichols' shipping dock. C) the two parties agree that revenue should be recognized. D) the customer pays the invoice. Answer: B Diff: 2 LO: 5-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 7) When goods are shipped FOB destination: A) revenue is recognized when the goods leave the shipping dock. B) revenue is recognized when the invoice is mailed to the customer. C) revenue is recognized only after cash payment is received. D) revenue is recognized when the goods are received by the customer. Answer: D Diff: 2 LO: 5-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 8) Which of the following statements regarding contracts is INCORRECT? A) The process of revenue recognition is based on contracts that the entity has with outsiders. B) A contract is an agreement between two parties that creates enforceable rights or performance obligations. C) Only written contracts are valid. D) Identifying the contract with the customer is the first step of the revenue recognition model. Answer: C Diff: 2 LO: 5-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

9) The transaction price: A) is the retail price and the same price to all customers. B) may include a trade discount. C) is always the list price. D) is always the price that competitors see. Answer: B Diff: 2 LO: 5-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 10) For retailers, a way to speed up cash collections is: A) getting cash quickly is not important. B) to accept debit and credit card sales. C) to not offer a sales discount. D) to lengthen credit cycles. Answer: B Diff: 2 LO: 5-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 11) To satisfy a performance obligation means that: A) the provider has substantially completed the service for the customer. B) the goods have been transferred to the customer who has assumed ownership and control over goods. C) the selling entity has done everything required to earn the revenue. D) All of the above statements are correct. Answer: D Diff: 2 LO: 5-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

12) We sell to a customer paying with Visa and the fee is 2%. Part of the transaction would include a debit to: A) Sales Revenue. B) Sales Discount. C) Accounts Receivable. D) Credit Card Discount Expense. Answer: D Diff: 2 LO: 5-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 13) Stelloh's Berry Farm accepted a bank-issued credit card in payment of a $1,600 sales transaction. Stelloh's bank charges 1% to process the transaction. The journal entry to record the sales transaction will include (Ignore cost of goods sold.): A) a debit to Accounts Receivable for $1,584 and a credit to Sales Revenue for $1,584. B) a debit to Cash for $1,600 and a credit to Sales Revenue for $1,600. C) a debit to Cash for $1,584, a debit to Credit Card Discount Expense for $16 and a credit to Sales Revenue for $1,600. D) a debit to Accounts Receivable for $1,600, a debit to Credit Card Revenue for $16 and a credit to Sales Revenue for $1,616. Answer: C Explanation: $1,600 × 1% = $16 Diff: 2 LO: 5-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 14) If Abby, Inc. sells items to a customer who uses a credit card for $1,900, and there is a credit card fee of 2.5%, Abby will record a(n): (Round your final answer to the nearest dollar.) A) credit to Sales Revenue for $1,852. B) debit to Accounts Receivable for $1,852. C) debit to Sales Expense for $48. D) debit to Credit Card Discount Expense for $48. Answer: D Explanation: $1,900 × 2.5% = $48 Diff: 2 LO: 5-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

15) When a merchant sells merchandise and lets the customer pay with a VISA credit card: A) The strategy may increase sales dramatically, with no additional costs involved. B) At the time of sale, Credit Card Receivable is debited and Sales Revenue is credited for the discounted portion of the sale amount. C) The merchant's point-of-sale terminal is linked to a VISA server which automatically credits the merchant's bank account for the full sale amount. D) The credit card discount is similar to interest expense and is reported on the income statement separately from operating income as other income (expense). Answer: D Diff: 2 LO: 5-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 16) Smart Company sells office furniture for $3,000 and the customer pays with a VISA card. VISA's fee is 2.5%. Prepare the journal entry for the sale, ignoring cost of goods sold. No sales returns are expected. Omit the explanation. Account

Debit

Credit

Answer: Account Debit Credit Cash 2,925 Credit Card Discount Expense 75 Sales Revenue 3,000 Diff: 3 LO: 5-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

17) On October 11, Younger Company sold merchandise with a selling price of $6,000 on account to Main Street Office Supplies, with a 10% trade discount. Journalize the 1) sale on account if cost of goods sold was $4,000. 2) the collection of cash payment on October 20th. Date

Accounts

Debit

Answer: Date Accounts Oct. 11 Accounts Receivable Sales Revenue ($6,000 × 90%)

Credit

Debit Credit 5,400 5,400

Cost of Goods Sold Inventory

4,000 4,000

Oct. 20 Cash Accounts Receivable

5,400 5,400

Diff: 3 LO: 5-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting Learning Objective 5-2 1) Customers usually have a right to return unsatisfactory or damaged merchandise to sellers for refund, credit, or exchange. Answer: TRUE Diff: 2 LO: 5-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

2) Companies are not required to estimate expected future returns as part of the end-of-period adjusting entry process. Answer: FALSE Diff: 2 LO: 5-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 3) As items are actually returned, the company reduces its sales refunds payable account for the amount of cash or accounts receivable credit it gives back to customers. Answer: TRUE Diff: 2 LO: 5-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 4) When journalizing for the estimated sales returns, there would be a debit to: A) Sales Refunds Payable. B) Cost of Goods Sold. C) Sales Returns and Allowances. D) Accounts Receivable. Answer: C Diff: 2 LO: 5-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 5) When journalizing for an actual sales return, there would be a debit to: A) Sales Refunds Payable. B) Cost of Goods Sold. C) Sales Returns and Allowances. D) Accounts Receivable. Answer: A Diff: 2 LO: 5-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

6) On December 2, a customer returned merchandise, with a selling price of $1,400 purchased on account, to a department store. Ignoring cost of goods sold, which journal entry should the department store prepare? Assume no discounts were offered. A) Debit Sales Revenue for $1,400 and credit Accounts Receivable for $1,400. B) Debit Sales Revenue for $1,400 and credit Cash for $1,400. C) Debit Sales Revenue for $1,400 and credit Sales Refunds Payable for $1,400. D) Debit Sales Refunds Payable for $1,400 and credit Accounts Receivable for $1,400. Answer: D Diff: 2 LO: 5-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 7) Jones Company historical expenses show that 2% of the items it sells are returned. If sales revenue is expected to be $100,000 for the current year and Cost of Goods Sold is 40% of sales, what are the journal entries to record the estimated expected future returns. Date

Accounts

Debit

Answer: Date Accounts Sales Returns and Allowances Sales Refunds Payable ($100,000 × .02)

Credit

Debit Credit 2,000 2,000

Inventory Returns Estimated Cost of Goods Sold ($100,0000 × .02) × .40

800 800

8) Smith Company returned $20,000 of inventory to us that was sold on account. Journalize the entries to record the return assuming Cost of Goods Sold is 40% of Sales and all returned inventory is returned to inventory. Date Accounts

Debit

Answer: Date Accounts Sales Refunds Payable Accounts Receivable

Debit Credit 20,000 20,000

Inventory Inventory Returns Estimated ($20,000 × .40)

Credit

8,000 8,000

Diff: 3 LO: 5-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting Learning Objective 5-3 1) The typical credit cycle for most sales on account is 30 days. Answer: TRUE Diff: 2 LO: 5-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

2) A typical sales discount might be stated as 2/10, n/30. This expression means that the seller is willing to discount the order by 10% if the buyer pays the invoice within 2 days of the invoice date. Answer: FALSE Diff: 2 LO: 5-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 3) Step 3 of the revenue recognition model requires that the seller set the price of the sale at the amount the seller expects to receive from the customer. Answer: TRUE Diff: 2 LO: 5-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 4) Leno Company sells goods to the Fallon Company for $11,000. It offers credit terms of 3/10, n/30. If Fallon Company pays the invoice within the discount period, Leno Company will record a debit to Cash in the amount of: A) $11,330. B) $330. C) $10,670. D) $11,000. Answer: C Explanation: $11,000 × 0.97 = $10,670 Diff: 2 LO: 5-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

5) On December 1, Macy Company sold merchandise with a selling price of $3,000 on account to Mrs. Jorgensen, with terms 1/10, n/30. Using the gross method and ignoring cost of goods sold, what journal entry did Macy Company prepare on December 1? Macy expects no sales returns. A) Debit Cash for $3,000 and credit Accounts Receivable for $3,000. B) Debit Accounts Receivable for $2,970 and credit Cash for $2,970. C) Debit Accounts Receivable for $2,970 and credit Sales Revenue for $2,970. D) Debit Accounts Receivable for $3,000 and and credit Sales Revenue for $3,000. Answer: D Diff: 2 LO: 5-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 6) On December 1, Macy Company sold merchandise with a selling price of $9,000 on account to Mrs. Jorgensen, with terms 4/10, n/30. On December 3, Mrs. Jorgensen returned merchandise with a selling price of $700. Mrs. Jorgensen paid the amount due on December 9. What journal entry did Macy Company prepare on December 9 assuming the gross method is used? A) Debit Cash for $7,968 and credit Accounts Receivable for $7,968. B) Debit Sales Revenue for $7,968, debit Sales Discounts for $332, and credit Accounts Receivable for $8,300. C) Debit Sales Revenue for $8,300, credit Sales Discount for $332 and credit Cash for $7,968. D) Debit Cash for $7,968, debit Sales Discounts for $332, and credit Accounts Receivable for $8,300. Answer: D Explanation: $9,000 - [$9,000 - $700) × 4%] - $700 = $7,968 for Cash $9,000 - $700 = $8,300 for Accounts Receivable $8,300 × 4% = $332 for Sales Discounts Diff: 2 LO: 5-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

7) On October 11, Younger Company sold merchandise with a selling price of $6,000 on account to Main Street Office Supplies, with terms 2/10, n/30. No sales returns are expected. On October 20, Younger received the full amount due from Main Street. Ignoring cost of goods sold, prepare the journal entries for Younger Company using the gross method. Omit explanations. Date

Accounts

Answer: Date Accounts Accounts Receivable–Main Street Oct. 11 Office Supplies Sales Revenue

Debit

Credit

Debit

Credit

6,000 6,000

Oct. 20 Cash

5,880

Sales Discount (6,000 × .02) Accounts Receivable–Main Street Office Supplies

120 6,000

Diff: 3 LO: 5-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

8) On July 8, ABC Plumbing provided services of $7,500 on account to First Bank, with terms 3/10, n/30. On July 28, ABC received the full amount due from First Bank. Prepare the journal entries for ABC Plumbing using the gross method. Omit explanations. Date

Accounts

Debit

Answer: Date Accounts July 8 Accounts Receivable–First Bank Service Revenue

Credit

Debit Credit 7,500 7,500

July 28 Cash Accounts Receivable–First Bank

7,500 7,500

Diff: 3 LO: 5-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

9) Smith and Son's Department Store has a policy that allows customers to return merchandise for up to 45 days for a full refund. Based on prior experience, approximately 8% of merchandise sold will be returned. In November, the store's total sales were $2,500,000, all for cash. The cost of the merchandise sold was $1,600,000. On November 30, the company prepared the adjusting entries for sales returns. In December, within the allowable return period, customers returned merchandise that retailed for $100,000 and that cost $66,000 for a refund. Prepare the journal entries for these transactions. Omit explanations. Date Accounts

Debit

Credit

Answer: Date Accounts Nov Cash Sales Revenue Cost of Goods Sold Inventory Nov 30

Dec

Debit Credit 2,500,000 2,500,000 1,600,000 1,600,000

Sales Returns and Allowances Sales Refunds Payable ($2,500,000 × 8%) Inventory Returns Estimated Cost of Goods Sold ($1,600,000 × 8%)

200,000

Sales Refunds Payable Cash Inventory Inventory Returns Estimated

100,000

200,000 128,000 128,000

100,000 66,000 66,000

Diff: 3 LO: 5-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting Learning Objective 5-4 1) The two major types of receivables are accounts receivable and trade receivables. Answer: FALSE Diff: 2 LO: 5-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 2) Accounts (trade) receivable are amounts to be collected from customers from the sale of goods or services. Answer: TRUE Diff: 1 LO: 5-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

3) Accounts receivable represents a form of extending credit which requires customers to sign a promise to pay the business a definite sum at the maturity date, plus interest. Answer: FALSE Diff: 1 LO: 5-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 4) The general ledger has a separate account receivable for each customer. Answer: FALSE Diff: 2 LO: 5-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 5) By selling on credit, companies run the risk of not collecting some receivables. Answer: TRUE Diff: 1 LO: 5-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 6) The multiple subsidiary ledgers for accounts receivable shows the separate accounts for each individual customer. Answer: TRUE Diff: 2 LO: 5-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 7) With regard to Accounts Receivable, a separate account for each customer is kept in a(n): A) control account. B) subsidiary ledger. C) general ledger. D) control ledger. Answer: B Diff: 2 LO: 5-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

8) One way the risk of not collecting receivables can be managed is: A) have all customers pay by check. B) separate cash-handling duties from record-keeping duties. C) separate cash-handling from the mailroom. D) have an imprest petty cash fund. Answer: B Diff: 2 LO: 5-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 9) With regard to notes receivable, which of the following statements is CORRECT? A) Notes receivable are less formal contracts than accounts receivable. B) Notes receivable are also called promissory notes because a written promise to pay is not required. C) All notes receivable require the borrower to pledge collateral. D) The borrower signs a written promise to pay the lender a definite sum at the maturity date, with interest. Answer: D Diff: 2 LO: 5-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 10) The journal entry to record lending money on a note receivable is: A) Debit Cash, credit Notes Receivable B) Debit Notes Receivable, credit Cash. C) Debit Cash, credit Accounts Receivable. D) Credit Accounts Receivable, credit Cash. Answer: B Diff: 2 LO: 5-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement Learning Objective 5-5 1) Accounts receivable are reported on the balance sheet at their net realizable value. Answer: TRUE Diff: 2 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 17 Copyright © 2019 Pearson Education, Inc.

2) Uncollectible-Account Expense is included in Cost of Goods Sold on the income statement. Answer: FALSE Diff: 2 LO: 5-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 3) Under the direct write-off method, the journal entry to record Uncollectible-Account Expense includes a credit to Accounts Receivable. Answer: TRUE Diff: 2 LO: 5-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 4) Under the allowance method, companies are not allowed to use different methods to estimate Uncollectible-Account Expense. Answer: FALSE Diff: 2 LO: 5-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 5) Generally Accepted Accounting Principles (GAAP) allow companies to use either the direct write-off method or the allowance method to determine Uncollectible-Account Expense. Answer: FALSE Diff: 2 LO: 5-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 6) Under the allowance method, Uncollectible-Account Expense is recorded in the same accounting period as the sale. Answer: TRUE Diff: 2 LO: 5-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

7) The Allowance for Uncollectible Accounts has a normal debit balance because it is an asset account. Answer: FALSE Diff: 2 LO: 5-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 8) The net realizable value of accounts receivable is the difference between gross accounts receivable and: A) Sales Discounts. B) Sales Returns and Allowances. C) Uncollectible-Account Expense. D) Allowance for Uncollectible Accounts. Answer: D Diff: 2 LO: 5-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 9) When evaluating the collectability of accounts receivable: A) the Uncollectible-Account Expense is a contra account. B) the Allowance for Uncollectible Accounts is an operating expense in the selling, general and administrative category. C) the allowance method uses estimates developed from the company's collection experience. D) the direct write-off method uses the Allowance for Uncollectible Accounts to record bad debts. Answer: C Diff: 2 LO: 5-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

10) The aging-of-receivables method of estimating uncollectible accounts is: A) not an acceptable method of estimating bad debts. B) a balance sheet approach, since it focuses on accounts receivable. C) an income statement approach, since it focuses on the amount of expense to be reported on the income statement. D) is required to be used by all companies because it focuses on what should be the most relevant and faithful representation of accounts receivable on the balance sheet. Answer: B Diff: 2 LO: 5-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 11) Under the allowance method for estimating uncollectible accounts: A) a company sets up an Allowance for Uncollectible Accounts to estimate the amount of the receivables the company does not expect to collect. B) the Allowance for Uncollectible Accounts is a contra account to gross Accounts Receivable. C) the Allowance for Uncollectible Accounts will normally have a credit balance. D) all of the above. Answer: D Diff: 2 LO: 5-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 12) Estimating uncollectible accounts by analyzing receivables from specific customers according to how long each has been outstanding is known as the: A) direct write-off method. B) percent-of-sales method. C) allowance method. D) aging-of-receivables method. Answer: D Diff: 2 LO: 5-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

13) The Allowance for Uncollectible Accounts is classified as: A) a contra-expense account. B) a contra-revenue account. C) a contra-asset account. D) an asset account. Answer: C Diff: 2 LO: 5-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 14) Which balance sheet account shows the amount of accounts receivable that the business does NOT expect to collect? A) Unearned Sales Revenue B) Accounts Receivable C) Allowance for Uncollectible Accounts D) Uncollectible-Account Expense Answer: C Diff: 2 LO: 5-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 15) Estimates are NOT used to record uncollectible accounts expense when using the ________ method. A) allowance. B) percent-of-sales. C) aging-of-receivables. D) direct write-off. Answer: D Diff: 2 LO: 5-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

16) The percent-of-sales method of computing uncollectible accounts for Accounts Receivable is used by some companies because: A) it ensures that Accounts Receivable are reported at net realizable value. B) it is more accurate than the aging method. C) it is easier and quicker to apply. D) it fine tunes their allowance for uncollectibles. Answer: C Diff: 2 LO: 5-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 17) The percent-of-sales method for computing uncollectible accounts: A) computes Uncollectible-Account Expense as a percent of accounts receivable. B) takes a balance sheet approach. C) employs the expense recognition (matching) concept. D) will result in the same amount of estimated Uncollectible-Accounts Expense as the aging-ofreceivables method. Answer: C Diff: 3 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 18) The entry to write off an Account Receivable under the allowance method: A) reduces total assets and increases net income. B) reduces net income and total assets. C) has no effect on total assets and net income. D) increases net income and total assets. Answer: C Diff: 3 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

19) The aging-of-receivables method for estimating uncollectible accounts: A) results in an immediate write-off of receivables that are more than 90 days past due. B) focuses on the amount of receivables that will not be collected. C) uses a balance sheet approach. D) B and C. Answer: D Diff: 2 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 20) Under the allowance method, when a company determines that a specific customer's Accounts Receivable will not be collected, its accounting department will debit: A) Uncollectible-Account Expense and credit Accounts Receivable. B) Accounts Receivable and credit Allowance for Uncollectible Accounts. C) Allowance for Uncollectible Accounts and credit Uncollectible Account Expense. D) Allowance for Uncollectible Accounts and credit Accounts Receivable. Answer: D Diff: 2 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 21) Most companies will use: A) the direct write-off method for interim statements and the allowance method at the end of the year. B) the allowance method for interim statements and the direct write-off method at the end of the year. C) the percent-of-sales method for interim statements and the aging-of-receivables method at the end of the year. D) the aging-of-receivables method for interim statements and the percent-of-sales method at the end of the year. Answer: C Diff: 3 LO: 5-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

22) The direct write-off method for uncollectible accounts receivable: A) reports receivables at their net realizable value. B) does not use an Allowance for Uncollectible Accounts. C) is considered to follow Generally Accepted Accounting Principles. D) estimates uncollectible accounts as a percentage of sales. Answer: B Diff: 2 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 23) The direct-write off method for uncollectible accounts receivable may ________ net income and ________ total assets in the year of the sale: A) understate; understate. B) overstate; overstate. C) understate; overstate. D) overstate; understate. Answer: B Diff: 3 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 24) Which of the following is a CORRECT statement regarding the direct write-off method for uncollectible accounts? A) Most companies use the direct-write off method for their financial statements. B) Companies are required to use the direct write-off method for federal income tax purposes. C) A company records the Uncollectible-Account Expense when it writes off an individual account receivable. D) B and C. Answer: D Diff: 3 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

25) The direct write-off method records Uncollectible-Account Expense: A) in the accounting period each sale occurs. B) at the end of the accounting period. C) when the specific account receivable is determined to be uncollectible. D) in the accounting period one year after the sale date. Answer: C Diff: 2 LO: 5-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 26) The allowance method records Uncollectible-Account Expense: A) in the year of sale. B) at the end of the accounting period. C) when the specific account receivable is determined to be uncollectible. D) A and B Answer: D Diff: 2 LO: 5-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 27) The balance in the Allowance for Uncollectible Accounts is considered prior to the year-end adjustment under: A) the direct write-off method. B) the percent-of-sales method. C) the aging-of-receivables method. D) both the percent-of-sales and aging-of-receivables methods. Answer: C Diff: 2 LO: 5-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

28) Under the allowance method, the entry to write off a $11,600 uncollectible account includes a: A) debit to Uncollectible Account Expense for $11,600 and credit to Allowance for Uncollectible Accounts for $11,600. B) debit to Accounts Receivable for $11,600 and credit to Uncollectible-Account Expense for $11,600. C) debit to Accounts Receivable for $11,600 and credit to Allowance for Uncollectible Accounts for $11,600. D) debit to Allowance for Uncollectible Accounts for $11,600 and credit to Accounts Receivable for $11,600. Answer: D Diff: 2 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 29) A year-end review of Accounts Receivable and estimated uncollectible percentages revealed the following:

Days Outstanding 1-30 days 31-60 days 61-90 days Over 90 days

Accounts Est. Percent Receivable Uncollectible $65,000 3% $45,000 5% $21,000 10% $8,000 50%

Before the year-end adjustment, the credit balance in Allowance for Uncollectible Accounts was $1,300. Under the aging-of-receivables method, the Uncollectible-Account Expense at year-end is: A) $1,950. B) $9,000. C) $10,300. D) $11,600. Answer: B Explanation: ($65,000 × 0.03) + ($45,000 × 0.05) + ($21,000 × 0.1) + ($8,000 × 0.5) =$10,300 $10,300 - $1,300 = $9,000 Diff: 2 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

30) A year-end review of Accounts Receivable and estimated uncollectible percentages revealed the following: Days Outstanding 1-30 days 31-60 days 61-90 days Over 90 days

Accounts Est. Percent Receivable Uncollectible $64,000 2% $44,000 4% $20,000 12% $6,000 51%

Before the year-end adjustment, the credit balance in Allowance for Uncollectible Accounts was $900. Under the aging-of-receivables method, the balance in the Allowance for Uncollectible Accounts will be ________ after the adjusting entry is made. A) $380 B) $7,600 C) $8,500 D) $9,400 Answer: C Explanation: ($64,000 × 0.02) + ($44,000 × 0.04) + ($20,000 × 0.12) + ($6,000 × 0.51) = $8,500 Diff: 2 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 31) An aging-of-accounts-receivable indicates that the amount of uncollectible accounts is $3,410. The Allowance for Uncollectible Accounts prior to adjustment has a credit balance of $300. The Accounts Receivable balance is $44,720. The amount of the adjusting entry for uncollectible accounts should be for: A) $300. B) $3,110. C) $3,710. D) $3,410. Answer: B Explanation: $3,410 - $300 = $3,110 Diff: 2 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

32) Using the percentage-of-sales method, the estimated total uncollectible accounts are $7,122. The Allowance for Uncollectible Accounts prior to adjustment has a debit balance of $3,135. The Accounts Receivable balance is $44,820. The amount of the adjusting entry for Uncollectible-Accounts Expense is: A) $3,135. B) $3,987. C) $7,122. D) $10,257. Answer: C Diff: 2 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 33) The following item appeared on a balance sheet: Accounts Receivable, less allowance of $28,712 …..$1,435,600 The gross balance in Accounts Receivable before the allowance was deducted was: A) $1,406,888. B) $1,435,600. C) $1,464,312. D) none of the above Answer: C Explanation: $1,435,600 + $28,712 = $1,464,312 Diff: 2 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

34) The following account balances were extracted from the accounting records of Thomas Corporation at the end of the year: Accounts Receivable Allowance for Uncollectible Accounts (Credit) Uncollectible-Account Expense

$1,105,000 $37,000 $60,000

What is the net realizable value of the accounts receivable? A) $1,068,000 B) $1,105,000 C) $1,142,000 D) $1,165,000 Answer: A Explanation: $1,105,000 - $37,000 = $1,068,000 Diff: 2 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 35) Jumpin Corporation uses the percent-of-sales method to estimate uncollectibles. Net credit sales for the current year amount to $2,030,000, and management estimates 5% will be uncollectible. The Allowance for Uncollectible Accounts prior to adjustment has a debit balance of $1,300. The amount of Uncollectible-Account Expense reported on the income statement will be: A) $1,300. B) $100,200. C) $101,500. D) $102,800. Answer: C Explanation: $2,030,000 × 0.05 = $101,500 Diff: 2 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

36) Jensen Corporation uses the percentage-of-sales method to estimate uncollectibles. Net credit sales for the current year amount to $2,010,000 and management estimates 3% will be uncollectible. The Allowance for Doubtful Accounts prior to adjustment has a debit balance of $18,000. After all adjusting entries are made, the balance in Allowance for Uncollectible Accounts will be: A) $18,000. B) $18,540. C) $42,300. D) $60,300. Answer: C Explanation: ($2,010,000 × 0.03) = $60,300 $60,300 - $18,000 = $42,300 Diff: 2 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 37) A company that uses the allowance method, writes-off a receivable of $3,000. Prior to the journal entry, the credit balance in the Allowance for Uncollectible Accounts was $23,432 and Accounts Receivable were $2,009,000. After the entry to write-off the receivable is made, the net realizable value of Accounts Receivable will be: A) $1,982,568. B) $1,985,568. C) $2,006,000. D) $2,009,000. Answer: B Explanation: $2,009,000 - $23,432 = $1,985,568 Diff: 2 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

38) The balance in Accounts Receivable was $650,000 at the beginning of the year and $760,000 at the end of the year. Credit sales for the year totaled $4,130,000. During the year, $410,000 in customer accounts were written off. How much cash was collected from customers during the period? A) $3,610,000 B) $4,020,000 C) $4,430,000 D) $4,650,000 Answer: A Explanation: 650,000 + 4,130,000 - 410,000 - x = 760,000 x = 3,610,000 Diff: 3 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 39) Following Generally Accepted Accounting Principles, which method of estimating uncollectible accounts is NOT acceptable? A) allowance method B) percent-of-sales method C) aging-of-receivables method D) direct write-off method Answer: D Diff: 3 LO: 5-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 40) Under the direct write-off method, what journal entry is prepared when an account is determined to be worthless or uncollectible? A) debit Allowance for Uncollectible Accounts and credit Accounts Receivable B) debit Accounts Receivable and credit Allowance for Uncollectible Accounts C) debit Uncollectible-Account Expense and credit Allowance for Uncollectible Accounts D) debit Uncollectible-Account Expense and credit Accounts Receivable Answer: D Diff: 3 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

41) On December 31 of the current year, James Company has an accounts receivable balance of $319,000 before any year-end adjustments. The Allowance for Doubtful Accounts has a $1,400 credit balance. The company prepares the following aging schedule for accounts receivable: Total Balance 1-30 days 31-60 days 61-90 days over 90 days $319,000 $158,000 $86,000 $55,000 $20,000 Percent uncollectible 1% 2% 5% 22% What is the Uncollectible-Account Expense at December 31 of the current year after adjustments? A) $1,580 B) $9,050 C) $10,450 D) $11,850 Answer: B Explanation: ($158,000 × 0.01) + ($86,000 × 0.02) + ($55,000 × 0.05) + ($20,000 × 0.22) = $10,450 $10,450 - $1,400 = $9,050 Diff: 3 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 42) On December 31 of the current year, Jerome Company has an accounts receivable balance of $329,000 before any year-end adjustments. The Allowance for Doubtful Accounts has a $1,100 credit balance. The company prepares the following aging schedule for accounts receivable: Total Balance 1-30 days 31-60 days 61-90 days over 90 days $329,000 $160,000 $90,000 $51,000 $28,000 Percent uncollectible 1% 2% 3% 20% What is the Allowance for Uncollectible Accounts at December 31 of the current year after adjustments? A) $1,100 B) $9,430 C) $10,530 D) $11,630 Answer: C Explanation: ($160,000 × 0.01) + ($90,000 × 0.02) + ($51,000 × 0.03) + ($28,000 × 0.2) = $10,530 Diff: 3 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 32 Copyright © 2019 Pearson Education, Inc.

43) An aging-of-accounts-receivable indicates that the amount of uncollectible accounts is $3,910. The Allowance for Uncollectible Accounts prior to adjustment has a debit balance of $600. The Accounts Receivable balance is $44,620. The amount of the adjusting entry for uncollectible accounts should be for: A) $600. B) $3,310. C) $3,910. D) $4,510. Answer: D Explanation: $3,910 + $600 = $4,510 Diff: 3 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 44) The balance in Accounts Receivable at the beginning of the year was $530,000. The balance in Accounts Receivable at the end of the year was $710,000. Customer accounts of $480,000 were written off. The company collected $4,100,000 from credit customers and $1,030,000 from cash customers. What are credit sales for the year? A) $4,400,000 B) $4,100,000 C) $4,580,000 D) $4,760,000 Answer: D Explanation: 530,000 + x -480,000 - 4,100,000 = 710,000 x = 4,760,000 Diff: 3 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

45) At the end of the year, Seidner Company has the following information available: Credit sales Sales returns and allowances Accounts Receivable Allowance for Uncollectible Accounts(Debit)

$1,000,000 10,000 560,000 42,000

The company uses the percent-of-sales method to estimate uncollectible accounts and has not prepared the year-end adjusting entry for Uncollectible-Account Expense. What does the debit balance in the Allowance for Uncollectible Accounts indicate? A) The company overestimated the amount of uncollectible accounts at the end of the prior accounting period. B) The company underestimated the amount of uncollectible accounts at the end of the prior accounting period. C) Write-offs of uncollectible accounts increased dramatically in the current accounting period. D) B and C Answer: D Diff: 3 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 46) At the end of the year, Smith Company has the following information available: Credit sales Sales returns and allowances Accounts Receivable Allowance for Uncollectible Accounts(Debit)

$1,000,000 10,000 560,000 42,000

The company uses the percent-of-sales method to estimate uncollectible accounts and has not prepared the year-end adjusting entry for Uncollectible-Account Expense. In the prior year, uncollectible accounts were estimated at 1% of credit sales. What action should Smith Company take in regards to uncollectible accounts at the end of the current year? A) increase the percentage in the percent-of-sales method B) reexamine credit policies, especially the extension of credit C) change to the direct write-off method D) A and B Answer: D Diff: 3 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 34 Copyright © 2019 Pearson Education, Inc.

47) What amount does a company expect to collect from Accounts Receivable? A) gross amount of Accounts Receivable B) net realizable value of Accounts Receivable C) gross amount of Accounts Receivable minus Allowance for Uncollectible Accounts D) B and C Answer: D Diff: 3 LO: 5-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 48) The income statement approach to estimating uncollectible accounts is called the ________ method. The balance sheet approach to estimating uncollectible accounts is called the ________ method. A) direct write-off; allowance B) allowance; direct write-off C) percent-of-sales; aging-of-receivables D) aging-of-receivables; percent-of-sales Answer: C Diff: 3 LO: 5-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

49) Tanya Company has the following information: Accounts Receivable, January 1, 20xx Accounts Receivable, December 31, 20xx Credit Sales Cash Sales Write-offs of uncollectible accounts

$230,000 400,000 1,810,000 1,000,000 14,000

What are collections from customers during the current year? A) $1,626,000 B) $1,640,000 C) $2,626,000 D) $2,640,000 Answer: C Explanation: Accounts Receivable Beg. 230,000 + Credit Sales 1,810,000 - Write-offs 14,000 x = Accounts Receivable End. 400,000 x = 1,626,000 Total Collections = $1,626,000 Credit Sales + $1,000,000 Cash Sales = $2,626,000 Diff: 3 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

50) Consider the following INDEPENDENT situations for Tommy Company: a. The Allowance for Uncollectible Accounts has a $1,200 credit balance prior to adjustment. Net credit sales during the year are $830,000 and 2% are estimated to be uncollectible. Accounts Receivable has a balance of $110,000 at the end of the year. The company uses the percent-ofsales method. b. The Allowance for Uncollectible Accounts has a $900 credit balance prior to adjustment. Based on an aging schedule of accounts receivable prepared at the end of the year, $20,000 of accounts receivable are estimated to be uncollectible. Accounts Receivable has a balance of $104,000 at the end of the year. c. The Allowance for Uncollectible Accounts has a $16,300 debit balance prior to adjustment. Based on an aging schedule of accounts receivable prepared at the end of the year, $200,000 of accounts receivable are estimated to be uncollectible. Accounts Receivable has a balance of $958,000 at the end of the year. d. The Allowance for Uncollectible Accounts has a $500 credit balance prior to adjustment. Net credit sales during the year are $900,000 and 1% are estimated to be uncollectible. Accounts Receivable has a balance of $825,000 at the end of the year. The company uses the percent-ofsales method. Required: Prepare the adjusting journal entries for uncollectible accounts for each INDEPENDENT situation. Explanations are not required. Date

Account

Debit

Credit

Answer: Date a.

Account Uncollectible-Account Expense Allowance for Uncollectible Accounts 830,000 × 0.02 = 16,600

Debit 16,600

Uncollectible-Account Expense Allowance for Uncollectible Accounts 20,000 - 900 = 19,100

19,100

Uncollectible-Account Expense Allowance for Uncollectible Accounts 200,000 + 16,300 = 216,300

216,300

Uncollectible-Account Expense Allowance for Uncollectible Accounts 900,000 × 0.01 = 9,000

9,000

Credit 16,600

19,100

216,300

Diff: 2 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

9,000

51) Journalize the following transactions for The Technology Store. The Technology Store uses the direct write-off method of accounting for uncollectible receivables. Ignore Cost of Goods Sold. Explanations are not required. April 5 The Technology Store sells $6,200 of computer equipment on account to Mrs. Jones. June 5 Mrs. Jones pays The Technology Store $2,000 of the amount she owes. July 7 After repeated attempts to collect the balance due from Mrs. Jones fail, The Technology Store writes-off the remainder of the amount she owes. Date

Answer: Date April 5

June 5

July 7

Account

Debit

Account

Credit

Debit

Accounts Receivable—Mrs. Jones Sales Revenue

6,200

Cash Accounts Receivable—Mrs. Jones

2,000

Uncollectible-Account Expense Accounts Receivable—Mrs. Jones

4,200

Credit

6,200

2,000

4,200

Diff: 2 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

52) Journalize the following transactions for The Computer Store. The Computer Store uses the allowance method of accounting for uncollectible receivables. Ignore Cost of Goods Sold Explanations are not required. April 5 The Computer Store sells $5,200 of computer equipment on account to Mr. Jones. June 5 Mr. Jones pays The Computer Store $2,000 of the amount he owes. July 7 After repeated attempts to collect the balance due from Mr. Jones fail, The Computer Store writes-off the remainder of the amount he owes. Date

Answer: Date April 5

June 5

July 7

Account

Debit

Account

Credit

Debit

Accounts Receivable—Mr. Jones Sales Revenue

5,200

Cash Accounts Receivable—Mr. Jones

2,000

Allowance for Uncollectible Accounts Accounts Receivable—Mr. Jones

3,200

Credit

5,200

2,000

Diff: 2 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

3,200

53) At December 31 of the current year, Accounts Receivable has a balance of $900,000, the Allowance for Uncollectible Accounts has a debit balance of $1,000 and net credit sales for the year are $3,000,000. Using the aging-of-receivables method, the balance of Allowance for Uncollectible Accounts is estimated at $30,000. Required: 1. Journalize the adjusting entry. Omit the explanation. Date Account Debit Credit

2. Determine the net realizable value of accounts receivable at the end of the year. Answer: 1. Date Account Debit Credit Dec. 31

Uncollectible-Account Expense Allowance for Uncollectible Accounts 30,000 plus 1,000 debit balance

31,000 31,000

2. Net realizable value = Accounts Receivable - Allowance for Uncollectible Accounts = $900,000 - $30,000 = $870,000 Diff: 2 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

54) At December 31 of the current year, Accounts Receivable has a balance of $900,000, the Allowance for Uncollectible Accounts has a debit balance of $1,000 and net credit sales for the year are $3,000,000. The company uses the percent-of-sales method. Its credit department has determined that uncollectible accounts will amount to 2% of net credit sales. Required: 1. Prepare the year- end adjusting journal entry. Omit the explanation. Date Account Debit Credit

2. Determine the adjusted balances for Accounts Receivable and the Allowance for Uncollectible Accounts. 3. Determine the net realizable value of accounts receivable at the end of the year. Answer: 1. Date Account Debit Credit Dec. 31

Uncollectible-Account Expense Allowance for Uncollectible Accounts 3,000,000 × 0.02 = 60,000

60,000 60,000

2. Accounts Receivable balance is $900,000 (no change to the account) Allowance for Uncollectible Accounts beg bal $1,000 debit plus $60,000 credit = $59,000 3. Net realizable value = Accounts Receivable -Allowance for Uncollectible Accounts = $900,000 - $59,000 = $841,000 Diff: 3 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

55) Johnsen Company earned service revenue on account of $300,000 and had cash collections of $130,000 for the year. During the year, uncollectible accounts receivable of $2,000 were written off. At December 31, an aging-of-accounts receivable schedule indicated that Johnsen Company will not collect $10,000 of accounts receivable. There was a credit balance of $2,100 in the Allowance for Uncollectible Accounts at the beginning of the year. Required: Journalize the entries to record (1) service revenue, (2) cash collections, (3) write-off of the uncollectible receivables and (4) the adjusting entry to record Uncollectible-Account Expense. Ignore Cost of Goods Sold. Explanations are not required. Date Account Debit Credit

Answer: Date 1.

Account

Debit

Accounts Receivable Service Revenue

300,000

Cash Accounts Receivable

130,000

Credit

300,000

130,000

Allowance for Uncollectible Accounts Accounts Receivable

2,000

Uncollectible-Account Expense Allowance for Uncollectible Accounts End. Balance, Allowance for Uncollectible Accounts: $2,100 - $2,000 = $100 credit Estimated Allowance for Uncollectible Accounts: $10,000 - $100 = $9,900

9,900

Diff: 3 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

2,000

9,900

56) During its first year of operations, Ness Company had the following transactions. The company uses the percent-of-sales method to estimate uncollectible accounts. Cash Sales Credit Sales Collections on Account Write-offs of uncollectible accounts Uncollectible-Account Expense

$1,000,000 $2,000,000 $500,000 $75,000 2.5%

Required: Prepare all journal entries for these transactions. Explanations are not required. Ignore Cost of Goods Sold.

Answer: Cash Sales Revenue

1,000,000 1,000,000

Accounts Receivable Sales Revenue

2,000,000 2,000,000

Cash

500,000 Accounts Receivable

500,000

Allowance for Uncollectible Accounts Accounts Receivable

75,000

Uncollectible-Account Expense Allowance for Uncollectible Accounts Diff: 2 LO: 5-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

50,000

75,000

50,000

Learning Objective 5-6 1) The maker of a note is the borrower. Answer: TRUE Diff: 2 LO: 5-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 2) The principal amount of a note is the amount lent by the debtor and borrowed by the creditor. Answer: FALSE Diff: 2 LO: 5-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 3) The maturity value of a note is the sum of the principal amount of a note plus the interest over the term of the note. Answer: TRUE Diff: 2 LO: 5-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 4) The principal amount of a note is the amount borrowed by the creditor. Answer: FALSE Diff: 1 LO: 5-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 5) Interest rates are always for an annual period unless stated otherwise. Answer: TRUE Diff: 2 LO: 5-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

6) On December 31, 2019, Sandy Company has a Note Receivable of $9,000. The note will be collected in installments. $1,800 is due on December 31, 2020 and $1,800 is due every year after December 31, 2020. The classification of the note on Sandy Company's balance sheet at December 31, 2019 is: A) all $9,000 is a current asset. B) all $9,000 is a long term asset. C) $1,800 is a current asset and $7,200 is a long-term asset. D) $7,200 is a current asset and $1,800 is a long-term asset. Answer: C Diff: 2 LO: 5-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 7) A company borrows $10,000 from the bank at 10% interest for sixty days. $10,000 is the ________ of the note. The maturity value of the note is ________. For computation of interest, use a 365-day year. (Round your final answer to the nearest dollar.) A) maturity value; $10,164 B) present value; $10,000 C) future value; $10,000 D) principal; $10,164 Answer: D Explanation: $10,000 + ($10,000 × 10% × 60/365) = $10,164 Diff: 2 LO: 5-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 8) Regarding the two parties to a note, the: A) creditor has a note receivable and the debtor has a note payable. B) creditor has a note payable and the debtor has a note receivable. C) creditor is also called the maker of the note. D) debtor is also called the lender. Answer: A Diff: 2 LO: 5-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

9) When a note matures: A) the debtor must pay the creditor only the interest on the note. B) the creditor must pay the debtor only the interest on the note. C) the debtor must pay the creditor the maturity value of the note. D) the creditor must pay the debtor the maturity value of the note. Answer: C Diff: 2 LO: 5-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 10) A three months, 12% note for $17,000, dated April 15, is received from a customer. The maturity value of the note is: A) $510. B) $17,000. C) $17,510. D) $19,040. Answer: C Explanation: $17,000 × 12% × 3/12 = $510 interest; Maturity value = $17,000 + $510 = $17,510 Diff: 2 LO: 5-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 11) A debtor and a creditor record the same note, respectively, as a: A) note receivable and note payable. B) note receivable and account receivable. C) note payable and note receivable. D) note payable and account payable. Answer: C Diff: 2 LO: 5-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

12) On May 1, 2019, Mary Smith signed a $10,000 promissory note with Continental Bank. The note is due in one year with 7% interest. What journal entry should Continental Bank prepare on May 1, 2019? A) Debit Cash for $10,000 and credit Notes Payable for $10,000. B) Debit Notes Receivable for $10,700 and credit Cash for $10,700. C) Debit Notes Receivable for $10,000 and credit Cash for $10,000. D) Debit Cash for $10,700 and credit Accounts Receivable for $10,700. Answer: C Diff: 2 LO: 5-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13) Emporium Bank lends money to a customer on a six month note. What journal entry does the bank prepare? A) debit Note Receivable and credit Service Revenue B) debit Cash and credit Note Payable C) debit Note Receivable and credit Cash D) debit Cash and credit Note Receivable Answer: C Diff: 2 LO: 5-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 14) On October 1, 2019, the Early Bank lends money to a customer on a six month note. The bank accrues interest on the note at December 31, 2019. The bank's journal entry on December 31, 2019 would include a: A) debit to Cash and a credit to Interest Revenue for three months of interest. B) debit to Cash and a credit to Interest Payable for three months of interest. C) debit to Interest Receivable and a credit to Interest Revenue for three months of interest. D) debit to Interest Revenue and a credit to Interest Receivable for three months of interest. Answer: C Diff: 2 LO: 5-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

15) Fourth Company receives a note from a customer for a $15,000 sale. On the date of sale, what journal entry did Fourth Company prepare? Ignore cost of goods sold. A) debit Accounts Receivable for $15,000 and credit Sales Revenue for $15,000 B) debit Notes Receivable for $15,000 and credit Cash for $15,000 C) debit Notes Receivable for $15,000 and credit Sales Revenue for $15,000 D) debit Cash for $15,000 and credit Notes Receivable for $15,000 Answer: C Diff: 2 LO: 5-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 16) The journal entry to record accrued interest on a note receivable at year end is: A) debit Interest Receivable and credit Interest Revenue. B) debit Note Receivable and credit Interest Revenue. C) debit Interest Receivable and credit Note Receivable. D) debit Cash and credit Interest Receivable. Answer: A Diff: 2 LO: 5-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 17) Lennon Company signed a 12-month, $53,000, 10% note on June 1, 2019. The amount of interest to be accrued on December 31, 2019, is: (Round your final answer to the nearest dollar.) A) $442. B) $2,650. C) $3,092. D) $5,300. Answer: C Explanation: $53,000 × 0.1 × 7/12 = $3,092 Diff: 2 LO: 5-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

18) The maturity value of a $55,000 note at 10% for 7 months is: (Round your final answer to the nearest dollar.) A) $55,000. B) $58,208. C) $57,750. D) $60,500. Answer: B Explanation: $55,000 × 0.1 × 7/12 = $3,208 interest Maturity value = $55,000 + $3,208 = $58,208 Diff: 2 LO: 5-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 19) The maturity value of a 6 month, 7% note for $70,000, dated May 12 is: (Round your final answer to the nearest dollar.) A) $2,450. B) $70,000. C) $74,900. D) $72,450. Answer: D Explanation: $70,000 × 7% × 6/12 = $2,450 interest Maturity value = $70,000 + $2,450 = $72,450 Diff: 2 LO: 5-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 20) If the interest rate on a note is 12.5% and the principal was $57,000, what is the maturity value of the note, if the term of the note is 5 months? (Round your final answer to the nearest dollar.) A) $57,000 B) $59,969 C) $64,125 D) $61,156 Answer: B Explanation: Interest = ($57,000 × 12.5% × 5/12) = $2,969 Maturity value = $57,000 + $2,969 = $59,969 Diff: 3 LO: 5-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

21) On December 31, 2017, the lender on a $5,700, 120-day,10% note dated November 5, 2017, will recognize: (Use a 365 day year and round your final answer to the nearest dollar.) A) interest receivable, $187. B) interest receivable, $87. C) interest payable, $187. D) interest payable, $87. Answer: B Explanation: $5,700 × 10% × 56/365 = $87 Diff: 2 LO: 5-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 22) If the interest rate on a note is 12% and the principal was $60,000, what is the interest expense for the 8 month note? (Round your final answer to the nearest dollar.) A) $3,600 B) $4,800 C) $7,200 D) $7,800 Answer: B Explanation: $60,000 × 12% × 8/12 = $4,800 Diff: 2 LO: 5-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

23) The Watertown Bank lent Sandy's Pastry Store $40,000 on a 4 month, 7% note dated May 31, 2017. The fiscal year end of the bank is June 30. Round all amounts to the nearest dollar. Required: 1. Determine the due date of the note. 2. Determine the maturity value of the note. 3. Prepare the journal entries made by the bank. Omit explanations. Date

Account

Debit

Credit

Answer: 1. Due date is September 30, 2019. 2. Maturity value = principal plus interest = $40,000 + ($40,000 × 7% × 4/12) = 4$0,933 3. Date Account Debit Credit May 31

June 30

Sept 30

Note Receivable Cash

40,000 40,000

Interest Receivable Interest Revenue ($40,000 × 7% × 1/12) = 233

233

Cash Note Receivable Interest Receivable Interest Revenue ($40,000 × 7% × 3/12) = 700

40,933

233

40,000 233 700

Diff: 3 LO: 5-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

24) On December 1, the Youngstown Company accepted a $8,000 note in settlement of an overdue Accounts Receivable. The note bears 8% interest for 3 months. The Youngstown Company has a year end of December 31. Required: Prepare the journal entries to record the (1) transaction on December 1, (2) the accrued interest at December 31, and (3) the collection of the note on March 1. Round any amounts to the nearest dollar. Omit explanations. Date Account Debit Credit

Answer: Date Dec. 1

Dec. 31

Mar. 1

Account

Debit

Credit

Note Receivable Accounts Receivable

8,000

Interest Receivable Interest Revenue 8,000 × 0.08 × 1/12 = 53

Cash Note Receivable Interest Receivable Interest Revenue Interest = 8,000 × 8% × 2/12= 107

8,000

8,160 8,000 53 107

Diff: 3 LO: 5-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

25) Following are key terms relating to notes receivable, as well as a list of definitions. A. Creditor B. Debtor C. Interest D. Maturity date E. Maturity value F. Principal G. Term ________ 1. The amount of money borrowed by the debtor ________ 2. Another term for the lender ________ 3. The cost of borrowing money stated as an annual percentage rate ________ 4. The length of time from when the note was signed to when the note must be paid ________ 5. The maker of the note ________ 6. The date on which the debtor must pay the note ________ 7. The sum of the principal and the interest on the note Required: Place the appropriate letter (A-G) on the line in front of the statement describing the term. Answer: 1. F, 2. A, 3. C, 4. G, 5. B, 6.D, 7. E Diff: 2 LO: 5-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement Learning Objective 5-7 1) Ratios are used only by company management, and not investors, to evaluate the financial health of a company. Answer: FALSE Diff: 1 LO: 5-7 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 2) The current ratio is a more stringent measure of a firm's ability to pay current liabilities than the quick ratio. Answer: FALSE Diff: 2 LO: 5-7 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

3) The higher the quick ratio, the easier it is to pay current liabilities. Answer: TRUE Diff: 2 LO: 5-7 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) In order to effectively evaluate the days' sales outstanding, it should be compared to the company's credit terms. Answer: TRUE Diff: 2 LO: 5-7 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) Days' sales outstanding tells a company how long it takes to collect its average level of receivables. Answer: TRUE Diff: 1 LO: 5-7 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 6) When compared to the current ratio, the quick ratio is a less stringent measure of a company's ability to pay its current liabilities. Answer: FALSE Diff: 1 LO: 5-7 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 7) Which of the following is considered to be a more stringent measure of a company's ability to pay its current liabilities than the current ratio? A) accounts payable B) quick ratio C) liquidity ratio D) collection period Answer: B Diff: 1 LO: 5-7 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 55 Copyright © 2019 Pearson Education, Inc.

8) A measure of the ability of an entity to pay all of its current liabilities if they came due immediately is the: A) debt ratio. B) quick ratio. C) liquidity ratio. D) accounts receivable turnover. Answer: B Diff: 1 LO: 5-7 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 9) The quick ratio and the day's sales outstanding measure: A) a company's cash conversion cycle. B) a company's profitability. C) a company's liquidity. D) all of the above. Answer: C Diff: 1 LO: 5-7 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) Days' sales outstanding can be computed in two logical steps. In the second step: A) the collection period must be determined. B) the average daily sales are computed. C) the average daily sales are divided by the average net receivables. D) the average net receivables are divided by the average daily sales. Answer: D Diff: 2 LO: 5-7 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

11) When computing the quick ratio, the numerator will include all of the following EXCEPT for: A) net current receivables. B) short-term investments. C) inventory. D) cash and cash equivalents. Answer: C Diff: 2 LO: 5-7 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) When calculating the denominator for the quick ratio, you would NOT include: A) accounts payable. B) long-term debt. C) salaries payable. D) current maturities of long-term debt. Answer: B Diff: 2 LO: 5-7 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13) If a company wants to increase its quick ratio, it should consider: A) buying equipment on account. B) paying off long-term notes payable. C) issuing long-term notes payable. D) collecting an accounts receivable. Answer: C Diff: 3 LO: 5-7 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

14) Robin's Nest had net credit sales for the current period of $580,000 and average net receivables were $45,000. What is Robin's Nest's average daily sales? (Use a 365-day year for your calculations. Round your final answer to the nearest dollar.) A) $13 B) $28 C) $123 D) $1,589 Answer: D Explanation: $580,000 ÷ 365 = $1,589 Diff: 2 LO: 5-7 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 15) Bird's Nest had net credit sales for the current period of $510,000 and average net receivables were $55,000. What is the days' sales outstanding? (Round any intermediary calculations to two decimal places and your final answer to the nearest day.) A) 9 days B) 151 days C) 39 days D) 30 days Answer: C Explanation: $510,000 ÷ 365 = $1,397.26 average daily sales $55,000 ÷ $1,397.26 = 39 days Diff: 2 LO: 5-7 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

16) A company has net credit sales of $2,060,000, a beginning balance of net receivables of $207,000, and an ending balance of net receivables of $246,000. What is the company's days' sales outstanding? (Round any intermediary calculations to two decimal places and your final answer to the nearest day.) A) 9 days B) 37 days C) 40 days D) 44 days Answer: C Explanation: ($207,000 + $246,000) ÷ 2 =$ 226,500 $2,060,000 ÷ 365 = $5,643.84 $226,500 ÷ $5,643.84 = 40 days Diff: 2 LO: 5-7 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 17) A company has $28,000 in cash and cash equivalents, $88,000 in short-term investments, $122,000 in net current receivables, $64,000 in inventory, $14,000 of prepaid insurance and $11,000 of supplies. The total current liabilities of the firm are $304,000. The quick ratio of the company is: (Round your final answer to two decimal places.) A) 0.38. B) 0.78. C) 0.99. D) 1.08. Answer: B Explanation: (Cash and Cash Equivalents $28,000 + Short-Term Investments $88,000 + Net Current Receivables $122,000) ÷ $304,000 = 0.78 Diff: 2 LO: 5-7 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

18) A company has net credit sales of $950,000, a beginning balance of net receivables of $71,000, and an ending balance of net receivables of $95,000. Its days' sales outstanding is: (Round any intermediary calculations to two decimal places and your final answer to the nearest day.) A) 27 days. B) 11 days. C) 32 days. D) 36 days. Answer: C Explanation: $950,000 ÷ 365 = $2,602.74 average daily sales ($71,000 + $95,000) ÷ 2 =$ 83,000 $83,000 ÷ $2,602.74 = 32 days Diff: 2 LO: 5-7 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 19) If the quick ratio is 3, and the current liabilities are $200,000, what is the amount of quick assets? (Round your final answer to the nearest dollar.) A) $200,000 B) $66,667 C) $600,000 D) none of the above Answer: C Explanation: 3 × $200,000 = $600,000 Diff: 3 LO: 5-7 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 20) If the collection period of a company is 30 days, and the average receivables are $83,000 what is the total amount of the credit sales? (Round any intermediary calculations to two decimal places and your final answer to the nearest dollar.) A) $2,767 B) $6,822 C) $83,000 D) $1,009,835 Answer: D Explanation: $83,000 ÷ 30 = $2,766.67 $2,766.67 × 365 = $1,009,835 Diff: 3 LO: 5-7 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 60 Copyright © 2019 Pearson Education, Inc.

21) When calculating the quick ratio, ________ is included in the numerator. A) inventory B) prepaid insurance C) supplies D) short-term marketable securities Answer: D Diff: 3 LO: 5-7 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 22) Emma Jones Company has the following information available: Account Accounts Payable Accounts Receivable, net Cash and Cash Equivalents Inventories Long-Term Investments Short-Term Investments Income Taxes Payable Long-Term Notes Payable

12/31/2019 $76,500 42,300 43,700 100,000 20,000 27,000 2,000 20,000

12/31/2018 $80,000 49,000 70,000 99,000 100,000 44,000 5,000 30,000

Did the quick ratio improve from 2018 to 2019? A) No. B) Yes. C) It stayed the same. D) There is not enough information. Answer: A Explanation: Quick Ratio at 12/31/2019: Quick Assets = Cash and Cash Equiv. $43,700 + Short-Term Investments $27,000 + Accounts Receivable $42,300 = $113,000 Current Liabilities = Accounts Payable $76,500 + Income Taxes Payable $2,000 = $78,500 Quick Ratio = $113,000 / $78,500 = 1.44 Quick Ratio at 12/31/2018: Quick Assets = Cash and Cash Equiv. $70,000 + Short-Term Investments $44,000 + Accounts Receivable $49,000 = $163,000 Current Liabilities = Accounts Payable $80,000 + Income Taxes Payable $5,000 = $85,000 Quick Ratio = $163,000 / $85,000 = 1.92 Diff: 3 LO: 5-7 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 61 Copyright © 2019 Pearson Education, Inc.

23) Excalibur Company has calculated the following ratios: Ratio Current Ratio Quick Ratio Collection Period

12/31/2019 2.25 1.10 30 days

12/31/2018 2.00 0.50 60 days

Did the company's liquidity improve in 2019? A) No. B) Yes, all the ratios improved. C) There is conflicting information. Two ratios improved and one ratio declined. D) There is not enough information to assess. Answer: B Diff: 3 LO: 5-7 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 24) Rockford Moving Company has calculated the following ratios: Ratio Current Ratio Quick Ratio Collection Period

12/31/2019 1.25 1.10 30 days

12/31/2018 2.00 1.50 60 days

Did the company's liquidity improve in 2019? A) No. B) Yes. C) There is conflicting information. One ratio improved and two ratios did not improve. D) There is not enough information to assess. Answer: C Diff: 3 LO: 5-7 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

25) Days' sales in receivables is also called: A) days' sales outstanding B) collection period C) accounts receivable turnover D) A and B Answer: D Diff: 3 LO: 5-7 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 26) Accounts receivable turnover equals: A) days' sales in receivables. B) average collection period. C) average net accounts receivable. D) net credit sales divided by average net accounts receivable. Answer: D Diff: 3 LO: 5-7 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 27) The Daisy Company had net credit sales of $830,000 for the year. Cash sales for the year were $1,170,000. Its receivables at the beginning of the year were $45,000 and at the end of the year they had increased to $90,000. The Daisy Company has credit terms of net 30 days. Compute the days' sales outstanding and evaluate the ratio as strong or weak. (Round any intermediary calculations to two decimal places and your final answer to the nearest day.) A) Days' sales outstanding 30 days; strong B) Days' sales outstanding 30 days; weak C) Days' sales outstanding 12 days; strong D) Days' sales outstanding 12 days; weak Answer: A Explanation: $830,000 ÷ 365 = $2,273.97 $67,500 ÷ $2,273.97 = 29.68 days The days' sales in receivables of 29.68 days is less than 30 days, so the ratio is strong. Diff: 3 LO: 5-7 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

28) Kaley Kaimainn, the controller for Supplies Unlimited has the following accounts: Account Cash and Cash Equivalents Short-Term Investments Current Receivables, net Inventory Prepaid Insurance Salaries Payable Short-Term Notes Payable Credit Sales for year

12/31/2019 12/31/2018 12/31/2017 $12,000 $15,000 10,000 5,000 22,000 32,000 $40,000 26,000 18,000 2,000 3,000 17,000 28,000 12,000 16,000 300,000 200,000

1. Compute the Quick Ratio for 2018 and 2019. 2. Did the Quick Ratio improve? 3. Compute the Collection Period (Days' Sales Outstanding) for 2018 and 2019. 4. Did the Collection Period improve? Answer: 1. 12/31/2019 Quick Ratio: Quick Assets = Cash $12,000 + Short-Term Investments $10,000 + Current Receivables $22,000 = $44,000 Current Liabilities = Salaries Payable $17,000 + Short-Term Note Payable $12,000 = $29,000 Quick Ratio = $44,000 ÷ $29,000 = 1.52 12/31/2018 Quick Ratio: Quick Assets = Cash $15,000 + Short-Term Investments $5,000 + Current Receivables $32,000 = $52,000 Current Liabilities = Salaries Payable $28,000 + Short-Term Note Payable $16,000 = $44,000 Quick Ratio = $52,000 ÷ $44,000 = 1.18 2. The quick ratio did improve. 3. Collection Period for Year Ending 12/31/2019: Average receivables = (22,000 + 32,000) ÷ 2 = 27,000 Daily sales = 300,000 ÷ 365 = 822 Collection period = 27,000 ÷ 822 = 32.85 days Collection Period for Year Ending 12/31/2018: Average receivables = (40,000 + 32,000) ÷ 2 = 36,000 Daily sales = 200,000 ÷ 365 = 548 Collection period = 36,000 ÷ 548 = 65.7 days Diff: 3 LO: 5-7 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

29) Complete the following chart by filling in the missing items. Use a 365-day year.

1 2

Average daily sales A $900

Days' sales outstanding B D

Average Accounts Receivable $80,400 $80,000

Credit Sales $800,000 C

Days' sales outstanding 36.7 88.9

Average Accounts Receivable $80,400 $80,000

Credit Sales $800,000 $328,500

Answer:

1 2

Average daily sales $2,192 $900

Calculations #1 A: 800,000 ÷ 365 = 2,192 B: 80,400 ÷ 2,192 = 36.7 Calculations # 2 C: 365 × 900 = 328,500 D: 80,000 ÷ 900 = 88.9 Diff: 3 LO: 5-7 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

30) The comparative financial statements of Walters Company for 2019, 2018, and 2017 contain the following selected data: 2019 Cash and Cash Equivalents Short-Term Investments Accounts Receivable, net Inventory Prepaid Insurance Accounts Payable Interest Payable Short-Term Note Payable Long-Term Note Payable Net Cash Sales Net Credit Sales

2018

$80 100 230 500 50 200 300 1,000 1,000 2,000 2,000

$75 100 225 400 60 200 200 500 500 1,500 1,900

2017 $60 100 250 300 70 200 100 200 100 1,000 1,800

Compute the following ratios for 2019 and 2018 and indicate which ratios improved and which ratios deteriorated: a. Quick ratio b. Days' sales outstanding Answer: a. 2019: Quick assets = (Cash and Cash Equivalents $80 + Short-Term Investments $100 + Accounts Receivable $230) = $410 Current liabilities = (Accounts Payable $200 + Interest Payable $300 + Short-Term Note Payable $1,000 = $1,500 Quick ratio = 0.27 2018 : Quick assets = (Cash and Cash Equivalents $75 + Short-Term Investments $100 + Accounts Receivable $225) = $400 Current liabilities = (Accounts Payable $200 + Interest Payable $200 + Short-Term Note Payable $500 = $900 Quick ratio = 0.44 b. 2019: step 1: 2,000 ÷ 365 = 5.48 step 2: (230 + 225) ÷ 2 = 227.5 Days' sales outstanding = 227.5 ÷ 5.48 = 41.51 days 2018: step 1: 1,900 ÷ 365 = 5.21 step 2: (225 + 250) ÷ 2 = 237.5 Days' sales outstanding = 237.5 ÷ 5.21 = 45.6 days

The quick ratio declined in 2019, which indicates the company's liquidity worsened. The days' sales outstanding improved in 2019 because it decreased, which indicates the company is collecting its outstanding receivables faster. This measure of liquidity improved. Diff: 3 LO: 5-7 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

31) For each of the following ratios, (a) provide the formula for computing the ratio, (b) state what the ratio measures and (c) discuss how the ratio is interpreted. 1. Quick Ratio 2. Accounts Receivable Turnover 3. Days' Sales Outstanding Answer: 1. Quick Ratio (a) Formula: (b) This ratio measures the ability to pay current liabilities with quick assets. This ratio is more stringent than the current ratio because only the most liquid current assets are used (cash and cash equivalents, short-term investments, and net current receivables). (c) The higher the quick ratio, the easier it is to pay current liabilities. A quick ratio of 0.75 means that the company has $0.75 of quick assets to pay each $1 of current liabilities. 2. Accounts Receivable Turnover (a) Formula: (b) This ratio measures the ratio of net credit sales to average net accounts receivable. The ratio shows the number of times a company collects its receivables annually. (c) The accounts receivable turnover shows the number of times per year the company completely collects its average accounts receivable. An accounts receivable turnover of 10.7 means that, on average, the company collects its accounts receivable 10.7 times each year. A higher turnover is preferable. 3. Days' Sales Outstanding (a) Formula: (b) This ratio measures how long it takes for the company to collect its average level of receivables. (c) The days' sales outstanding ratio converts the accounts receivable turnover into the average number of days that it takes to collect accounts receivable. This can be compared to the credit terms. For example, if the sales are made n/30 and the days' sales outstanding is 45 days, customers are not paying within the period allowed in the credit terms. In this case, the collection period is too long, and the company should take corrective action. Diff: 3 LO: 5-7 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

Financial Accounting, 12e (Thomas/Tietz/Harrison) Chapter 6 Inventory & Cost of Goods Sold Learning Objective 6-1 1) Cost of Goods Sold is an operating expense on the income statement. Answer: FALSE Diff: 1 LO: 6-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 2) Inventory is reported on the balance sheet at the selling price of the inventory still on hand. Answer: FALSE Diff: 2 LO: 6-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 3) Service entities report cost of goods sold on the income statement. Answer: FALSE Diff: 1 LO: 6-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 4) The seller does not include consigned merchandise on hand in its balance sheet, because the seller does not own this inventory. Answer: TRUE Diff: 2 LO: 6-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) To document approval of purchase returns, the buyer issues a credit memorandum meaning that accounts payable are reduced for the amount of the return. Answer: FALSE Diff: 2 LO: 6-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 1 Copyright © 2019 Pearson Education, Inc.

6) In a perpetual inventory system, a business maintains a running record of the number of units bought, sold and on hand for each inventory item. Answer: TRUE Diff: 2 LO: 6-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 7) Since a perpetual inventory system continuously updates the inventory account, a physical inventory count is not necessary to prove the inventory records. Answer: FALSE Diff: 2 LO: 6-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 8) A purchase discount decreases the cost of the inventory. Answer: TRUE Diff: 2 LO: 6-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 9) Freight in is accounted for as a delivery expense. Answer: FALSE Diff: 2 LO: 6-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) The cost of inventory shifts from asset to expense when the seller fulfills its contract with the customer, delivers the goods to the buyer and recognizes revenue. Answer: TRUE Diff: 2 LO: 6-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

11) The financial statements of a merchandising company will show: A) the same accounts as the financial statements of a service company. B) gross profit after operating expenses on the income statement. C) inventory as a current asset on the balance sheet. D) cost of goods sold as a contra revenue account on the income statement. Answer: C Diff: 2 LO: 6-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 12) The cost of the inventory that a business has sold to customers is called: A) inventory. B) cost of goods sold. C) purchases. D) gross profit. Answer: B Diff: 2 LO: 6-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 13) The cost of inventory that is still on hand is called: A) cost of goods sold, an expense that appears on the balance sheet. B) inventory, a long-term asset that appears on the balance sheet. C) inventory, a current asset that appears on the balance sheet. D) purchases, a current asset that appears on the balance sheet. Answer: C Diff: 2 LO: 6-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 14) Another term for gross profit is: A) gross income. B) gross sales. C) gross margin. D) gross operating income. Answer: C Diff: 1 LO: 6-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 3 Copyright © 2019 Pearson Education, Inc.

15) Two accounts that appear on the financial statements of a merchandising company but are NOT needed by a service company are: A) cost of goods sold and depreciation. B) cost of goods sold and net income. C) cost of goods sold and inventory. D) inventory and depreciation. Answer: C Diff: 2 LO: 6-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 16) Sales revenue is based on the ________ of the inventory, while cost of goods sold is based on the ________ of the inventory. A) cost; sale price B) cost; fair market value C) sale price; retail price D) sale price; cost Answer: D Diff: 2 LO: 6-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 17) Which is the CORRECT order for items to appear on the income statement? A) sales revenue, operating expenses, gross profit, net income B) sales revenue, gross profit, net income, operating expenses C) sales revenue, gross profit, cost of goods sold, operating expenses D) sales revenue, cost of goods sold, gross profit, operating expenses Answer: D Diff: 2 LO: 6-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

18) A periodic inventory system: A) is used for inexpensive goods. B) is used when inventory cannot be controlled by visual inspection. C) keeps a running record of inventory on hand. D) is used for small, low-value items. Answer: D Diff: 2 LO: 6-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 19) Roadway Company purchases inventory from Fedway Company with the shipping terms FOB destination. This means that: A) Roadway Company owns the goods while they are in transit. B) Legal title passes to Roadway Company when the goods leave Fedway's shipping dock. C) Fedway Company will pay the freight on this transaction. D) Roadway Company will include the goods in their inventory as soon as they leave Fedway's shipping dock. Answer: C Diff: 2 LO: 6-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 20) Under a perpetual inventory system, when a sale is made, the seller needs to prepare: A) no journal entry. B) one journal entry only. C) two journal entries. D) three journal entries. Answer: C Diff: 2 LO: 6-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

21) How do purchase returns and allowances and purchase discounts affect gross purchases? A) Both are added to purchases. B) Both are subtracted from purchases. C) Purchase returns and allowances are added to purchases; purchase discounts are subtracted from purchases. D) Purchase returns and allowances are subtracted from purchases; purchase discounts are added to purchases. Answer: B Diff: 2 LO: 6-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 22) Which of the following is NOT used to determine the cost of net purchases? A) freight-out B) freight-in C) purchase returns D) purchase discounts Answer: A Diff: 2 LO: 6-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 23) When inventory is shipped from the seller to the buyer with shipping terms of FOB destination: A) title passes from the seller to the buyer when the goods leave the seller's shipping dock. B) the goods will be included in the inventory of the buyer while in transit. C) the seller has title to the goods while they are in transit. D) the buyer will pay the transportation costs associated with the purchase. Answer: C Diff: 2 LO: 6-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

24) Company A has inventory out on consignment and held for sale by Company B. Which company will include the goods in their inventory? A) Company A B) Company B C) either Company A or Company B D) cannot be determined from the facts Answer: A Diff: 2 LO: 6-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 25) Using a perpetual inventory system, which journal entry(ies) is(are) prepared when two units of merchandise are sold on account? A) debit Accounts Receivable and credit Sales Revenue only B) debit Cash and credit Sales Revenue; debit Cost of Goods Sold and credit Inventory C) debit Accounts Receivable and credit Sales Revenue; debit Cost of Goods Sold and credit Inventory D) debit Accounts Receivable and credit Sales Revenue; debit Inventory and credit Cost of Goods Sold Answer: C Diff: 2 LO: 6-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 26) A company purchased inventory for $1,300 per unit. The company later sold one unit of the inventory for cash of $1,900. Under the perpetual inventory system, which accounts will be debited to record the sale? A) Cash, $1,900; Inventory, $1,300 B) Cash, $1,900; Cost of Goods Sold, $1,300 C) Cash, $1,900; Cost of Goods Sold, $600 D) Cash, $1,900; Inventory, $600 Answer: B Diff: 2 LO: 6-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

27) Under a perpetual inventory system, the journal entry to record the purchase of inventory on account will include a: A) debit to Inventory and a credit to Cash. B) debit to Inventory and a credit to Accounts Payable. C) debit to Accounts Payable and a credit to Inventory. D) debit to Purchases and a credit to Accounts Payable. Answer: B Diff: 2 LO: 6-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 28) The selling price of a television is $1,700 and the cost to the retailer is $725. What is the retailer's gross profit from the sale of the television? A) $0 B) $975 C) $725 D) $1,700 Answer: B Explanation: $1,700 - $725 = $975 Diff: 2 LO: 6-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 29) Boston Company sells thirty items for $800 per unit and has a cost of goods sold per unit of $480. The gross profit to be reported for selling 30 items is: A) $320. B) $9,600. C) $14,400. D) $24,000. Answer: B Explanation: Gross profit for 30 items: Gross profit per unit: ($800 - $480) / $800 = 40% $800 × 40% = $320 × 30 = $9,600 Diff: 3 LO: 6-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

30) Sanfran Company purchased inventory for $110,000. In addition they had purchase returns of $6,000 and paid freight-in of $13,000. Sanfran Company's net cost of purchases would be: A) $91,000. B) $103,000. C) $117,000. D) $129,000. Answer: C Explanation: 110,000 - 6,000 + 13,000 = 117,000 Diff: 2 LO: 6-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 31) Grogan Company purchases inventory on account with a cost of $1,700 and a retail price of $3,400. Grogan Company uses the perpetual inventory method. What journal entry is required on the date of purchase? A) debit Purchases for $1,700 and credit Accounts Payable for $1,700 B) debit Purchases for $3,400 and credit Cash for $3,400 C) debit Inventory for $1,700 and credit Accounts Payable for $1,700 D) debit Accounts Receivable for $3,400 and credit Purchases for $3,400 Answer: C Diff: 2 LO: 6-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 32) On June 1, Nicholson Company purchased inventory on account with a cost of $1,600. Credit terms were 2/10, net 30. On June 2, Nicholson Company returned 50 percent of the inventory. Nicholson Company uses the perpetual inventory system. What journal entry did Nicholson Company prepare on June 2? A) debit Purchase Returns for $1,600 and credit Accounts Payable for $1,600 B) debit Cash for $1,600 and credit Accounts Payable for $1,600 C) debit Purchase Returns for $800 and credit Accounts Payable for $800 D) debit Accounts Payable for $800 and credit Inventory for $800 Answer: D Diff: 2 LO: 6-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

33) On July 1, Corrao Company purchased $800 of inventory on account with credit terms of 3/10, net 30. Corrao Company uses the perpetual inventory system. On July 5, Corrao Company paid the amount due. What journal entry did they prepare on July 5? A) debit Accounts Receivable for $800 and credit Cash for $800 B) debit Accounts Payable for $800, credit Inventory for $24 and credit Cash for $776 C) debit Purchase Discount for $24, debit Accounts Payable for $752 and credit Cash for $776 D) debit Accounts Payable for $776 and credit Cash for $776 Answer: B Explanation: $800 × 3% = $24 discount Diff: 2 LO: 6-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 34) On August 1, Savage Company purchased $2,100 of inventory on account with credit terms of 4/10, net 30. Savage Company uses the perpetual inventory system. On August 15, Savage Company paid the amount due. What journal entry did they prepare on August 15? A) debit Inventory for $2,100 and credit Accounts Payable for $2,100 B) debit Accounts Payable for $2,100, credit Inventory for $84 and credit Cash for $2,016 C) debit Accounts Payable for $2,100 and credit Cash for $2,100 D) debit Accounts Payable for $2,016 and credit Cash for $2,016 Answer: C Diff: 2 LO: 6-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 35) On May 1, Santelle Company purchased $700 of inventory on account with credit terms of 4/10, net 30. Santelle uses the perpetual inventory system. On May 2, the seller gave Santelle a $100 allowance due to a product defect. What journal entry did Santelle Company prepare on May 2? A) debit Accounts Payable for $100 and credit Purchase Returns and Allowances for $100 B) debit Accounts Payable for $100 and credit Purchase Discounts for $100 C) debit Cash for $100 and credit Accounts Payable for $100 D) debit Accounts Payable for $100 and credit Inventory for $100 Answer: D Diff: 2 LO: 6-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

36) To determine the cost of goods sold, to report on the income statement, multiply the number of units of inventory: A) sold times the retail price per unit. B) sold times the cost per unit. C) purchased times the retail price per unit. D) purchased times the cost per unit. Answer: B Diff: 2 LO: 6-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 37) Which statement is TRUE? A) Most businesses use the periodic inventory system. B) The excess of sales revenue over cost of goods sold is called gross profit because operating expenses have not yet been subtracted. C) Most companies use the specific identification method. D) Most companies in the United States follow International Financial Reporting Standards. Answer: B Diff: 2 LO: 6-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 38) On June 1, Neighbor Company purchased inventory on account with a cost of $3,000. The credit terms were 3/10, net 30. On June 2, Neighbor returned 50 percent of the inventory. Neighbor uses the perpetual inventory system. On June 8, Neighbor paid for the inventory. What journal entry did Neighbor Company prepare on June 8? A) debit Purchase Discount for $45, debit Cash for $1,455 and credit Accounts Payable for $1,500 B) debit Accounts Payable for $1,500 and credit Cash for $1,500 C) debit Accounts Payable for $1,500 credit Purchase Discount for $45 and credit Cash for $1,455 D) debit Accounts Payable for $1,500, credit Inventory for $45 and credit Cash for $1,455 Answer: D Diff: 2 LO: 6-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

39) The inventory system that uses computer software to keep a running record of inventory on hand is the: A) cost of goods sold inventory system. B) periodic inventory system. C) perpetual inventory system. D) hybrid inventory system. Answer: C Diff: 2 LO: 6-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

40) During the current year, the following transactions occurred for Marjorie's Jewelry Store: A. On May 1, the business purchased 10 rings on account at $6,000 each. Credit terms were 2/10, net/30. B. On May 2, the business returned one ring because of a defect. C. On May 3, three of the rings were sold on account at $8,000 each, to one customer. Credit terms were n/30. No sales returns were expected. D. On May 9, the accounts payable was paid in full. E. On May 10, the customer paid for one ring sold on May 3. F. On May 31, the business paid rent of $4,000 for the month of May and wages of $5,000. Required: 1. Journalize the above transactions for Marjorie's Jewelry Store. The store uses the perpetual inventory system. Explanations are not required. 2. Prepare the income statement for the month ending May 31 of the current year. Use the multistep format and ignore taxes. Answer: 1. Date Account Dr Cr May 1 Inventory 60,000 Accounts Payable 60,000 May 2 Accounts Payable Inventory

6,000

May 3 Accounts Receivable Sales Revenue

24,000

May 3 Cost of Goods Sold Inventory

18,000

May 9 Accounts Payable Cash Inventory ($54,000 × 2%)

54,000

May 10

Cash

6,000

24,000

18,000

52,920 1,080

8,000

Accounts Receivable May 31

Rent Expense Wages Expense Cash

8,000

4,000 5,000 9,000

2. Marjorie's Jewelry Store Income Statement For the Month Ended May 31, 2017 Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses: Wages Expense Rent Expense

$24,000 18,000 6,000

5,000 4,000

Net Loss Diff: 2 LO: 6-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

9,000 ($3,000)

41) Steve's Hardware Store uses the perpetual inventory system. The business incurred the following transactions: A. On November 1, 10 snow blowers were purchased on account at $1,000 each. Credit terms were 2/10, net 30. B. On November 2, the business returned two snow blowers due to damage incurred in shipping. C. On November 10, the business sold three of the snow blowers on account at $1,500 each. The credit terms were 2/10, net 30. No sales returns are expected. D. On November 12, the business paid for the snow blowers. E. On November 30, the business paid wages of $2,000. Required: Journalize the above transactions for Steve's Hardware Store. Explanations are not required. Date

Account

Answer: Date Account Nov. 1 Inventory (10 × $1,000) Accounts Payable Nov. 2

Accounts Payable Inventory (2 × $1,000)

Dr 10,000

Cr 10,000

2,000 2,000

Nov. 10 Accounts Receivable Sales Revenue ($4,500 × 98%)

4,500

Nov. 10 Cost of Goods Sold* (3 × $990) Inventory

3,000

Nov. 12 Accounts Payable Cash

8,000

Nov. 30 Wage Expense Cash

2,000

4,500

3,000

8,000

2,000

*Before the sale on Nov. 10, there were 8 snow blowers in inventory. The total cost of $8,000 was reduced by the $80 allowance that was granted by the vendor on Nov. 3. The cost of each snow blower is now $7,920/8 = $990. Diff: 2 LO: 6-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

42) An auto dealer uses a perpetual inventory system. The dealer incurred the following transactions during the month of May: 1. On May 1, the dealer purchased 10 vehicles on account at $20,000 each, with credit terms of 2/10, net 30. 2. On May 2, the dealer returned one vehicle due to a product defect. 3. On May 3, the dealer sold 5 vehicles for $25,000 each on account. The credit terms are n/30. No sales returns are expected. 4. On May 9, the dealer paid for the vehicles purchased less the return on May 2. 5. On May 31, the dealer collected one-half of the amount due from the May 3 sale. 6. On May 31, the dealer paid the rent for the next month of $2,500. Required: Prepare the journal entries for the dealer during the month of May. Explanations are not required. Date

Account

Answer: Date Account May 1 Inventory (10 × $20,000) Accounts Payable May 2

May 3

May 9

May 31

Dr Cr 200,000 200,000

Accounts Payable Inventory

20,000

Accounts Receivable (5 × $25,000) Sales Revenue

125,000

Cost of Goods Sold (5 × $20,000) Inventory

100,000

20,000

Accounts Payable ($200,000 $20,000) Cash ($180,000 - $3,600) Inventory (2% × $180,000)

125,000

100,000

180,000 176,400 3,600

Cash ($125,000 × 50%) Accounts Receivable

62,500

Prepaid Rent Cash

2,500

62,500

2,500

Diff: 2 LO: 6-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement Learning Objective 6-2 1) The choice of an inventory costing method does not impact a company's balance sheet. Answer: FALSE Diff: 1 LO: 6-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

2) The LIFO method assigns the most recent inventory cost to cost of goods sold. Answer: TRUE Diff: 2 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) The average cost per unit is calculated as the cost of goods available for sale divided by the number of units sold. Answer: FALSE Diff: 2 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) The inventory cost under the average cost per unit method will generally fall in between the inventory cost using the LIFO and FIFO methods. Answer: TRUE Diff: 2 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) If a company uses LIFO for tax purposes, they must use LIFO for financial reporting purposes. Answer: TRUE Diff: 2 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 6) When inventory costs are rising, a company using the LIFO costing method will generally pay less taxes than if the company had been using the FIFO method. Answer: TRUE Diff: 2 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

7) When inventory costs are rising, FIFO allows managers to manipulate net income by timing the purchases of inventory. Answer: FALSE Diff: 2 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 8) All of the following costs would be included in the cost of inventory EXCEPT for: A) insurance while in transit from seller. B) costs to get inventory ready for sale. C) taxes paid on the purchase price. D) sales commission paid to salesperson when the inventory is sold. Answer: D Diff: 2 LO: 6-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 9) ABC Furniture Unlimited sells antique furniture. ABC will most likely use the ________ method to cost its ending inventory. A) First-in, first-out B) Last-in, first-out C) Specific identification D) Average Answer: C Diff: 1 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 10) The inventory method used by a company affects: A) net income on the income statement. B) the income taxes to be paid. C) the ending inventory on the balance sheet. D) all of the above. Answer: D Diff: 2 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

11) To determine the cost of ending inventory using the LIFO method: A) the latest purchase costs are used. B) the specific unit cost of the inventory is used. C) the average cost of the inventory is used. D) the beginning inventory and earliest purchase costs are used. Answer: D Diff: 2 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) Under the average-cost inventory method, to determine the average cost per unit: A) the cost of beginning inventory is divided by the number of units available. B) the cost of beginning inventory plus the cost of purchases is divided by the number of units sold. C) the cost of purchases for the period are divided by the number of units available. D) the cost of beginning inventory plus the cost of purchases is divided by the number of units available. Answer: D Diff: 2 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13) When inventory costs are increasing, the FIFO costing method will generally yield a cost of goods sold that is: A) higher than cost of goods sold under the LIFO method. B) lower than cost of goods sold under the LIFO method. C) equal to the gross profit under the LIFO method. D) equal to cost of goods sold under the LIFO method. Answer: B Diff: 2 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

14) Under the ________ method, ending inventory is based on the costs of the most recent purchases. A) average-cost B) FIFO C) LIFO D) specific-identification Answer: B Diff: 2 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 15) When inventory costs are decreasing, the LIFO costing method will generally result in: A) a higher gross profit than under FIFO. B) a lower gross profit than under FIFO. C) a lower inventory value than under FIFO. D) the same inventory value as FIFO. Answer: A Diff: 2 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 16) When comparing the results of LIFO and FIFO when inventory costs are decreasing: A) cost of goods sold will be lower using FIFO. B) ending inventory will be higher using FIFO. C) cost of goods sold will be higher using LIFO. D) ending inventory will be higher using LIFO. Answer: D Diff: 3 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

17) The use of the FIFO method generally increases taxable income: A) when inventory costs are constant. B) when inventory costs are declining. C) when inventory costs are increasing. D) under all circumstances. Answer: C Diff: 2 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 18) If inventory costs are rising and a company is using LIFO, large purchases of inventory near the end of the year will: A) increase income taxes paid. B) decrease income taxes paid. C) not change the amount of income taxes paid. D) cannot be determined. Answer: B Diff: 2 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 19) When comparing the FIFO and LIFO inventory methods: A) LIFO reports inventory at net realizable value. B) LIFO reports the most up-to-date inventory cost on the balance sheet. C) FIFO results in the most realistic net income figure. D) FIFO matches old inventory costs against revenue. Answer: D Diff: 2 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

20) A LIFO liquidation occurs when ________ fall(s) below the ending inventory quantities in the previous period. A) beginning inventory quantities B) ending inventory quantities C) beginning inventory costs D) ending inventory retail value Answer: B Diff: 2 LO: 6-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 21) A company has a beginning inventory of $20,000 and purchases during the year of $140,000. The beginning inventory consisted of 2,000 units and 7,000 units were purchased during the year. The company has 5,000 units left at year-end. Under average-cost, what is Cost of Goods Sold? (Round any intermediary calculations to two decimal places and your final answer to the nearest dollar.) A) $124,460 B) $71,120 C) $140,000 D) $160,000 Answer: B Explanation: ($20,000 + $140,000) ÷ (2,000 + 7,000) = $17.78 per unit; $17.78 × (9,000 available - 5,000 ending inventory) = $71,120 Diff: 2 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 22) A company has a beginning inventory of $50,000 and purchases during the year of $150,000. The beginning inventory consisted of 3,000 units and 8,000 units were purchased during the year. 3,780 units remain in ending inventory. The cost of the ending inventory using the averagecost method will be: (Round any intermediary calculations to two decimal places and your final answer to the nearest dollar.) A) $131,260. B) $199,980. C) $68,720. D) $268,700. Answer: C Explanation: $200,000 ÷ 11,000 = $18.18 per unit; $18.18 × 3,780 = $68,720 Diff: 2 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 24 Copyright © 2019 Pearson Education, Inc.

23) Given the following data, calculate the cost of ending inventory using the average cost method. (Round any intermediary and final answers to two decimal places.) Date Item Unit 1/1 Beginning inventory 50 units at $20 per unit 3/5 Purchase of inventory 30 units at $10 per unit 5/30 Purchase of inventory 35 units at $32 per unit 12/31 Ending inventory 30 units A) $620.10 B) $631.20 C) $300.00 D) $1,120.00 Answer: B Explanation: 50 units × $20 = $1,000.00 30 units × $10 = 300.00 35 units × $32 = 1,120.00 85 Units total $2,420.00 $2,420.00 ÷ 115 =$21.04; $21.04 × 30 = $631.20 Diff: 2 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

24) Given the following data, calculate the cost of goods sold using the average-cost method. Round average cost per unit calculations to two decimal places. Round final answer to the nearest dollar. Date Item Unit 1/1 Beginning inventory 40 units at $10 per unit 5/10 Purchase of inventory 20 units at $30 per unit 10/9 Purchase of inventory 20 units at $32 per unit 12/31 Ending inventory 28 units A) $1,394 B) $1,066 C) $1,640 D) $3,046 Answer: B Explanation: 40 units × $10 = $400 20 units × $30 = 600 20 units × $32 = 640 80 $1,640 $1,640 ÷ 80 = $20.50 per unit (80 - 28) × $20.50 = $1,066 Diff: 2 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

25) Tomasino's inventory records show the following data at January 31: Beginning inventory Jan. 1 Jan. 10 purchase Jan. 22 purchase

90 units at $7 per unit 320 units at $10 per unit 120 units at $11 per unit

At January 31, 240 units are still on hand. What is the cost of the ending inventory at January 31 if Tomasino uses the FIFO method? A) $1,680 B) $1,950 C) $2,520 D) $2,130 Answer: C Explanation: 120 units × $11 = $1,320 120 units × $10 =$1,200 240 $2,520 Diff: 2 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 26) Thelen's inventory records show the following data at January 31: Beginning inventory Jan. 1 Jan. 10 purchase Jan. 22 purchase

90 units at $9 per unit 280 units at $12 per unit 90 units at $13 per unit

At January 31, 240 units are still on hand. What is the cost of the ending inventory at January 31 if Thelen uses the LIFO method? A) $2,160 B) $2,610 C) $3,120 D) $2,760 Answer: B Explanation: (90 × $9) + (150 × $12) = $2,610 Diff: 2 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

27) Given the following data, what is cost of goods sold as determined by the FIFO method? Sales 310 units Beginning inventory 280 units at $7 per unit Purchases 108 units at $8 per unit A) $2,170 B) $2,200 C) $2,278 D) $2,480 Answer: B Explanation: (280 × $7) + (30 × $8) = $2,200 Diff: 2 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 28) Summertime had the following data for the month of March: Beginning inventory March 1 296 units at $16 per unit March 19 purchase 234 units at $25 per unit March 27 purchase 208 units at $26 per unit On March 31, 300 units are still on hand. Determine the cost of goods sold for March if Summertime uses the FIFO method. A) $11,808 B) $7,800 C) $8,286 D) $9,088 Answer: C Explanation: Beginning inventory + Purchases = units available 296 + 234 + 208 = 738 738 units - 300 units on hand = 438 units sold 296 units × $16 = $4,736 142 units × $25 = $3,550 $8,286 Diff: 2 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

29) The following data was extracted from the records of Today Company: Sales revenue Beginning inventory Purchases

600 units at $45 per unit 110 units at $24 per unit 600 units at $35 per unit

What is the gross profit using the LIFO method? A) $6,000 B) $24,360 C) $21,000 D) $27,000 Answer: A Explanation: Sales 600 units × $45 = $27,000 COGS 600 units × $35 = 21,000 GP 600 × $10 = $6,000 Diff: 3 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

30) Given the following data, calculate cost of goods sold using the FIFO costing method. Date Item 1/1 Beginning inventory 2/25 Purchase of inventory 5/20 Purchase of inventory 8/15 Purchase of inventory 10/17 Purchase of inventory 12/31 Ending inventory A) $720 B) $888 C) $1,004 D) $1,354 Answer: A Explanation: 33 units × $8 = $264 12 units × $10 = $120 24 units × $14 = $336 69 $720

Unit 33 units at $8 per unit 12 units at $10 per unit 25 units at $14 per unit 5 units at $12 per unit 12 units at $18 per unit 18 units

33 units + 12 units + 25 units + 5 units + 12 units = 87 units available 87 units available — 18 units ending inventory = 69 units sold Diff: 2 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

31) Given the following data, calculate the cost of goods sold using the LIFO costing method. Date Item 1/1 Beginning inventory 3/18 Purchase of inventory 6/20 Purchase of inventory 9/27 Purchase of inventory 11/27 Purchase of inventory 12/31 Ending inventory A) $1,981 B) $925 C) $1,091 D) $820 Answer: C Explanation: 25 units × $27 = $675 16 units × $26 = $416 $1,091

Unit 14 units at $20 per unit 12 units at $22 per unit 9 units at $25 per unit 30 units at $26 per unit 25 units at $27 per unit 49 units

14 units + 12 units + 9 units + 30 units + 25 units = 90 units available 90 units available — 49 units ending inventory = 41 units sold Diff: 2 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 32) Which statement is FALSE? A) Many U.S. companies that currently use LIFO for their U.S. operations must use another method if they have operations in foreign countries. B) IFRS does not permit the use of LIFO. C) IFRS does permit the FIFO method. D) If LIFO is no longer allowed to be used in the United States, the tax burden on many companies will be lower. Answer: D Diff: 3 LO: 6-2 AACSB: Reflective Thinking AICPA Bus Persp: International/Global AICPA Functional: Measurement

33) If inventory costs are decreasing over time, the income taxes paid using FIFO will ________ the income taxes paid using LIFO. A) exceed B) equal C) be less than D) none of the above Answer: C Diff: 3 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 34) Gross profit will be the: A) highest if LIFO is used and inventory costs are decreasing. B) lowest if LIFO is used and inventory costs are increasing. C) highest if FIFO is used and inventory costs are increasing. D) all of the above. Answer: D Diff: 3 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 35) Which inventory costing method provides the most realistic measure of net income? A) FIFO B) LIFO C) average cost D) specific identification Answer: B Diff: 3 LO: 6-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

36) Which inventory costing method provides the most current, up-to-date cost of inventory on the balance sheet? A) FIFO B) LIFO C) average cost D) specific identification Answer: A Diff: 3 LO: 6-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 37) When inventory costs are falling, which inventory costing method minimizes the taxes paid? A) FIFO B) LIFO C) average cost D) specific identification Answer: A Diff: 3 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

38) The following data was obtained from the records of Ivanovich Artists, Inc., for the current year. Sales during the year were 400 units. Jan. 1 February 1 April 1 July 1

Beginning Inventory Purchase Purchase Purchase

100 units at $10 200 units at $12 100 units at $14 60 units at $16

Required: 1. Calculate the cost of the ending inventory using: a. FIFO. b. LIFO. c. Average cost. Round average cost per unit to two decimal places. Round final answers to the nearest dollar. 2. Calculate the cost of goods sold by: a. FIFO. b. LIFO. c. Average cost. Round average cost per unit to two decimal places. Round final answers to the nearest dollar. Answer: 1. 100 units + 200 units + 100 units + 60 units = 460 units available 460 available – 400 sold = 60 units in ending inventory a. FIFO Ending Inventory: 60 × $16 = $960 b. LIFO Ending Inventory: 60 × $10 = $600 c. Average Cost - Ending Inventory: Beginning Inventory 100 × $10 = $1,000 Purchase 200 × $12 = $2,400 Purchase 100 × $14 = $1,400 Purchase 60 × $16 = $960 Total Cost 460 units at $5,760 Average Cost per Unit = $5,760 ÷ 460 = $12.52 per unit Cost of Ending Inventory: $12.52 × 60 = $751 2. a. FIFO Cost of Goods Sold: (100 × $10) + (200 × $12) + (100 × 14) = $4,800 b. LIFO Cost of Goods Sold: (40 × $10) + (200 × $12) + (100 × $14) + (60 × $16) = $5,160 c. Average Cost - Cost of Goods Sold: $12.52 × 400 = $5,008 Diff: 2 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

39) The following data was obtained from the records of Brankovich Tool and Die, Inc., for the current year: Jan. 1 February 1 April 1 July 1

Beginning Inventory Purchase Purchase Purchase

110 units at $10 200 units at $12 100 units at $14 80 units at $16

The company sold 200 units during the year. Sales for the year are $70,000; operating expenses are $20,000; and the tax rate is 40%. Required: Using the multistep format, prepare the income statement using: 1. FIFO 2. LIFO 3. Average cost (Round all calculations to two decimal places.) Answer: 1. FIFO Sales $70,000 Cost of Goods Sold* 2,180 Gross Profit 67,820 Operating Expenses 20,000 Income Before Taxes 47,820 Income Tax Expense 19,128 Net Income $28,692 *Cost of Goods Sold: (110 × $10) + (90 × $12) = $2,180 2. LIFO Sales Cost of Goods Sold*

$70,000 2,920

Gross Profit 67,080 Income Before Taxes 47,080 Income Tax Expense 18,832 Net Income $28,248 *Cost of Goods Sold: (80 × $16) + (100 × $14) + (20 × $12) = $2,920

3. Average Cost Sales Cost of Goods Sold*

$70,000.00 2,522.00

Gross Profit Operating Expenses

67,4786.00 20,000.00

Income Before Taxes 47,478.00 Income Tax Expense 18,991.20 Net Income $28,486.80 Cost of Goods Sold: (110 × $10) + (200 × $12) + (100 × $14) + (80 × $16) = $6,180 total cost 110 + 200 + 100 + 80 = 490 total units $6,180 / 490 units = $12.61 average cost per unit $12.61 × 200 = $2,522.00 Diff: 3 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

40) The units of inventory available for sale during the month of June were as follows: June 1 June 15 June 22

Beginning Inventory Purchase Purchase

60 units at $40 40 units at $30 20 units at $20

There are 20 units of inventory at June 30. Required: Determine the ending inventory using: 1. FIFO 2. LIFO 3. Average cost (Round all calculations to two decimal places.) Answer: 1. FIFO 20 units × $20 = $400 2. LIFO

20 units × $40 =

$800

3. Average 60 × $40 = $2,400 cost 40 × $30 = 1,200 20 × $20 = 400 Total $4,000 $4,000 ÷ 120 = $33.33 $33.33 × 20 = $666.60 Diff: 2 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

41) Carboni Company had the following data available for the current month: Beginning Inventory Purchase #1 Purchase #2

10 units 30 units 25 units

$55 per unit $60 per unit $65 per unit

Assume 40 units were sold during the month. Sales Revenue for the month is $7,000 and operating expenses are $2,200. The income tax rate is 30%. Required: Compute cost of goods sold using: a. FIFO b. LIFO Answer: a. FIFO Cost of Goods Sold: 10 × $55 = $550 30 × $60 = 1,800 Total $2,350 b. LIFO Cost of Goods Sold: 25 × $65 = $1,625 15 × $60 = 900 Total $2,525 Diff: 2 LO: 6-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting Learning Objective 6-3 1) When applying the lower-of-cost-or-market rule to inventory valuation in the United States, market value generally refers to the selling price of the inventory. Answer: FALSE Diff: 2 LO: 6-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 2) IFRS defines market value for inventory as net realizable value. Answer: TRUE Diff: 1 LO: 6-3 AACSB: Reflective Thinking AICPA Bus Persp: International/Global AICPA Functional: Measurement 38 Copyright © 2019 Pearson Education, Inc.

3) The disclosure principle holds that a company's financial statements should report enough information for outsiders to make informed decisions about the company. Answer: TRUE Diff: 2 LO: 6-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 4) By having knowledge of the company's inventory method, as well as having clear, complete disclosures in the financial statements, bankers are guaranteed that the company will repay its loans. Answer: FALSE Diff: 2 LO: 6-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 5) The lower-of-cost-or-market rule is based on the principles of relevance and representational faithfulness. Answer: TRUE Diff: 2 LO: 6-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 6) Under U.S. GAAP, the application of the lower-of-cost-or-market rule to inventories is optional. Answer: FALSE Diff: 2 LO: 6-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

7) A company uses LIFO in one year, then switches to FIFO and then to average-cost. This is a violation of the: A) disclosure principle B) historical cost principle. C) consistency principle. D) conservatism principle. Answer: C Diff: 1 LO: 6-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 8) Under U.S. GAAP, inventories are reported on the balance sheet at: A) historical cost only. B) current replacement cost only. C) selling price. D) lower-of-cost-or-market. Answer: D Diff: 2 LO: 6-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 9) Lower-of-cost-or-market requires that LIFO inventory be reported in the financial statements at whichever is lower of: A) historical cost or market value. B) purchase cost or net realizable value. C) purchase cost or historical cost. D) FIFO cost or LIFO cost. Answer: A Diff: 1 LO: 6-3 AACSB: Reflective Thinking AICPA Bus Persp: International/Global AICPA Functional: Measurement, Reporting

10) When using FIFO for inventories, market value generally refers to ________ under U.S. GAAP and ________ under IFRS. A) current replacement cost; historical cost B) historical cost; net realizable value C) historical cost; current replacement cost D) net realizable value; net realizable value Answer: D Diff: 2 LO: 6-3 AACSB: Reflective Thinking AICPA Bus Persp: International/Global AICPA Functional: Measurement 11) Which of the following is a CORRECT statement about the lower-of-cost-or market rule when applied to inventories? A) Under U.S. GAAP, once inventory has been written down to market value, the write-downs can be reversed in future periods. B) Under U.S. GAAP, the lower-of-cost-or-market rule is optional. C) Currently, the lower-of-cost-or-market rules are the same for both U.S. GAAP and IFRS. D) Under IFRS, some lower-of-cost-or-market write-downs may be reversed. Answer: D Diff: 2 LO: 6-3 AACSB: Reflective Thinking AICPA Bus Persp: International/Global AICPA Functional: Measurement 12) Perfect Catering Company's ending inventory was $103,700 at historical cost and $116,500 at current replacement cost. The company uses LIFO. Before consideration of the lower-of-costor-market rule, the company's cost of goods sold was $58,000. Following U.S. GAAP, which of the following statements reflect the correct application of the lower-of-cost-or-market rule? A) The Ending Inventory balance will be $103,700, and Cost of Goods Sold will be $58,000. B) The Ending Inventory balance will be $116,500, and Cost of Goods Sold will be $58,000. C) The Ending Inventory balance will be $116,500, and Cost of Goods Sold will be $70,800. D) The Ending Inventory balance will be $116,500, and Cost of Goods Sold will be $45,200. Answer: A Diff: 2 LO: 6-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

13) Mariah Company has inventory at the end of the year with a historical cost of $73,000. Mariah Company uses the perpetual inventory system. Under the LCM rule, the current replacement cost is $70,600. The company uses LIFO. Under U.S. GAAP, the journal entry to record the write-down to LCM will: A) debit Cost of Goods Sold for $2,400 and credit Inventory for $2,400. B) debit Cost of Goods Sold for $2,400 and credit Purchases for $2,400. C) debit Inventory for $2,400 and credit Cost of Goods Sold for $2,400. D) debit Purchases for $2,400 and credit Cost of Goods Sold for $2,400. Answer: A Diff: 2 LO: 6-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 14) The historical cost of Jahn Company's ending inventory was less than the net realizable value. The company uses FIFO. Following U.S. GAAP, which journal entry is required? A) debit Cost of Goods Sold and credit Sales B) debit Inventory and credit Cost of Goods Sold C) debit Cost of Goods Sold and credit Inventory D) No journal entry is needed. Answer: D Diff: 2 LO: 6-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 15) Uptown Department Store uses the perpetual inventory system and has ending inventory with a historical cost of $610,000. The current replacement cost of the inventory is $598,000. The net realizable value is $670,000. The company uses LIFO. Before any adjustments at the end of the period, the cost of goods sold account has a balance of $930,000. Which journal entry is required under U.S. GAAP? A) debit Cost of Goods Sold for $60,000 and credit Inventory for $60,000 B) debit Inventory for $60,000 and credit Cost of Goods Sold for $60,000 C) debit Cost of Goods Sold for $12,000 and credit Inventory for $12,000 D) debit Inventory for $12,000 and credit Cost of Goods Sold for $12,000 Answer: C Diff: 2 LO: 6-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

16) The lower-of-cost-or-market rule for inventory is based on the accounting principle(s) of: A) relevance. B) representational faithfulness. C) disclosure. D) A and B. Answer: D Diff: 2 LO: 6-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 17) It is the end of the year and Katerinos Company is applying the lower-of-cost-or-market (LCM) rule to inventory. The company uses the perpetual inventory system and LIFO. Katerinos has provided the following information before any year-end adjustments: Cost of Goods Sold Ending Inventory(Historical Cost) Ending Inventory(Current Replacement Cost) Ending Inventory(Net Realizable Value)

$500,000 $120,000 $105,000 $115,000

Required: Prepare the required journal entry at year-end following U.S. GAAP. Answer: 1. Debit Credit Cost of Goods Sold $15,000 Inventory $15,000 ($120,000 - $105,000) Diff: 2 LO: 6-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 18) Why does U.S. GAAP require companies to apply the lower-of-cost-or-market rule to inventories? Answer: If the market value of inventory falls below its historical cost, a business must write down the value of its goods to market value because that is the most relevant and representationally faithful measure of the true worth to the business. Diff: 2 LO: 6-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

19) How does the disclosure principle help financial statements users compare the financial statements of retailers, with regard to inventories? Answer: The disclosure principle holds that a company's financial statements should report enough information for outsiders to make informed decisions about the company. The company should report relevant and representationally faithful information about itself. This means properly disclosing inventory accounting methods, as well as the substance of all material transactions impacting the existence and proper valuation of inventory. It also requires the use of comparable methods for consistency of presentation from period to period. The financial statements typically contain a footnote describing the inventory pricing method used, as well as the fact that inventory was valued at the lower of that method or market. The financial statements of retailers can be compared if they use the same inventory method. The disclosures reveal the inventory method used by each company, so users can compare companies with the same inventory method. Diff: 2 LO: 6-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting Learning Objective 6-4 1) For most firms, the gross profit percentage changes significantly from year to year. Answer: FALSE Diff: 1 LO: 6-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 2) The gross profit percentage equals net sales divided by gross profit. Answer: FALSE Diff: 1 LO: 6-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 3) The inventory turnover ratio should be the same for all types of industries. Answer: FALSE Diff: 2 LO: 6-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

4) An inventory turnover of 3.65 means that, on average, items of inventory sat on a retailer's shelves for 100 days before being sold. Answer: TRUE Diff: 2 LO: 6-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) A 30% gross profit percentage means that: A) for each dollar of sales, the company has a cost of goods sold of seventy cents. B) for each dollar of sales, the company has a gross profit of thirty cents. C) for each dollar of sales, the company has a cost of goods sold of thirty cents. D) A and B Answer: D Diff: 2 LO: 6-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 6) The inventory turnover ratio: A) is determined by dividing cost of goods sold by net sales. B) shows how many times the company sold its average level of inventory. C) should be high for a company that sells high-end merchandise. D) will be lower for companies that have many low-priced items in their inventory. Answer: B Diff: 2 LO: 6-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 7) The gross profit percentage is calculated as: A) cost of goods sold divided by net sales revenue. B) net sales revenue minus gross profit on sales. C) net sales revenue minus cost of goods sold. D) gross profit divided by net sales revenue. Answer: D Diff: 2 LO: 6-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

8) Marian Company reported the following items for the month of July: Sales revenue Beginning inventory

$477,300 Cost of goods sold $63,400 Ending inventory

$300,000 $78,200

Inventory turnover is: (Round your final answer to two decimal places.) A) 2.50. B) 3.84. C) 4.24. D) 4.73. Answer: C Explanation: Average inventory =($63,400 + $78,200) ÷ 2 = $70,800 $300,000 ÷ $70,800 = 4.24 Diff: 2 LO: 6-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 9) Maydak Company reported the following items for the month of July: Sales revenue Beginning inventory

$600,000 Cost of goods sold $66,400 Ending inventory

$280,000 $76,200

The gross profit percentage is: (Round your final answer to the nearest percentage.) A) 27%. B) 47%. C) 53%. D) 22%. Answer: C Explanation: Sales of ($600,000 - cost of goods sold of $280,000) = $320,000 gross profit $320,000 ÷ $600,000 = 53% Diff: 2 LO: 6-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

10) Thomas Industries reported the following: Net sales Operating expenses

$430,000 Cost of goods sold $65,000 Tax rate

$320,000 50%

The gross profit percentage is: (Round your final answer to the nearest percentage.) A) 74%. B) 17%. C) 37%. D) 26%. Answer: D Explanation: (Sales $430,000 - cost of goods sold $320,000 )= $110,000 gross profit $110,000 ÷ $430,000 = 26% Diff: 2 LO: 6-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

11) Margaret Company reported the following information for the current year: Net sales Purchases Beginning Inventory Ending Inventory Cost of Goods Sold

$3,000,000 $1,957,000 $245,000 $115,000 65% of sales

Industry Averages available are: Inventory Turnover Gross Profit Percentage

5.29 28%

How do the inventory turnover and gross profit percentage for Margaret Company compare to the industry averages for the same ratios? (Round inventory turnover to two decimal places. Round gross profit percentage to the nearest percent.) A) Margaret Company has superior gross profit percentage and inventory turnover. B) Margaret Company has superior gross profit percentage and inferior inventory turnover. C) Margaret Company has inferior gross profit percentage and superior inventory turnover. D) Margaret Company has inferior gross profit percentage and inventory turnover. Answer: A Explanation: Average inventory = ($245,000 + $115,000) ÷ 2 = $180,000 Cost of Goods Sold = 65% × $3,000,000 = $1,950,000 Inventory turnover = $1,950,000 ÷ $180,000 = 10.83 Gross Profit = 35% × $3,000,000 = $1,050,000 Gross Profit Percentage = $1,050,000 ÷ $3,000,000 = 35% Margaret's ratios for inventory turnover and gross profit percentage exceed industry averages. Diff: 3 LO: 6-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

12) Scott Walker Company reported the following data for the past year: Net sales Purchases Beginning Inventory Ending Inventory Cost of Goods Sold

$460,000 $230,000 $100,000 $140,000 $280,000

Industry Averages available are: Inventory Turnover Gross Profit Percentage

5.00 50%

How do the inventory turnover and gross profit percentage for Scott Walker Company compare to the industry averages for the same ratios? (Round inventory turnover to two decimal places. Round gross profit percentage to the nearest percent.) A) Walker Company is superior on both measures. B) Walker Company is inferior on both measures. C) Walker Company is inferior on one measure and superior on the other measure. D) There is not enough information. Answer: B Explanation: Average inventory = ($100,000 + $140,000) ÷ 2 = $120,000 Inventory turnover = $280,000 ÷ $120,000 = 2.33 Gross profit = $460,000 - $280,000 = $180,000 Gross profit percentage = $180,000 ÷ $460,000 = 39% Industry averages for both ratios exceed Walker's ratios. Diff: 3 LO: 6-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13) For discount retailers such as Walmart, inventory turnover equals: A) sales divided by average inventory. B) cost of goods sold divided by average inventory. C) sales discounts divided by average receivables. D) sales divided by average receivables. Answer: B Diff: 2 LO: 6-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

Learning Objective 6-5 1) A company can use the cost-of-goods-sold model to determine how much inventory to purchase. Answer: TRUE Diff: 2 LO: 6-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 2) The cost-of-goods-sold model can be used to estimate ending inventory. Answer: TRUE Diff: 1 LO: 6-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 3) The gross profit method cannot be used for calculating inventory destroyed by a disaster, such as a fire. Answer: FALSE Diff: 1 LO: 6-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 4) The cost-of-goods-sold model is: A) beginning inventory, plus purchases, plus ending inventory equals cost of goods sold. B) beginning inventory, less purchases, less ending inventory equals cost of goods sold. C) beginning inventory, plus purchases, less ending inventory equals cost of goods sold. D) beginning inventory, less purchases, plus ending inventory equals cost of goods sold. Answer: C Diff: 2 LO: 6-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

5) Kennel Company reported the following: Cost of goods sold (estimated for next period) $320,000 Ending inventory (estimated for next period) $95,000 Beginning inventory for the period $60,000 Based on this information, the purchases for the next period should be: A) $285,000. B) $355,000. C) $380,000. D) $415,000. Answer: B Explanation: Beginning inventory + Purchases - Ending inventory = Cost of Goods Sold 60,000 + x - 95,000 = 320,000 x = $355,000 x = purchases Diff: 2 LO: 6-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 6) Lolita Company has the following information: Beginning Inventory Net Purchases Net Sales Gross Profit Percentage

$190,000 $420,000 $790,000 40%

Lolita Company's estimated ending inventory is: (Round your final answer to the nearest dollar.) A) $136,000. B) $294,000. C) $474,000. D) $610,000. Answer: A Explanation: Cost of Goods Available = $190,000 + $420,000 = $610,000 Less: Cost of Goods Sold = 60% × $$790,000 = $474,000 Estimated Ending Inventory = $610,000 - $474,000 = $136,000 Diff: 2 LO: 6-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

7) Blue Company has the following data for the year: Beginning inventory Net sales revenue

$231,000 Net purchases $330,000 Normal gross profit rate

$90,000 30%

What is the estimated ending inventory? (Round your final answer to the nearest dollar.) A) $90,000 B) $231,000 C) $222,000 D) $321,000 Answer: A Explanation: Beginning inventory $231,000 Plus purchases 90,000 Cost of Goods Available for Sale 321,000 Less Cost of goods sold (70% × $330,000) 231,000 Equals ending inventory $90,000 Diff: 2 LO: 6-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 8) The following data are for Jessee's Candy Store for January: Beginning inventory Net purchases

$195,000 Net sales revenue $615,000 Normal gross profit rate

$470,000 40%

What is the company's estimated cost of goods sold for the month? A) $145,000 B) $188,000 C) $275,000 D) $282,000 Answer: D Explanation: 60% × $470,000 = $282,000 Diff: 2 LO: 6-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

9) The following data are for Steve's Candy Store for January: Beginning inventory Net purchases

$181,000 Net sales revenue $530,000 Normal gross profit rate

$610,000 40%

What is the company's estimated ending inventory for the month? A) $345,000 B) $244,000 C) $366,000 D) $467,000 Answer: A Explanation: Beginning inventory $181,000 Plus Purchases 530,000 Cost of Goods available for sale 711,000 Less Cost of goods sold (60% × $610,000) 366,000 Equals ending inventory $345,000 Diff: 2 LO: 6-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) A fire destroyed the inventory of Barber Company. The following information is available: Beginning Inventory Purchases Net Sales Revenue Gross Profit Percentage

$50,000 $170,000 $200,000 30%

Prepare a schedule to compute the amount of inventory lost in the fire. Answer: Beginning Inventory Add: Purchases Cost of Goods Available for Sale Less: Cost of Goods Sold = ($200,000 × 70%) Ending Inventory Diff: 2 LO: 6-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

$50,000 $170,000 $220,000 ($140,000) $80,000

11) A fire destroyed the inventory and store of Schlichting Company. The following information is available: Beginning Inventory Purchases Net Sales Revenue Gross Profit Percentage

$100,000 $400,000 $600,000 20%

Prepare a schedule to compute the amount of inventory lost in the fire. Answer: Beginning Inventory Add: Purchases

$100,000 $400,000

Cost of Goods Available for Sale $500,000 Less: Cost of Goods Sold = ($600,000 × 80%) ($480,000) Ending Inventory $20,000 Diff: 2 LO: 6-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 12) Barker Office Supply Store is budgeting for the fiscal year ending March 31, 2020. During the fiscal year ended March 31, 2019, sales totaled $1,200,000 and cost of goods sold was $660,000. At March 31, 2019, inventory was $200,000. During the upcoming fiscal year, Barker estimates that cost of goods sold will increase by 9% and that ending inventory will be $225,000. Required: How much inventory should Barker purchase during the fiscal year ending March 31, 2020? Show your well-labeled computations. Answer: Barker Office Supply Store Budgeted Purchases Fiscal Year Ending March 31, 2018 Estimated cost of goods sold ($660,000 × 1.09) $719,400 Estimated ending inventory 225,000 Cost of goods available as planned 944,400 Beginning inventory - March 31, 2019 (200,000) Budgeted purchases $744,400 Diff: 2 LO: 6-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Decision Modeling

13) List three ways in which the gross profit method can be used by a retailer. Answer: The gross profit method can be used to: 1. estimate the value of inventory that was destroyed by fire or natural disaster. 2. test the overall reasonableness of an ending inventory amount. 3. detect large errors. Diff: 2 LO: 6-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement Learning Objective 6-6 1) Overstating ending inventory in the current year will understate the following year's net income. Answer: TRUE Diff: 2 LO: 6-6 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 2) An error in ending inventory creates errors for two accounting periods. Answer: TRUE Diff: 2 LO: 6-6 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) If ending inventory for a year is overstated, then gross profit for that year will be overstated. Answer: TRUE Diff: 2 LO: 6-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) Beginning inventory and ending inventory have opposite effects on cost of goods sold. Answer: TRUE Diff: 2 LO: 6-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

5) An error in the ending inventory for the year ended December 31, 2019: A) automatically creates errors in cost of goods sold in the 2019 and 2020 financial statements. B) has no effect on the 2019 financial statements, but will create an error in the 2020 financial statements. C) automatically creates errors in the ending inventory balance in the 2019 and 2020 financial statements. D) affects only the 2019 financial statements. Answer: A Diff: 3 LO: 6-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 6) If ending inventory is overstated by $6,000, then: A) stockholders' equity is overstated by $6,000. B) cost of goods sold is understated by $6,000. C) gross profit is understated by $6,000. D) A and B. Answer: D Diff: 2 LO: 6-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 7) Ending inventory for the year ended December 31, 2019, is understated by $8,000. How will this affect net income for 2019 and 2020? A) Net income will be understated by $8,000 in 2019 and 2020. B) Net income will be overstated by $8,000 in 2019 and 2020. C) Net income will be understated by $8,000 in 2019 and overstated by $8,000 in 2020. D) Net income will be overstated by $8,000 in 2019 and understated by $8,000 in 2020. Answer: C Diff: 2 LO: 6-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

8) Ending inventory for the year ended December 31, 2019, is understated by $23,000. How will this error affect net income for 2020? A) Net income will be understated by $46,000. B) Net income will be overstated by $46,000. C) Net income will be understated by $23,000. D) Net income will be overstated by $23,000. Answer: D Diff: 2 LO: 6-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 9) Beginning inventory for the year ended December 31, 2019, is understated. How will this error affect net income for 2019 and 2020? A) 2019 overstated; 2020 understated B) 2019 understated; 2020 overstated C) 2019 overstated; 2020 no effect D) 2019 understated; 2020 no effect Answer: C Diff: 3 LO: 6-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) If ending inventory is understated for Year 1, then in Year 2: A) cost of goods sold and gross profit will both be understated. B) cost of goods sold and gross profit will both be overstated. C) cost of goods sold will be overstated and gross profit will be understated. D) cost of goods sold will be understated and gross profit will be overstated. Answer: D Diff: 3 LO: 6-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

11) If ending inventory for the year ended December 31, 2019, is understated, this error will cause owners' equity to be: A) overstated at the end of 2019 and understated at the end of 2020. B) understated at the end of 2019 and overstated at the end of 2020. C) overstated at the end of 2019 and correctly stated at the end of 2020. D) understated at the end of 2019 and correctly stated at the end of 2020. Answer: D Diff: 3 LO: 6-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) There is an error in computing ending inventory in Year 1. Which statement is TRUE? A) The error will have no effect on Year 2 financial statements. B) After three years, the inventory error will counterbalance. C) Gross profit will continue to be incorrect until an adjusting entry is made. D) The total gross profit for Year 1 and Year 2 combined will be correct. Answer: D Diff: 2 LO: 6-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13) Slowinski Corporation reported net income of $465,000 for the current year. After the financial statements had been prepared, it was discovered that ending inventory had been overstated by $25,000 and beginning inventory was understated by $1,000. The correct net income was: A) $439,000. B) $441,000. C) $489,000. D) $491,000. Answer: A Explanation: $465,000 - $25,000- $1,000 = $439,000 Diff: 2 LO: 6-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

14) Speedy Corporation reported net income of $465,000 for the current year. After the financial statements had been prepared, it was discovered that ending inventory had been understated by $45,000. If the tax rate is 40%, after the error has been corrected, net income, after tax, will: A) increase by $27,000. B) decrease by $27,000. C) increase by $45,000. D) decrease by $45,000. Answer: A Explanation: $45,000 × 0.60 = $27,000 Diff: 3 LO: 6-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 15) In 2019, ending inventory is overstated. What is the effect of the error on net income in 2019 and 2020? A) Net income is overstated in 2019 and understated in 2020. B) Net income is understated in 2019 and overstated in 2020. C) Net income is understated in 2019 and 2020. D) Net income is overstated in 2019 and 2020. Answer: A Diff: 3 LO: 6-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 16) In 2019, ending inventory is overstated. What is the effect of the error on total stockholders' equity in 2019 and 2020? A) Total stockholders' equity is overstated in 2019 and 2020. B) Total stockholders' equity is understated in 2019 and 2020. C) Total stockholders' equity is overstated in 2019 and correctly stated at the end of 2020. D) Total stockholders' equity is overstated in 2019 and understated in 2020. Answer: C Diff: 3 LO: 6-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

17) In 2019, beginning inventory is overstated. What is the effect of the error on net income in 2019 and 2020? A) Net income is overstated in 2019 and 2020. B) Net income is understated in 2019 and 2020. C) Net income is understated in 2019 and overstated in 2020. D) Net income is understated in 2019 and correctly stated in 2020. Answer: D Diff: 3 LO: 6-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 18) In 2019, beginning inventory is overstated. What is the effect of the error on total stockholders' equity in 2020? A) Total stockholders' equity is overstated in 2020. B) Total stockholders' equity is understated in 2020. C) Total stockholders' equity is correctly stated in 2020. D) none of the above. Answer: C Diff: 3 LO: 6-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting Learning Objective 6-7 1) In the periodic inventory system, the Inventory account is debited for the purchases made during the year. Answer: FALSE Diff: 1 LO: Appendix 6A AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 2) Under the periodic inventory system, a physical inventory count is taken to determine the cost of the inventory on hand and the cost of the merchandise sold. Answer: TRUE Diff: 1 LO: Appendix 6A AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

3) The journal entry to record the purchase of inventory on account under the periodic inventory system is: A) debit Inventory and credit Accounts Payable. B) debit Purchases and credit Accounts Payable. C) debit Cost of Goods Sold and credit Accounts Payable. D) debit Inventory and credit Cost of Goods Sold. Answer: B Diff: 2 LO: Appendix 6A AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) Under the periodic inventory system: A) the Inventory account is always up-to-date. B) the Purchases account is an asset account. C) an entry to credit Inventory must be made at the time a sale is recorded. D) an entry must be made at the end of the period to transfer Purchases to Cost of Goods Sold. Answer: D Diff: 2 LO: Appendix 6A AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) The journal entry to remove the beginning inventory under the periodic inventory system is: A) debit Purchases and credit Cost of Goods Sold. B) debit Purchases and credit Inventory. C) debit Inventory and credit Cost of Goods Sold. D) debit Cost of Goods Sold and credit Inventory. Answer: D Diff: 2 LO: Appendix 6A AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

6) Under the periodic inventory system, the journal entry to record the cost of ending inventory determined by a physical count is: A) debit Inventory and credit Cost of Goods Sold. B) debit Inventory and credit Sales Revenue. C) debit Purchases and credit Inventory. D) debit Cost of Goods Sold and credit Inventory. Answer: A Diff: 2 LO: Appendix 6A AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 7) Jaronski Company uses the periodic inventory system. At the end of the accounting period, journal entries are prepared to remove: A) beginning and ending inventory balances. B) purchases only. C) beginning inventory balance and purchases. D) beginning inventory balance, purchases, and ending inventory balance. Answer: C Diff: 2 LO: Appendix 6A AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 8) Bayer Company uses the periodic inventory system. Bayer Company sold goods on account with a retail price of $1,400 and a cost of $600. Which journal entry(ies) is(are) prepared? A) debit Accounts Receivable for $1,400 and credit Sales Revenue for $1,400 B) debit Accounts Receivable for $600 and credit Sales Revenue for $600 C) debit Accounts Receivable for $1,400 and credit Sales Revenue for $1,400, debit Cost of Goods Sold for $600 and credit Inventory for $600 D) debit Inventory for $600 and credit Purchases for $600 Answer: A Diff: 2 LO: Appendix 6A AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

9) Dole Company uses the periodic inventory system. At the end of the accounting period, ending inventory is $10,000 and beginning inventory is $5,000. Purchases for the period are $99,000. How many journal entries are necessary at the end of the accounting period? A) none B) one C) two D) three Answer: D Diff: 2 LO: Appendix 6A AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 10) Seifert Company uses the periodic inventory system. At the end of the accounting period, on December 31, ending inventory is $18,000 and beginning inventory is $7,000. Purchases for the period are $102,000. Which of the following journal entries did Seifert Company prepare on December 31? A) debit Cost of Goods Sold for $102,000 and credit Purchases for $102,000 B) debit Cost of Goods Sold for $18,000 and credit Inventory for $18,000 C) debit Inventory for $7,000 and credit Cost of Goods Sold for $7,000 D) all of the above Answer: A Diff: 2 LO: Appendix 6A AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 11) Under the periodic inventory system, which of the following entries is prepared at the end of the accounting period? A) debit Purchases and credit Cost of Goods Sold B) debit Cost of Goods Sold and credit Inventory C) debit Cost of Goods Sold and credit Purchases D) B and C Answer: D Diff: 2 LO: Appendix 6A AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

12) Jolly Rancher Company uses the periodic inventory system. Required: Prepare the journal entries to record the following transactions. Omit explanations. 1. Purchased $500,000 of inventory on account. 2. Sales on account were $840,000. 3. Closed out beginning inventory of $110,000. 4. The ending inventory based on a physical count was $117,000. 5. Closed out purchases account. Date Account

Debit

Credit

Answer: Date Account 1. Purchases Accounts Payable

Debit 500,000

Credit

Accounts Receivable Sales

840,000

Cost of Goods Sold Inventory

110,000

Inventory Cost of Goods Sold

117,000

500,000

840,000

110,000

117,000

Cost of Goods Sold 500,000 Purchases 500,000 Diff: 2 LO: Appendix 6A AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 64 Copyright © 2019 Pearson Education, Inc.

Learning Objective 6-8 1) The Internal Revenue Service allows companies to use LIFO for income tax purposes even if they use FIFO for financial reporting. Answer: FALSE Diff: 2 LO: Appendix 6B AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 2) The LIFO Reserve is the difference between the LIFO cost of inventory and what the cost of that inventory would be under FIFO. Answer: TRUE Diff: 2 LO: Appendix 6B AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 3) The income tax saved by using LIFO instead of FIFO is equal to the ________ times the income tax rate. A) cost of the ending inventory B) retail price of the ending inventory C) cost of the beginning inventory D) LIFO Reserve Answer: D Diff: 2 LO: Appendix 6B AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 4) The LIFO Reserve can increase only when: A) inventory costs are stable. B) inventory costs are falling. C) inventory costs are rising. D) the foreign exchange rate is rising. Answer: C Diff: 2 LO: Appendix 6B AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

5) Using the following data, by how much would taxable income change if LIFO is used rather than FIFO? Beginning inventory Purchases Units sold A) There is no difference. B) Increase by $20,000. C) Decrease by $20,000. D) Decrease by $60,000. Answer: C Explanation: LIFO 6,000 units × $65 = COGS

2,000 units at $55 6,000 units at $65 6,000

$390,000

FIFO 2,000 units × $55 = COGS 4,000 units × $65 =

$110,000 $260,000 $370,000

Difference

$20,000

Diff: 3 LO: Appendix 6B AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

6) Using the following data, by how much would taxable income change if FIFO is used rather than LIFO? Beginning inventory Purchases Units sold A) Decrease by $10,000. B) Decrease by $90,000. C) Increase by $10,000. D) Increase by $90,000. Answer: C Explanation: LIFO 6,000 units × $72 = COGS 3,000 units × $62= 9,000 units FIFO 4,000 units × $62 = COGS 5,000 units × $72 = 9,000

4,000 units at $62 6,000 units at $72 9,000

$432,000 186,000 $618,000 $248,000 $360,000 $608,000

Difference $10,000 Diff: 3 LO: Appendix 6B AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

7) Carboni Company had the following data available for the current month: FIFO Cost of Goods Sold: 10 × $55 = $550 30 × $60 = 1,800 Total $2,350 LIFO Cost of Goods Sold: 25 × $65 = $1,625 15 × $60 = 900 Total $2,525 The income tax rate is 30%. Required: How much would Carboni Company save in income taxes if they used LIFO instead of FIFO? Answer: ($2,525 - $2,350) × 30% = $52.50 Diff: 2 LO: Appendix 6B AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

Financial Accounting, 12e (Thomas/Tietz/Harrison) Chapter 7 Plant Assets, Natural Resources, & Intangibles Learning Objective 7-1 1) The costs assigned to the Land account include legal fees, survey fees, and expenditures for grading and clearing the land. Answer: TRUE Diff: 1 LO: 7-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 2) The cost of land includes the cost of any back property taxes that the purchaser pays. Answer: TRUE Diff: 2 LO: 7-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 3) The cost of land includes the cost of fencing the property and paving the parking lot on the land. Answer: FALSE Diff: 2 LO: 7-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) Leasehold improvements are not subject to depreciation or amortization. Answer: FALSE Diff: 1 LO: 7-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 5) The installation costs for a new machine should be part of the cost of the machine and should be depreciated. Answer: TRUE Diff: 2 LO: 7-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 1 Copyright © 2019 Pearson Education, Inc.

6) The cost of a new building includes the cost to demolish and remove an old building on the same site as the new building. Answer: FALSE Diff: 2 LO: 7-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 7) If a company buys a building and the surrounding land for cash, total assets increase. Answer: FALSE Diff: 2 LO: 7-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 8) Major Company purchased equipment to be used in its distribution center. All of the following should be included in the cost of the equipment EXCEPT for: A) insurance while in transit. B) wages of workers who test the equipment before it is placed in service. C) employee training costs before the equipment is placed in service. D) insurance costs after the equipment is up and running. Answer: D Diff: 2 LO: 7-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 9) Which of the following should be included in the cost of land improvements? A) fencing B) sprinkler system for the landscaping C) driveways D) all of the above Answer: D Diff: 2 LO: 7-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

10) Minor Company purchased land which is being prepared for the construction of a new office building. Which of the following should be included in the cost of the land? A) cost of removing an old building B) cost of clearing and grading the land C) cost of the fence which surrounds the property D) A and B Answer: D Diff: 2 LO: 7-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 11) ABC Company purchased land with an old building. ABC plans to demolish the old building and then construct a new, modern building. The cost of demolishing the building will be part of the cost of the: A) new building. B) old building. C) land. D) land improvements. Answer: C Diff: 2 LO: 7-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) The cost of installing lights in a company's parking lot should be recorded as a cost of: A) land. B) land improvements. C) leasehold improvements. D) leaseholds. Answer: B Diff: 2 LO: 7-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

13) The ________ method is used to allocate the cost of multiple assets acquired in a basket purchase. A) book-value B) cost C) gross margin ratio D) relative-sales-value Answer: D Diff: 2 LO: 7-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 14) A lump-sum purchase of multiple, long-term plant assets requires the company to: A) record the assets purchased as a single asset. B) divide the total cost among the various assets according to values estimated by the company's management. C) divide the total cost among the various assets according to their market values. D) divide the total cost among the various assets according to their book values. Answer: C Diff: 2 LO: 7-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 15) Which of the following statements is INCORRECT? A) The cost of land includes fencing and paving. B) The cost of any asset is the sum of all the costs incurred to bring the asset to its intended use. C) The cost of a leasehold improvement should be amortized over the shorter of its useful life or the term of the lease. D) All of the above statements are correct. Answer: A Diff: 2 LO: 7-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

16) Land, a building and equipment are acquired for a lump sum of $800,000. The market values of the land, building and equipment are $400,000, $900,000 and $300,000, respectively. What is the cost assigned to the equipment? (Do not round any intermediary calculations, and round your final answer to the nearest dollar.) A) $0 B) $150,000 C) $300,000 D) $800,000 Answer: B Explanation: $400,000 + $900,000 + $300,000 = $1,600,000 total market value ($300,000 ÷ $1,600,000) × $800,000 = $150,000 Diff: 2 LO: 7-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 17) Land is purchased for $300,000. Back taxes paid by the purchaser were $8,500; total costs to demolish an existing building were $12,000 and the cost to clear the land was $22,000. The cost of paving the parking lot was $8,100. The cost of land is ________ and the cost of land improvements is ________. A) $320,500; $30,100 B) $342,500; $8,100 C) $350,600; $0 D) $342,100; $8,500 Answer: B Explanation: Land: $300,000 + Back taxes $8,500 + Demolition cost $12,000 + Clear the land cost $22,000 = $342,500 Diff: 2 LO: 7-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

18) Jimmy Company leased a delivery van for payments of $11,000 per year for three years. In addition, Jimmy Company also paid $1,700 for new larger windows in the van and spent $5,400 for special storage racks for the van. Leasehold Improvements equal: A) $11,000. B) $1,700. C) $5,400. D) $7,100. Answer: D Explanation: $5,400 + $1,700 = $7,100 Diff: 2 LO: 7-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 19) Gengler Company acquired three pieces of equipment for $1,700,000. Equipment #1 is appraised at $470,000, equipment #2 is appraised at $630,000 and equipment #3 is appraised for $640,000. The cost of equipment #1 is: (Do not round any intermediary calculations, and round your final answer to the nearest dollar.) A) $129,941. B) $126,954. C) $459,195. D) $470,000. Answer: C Explanation: $470,000 + $630,000 + $640,000 = $1,740,000 ($470,000 ÷ $1,740,000) × $1,700,000 = $459,195 Diff: 2 LO: 7-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

20) Barbarino Corporation purchased land and a building for $1,000,000. An appraisal indicates that the land's market value is $600,000 and the building's market value is $900,000. When recording this transaction Barbarino should debit: (Do not round any intermediary calculations, and round your final answer to the nearest dollar.) A) Land for $600,000. B) Land for $400,000. C) Building for $900,000. D) Building for $1,000,000. Answer: B Explanation: $600,000 ÷ ($600,000 + $900,000) = 40% 40% × $1,000,000 = $400,000 Diff: 2 LO: 7-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 21) A machine is purchased for $80,000. The transportation cost from the seller was $3,000, installation costs were $2,000 and taxes on the purchase price were $700. Testing runs of the new machine cost $3,000. What is the cost of the machine? A) $80,000 B) $85,000 C) $85,700 D) $88,700 Answer: D Explanation: All the costs are added to the cost of the machine. Diff: 2 LO: 7-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

22) A company incurred the following costs: Purchase price of land Survey fees Payment for demolition of old building on land Back property taxes on land Paving costs for parking lot Fence around perimeter of land Lights in parking lot Signs for new business

$270,000 4,000 20,000 2,000 60,000 15,000 90,000 5,000

What is the cost of the land? A) $270,000 B) $296,000 C) $356,000 D) $294,000 Answer: B Explanation: Purchase price $270,000 + Survey fees $4,000 + Demolition $20,000 + Back taxes $2,000 = $296,000 Diff: 2 LO: 7-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

23) A company incurred the following costs for a new delivery truck: Purchase price Sales tax Delivery charge from seller's location Special racks for storage Normal repairs to the truck before it was used for the first time Signs painted on the truck Insurance on truck before it was used for the first time

$110,000 7,000 1,600 3,000 1,100 2,000 3,000

What is the cost of the delivery truck? A) $118,600 B) $120,600 C) $123,600 D) $127,700 Answer: D Explanation: All of the costs should be assigned to the new truck. Diff: 2 LO: 7-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 24) Land improvements include expenditures for: A) paving the parking lot. B) grading and clearing the land. C) removing an unwanted building. D) all of the above. Answer: A Diff: 2 LO: 7-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

25) Which of the following is NOT included in the cost of a building that was constructed by the company? A) interest on money borrowed to finance the construction B) cost of removing an unwanted building from the property C) architectural fees D) payments for material, labor and overhead for construction of new building Answer: B Diff: 2 LO: 7-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 26) On January 1, of the current year, Roadway Delivery Company purchased a truck for $20,000. Depreciation Expense is $1,000 per year. During the first year of use, the company paid $5,000 to repaint the truck and $1,600 for new tires. What is the total expense for the year ended December 31, end of current year? A) $1,000 B) $6,000 C) $6,600 D) $7,600 Answer: D Diff: 2 LO: 7-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

27) Miscellaneous costs associated with the purchase of new equipment include: Insurance costs before the equipment is ready for use Maintenance costs before the equipment is ready for use Insurance costs after the equipment is placed into service Cost of test run Training costs for employees to learn how to use equipment

$1,000 600 1,500 900 400

What is the amount assigned to the new equipment? A) $2,300 B) $2,500 C) $2,900 D) $4,400 Answer: C Explanation: Insurance costs before use $1,000 + Maintenance costs before use $600 + Cost of test run $900 + Training costs $400 = $2,900 Diff: 2 LO: 7-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 28) Dorman Company purchased a new machine for its production process. The following costs were incurred for the new machine: Training costs for workers who will operate the machine Wages paid to workers who operate the machine during production Ordinary repairs to the machine before the first production run Cost of platform used to properly secure the machine Cost of test run which took place before the first production run

$18,000 108,000 3,000 20,000 12,000

Which costs should be added to the cost of the machine? A) $18,000 B) $38,000 C) $53,000 D) $161,000 Answer: C Explanation: All of the costs should be added except for wages paid to workers who operate the machine during production. Diff: 3 LO: 7-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

29) The Manson Company purchased assets for a lump-sum price of $1,000,000. An appraisal indicates the following market prices: Equipment $560,000 Land $210,000 Building $630,000 Prepare the appropriate journal entry if Manson Company paid cash for this transaction. Date

Account

Debit

Credit

Answer: ($560,000 + $210,000 + $630,000) = $1,400,000 Equipment: ($560,000 ÷ $1,400,000) × $1,000,000 = $400,000 Land: ($210,000 ÷ $1,400,000) × $1,000,000 = $150,000 Building: ($630,000 ÷ $1,400,000) × $1,000,000 = $450,000 Date

Account Equipment Land Building Cash

Debit 400,000 150,000 450,000

Credit

1,000,000 Diff: 3 LO: 7-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

30) Auto Shop, Inc., incurred the following costs in acquiring plant assets: a. Purchased land with a $100,000 down payment and signed a $75,000 note payable for the balance. b. Delinquent property tax of $2,500 and legal fees of $1,000 had to be paid before the land could be purchased. c. $12,000 was paid to demolish an unwanted building on the land. d. Architect fee of $7,000 was paid for the design of a new office building. e. An office building was constructed at a cost of $500,000. A long-term note payable was used to pay for the cost. f. $17,500 was paid for fencing around the new building. $55,000 was paid for paving the parking lot by the new building. g. $20,000 was paid for lights in the new parking lot. h. $10,000 was paid for a sprinkler system for the bushes and grass. Required: Prepare journal entries for the above transactions. Explanations are not required. Accounts Debit Credit

Answer: a.

Accounts Land Cash Note Payable Land

Debit 175,000

100,000 75,000 3,500

Cash c.

Land

3,500 12,000

Cash d.

Building

12,000 7,000

Cash e.

Building

7,000 500,000

Note Payable f.

Credit

500,000

Land Improvements Cash

72,500

Land Improvements Cash

20,000

72,500

20,000

Land Improvements 10,000 Cash Diff: 3 LO: 7-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

10,000

Learning Objective 7-2 1) The distinction between a capital expenditure and an immediate expense for a plant asset requires judgment. Answer: TRUE Diff: 2 LO: 7-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

2) Expenditures that extend a plant asset's useful life should be capitalized. Answer: TRUE Diff: 1 LO: 7-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 3) Costs that do not extend a plant asset's capacity or its useful life, but merely maintain the asset or restore it to working order are recorded as: A) capital expenditures. B) expenses. C) extraordinary repairs. D) modification of assets. Answer: B Diff: 1 LO: 7-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) Which of the following costs associated with a delivery van should NOT be capitalized? A) The van's engine is overhauled, and this will extend the useful life by five years. B) The van is modified so it can be used for multiple purposes in the business. C) The van is repainted after 4 years of use. D) All of the above items should be capitalized. Answer: C Diff: 2 LO: 7-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) The journal entry to record an addition to an office building would include: A) credit to Depreciation Expense. B) credit to Accumulated Depreciation. C) debit to Repair Expense. D) debit to Office Building. Answer: D Diff: 2 LO: 7-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

6) Pat's Pets recently paid $15,000 to have the engine in its delivery van overhauled. The estimated useful life of the van was originally estimated to be 4 years. The overhaul is expected to extend the useful life of the van to 10 years. The overhaul is regarded as a(n): A) revenue expenditure. B) capital expenditure. C) equity expenditure. D) The answer depends on management's judgment. Answer: B Diff: 2 LO: 7-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 7) Capital expenditures are NOT immediately expensed because these items: A) extend the useful life of a plant asset. B) return a plant asset to its prior condition. C) decrease the plant asset's capacity. D) maintain a plant asset in working condition. Answer: A Diff: 2 LO: 7-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 8) Morgan Oaks Company replaced the windshields and painted several of its vehicles during the year. These costs should be: A) debited to Equipment. B) depreciated over the life of the vehicles. C) credited to Accumulated Depreciation. D) debited to Repair Expense. Answer: D Diff: 2 LO: 7-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

9) On June 1, Roadway's Trucking Company paid $9,000 to overhaul the engine on a delivery truck to allow it to be used for two additional years. It also paid $8,000 to change the storage capacity of the truck so that it could haul more merchandise. Which of the following statements is TRUE? A) The $9,000 is a capital expenditure and the $8,000 is an expense. B) The $9,000 is an expense and the $8,000 is a capital expenditure. C) Both items are capital expenditures. D) Both items are expenses. Answer: C Diff: 2 LO: 7-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) Treating a capital expenditure as an immediate expense: A) overstates assets and stockholders' equity in the year of the error. B) understates assets and stockholders' equity in the year of the error. C) understates assets and overstates stockholders' equity in the year of the error. D) overstates assets and understates stockholders' equity in the year of the error. Answer: B Diff: 2 LO: 7-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 11) If a company capitalizes a cost that should have been expensed: A) expenses and net income will be overstated in the year of the error. B) expenses and net income will be understated in the year of the error. C) expenses will be overstated and net income will be understated in the year of the error. D) expenses will be understated and net income will be overstated in the year of the error. Answer: D Diff: 3 LO: 7-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

12) WorldCom's fraudulent scheme of capitalizing telephone line costs instead of expensing them was discovered by: A) external auditors. B) astute investors. C) U.S. Securities and Exchange Commission. D) internal auditors. Answer: D Diff: 3 LO: 7-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Risk Analysis 13) Which of the following statements is INCORRECT? A) The rules for determining whether a cost should be expensed or capitalized are so complete and clear that judgment is not needed. B) Capital expenditures are capitalized when the cost is added to an asset account. C) Most companies expense all small (immaterial) costs regardless of whether the costs are capital in nature. D) An expense merely maintains the asset in its present condition or restores it to working order. Answer: A Diff: 3 LO: 7-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 14) Which of the following costs for a delivery vehicle should NOT be capitalized? A) repair dented fender B) service air conditioning system C) repair air conditioning system D) all of the above Answer: D Diff: 3 LO: 7-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

15) Costs that maintain a plant asset in its present condition should be ________. Costs that restore a plant asset to working order or its prior condition should be ________. A) capitalized; capitalized B) capitalized; expensed C) expensed; capitalized D) expensed; expensed Answer: D Diff: 3 LO: 7-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 16) A conservative policy with regard to capitalizing or expensing costs associated with plant assets avoids ________. A) understating profits and assets B) overstating profits and assets C) overstating profits and understating assets D) understating profits and overstating assets Answer: B Diff: 3 LO: 7-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 17) What is the distinction between a capital expenditure (for a long-term asset) and an immediate expense? Answer: Does the cost extend the asset's useful life or increase its capacity? If so, record an asset. If the cost merely maintains the asset in its present condition or returns it to its prior condition, then record an expense. Diff: 2 LO: 7-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting Learning Objective 7-3 1) The depreciation process follows the revenue recognition principle. Answer: FALSE Diff: 1 LO: 7-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 19 Copyright © 2019 Pearson Education, Inc.

2) The Accumulated Depreciation account is an income statement account. Answer: FALSE Diff: 1 LO: 7-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 3) Obsolescence may cause an asset's useful life to be longer than the asset's physical life. Answer: FALSE Diff: 1 LO: 7-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 4) Book value of a plant asset equals the cost of the asset less the current year's depreciation expense. Answer: FALSE Diff: 2 LO: 7-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 5) The normal balance of the Accumulated Depreciation account is a debit. Answer: FALSE Diff: 2 LO: 7-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 6) At the end of its useful life, the book value of a plant asset must be zero. Answer: FALSE Diff: 2 LO: 7-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

7) In the units-of-production method, a fixed amount of depreciation expense is assigned to each unit of output. Answer: TRUE Diff: 2 LO: 7-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 8) When compared to the accelerated depreciation methods, the use of the straight-line method increases a company's tax liability. Answer: TRUE Diff: 2 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 9) Under the double-declining-balance method of depreciation, residual value is initially ignored. Answer: TRUE Diff: 2 LO: 7-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) Depreciation expense decreases both assets and stockholders' equity. Answer: TRUE Diff: 2 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 11) The book value of an asset cannot be less than its residual value. Answer: TRUE Diff: 2 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

12) The depreciation process follows the ________ principle. A) revenue recognition B) expense recognition C) disclosure D) consistency Answer: B Diff: 2 LO: 7-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 13) An asset is ________ when another asset can do the job more efficiently. A) fully depreciated B) deteriorated C) physically worn D) obsolete Answer: D Diff: 2 LO: 7-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 14) Double-declining-balance depreciation: A) is an accelerated depreciation method. B) ignores the residual value in computing depreciation, except during the last year. C) is based on the book value of the plant asset. D) is all of the above. Answer: D Diff: 2 LO: 7-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

15) Which of the following depreciation methods best applies to those assets that generate greater revenue earlier in their useful lives? A) straight-line method B) depletion method C) double-declining-balance method D) units-of-production method Answer: C Diff: 2 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 16) All of the following are needed to measure depreciation, EXCEPT for: A) cost. B) market value. C) estimated useful life. D) estimated residual value. Answer: B Diff: 1 LO: 7-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 17) A depreciation method in which an equal amount of depreciation expense is assigned to each year of the asset's use is the: A) units-of-production method. B) straight-line method. C) accelerated depreciation method. D) estimated residual value method. Answer: B Diff: 2 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

18) The expected cash value of a plant asset at the end of its useful life is known as: A) scrap value. B) salvage value. C) estimated residual value. D) all of the above. Answer: D Diff: 1 LO: 7-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 19) The depreciable cost of a plant asset equals the: A) historical cost of the asset plus the estimated residual value. B) historical cost of the asset minus the estimated residual value. C) historical cost of the asset minus accumulated depreciation. D) current replacement cost minus accumulated depreciation. Answer: B Diff: 2 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 20) The book value of a plant asset is defined as: A) historical cost minus estimated residual value. B) historical cost minus accumulated depreciation. C) current sales value minus historical cost. D) replacement cost minus accumulated depreciation. Answer: B Diff: 2 LO: 7-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 21) Cost minus residual value divided by useful life, in years, is the formula for the: A) straight-line depreciation method. B) units-of-production depreciation method. C) double-declining-balance depreciation method. D) modified accelerated cost recovery method. Answer: A Diff: 1 LO: 7-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 24 Copyright © 2019 Pearson Education, Inc.

22) When compared to the other methods of depreciation, the double-declining-balance method of depreciation gives depreciation expense that is: A) less in the earlier periods. B) higher in the earlier periods. C) approximately the same in earlier periods as with other methods. D) the same from year to year. Answer: B Diff: 2 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 23) The journal entry to record depreciation expense for equipment is: A) debit Depreciation Expense, credit Equipment. B) debit Accumulated Depreciation - Equipment, credit Equipment. C) debit Equipment, credit Accumulated Depreciation - Equipment. D) debit Depreciation Expense - Equipment, credit Accumulated Depreciation - Equipment. Answer: D Diff: 2 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 24) As a plant asset is used in operations: A) accumulated depreciation increases and the book value of the asset increases. B) accumulated depreciation increases and the book value of the asset decreases. C) accumulated depreciation remains the same and the book value of the asset decreases. D) accumulated depreciation increases and the book value of the asset remains the same. Answer: B Diff: 2 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

25) When computing depreciation using the units-of-production method: A) a variable amount of depreciation is assigned to each unit of output. B) a fixed amount of depreciation is assigned to each unit of output. C) the depreciation expense depends directly on the amount of output or usage. D) B and C. Answer: D Diff: 2 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 26) Which of the following is an accurate statement regarding financial statement and income tax depreciation methods? A) Straight-line depreciation is the most popular method for income tax purposes. B) The IRS expects a company to use accelerated depreciation methods for tax purposes. C) The Modified Accelerated Cost Recovery System can be used for both financial statement and income tax purposes. D) If an accelerated depreciation method is used for income tax purposes, a company will pay more in income taxes. Answer: B Diff: 2 LO: 7-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 27) When a plant asset is fully depreciated: A) the asset's accumulated depreciation is higher than the historical cost of the asset. B) the book value is equal to the salvage value. C) the depreciable cost is equal to the estimated residual value, and the asset is of no further use to the company. D) the book value is zero and the asset has no market value. Answer: B Diff: 3 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

28) When using straight-line depreciation to compute depreciation for a partial year: A) compute depreciation for a full year under straight-line depreciation and multiply it by 50%. B) compute depreciation for a full year under straight-line depreciation and use that amount. C) the straight-line method automatically adjusts for partial periods, so no adjustments are needed. D) compute depreciation for a full year under straight-line depreciation and multiply it by the fraction of the year that you held the asset. Answer: D Diff: 2 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 29) On January 2, 2019, Konrad Corporation acquired equipment for $500,000. The estimated life of the equipment is 5 years or 18,000 hours. The estimated residual value is $14,000. If Konrad Corporation uses the units of production method of depreciation, what will be the debit to Depreciation Expense for the year ended December 31, 2020, assuming that during this period, the asset was used 6,000 hours? A) $166,667 B) $97,200 C) $162,000 D) $171,333 Answer: C Explanation: ($500,000 - $14,000) ÷ 18,000 = $27 per hour $27 × 6,000 = $162,000 Diff: 2 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

30) On January 2, 2019, Kaiman Corporation acquired equipment for $700,000. The estimated life of the equipment is 5 years or 80,000 hours. The estimated residual value is $20,000. What is the balance in Accumulated Depreciation on December 31, 2020, if Kaiman Corporation uses the straight-line method of depreciation? A) $140,000 B) $136,000 C) $272,000 D) $280,000 Answer: C Explanation: ($700,000 - $20,000) ÷ 5 years = $136,000 depreciation expense per year $136,000 × 2 years = $272,000 Diff: 2 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 31) On January 2, 2019, Kellogg Corporation acquired equipment for $700,000. The estimated life of the equipment is 5 years or 90,000 hours. The estimated residual value is $40,000. What is the book value of the asset on December 31, 2020, if Kellogg Corporation uses the straight-line method of depreciation? (Round any intermediary calculations to two decimal places and your final answer to the nearest dollar.) A) $568,000 B) $436,000 C) $700,000 D) $660,000 Answer: B Explanation: ($700,000 - $40,000) ÷ 5 years = $132,000 depreciation expense per year $132,000 × 2 years = $264,000 accumulated depreciation at end of second year Book value = $700,000 - $264,000 = $436,000 Diff: 2 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

32) On January 2, 2019, Kornis Corporation acquired equipment for $1,500,000. The estimated life of the equipment is 5 years or 90,000 hours. The estimated residual value is $50,000. What is the balance in Accumulated Depreciation on December 31, 2019, if Kornis Corporation uses the double-declining-balance method of depreciation? A) $290,000 B) $300,000 C) $580,000 D) $600,000 Answer: D Explanation: $1,500,000 × 40% = $600,000 Diff: 2 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 33) On January 2, 2019, Konan Corporation acquired equipment for $900,000. The estimated life of the equipment is 5 years or 100,000 hours. The estimated residual value is $20,000. What is the balance in Accumulated Depreciation on December 31, 2020, if Konan Corporation uses the double-declining-balance method of depreciation? (Round any intermediary calculations to two decimal places and your final answer to the nearest dollar.) A) $576,000 B) $352,000 C) $216,000 D) $880,000 Answer: A Explanation: $900,000 × 40% = $360,000 ($900,000 - $360,000) × 40% = $216,000 $360,000 + $216,000 = $576,000 Diff: 3 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

34) On January 4, 2019, Margaret's Cafe acquired equipment for $147,500. The estimated life of the equipment is 4 years or 42,500 hours. The estimated residual value is $20,000. What is the depreciation for 2019, if Margaret's Cafe uses the asset 14,400 hours and uses the units-ofproduction method of depreciation? A) $31,875 B) $43,200 C) $20,000 D) $36,875 Answer: B Explanation: ($147,500 - $20,000) ÷ 42,500 = $3 per hour $3 × 14,400 = $43,200 Diff: 2 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 35) On January 4, 2019, Mary's Cafe acquired equipment for $500,000. The estimated life of the equipment is 8 years or 60,000 hours. The estimated residual value is $40,000. What is the balance in the Accumulated Depreciation account at December 31, 2020 if the straight-line method is used? A) $40,000 B) $62,500 C) $115,000 D) $57,500 Answer: C Explanation: ($500,000 - $40,000) ÷ 8 = $57,500 $57,500 × 2 years = $115,000 Diff: 2 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

36) On January 2, 2019, Saminski, Inc., acquired equipment for $200,000. The estimated life of the equipment is 5 years. The estimated residual value is $40,000. What is the Accumulated Depreciation of the equipment on December 31, 2020, if Saminski uses the double-decliningbalance method of depreciation? (Round intermediary calculations to two decimal places and your final answer to the nearest dollar.) A) $64,000 B) $80,000 C) $48,000 D) $128,000 Answer: D Explanation: $200,000 × 40% = $80,000 ($200,000 - $80,000) × 40% = $48,000 $80,000 + $48,000 = $128,000 Diff: 2 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 37) On January 2, 2019, Mumford Corporation acquired equipment for $90,000. The estimated life of the equipment is 4 years. The estimated residual value is $3,000. What is the amount of depreciation expense for 2020, if the company uses the double-declining-balance method of depreciation? (Round intermediary calculations to two decimal places and your final answer to the nearest dollar.) A) $21,750 B) $22,500 C) $43,500 D) $45,000 Answer: B Explanation: $90,000 × 50% = $45,000 ($90,000 - $45,000) × 50% = $22,500 Diff: 2 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

38) On January 2, 2019, Helmkamp Company purchased a $30,000 machine. It had an estimated useful life of 5 years and a residual value of $3,000. What is the amount of depreciation expense for 2020, the second year of the asset's life, using the double declining-balance method? (Round intermediary calculations to two decimal places and your final answer to the nearest dollar.) A) $6,000 B) $7,200 C) $5,400 D) $12,000 Answer: B Explanation: $30,000 × 40% = $12,000 ($30,000 - $12,000) × 40% = $7,200 Diff: 2 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 39) Martin Company paid $900,000 for equipment. Martin uses straight-line depreciation. Currently the Accumulated Depreciation account shows a balance of $180,000. If the asset has no residual value and an estimated life of 10 years, how many years has the asset been depreciated? (Round your final answer to the nearest year.) A) 5 B) 3 C) 2 D) 10 Answer: C Explanation: $900,000 ÷ 10 = $90,000 per year $180,000 ÷ $90,000 = 2 years Diff: 3 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

40) Income before depreciation and taxes amounts to $200,000. Using straight-line depreciation, the current year's depreciation expense will be $13,500. Using double-declining-balance depreciation, the current year's depreciation expense will be $19,500. Assuming a tax rate of 30%, what is the net cash saved in income taxes by using double-declining-balance depreciation over straight-line depreciation? A) $1,800 B) $4,050 C) $6,000 D) $5,850 Answer: A Explanation: Difference in depreciation = $19,500 - $13,500 = $6,000 $6,000 × 30% = $1,800 savings Diff: 3 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 41) Roho Company acquired equipment on July 1, 2019, for $100,000. The residual value is $20,000 and the estimated life is 5 years or 40,000 hours. Compute the depreciation expense for the years ending December 31, 2019 and December 31, 2020 if Roho Company uses the doubledeclining-balance method of depreciation. A) $40,000 for 2019; $24,000 for 2020 B) $20,000 for 2019; $32,000 for 2020 C) $11,000 for 2019; $35,600 for 2020 D) $5,500 for 2019; $11,000 for 2020 Answer: B Explanation: $100,000 × 40% × 50% = $20,000 (use 50% for half year as purchased on July 1) ($100,000 - $20,000) × 40% = $32,000 Diff: 3 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

42) Lorenzo Corporation purchased equipment on January 1, 2019 for $600,000. The equipment had an estimated useful life of 5 years and an estimated salvage value of $60,000. After using the equipment for 2 years, the company determined that the equipment could be used for an additional 6 years and have a salvage value of $8,000. Assuming Lorenzo Corporation uses straight-line depreciation, compute depreciation expense for the year ending December 31, 2021. (Round your final answer to the nearest dollar.) A) $216,000 B) $64,000 C) $62,667 D) $108,000 Answer: C Explanation: ($600,000 - $60,000) ÷ 5 × 2 = $216,000 ($600,000 - $216,000 - $8,000) ÷ 6 = $62,667 Diff: 3 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 43) Marjorie Corporation acquired a building on January 1, 2019, for $800,000. The building had an estimated useful life of 20 years and an estimated salvage value of $29,000. On January 1, 2021, Marjorie Corporation determined that the building could only be used for another 10 years and there would be no salvage value. Compute depreciation expense for the year ending December 31, 2021, if Marjorie Corporation uses straight-line depreciation. A) $38,550 B) $115,650 C) $72,290 D) $77,100 Answer: C Explanation: ($800,000 - $29,000) ÷ 20 = $38,550 × 2 = $77,100 ($800,000 - $77,100) ÷ 10 = $72,290 Diff: 3 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

44) Cramer Company purchased equipment on May 1, 2019 for $200,000. The residual value is $20,000 and the estimated useful life is 10 years. What is the Depreciation Expense for the year ending December 31, 2019, if the company uses the straight-line method? (Round your final answer to the nearest dollar.) A) $13,333 B) $12,000 C) $20,000 D) $18,000 Answer: B Explanation: ($200,000 - $20,000) ÷ 10 = $18,000 $18,000 × 8/12 = $12,000 Diff: 3 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 45) Jerry Willis Company purchased equipment on May 1, 2019 for $900,000. The residual value is $25,000 and the estimated useful life is 10 years. What is the Depreciation Expense for the year ending December 31, 2019, if the company uses the double-declining-balance method? (Round your final answer to the nearest dollar.) A) $90,000 B) $120,000 C) $180,000 D) $87,500 Answer: B Explanation: $900,000 × 20% = $180,000 $180,000 × 8/12 = $120,000 Diff: 3 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

46) Gary Kraen Company purchased equipment on May 1, 2019 for $800,000. The residual value is $10,000 and the estimated useful life is 10 years. What is the Depreciation Expense for the year ending December 31, 2020, if the company uses the double-declining-balance method? (Round your final answer to the nearest dollar.) A) $106,667 B) $80,000 C) $138,667 D) $79,000 Answer: C Explanation: $800,000 × 20% = $160,000 × 8/12 = $106,667 ($800,000 -$106,667) × 20% = $138,667 Diff: 3 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 47) Which statement is FALSE? A) Depreciation is caused by the physical wear and tear of a plant asset. B) Depreciation is caused by obsolescence of a plant asset. C) Depreciation is not based on changes in the market value of a plant asset. D) Accumulated depreciation is a cash fund to be used to replace a plant asset when it wears out. Answer: D Diff: 3 LO: 7-3 AACSB: Reflective Thinking AICPA Bus Persp: International/Global AICPA Functional: Measurement 48) On January 1, 2019, a machine has a remaining book value of $5,000. The residual value of the machine is $1,500. The company uses the double-declining-balance method of depreciation. If 2019 is the last year for depreciation, what is Depreciation Expense for the year ending December 31, 2019? A) $0 B) $1,500 C) $3,500 D) $5,000 Answer: C Explanation: $5,000 - $1,500 Residual Value = $3,500 Diff: 3 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

49) For a plant asset that generates revenue evenly over time, which depreciation method best meets the expense recognition principle? A) straight-line B) double-declining-balance C) modified accelerated D) units-of-production Answer: A Diff: 1 LO: 7-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 50) For a plant asset that wears out because of physical use rather than obsolescence, which depreciation method best meets the expense recognition principle? A) straight-line B) double-declining-balance C) modified accelerated D) units-of-production Answer: D Diff: 1 LO: 7-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 51) The long-term asset that is not depreciated or amortized is: A) land improvement. B) leasehold improvement. C) office computers. D) land. Answer: D Diff: 1 LO: 7-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

52) Weaver Motors purchased a machine that will help diagnose problems with engines. The machine cost $300,000 on January 3, 2019 and had a residual value of $30,000, with a useful life of 6 years. Required: Calculate the depreciation expense and book value as of December 31, 2019 under both the straight-line and double-declining-balance methods. Answer: STRAIGHT-LINE Depreciation Expense: ($300,000 - $30,000) ÷ 6 = $45,000 Book value: $300,000 - $45,000 = $255,000 DOUBLE-DECLINING-BALANCE Depreciation Expense: ($300,000 × 2/6) = $100,000 Book value: $300,000 - $100,000 = $200,000 Diff: 2 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

53) Carrie Heffernan Company purchased a delivery van on January 1, 2019, for $50,000. The van was expected to remain in service 4 years (or 100,000 miles) and has a residual value of $5,000. The van traveled 30,000 miles the first year, 25,000 miles the second year, and 22,500 miles in the third and fourth years. Required: 1. Prepare a schedule of depreciation expense per year for the first four years of the asset's life using the (a) straight-line method, (b) units-of-production method, and (c) double-decliningbalance method. 2. Prepare a schedule of the book value of the van for each of the four years using the (a) straight-line method, (b) units-of-production method and (c) double-declining-balance method. Answer: (a) Straight-line method: 1a. Depreciation Expense: ($50,000 - $5,000) ÷ 4 = $11,250 per year 2a. Book Value: 12/31/2019 $50,000 - $11,250 = $38,750 12/31/2020 $38,750 - $11,250 = $27,500 12/31/2021 $27,500 - $11,250 = $16,250 12/31/2022 $16,250 - $11,250 = $5,000 (b) Units of production method: 1b. Depreciation Expense: ($50,000 - $5,000) ÷ 100,000 miles = $0.45 per mile 12/31/2019 $0.45 × 30,000 = $13,500 12/31/2020 $0.45 × 25,000 = $11,250 12/31/2021 $0.45 × 22,500 = $10,125 12/31/2022 $0.45 × 22,500 = $10,125 2b. Book Value: 12/31/2019 $50,000 - $13,500 = $36,500 12/31/2020 $36,500 - $11,250 = $25,250 12/31/2021 $25,250 - $10,125 = $15,125 12/31/2022 $15,125 - $10,125 = $5,000 (c) Double declining-balance method: 1c. Depreciation Expense: 12/31/2019 12/31/2020 12/31/2021 12/31/2022

$50,000 × 50% = $25,000 ($50,000 - $25,000) × 50% = $12,500 ($25,000 - $12,500) × 50% = $6,250 $1,250

2c. Book Value: 12/31/2019 $50,000 - $25,000 = $25,000 12/31/2020 $25,000 - $12,500 = $12,500 12/31/2021 $12,500 - $6,250 = $6,250 12/31/2022 $6,250 - $1,250 = $5,000 Diff: 3 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 54) A machine costing $40,000 was purchased on January 1, 2019. It has an estimated useful life of 5 years and a salvage value of $5,000. Required: 1. Calculate depreciation expense for 2019 and 2020 using (a) straight-line rate, and (b) doubledeclining-balance method. 2. Determine the book value of the machine at December 31, 2020 under the (a) straight-line method and (b) double-declining-balance method. Answer: 1. (a) Straight-line: Depreciation Expense for 2019 and 2020: ($40,000 - $5,000) ÷ 5 = $7,000 (b) Double-declining-balance: Depreciation Expense for 2019: $40,000 × 40% = $16,000 Depreciation Expense for 2020: ($40,000 - $16,000) × 40% = $9,600 2. (a) Straight-line: Book value = cost - accumulated depreciation Book value at 12/31/2020 = $40,000 - ($7,000 + $7,000) = $26,000 (b) Double-declining-balance: Book value = cost - accumulated depreciation Book value at 12/31/2020 = $40,000 - ($16,000 + $9,600) = $14,400 Diff: 3 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

55) A plant asset is acquired by a business on January 1, 2019, for $100,000. The asset's estimated residual value is $10,000 and its estimated life is 5 years. Management chooses to use straight-line depreciation. On January 1, 2021, management revises the total useful life to 8 years since purchased and the residual value to $5,000. Required: 1. Compute the balance in Accumulated Depreciation on January 1, 2021. 2. Compute the Depreciation Expense for the year ending December 31, 2021. 3. Compute the balance in Accumulated Depreciation on December 31, 2021. 4. Prepare the adjusting journal entry on December 31, 2021 for the year. Omit the explanation. Answer: 1. ($100,000 - $10,000) ÷ 5 = $18,000 $18,000 × 2 = $36,000 2. ($100,000 - $36,000 - $5,000) ÷ 6 = $9,833 3. $36,000 + $9,833 = $45,833 4. Account Debit Credit Depreciation Expense 9,833 Accumulated Depreciation 9,833 Diff: 3 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

56) On January 1, 2019, Williams Company, Inc. purchased machinery for $350,000 and depreciated it on a straight-line basis over 20 years. The estimated residual value was zero. On January 1, 2022, the company realized the machine will remain useful for only 5 more years and also revised the residual value to $12,000. Required: 1. What is the depreciation expense per year before the change in estimate? 2. What is the revised depreciation expense per year? 3. Prepare the adjusting journal entry for the year ending December 31, 2022. Omit the explanation. Answer: 1. Depreciation Expense: Original calculation: ($350,000 - 0) ÷ 20 = $17,500 per year 2. Revised depreciation expense: $17,500 × 3 years = $52,500 Accumulated Depreciation as of December 31, 2021 ($350,000 - $52,500 - $12,000) ÷ 5 = $57,100 3. Accounts Debit Depreciation Expense - Machinery 57,100 Accumulated Depreciation Machinery Diff: 3 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

Credit

57,100

57) Martindale Motors purchased a machine that will help diagnose problems with engines that are used in its production department. The machine was purchased on January 1, 2019 at a cost of $210,000. A residual value of $10,000 was estimated. The expected useful life is 5 years. In 2019, Martindale Motors has a gross profit of $400,000 and operating expenses of $180,000. The tax rate is 35%. Required: 1. Compute the depreciation expense for 2019 under both the straight-line and double-decliningbalance depreciation methods. 2. What is the net cash saved if the accelerated depreciation method is used in 2019? Answer: 1. Straight-line: ($210,000 - $10,000) ÷ 5 = $40,000 depreciation expense for 2019 Double-declining-balance: $210,000 × 40% = $84,000 depreciation expense for 2019 2. ($84,000 - $40,000) × 35% = $15,400 Diff: 3 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

58) Katie's Garden Company purchased a machine on July 1, 2019. The machine cost $200,000 and has an estimated residual value of $20,000. The expected useful life is 8 years. The machine is to be used for 100,000 machine hours. Required: 1. Calculate the depreciation expense for 2019 and 2020 using the straight-line method. 2. Calculate the depreciation expense for 2019 and 2020 using the units-of-production method. The machine was used for 8,000 machine hours in 2019 and 23,000 machine hours in 2020. 3. Calculate the depreciation expense for 2019 and 2020 using the double-declining-balance method. Answer: 1. Straight-line Depreciation Expense for 2019 (one-half of year): ($200,000 - $20,000) ÷ 8 × 50% = $11,250 Depreciation Expense for 2020: ($200,000 - $20,000) ÷ 8 = $22,500 2. Units-of-production Depreciation Expense for 2019: ($200,000 - $20,000) ÷ 100,000 = $1.80 per hour $1.80 × 8,000 = $14,400 Depreciation Expense for 2020: $1.80 × 23,000 = $41,400 3. Double-declining-balance Depreciation Expense for 2019 (one-half of year): $200,000 × 2/8 × 50% =$25,000 Depreciation Expense for 2020: ($200,000 - $25,000) × 2/8 = $43,750 Diff: 3 LO: 7-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

Learning Objective 7-4 1) To account for the disposal of a plant asset, the cost of the asset and its related accumulated depreciation are removed from the books. Answer: TRUE Diff: 2 LO: 7-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 2) A Loss on Sale of Equipment will result when the book value of the equipment exceeds the cash received from the sale of the equipment. Answer: TRUE Diff: 2 LO: 7-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) The Loss on Disposal of Equipment account is reported as Other income (expense) on the income statement. Answer: TRUE Diff: 2 LO: 7-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 4) Gains on the sale of equipment increase net income while losses on the sale of equipment decrease net income. Answer: TRUE Diff: 2 LO: 7-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) Before accounting for the disposal of a plant asset, the business should bring depreciation up to date in order to determine the asset's original cost. Answer: FALSE Diff: 2 LO: 7-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 45 Copyright © 2019 Pearson Education, Inc.

6) In respect to accounting for depreciation, IFRS uses a "components" approach for assets such as buildings, aircraft, and manufactured equipment. Answer: TRUE Diff: 2 LO: 7-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 7) A company purchased a machine for $100,000. The accumulated depreciation on the machine is now $100,000. Which of the following statements is TRUE regarding the disposal of the machine for no cash proceeds? A) The cost of the asset, but not its accumulated depreciation, must be removed from the books. B) A gain or loss on the disposal can occur. C) The journal entry to record the disposal will decrease net assets. D) There will be no gain or loss on the disposal. Answer: D Diff: 2 LO: 7-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 8) A company purchased a machine for $700,000. The accumulated depreciation on the machine is now $120,000. The machine is junked. Which journal entry is prepared to record the disposal? A) debit Loss on Disposal of Machine for $580,000, debit Accumulated Depreciation - Machine $580,000 and credit Machine for $1,160,000 B) debit Accumulated Depreciation - Machine for $120,000 and credit Machine for $120,000 C) debit Accumulated Depreciation - Machine for $700,000, credit Machine for $120,000 and credit Gain on Disposal of Machine for $580,000 D) debit Loss on Disposal of Machine for $580,000, debit Accumulated Depreciation - Machine for $120,000 and credit Machine for $700,000 Answer: D Diff: 2 LO: 7-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

9) When plant assets are exchanged, the gain or loss on the exchange equals: A) the difference between the fair value and the book value of the asset received. B) the difference between the fair value and the book value of the asset given up. C) the fair value of the asset received plus the cash paid. D) the fair value of the asset given up plus the cash paid. Answer: B Diff: 3 LO: 7-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) U.S. Generally Accepted Accounting Principles require the reporting of plant assets at ________ on the balance sheet. International Financial Reporting Standards allow the reporting of plant assets at ________ on the balance sheet. A) current replacement cost; fair market value B) fair market value; fair market value C) historical cost; fair market value D) historical cost; net realizable value Answer: C Diff: 3 LO: 7-4 AACSB: Reflective Thinking AICPA Bus Persp: International/Global AICPA Functional: Measurement, Reporting 11) Franco Company sold office furniture for $2,700 cash. The furniture cost $70,000 and had accumulated depreciation through the date of sale totaling $34,000. The company will recognize: A) a gain of $33,300. B) a loss of $33,300. C) a gain of $36,000. D) a loss of $36,000. Answer: B Explanation: Book value = $70,000 - $34,000 = $36,000 Cash proceeds $2,700 Loss on sale = $36,000 - $2,700 = $33,300 Loss on sale = Book value - Cash proceeds Diff: 2 LO: 7-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

12) Smiley Corporation sold equipment costing $72,000 with $66,000 of accumulated depreciation for $11,000 cash. Which of the following journal entries should be prepared? A) debit Cash for $11,000 and credit Gain on Sale of Equipment for $11,000 B) debit Accumulated Depreciation - Equipment for $66,000 and credit Equipment for $66,000 C) debit Cash for $11,000, credit Equipment for $6,000 and credit Gain on Sale of Equipment for $5,000 D) debit Cash for $11,000, debit Accumulated Depreciation - Equipment for $66,000, credit Equipment for $72,000 and credit Gain on Sale of Equipment for $5,000 Answer: D Explanation: Book value of equipment = $72,000 - $66,000 = $6,000; Cash proceeds of $11,000 exceed the book value of $6,000, so there is a gain. Gain = $11,000 cash proceeds -$6,000 book value = $5,000 Diff: 2 LO: 7-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13) Equipment costing $40,000 with a book value of $16,000 is sold for $23,000. Which journal entry is used to record the sale? A) debit Cash for $23,000 and credit Equipment for $23,000 B) debit Cash for $16,000, debit Accumulated Depreciation - Equipment for $24,000 and credit Equipment for $40,000 C) debit Cash for $23,000, debit Accumulated Depreciation - Equipment for $24,000, credit Equipment for $40,000 and credit Gain on Sale of Equipment for $7,000 D) debit Cash for $16,000, debit Loss on Sale of Equipment for $7,000 and credit Equipment for $23,000 Answer: C Explanation: Cost of $40,000 – book value of $16,000 = $24,000 accumulated depreciation Cash received is $23,000; Gain on sale = $23,000 cash proceeds - $16,000 book value = $7,000 Diff: 2 LO: 7-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

14) Equipment purchased for $70,000 on January 1, 2020, was sold on July 1, 2023. The company uses the straight-line method of computing depreciation and recognizes $10,000 of depreciation expense annually. When recording the sale, the company should record a debit to Accumulated Depreciation–Equipment for: A) $0. B) $30,000. C) $35,000. D) $40,000. Answer: C Explanation: $10,000 depreciation for year × 3.5 years = $35,000 Diff: 2 LO: 7-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 15) Equipment acquired on January 1, 2020, is sold on June 30, 2024, for $11,200. The equipment cost $46,200, had an estimated residual value of $6,300, and an estimated useful life of 5 years. The company prepares financial statements on December 31, and the equipment has been depreciated using the straight-line method. On June 30, 2024, the company should record Depreciation Expense for the first six months of the year of: A) $0. B) $1,995. C) $3,990. D) $7,980. Answer: C Explanation: ($46,200 - $6,300) ÷ 5 = $7,980; $7,980 × 50% = $3,990 Diff: 2 LO: 7-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

16) Kolonas, Inc., sold equipment for $5,400 cash. The equipment cost $73,900 and had accumulated depreciation through the date of sale of $70,000. At the date of sale, the journal entry to record the sale will have: A) a Gain on Sale of Equipment for $3,900. B) a Loss on Sale of Equipment for $3,900. C) a Loss on Sale of Equipment for $1,500. D) a Gain on Sale of Equipment for $1,500. Answer: D Explanation: Book value = $73,900 - $70,000 = $3,900 Cash proceeds = $5,400 Gain = $5,400 - $3,900 = $1,500 Diff: 2 LO: 7-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 17) Willis Company trades in a printing press for a newer model. The cost of the old printing press was $60,000, and accumulated depreciation up to the date of the trade-in is $43,000. The company also pays $43,000 cash for the newer printing press. The fair market value of the newer printing press is $70,000. The journal entry to acquire the new printing press will require a debit to Printing Press for: A) $43,000. B) $60,000. C) $70,000. D) $103,000. Answer: C Explanation: Book value of old press = $60,000 - $43,000 = $17,000 Implied fair value of old press = $70,000 new press fair value - $43,000 cash paid = $27,000 Fair value given up: $27,000 old press + $43,000 cash paid = $70,000 Diff: 3 LO: 7-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

18) Tom's Roadside Burger Stand has a beginning balance in the Accumulated Depreciation— Equipment account of $200,000. The depreciation expense on the equipment for the year was $50,000. At the end of the year, the balance in the Accumulated Depreciation—Equipment account was $140,000. What was the accumulated depreciation on the equipment sold during the year? A) $60,000 B) $90,000 C) $110,000 D) $150,000 Answer: C Explanation: Accumulated Depreciation, Beg. Balance $200,000 + Depreciation Expense $50,000 - x = Accumulated Depreciation, End. Balance $140,000 x = $110,000 Diff: 3 LO: 7-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 19) Equipment with a historical cost of $100,000 and Accumulated Depreciation of $100,000 is junked. Which journal entry is necessary? A) debit Equipment for $100,000 and credit Accumulated Depreciation - Equipment for $100,000 B) debit Cash for $100,000 and credit Equipment for $100,000 C) debit Equipment for $100,000 and credit Cash for $100,000 D) debit Accumulated Depreciation - Equipment for $100,000 and credit Equipment for $100,000 Answer: D Diff: 3 LO: 7-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

20) Equipment with a historical cost of $70,000 and Accumulated Depreciation of $15,000 is junked. No cash is received upon disposal. Which journal entry is necessary? A) debit Accumulated Depreciation - Equipment for $70,000 and credit Equipment for $70,000 B) debit Accumulated Depreciation - Equipment for $15,000, debit Gain on Disposal of Equipment for $55,000 and credit Equipment for $70,000 C) debit Accumulated Depreciation - Equipment for $15,000, debit Loss on Disposal of Equipment for $55,000 and credit Equipment for $70,000 D) debit Accumulated Depreciation - Equipment for $15,000 and credit Equipment for $15,000 Answer: C Diff: 3 LO: 7-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 21) Excalibur Company sells equipment for $20,000 cash. The gain or loss on the sale of equipment equals: A) the cash received upon the sale. B) the book value of the equipment. C) the accumulated depreciation of the equipment plus the cash received from the sale. D) the difference between the cash received on sale and the book value of the equipment. Answer: D Diff: 3 LO: 7-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 22) Tony Company sells equipment for $20,000 cash. The equipment has a historical cost of $60,000 and accumulated depreciation of $52,000. What is the gain or loss on sale of the equipment? A) $12,000 loss B) $12,000 gain C) $20,000 loss D) $20,000 gain Answer: B Explanation: Book Value = $60,000 - $52,000 = $8,000 Cash Received = $20,000 Gain = Cash Received $20,000 - Book Value $8,000 = $12,000 gain Diff: 3 LO: 7-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

23) Remini Company sells equipment for $20,000 cash. The equipment has a historical cost of $80,000 and accumulated depreciation of $50,000. What is the journal entry to record the sale of the equipment? A) debit Cash for $20,000 and credit Gain on Sale of Equipment for $20,000 B) debit Cash for $20,000, debit Accumulated Depreciation - Equipment for $50,000 and credit Equipment for $70,000 C) debit Loss on Sale of Equipment for $10,000, debit Cash for $20,000, debit Accumulated Depreciation - Equipment for $50,000 and credit Equipment for $80,000 D) debit Cash for $20,000, debit Accumulated Depreciation - Equipment for $50,000, debit Gain on Sale of Equipment $10,000 and credit Equipment for $80,000 Answer: C Explanation: Book Value = $80,000 - $50,000 = $30,000 Cash Received = $20,000 Loss = Book Value $30,000 - Cash Received $20,000 = $10,000 Diff: 3 LO: 7-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 24) The Pizza Store trades in a delivery car for a newer model. The old delivery car has a cost of $9,000 and accumulated depreciation of $7,000. The Pizza Store pays cash of $8,000. The fair value of the newer car is $16,000. What is the gain or loss for the Pizza Store on the exchange of vehicles? A) $6,000 loss B) $2,000 gain C) $6,000 gain D) $8,000 gain Answer: C Explanation: Book Value = $9,000 - $7,000 = $2,000 Implied fair value of old car = $8,000 = Fair value new car $16,000 - Cash paid $8,000 Gain = $8,000 - $2,000 = $6,000 Gain = Fair value of old car - Book value of old car Diff: 3 LO: 7-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

25) Beck Company trades in old equipment for new equipment. The old equipment has a cost of $10,000 and accumulated depreciation of $9,000. Beck Company pays cash of $21,000. The fair value of the new equipment is $28,000. What is the gain or loss for Beck Company on the exchange of equipment? A) $6,000 loss B) $6,000 gain C) $1,000 loss D) $1,000 gain Answer: A Explanation: Book Value = $10,000 - $9,000 = $1,000 Implied Fair value of old equipment = Fair value new equipment $28,000 - Cash paid $21,000 = $7,000 Loss = $7,000 - $1,000 = $6,000 Loss = Fair value old equipment - Book value old equipment Diff: 3 LO: 7-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 26) A company exchanges an old machine for a new machine and cash is paid for the new machine. Assume there is a Gain on Exchange of Machine. In the journal entry to record the exchange by the owner of the old machine, which accounts will be debited? A) Machine and Accumulated Depreciation - Machine B) Cash and Machine C) Accumulated Depreciation - Machine, Cash and Machine D) Accumulated Depreciation - Machine, Cash, Machine and Gain on Exchange of Machine Answer: A Diff: 3 LO: 7-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 27) When recording a nonmonetary exchange of two plant assets, what information is NOT needed? A) book value of the asset given up B) book value of the asset received C) fair value of asset given up D) fair value of the asset received. Answer: B Diff: 3 LO: 7-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 54 Copyright © 2019 Pearson Education, Inc.

28) At the beginning of the year, the balance in the Buildings account was $800,000. At the end of the year, the balance in the Buildings account was $1,600,000. During the year, a building was purchased for $1,500,000. This was the only purchase of buildings during the year. What was the cost of the building or buildings sold during the year? A) $0 B) $700,000 C) $800,000 D) $1,500,000 Answer: B Explanation: Beginning Balance Buildings + Cost of Purchases - Cost of Building Sold = Ending Balance Buildings 800,000 + 1,500,000 - x = 1,600,000 x = 700,000 Diff: 3 LO: 7-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

29) Sullivan Sales purchased a machine on January 1, 2019 which cost $450,000. The machine had a residual value of $50,000 and a useful life of 10 years. Sullivan Sales can replace this machine with one that is more efficient and decides to sell the old machine for $100,000 on July 1, 2021. Required: Prepare the appropriate journal entries to record the sale of this machine, assuming the company uses the double-declining-balance method of depreciation. The fiscal year ends on December 31. Answer: Depreciation Schedule: Book Value Annual Accumulated Year Beginning of Year Rate Depreciation Depreciation Book Value 450,000 2019 450,000 20% 90,000 90,000 360,000 2020 360,000 20% 72,000 162,000 288,000 2021 288,000 20% 28,800* 190,800 259,200 The machine was sold on July 1, 2021. 6 months of depreciation is recorded in 2021 ($57,600 × 1/2 = $28,800). Date Account Debit Credit July 1, 2021 Depreciation Expense - Machine 28,800 Accumulated Depreciation- Machine 28,800 ($57,600 × 1/2) Cash Accumulated Depreciation- Machine Loss on Sale of Machine Machine

100,000 190,800 159,200

Diff: 3 LO: 7-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

450,000

30) A computer, with a cost of $10,000 is sold on July 1. Accumulated depreciation up to the date of sale is $5,000. Journalize the entries for the disposal of the computer under the following INDEPENDENT scenarios: 1. The computer was sold for $6,000. 2. The computer was sold for $1,000. 3. The computer is obsolete and was junked. Date

Account

Answer: Date Account 1.

Cash Accumulated Depreciation - Computer Gain on Sale of Computer Computer

6,000 5,000 1,000 10,000

Book value = $10,000 - $5,000 = $5,000 Cash Received - Book Value = Gain/Loss $6,000 - $5,000 = $1,000 gain 2.

Cash Accumulated Depreciation- Computer Loss on Sale of Computer Computer

1,000 5,000 4,000 10,000

Book value = $10,000 - $5,000 = $5,000 Cash Received - Book Value = Gain/Loss $1,000 - $5,000 = $4,000 Loss 3.

Accumulated Depreciation- Computer Loss on Disposal of Computer Computer

5,000 5,000 10,000

Book Value = $10,000 - $5,000 = $5,000 Cash Received - Book Value = Gain/Loss 0 - $5,000 = $5,000 Loss Diff: 2 LO: 7-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement Learning Objective 7-5 1) Natural resources are reported in the Intangible Assets section of the balance sheet. Answer: FALSE Diff: 2 LO: 7-5 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

2) Intangible assets can have either finite or indefinite lives. Answer: TRUE Diff: 2 LO: 7-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 3) All intangible assets must be amortized. Answer: FALSE Diff: 2 LO: 7-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 4) A purchaser is willing to pay for goodwill when the purchaser buys a company that has abnormal earning power. Answer: TRUE Diff: 1 LO: 7-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 5) Goodwill is recorded only when the purchase price exceeds the market value of the net liabilities in the acquisition of another company. Answer: FALSE Diff: 2 LO: 7-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 6) Most intangible assets have a residual value. Answer: FALSE Diff: 2 LO: 7-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

7) Adoption of IFRS by U.S. companies is expected to result in the recognition of less intangible assets on their balance sheets than presently exist. Answer: FALSE Diff: 2 LO: 7-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 8) Patents are state government grants that give the holder the exclusive right to produce and sell an invention for 20 years. Answer: FALSE Diff: 1 LO: 7-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 9) The useful lives of many franchises are indefinite and therefore are not amortized. Answer: TRUE Diff: 2 LO: 7-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 10) Some trademarks have an indefinite life and should not be amortized. Answer: TRUE Diff: 2 LO: 7-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

11) Which the following statements regarding accounting for natural resources is INCORRECT? A) Natural resources are often called wasting assets because they are actually physically used up over time. B) When the natural resource is extracted, the entity follows an approach much like the straightline method of depreciation to account for the production. C) If all of the natural resource that is extracted is sold, the amount depleted is transferred directly from long-term assets to the income statement as depletion expense. D) The portion of the extracted natural resource that is not immediately sold, becomes inventory. Answer: B Diff: 1 LO: 7-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 12) The computation of depletion expense is most closely related to which method for computing depreciation? A) straight-line B) units-of-production C) double-declining balance D) modified accelerated cost recovery system Answer: B Diff: 2 LO: 7-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13) Which intangible asset is NOT amortized? A) patents B) trademarks C) copyrights D) goodwill Answer: D Diff: 2 LO: 7-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

14) Amortization expense is recorded for: A) intangible assets with an indefinite life. B) intangible assets with a finite life. C) goodwill. D) a franchise established with a contract that allows for unlimited extensions. Answer: B Diff: 2 LO: 7-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 15) The journal entry to amortize a copyright affects the accounting equation by: A) increasing assets and stockholders' equity. B) decreasing assets and stockholders' equity. C) increasing assets and decreasing stockholders' equity. D) decreasing assets and increasing stockholders' equity. Answer: B Diff: 2 LO: 7-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 16) When an intangible asset is amortized: A) stockholders' equity decreases. B) net income decreases. C) net assets decrease. D) all of the above are correct. Answer: D Diff: 2 LO: 7-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 17) Patents are amortized over a period of: A) 20 years. B) 25 years. C) 70 years plus the life of inventor. D) 70 years. Answer: A Diff: 2 LO: 7-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 62 Copyright © 2019 Pearson Education, Inc.

18) Which of the following is a CORRECT statement regarding intangible assets? A) The useful life of a patent can be longer than its legal life. B) Copyrights do not protect computer software programs. C) Trademarks are rights to reproduce and sell a work of art. D) Intangible assets with indefinite lives must be checked annually for any loss in value. Answer: D Diff: 2 LO: 7-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 19) The entry to record patent amortization expense: A) increases total assets and decreases total stockholders' equity. B) decreases total assets and increases total stockholders' equity. C) decreases both total assets and total stockholders' equity. D) increases both total assets and total stockholders' equity. Answer: C Diff: 2 LO: 7-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 20) If a company has goodwill on its books, the goodwill: A) is amortized over 40 years or useful life, whichever is less. B) is tested for impairment annually. C) may have been internally created. D) may be written up to fair value. Answer: B Diff: 2 LO: 7-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

21) Merck Pharmaceutical Company has many scientists working in their labs trying to develop a new drug to treat congestive heart failure. Following U.S. Generally Accepted Accounting Principles, the cost of this research and development must be: A) recorded as an intangible asset and not amortized. B) recorded as an intangible asset and amortized over 20 years. C) recorded as an intangible asset and tested for impairment on a yearly basis. D) expensed as incurred. Answer: D Diff: 2 LO: 7-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 22) According to U.S. GAAP, ________ is not amortized because for many entities, it increases in value over time. A) research and development costs B) goodwill C) patients D) copyrights Answer: B Diff: 2 LO: 7-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 23) A distinctive identification of a product or a service is a: A) patent. B) trademark. C) copyright. D) license. Answer: B Diff: 1 LO: 7-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

24) The exclusive right to produce and sell an invention such as a smart phone requires a: A) copyright. B) license. C) trademark. D) patent. Answer: D Diff: 1 LO: 7-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 25) Marvin Company purchased Marathon Company on August 31st, 2016 and recorded goodwill. How will Marvin Company account for this goodwill in future accounting periods? A) Marvin Company will amortize the goodwill over a 40-year life. B) If the value of the goodwill increases in subsequent years, Marvin Company will increase the Goodwill account. C) If the goodwill is impaired in subsequent years, Marvin Company will decrease the Goodwill account. D) Marvin Company is not allowed to change the value of the Goodwill account. Answer: C Diff: 3 LO: 7-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 26) On June 5, 2019, Mabel Company purchased an oil well for $850,000. The well contains an estimated $85,000 barrels of oil, with an estimated residual value of zero. During July, 2019, $25,500 barrels of oil were removed from the well. All of the oil went into inventory. What amount of Depletion Expense is recorded in July, 2019? (Round your final answer to the nearest dollar.) A) $0. B) $850,000. C) $85,000. D) $255,000. Answer: A Diff: 2 LO: 7-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

27) CBS Corporation acquired a patent for $3,800,000. The patent has a legal life of 20 years. Because of changing technology, this patent is expected to generate revenue for only 5 years and have no residual value. The annual amortization expense for the patent is: (Round your final answer to the nearest dollar.) A) $0 B) $3,800,000 C) $190,000 D) $760,000 Answer: D Explanation: $3,800,000 ÷ 5 = $760,000 Diff: 2 LO: 7-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 28) First Company purchased Second Company for $20,000,000 cash. At the time of purchase, Second Company's assets had a market value of $30,000,000 and the liabilities had a market value of $14,000,000. At the time of purchase, Second Company's assets had a book value of $14,000,000 and the liabilities had a book value of $7,000,000. What amount of goodwill is recorded? A) $4,000,000 B) $16,000,000 C) $10,000,000 D) $14,000,000 Answer: A Explanation: Fair value of assets $30,000,000- fair value of liabilities $14,000,000 = $16,000,000 Goodwill = Cash paid $20,000,000 - $16,000,000 = $4,000,000 Diff: 3 LO: 7-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

29) On January 1, 2019, Plenty of Oil, Inc. purchased an oil field that is estimated to have 15,000,000 barrels of oil for $45,000,000. In 2019, 1,300,000 barrels of oil were extracted and sold. In 2020, 2,100,000 barrels of oil were extracted and sold. The oil field will have no residual value. What is the book value of the oil reserves that will be reported on the balance sheet as of December 31, 2020? A) $10,200,000 B) $34,800,000 C) $38,700,000 D) $45,000,000 Answer: B Explanation: $45,000,000 ÷ 15,000,000 = $3 per barrel Accumulated Depletion = $3 × (1,300,000 + 2,100,000) = $10,200,000 Oil Reserves = $45,000,000 - $10,200,000 = $34,800,000 Diff: 3 LO: 7-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 30) If a natural resource is extracted and not sold, which of the following accounts are debited and credited? A) debit Depletion Expense and credit Accumulated Depletion B) debit Cost of Goods Sold and credit Inventory C) debit Accumulated Depletion and credit Natural Resource D) debit Inventory and credit Natural Resource Answer: D Diff: 3 LO: 7-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 31) If a natural resource is extracted and then immediately sold, which of the following accounts are debited and credited? A) debit Cost of Goods Sold and credit Inventory B) debit Natural Resource and credit Accumulated Depletion C) debit Depletion Expense and credit Accumulated Depletion D) debit Depreciation Expense and credit Accumulated Depreciation Answer: C Diff: 3 LO: 7-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

32) In 2019, the Best Diamond Company purchased mineral rights for a diamond mine (industrial grade diamonds) by signing a promissory note for $7,000,000. In addition to the purchase price, Best paid cash of $100,000 for a geological survey and $20,000 for a license fee to the country where the mine is located. It is estimated that there will be no residual value when the mine is fully depleted and that the mine contains 1,000,000 carats of diamonds. During the first year of mining, Best Diamond extracted 50,000 carats of diamonds which were not sold after they were extracted. In 2020, the company extracted 250,000 carats of diamonds and sold 200,000 carats of diamonds from its inventory. Required: Prepare the journal entry without explanations to: 1. Record the purchase of the diamond mineral rights. 2. Record depletion for 2019. 3a. Record depletion for 2020. 3b. Record cost of goods sold for 2020. Date

Account

Answer: Date Account 1

Diamond Mineral Rights Note Payable Cash ($7,000,000 + $100,000 + $20,000) Inventory Diamond Mineral Rights* ($7,120,000/1,000,000 = $7.12 per carat) ($7.12 × 50,000 = $356,000) Inventory Diamond Mineral Rights* ($7.12 × 250,000 = $1,780,000) Cost of Diamonds Sold (Cost of Goods Sold) Inventory ($7.12 × 200,000 = $1,424,000)

7,120,000 7,000,000 120,000

356,000 356,000

1,780,000 1,780,000

1,424,000

*Alternatively, the credit could be Accumulated Depletion. Diff: 2 LO: 7-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

1,424,000

33) For each of the following, match the intangible asset with its definition.

A B

Goodwill

Patent

Trademark

Federal government grants the holder the exclusive right for 20 years to produce and sell an invention. A distinctive identification of a product or service. Excess of the cost of an acquired company over the sum of the market values of its net assets. Exclusive right issued by the federal government to reproduce and sell a book, musical composition, film or other work of art extending for 70 years beyond the author's life. Privileges granted by a private business to sell a product or service in accordance with specified conditions.

Copyright Franchises Goodwill Patent Trademark Answer: Copyright D Franchises E Goodwill C Patent A Trademark B Diff: 2 LO: 7-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

34) 1. On June 1, 2019, Fox Company purchased Wolf Corporation for $26,000,000 cash. At the time of the purchase, the market value of Wolf Corporation's assets and liabilities were $30,000,000 and $5,000,000, respectively. The book value of Wolf Corporation's assets and liabilities were $10,000,000 and $6,000,000, respectively. Record the journal entry for the acquisition by Fox Company. 2. By December 31, 2019, Fox Company discovered that the goodwill associated with Wolf Corporation is impaired and is worthless. Wolf Corporation is on the brink of bankruptcy. Record the journal entry needed by Fox Company. 1. Date

Account

Debit

Credit

2. Date

Account

Debit

Credit

Answer: 1. Date Account Debit Credit June 1, 2019 Assets 30,000,000 Goodwill 1,000,000 Liabilities 5,000,000 Cash 26,000,000 Fair value of net assets = ($30,000,000 - $5,000,000) = $25,000,000 Goodwill = Cash paid $26,000,000 - Fair value of net assets $25,000,000 = $1,000,000 2. Date Account Dec. 31, 2019 Loss due to Impairment of Goodwill Goodwill Diff: 2 LO: 7-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

Debit

Credit

1,000,000 1,000,000

35) On January 4, 2019, David Company paid $250,000 for an oil field that contains an estimated 20,000 barrels of oil. The oil field has no residual value. 5,000 barrels are extracted and sold in 2019 and 6,500 barrels are extracted and sold in 2020. Required: Prepare all journal entries. Explanations are not required. Date

Accounts

Debit

Credit

Answer: $250,000 ÷ 20,000 = $12.50 depletion per barrel Date 1/4/2019

12/31/2019

Accounts Oil Reserve Cash Depletion Expense Oil Reserve* $12.50 × 5,000 = $62,500

Debit 250,000

Credit 250,000

62,500

Depletion Expense 81,250 Oil Reserve* $12.50 × 6,500 = $81,250 *Alternatively, the credit could be Accumulated Depletion. Diff: 2 LO: 7-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

62,500

12/31/2020

81,250

36) New Tech Company acquired a patent on January 1, 2019 for $35,000. The residual value of the patent is $0. The patent is expected to benefit New Tech Company for 5 years. After using the patent one year, it was discovered that the patent would only be useful for 3 more years. Required: 1. Prepare the journal entry to record the acquisition of the patent. Omit explanations. 2. Prepare the adjusting journal entry at December 31, 2019. Omit explanation. 3. Prepare the adjusting journal entry at December 31, 2020. Omit explanation. Date

Account

Answer: Date

Account

Jan. 1, 2019

Patent Cash

35,000 35,000

Dec. 31, 2019 Amortization Expense—Patent Patent $35,000 ÷ 5 = $7,000

7,000

Dec. 31, 2020 Amortization Expense—Patent Patent ($35,000 - $7,000)÷ 3 = $9,333 Diff: 2 LO: 7-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

9,333

7,000

9,333

Learning Objective 7-6 1) If a long-term plant asset is impaired, generally accepted accounting principles require the owner to adjust the carrying value downward from its book value to its fair value. Answer: TRUE Diff: 2 LO: 7-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 2) Like U.S. GAAP, asset impairments under IFRS may be reversed in future periods for all types of long-term assets. Answer: FALSE Diff: 2 LO: 7-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 3) If a long-term an asset is impaired, estimated future cash flows will exceed the net book value. Answer: FALSE Diff: 3 LO: 7-6 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 4) Which of the following is a CORRECT statement about long-term asset impairment? A) An asset is impaired if the net book value is less than the expected future cash flows. B) If an asset is impaired, the expected future cash flows will exceed the fair value of the asset. C) Under U.S. GAAP, an asset that has been written down because of impairment can be written back up if it increases in value in the future. D) If an asset is impaired, the impairment loss is the difference between the net book value and the fair value. Answer: D Diff: 3 LO: 7-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

5) Sylvia Company has a long-term plant asset with the following information as of the end of the year: Net book value Estimated future cash flows Fair value

$87,500 $70,000 $67,000

The amount of the impairment loss is: A) $17,500. B) $3,000. C) $157,500. D) $20,500. Answer: D Explanation: $87,500 - $67,000 = $20,500 Diff: 2 LO: 7-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 6) Samson Company has a machine with the following data: Net book value Estimated future cash flows Fair value

$910,000 $760,000 $60,000

Is the machine impaired? A) No, the net book value of the machine exceeds the estimated future cash flows from the machine. B) No, the estimated future cash flows from the machine exceed the fair value of the machine. C) Yes, the fair value of the machine is less than the net book value of the machine. D) Yes, the estimated future cash flows from the machine are less than the net book value of the machine. Answer: D Diff: 2 LO: 7-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

7) If a long-term plant asset is impaired, the company is required to adjust the carrying value downward to its: A) original cost. B) present value. C) expected future cash flows. D) fair value. Answer: D Diff: 2 LO: 7-6 AACSB: Reflective Thinking AICPA Bus Persp: International/Global AICPA Functional: Measurement 8) What is the impairment test for long-term plant assets? A) Is the net book value greater than the fair value? B) Is the fair value greater than the net book value? C) Is the net book value greater than the estimated future cash flows? D) Are the estimated future cash flows greater than the net book value? Answer: C Diff: 2 LO: 7-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 9) The impairment test for long-term assets applies to: A) tangible long-term assets. B) intangible long-term assets. C) all assets. D) A and B. Answer: D Diff: 2 LO: 7-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

10) The impairment loss on long-term plant assets equals: A) net book value minus fair value. B) net book value minus estimated future cash flows. C) estimated future cash flows minus fair value. D) estimated future cash flows minus present value. Answer: A Diff: 2 LO: 7-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 11) For each of the following scenarios, use the two step approach to determine whether a longterm asset has been impaired and, if so, the amount of loss that should be recorded. a. Equipment Net book value: $450,000 Estimated future cash flows: $400,000 Fair value: $425,000 b. Patent Net book value: $650,000 Estimated future cash flows: $750,000 Fair value: $700,000 Answer: a. Step 1: Test the asset for impairment. Net book value $450,000 exceeds estimated future cash flows $400,000. The asset is impaired. Step 2: Compute the impairment loss. Net book value $450,000 - Fair value $425,000 = Impairment loss $25,000 b. Step 1: Test the asset for impairment. Net book value $650,000 is less than estimated future cash flows $750,000. The asset is not impaired. Diff: 3 LO: 7-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

Learning Objective 7-7 1) Return on assets measures how profitably management has used its assets. Answer: TRUE Diff: 1 LO: 7-7 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 2) When determining the rate of return on assets: A) the DuPont model breaks return on assets down into three component ratios that drive it. B) the DuPont model calculates the rate of return on assets as the net profit margin ratio times total asset turnover. C) it is important for companies to develop strategies to decrease total asset turnover. D) total asset turnover measures how much every sales dollar generates in profit. Answer: B Diff: 2 LO: 7-7 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) Calculate Company Y's total asset turnover based on the following information for the current year: (Round your final answer to two decimal places.) Net income Assets at the beginning of the year Assets at the end of the year Net sales

$600,000 $120,000 $110,000 $300,000

A) 2.73 B) 5.22 C) 2.61 D) 2.50 Answer: C Explanation: ($120,000 + $110,000) ÷ 2 = $115,000 $300,000 ÷ $115,000 = 2.61 Diff: 2 LO: 7-7 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

4) The records of Milwaukee Sprinkler Systems report net sales of $520,000, net income of $130,000 and average total assets of $360,000. Using DuPont analysis, calculate the two ratios used for return on assets. (Round your final answer to two decimal places.) A) Net profit margin ratio is 2.77; Total asset turnover is 25%. B) Net profit margin ratio is 25%; Total asset turnover is 1.44. C) Net profit margin ratio is 36%; Total asset turnover is 4.00. D) Net profit margin ratio is 2.50; Total asset turnover is 36%. Answer: B Diff: 2 LO: 7-7 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) Return on assets measures: A) how much the entity earned for each dollar of assets invested by both stockholders and creditors. B) net profit margin ratio times total asset turnover. C) profitability of a company's core business operations. D) A and B. Answer: D Diff: 2 LO: 7-7 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 6) a. What does total asset turnover measure? b. List three ways in which asset turnover can be increased. Answer: a. Total asset turnover measures how many sales dollars are generated for each dollar of assets invested. This is a measure of how efficiently the company manages its assets. b. The asset turnover can be increased by (1) increasing sales volume or revenue from services; increasing sales prices (2) keeping less inventory on hand. (3) closing unproductive or low-performing facilities, selling idle assets, and consolidating operations to fewer places to reduce the amount of plant assets needed and focus efforts on the more profitable areas of the business. Diff: 3 LO: 7-7 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Decision Modeling

7) a. What does the net profit margin ratio measure? b. List three ways in which this ratio can be increased. Answer: a. The net profit margin ratio measures how much every sales dollar generates in profit. b. The net profit margin ratio can be increased by (1 ) increasing sales volume or the amount of services performed. (2) increasing sales prices. (3) decreasing cost of goods sold and operating expenses. Diff: 3 LO: 7-7 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Decision Modeling Learning Objective 7-8 1) The disposition of a plant asset is reported on the statement of cash flows as a financing activity. Answer: FALSE Diff: 2 LO: 7-8 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 2) Acquisitions and sales of long-term assets are reported as investing activities on the statement of cash flows. Answer: TRUE Diff: 2 LO: 7-8 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 3) Equipment is acquired by issuing a note payable for $58,000 and a making a down payment of $26,000. The statement of cash flows will report a: A) $26,000 outflow in the operating activities section. B) $84,000 outflow in the investing activities section. C) $58,000 inflow in the financing activities section. D) $26,000 outflow in the investing activities section. Answer: D Diff: 3 LO: 7-8 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 80 Copyright © 2019 Pearson Education, Inc.

4) Equipment with a book value of $8,000 is sold for $3,000 cash. The statement of cash flows will report a: A) $3,000 cash inflow in the operating activities section B) $3,000 cash inflow in the investing activities section. C) $5,000 cash outflow in the operating activities section. D) $5,000 cash outflow in the financing activities section. Answer: B Diff: 2 LO: 7-8 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 5) Each of the following transactions appear on the statement of cash flows, EXCEPT: A) acquiring long-lived assets. B) depreciating long-lived assets. C) disposing of long-lived assets for no cash proceeds. D) selling long-lived assets. Answer: C Diff: 2 LO: 7-8 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

Financial Accounting, 12e (Thomas/Tietz/Harrison) Chapter 8 Current and Contingent Liabilities Learning Objective 8-1 1) Current liabilities are expected to be paid within one year or the operating cycle, whichever is shorter. Answer: FALSE Diff: 1 LO: 8-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 2) Current liabilities are usually associated with various day-to-day operating activities. Answer: TRUE Diff: 1 LO: 8-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) The most frequently used current liabilities are accounts receivable and notes receivable. Answer: FALSE Diff: 1 LO: 8-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 4) Long-term liabilities are incurred mostly for operating activities. Answer: FALSE Diff: 1 LO: 8-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

5) All of the following are reported as current liabilities EXCEPT: A) unearned revenues for services to be provided in 16 months. B) payroll tax payable. C) accounts payable. D) notes payable due in 6 months. Answer: A Diff: 1 LO: 8-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 6) Which of the following liability accounts is usually NOT an accrued liability: A) Warranties Payable. B) Wages Payable. C) Taxes Payable. D) Notes Payable. Answer: D Diff: 1 LO: 8-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 7) Notes payable due in six months are reported as: A) a reduction to notes receivable on the balance sheet. B) current assets on the balance sheet. C) current liabilities on the balance sheet. D) long-term liabilities on the balance sheet. Answer: C Diff: 1 LO: 8-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

8) Unearned Service Revenue relating to services to be provided in one month, is reported on the balance sheet as: A) a revenue account. B) a current liability. C) a component of stockholders' equity. D) a long-term liability. Answer: B Diff: 1 LO: 8-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 9) The most frequently used current liabilities are: A) accounts payable, accounts receivable, and accrued liabilities. B) accounts payable, notes payable, and accrued liabilities. C) cash, notes payable, and accrued liabilities. D) accounts payable, notes payable, and inventories. Answer: B Diff: 1 LO: 8-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 10) Which is NOT a current liability? A) unearned revenue B) accounts payable C) service revenue D) accrued liabilities Answer: C Diff: 1 LO: 8-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

11) Long-term liabilities are mostly for: A) operating activities B) financing activities. C) investing activities. D) both A and B. Answer: B Diff: 1 LO: 8-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 12) Current liabilities are mostly for: A) operating activities B) financing activities. C) investing activities. D) both A and B. Answer: A Diff: 1 LO: 8-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 13) Current liabilities are usually associated with: A) purchase of a building. B) purchase of equipment. C) payment of wages owed. D) both A and B. Answer: C Diff: 1 LO: 8-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 14) Long-term liabilities are usually associated with: A) purchase of a building B) purchase of equipment C) payment of wages owed. D) both A and B. Answer: D Diff: 1 LO: 8-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 4 Copyright © 2019 Pearson Education, Inc.

Learning Objective 8-2 1) Accounts payable turnover is an important measure of liquidity for a retail business. Answer: TRUE Diff: 1 LO: 8-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 2) Amounts owed for products or services purchased on account are accounts payable. Answer: TRUE Diff: 1 LO: 8-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) Accounts payable turnover measures the number of times per day the company is able to pay its accounts payable. Answer: FALSE Diff: 1 LO: 8-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) Companies with longer payment periods are usually better credit risks than those with shorter payment periods. Answer: FALSE Diff: 2 LO: 8-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) Large companies, like Amazon, typically purchase all of their inventory through accounts payable. Answer: TRUE Diff: 1 LO: 8-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

6) Large companies, like Amazon, typically pay most of their financing expenses through accounts payable. Answer: TRUE Diff: 1 LO: 8-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 7) Typically, the hard part about computing the accounts payable turnover is getting the: A) purchases from suppliers. B) beginning inventory. C) ending inventory. D) average inventory. Answer: A Diff: 1 LO: 8-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 8) Which number is needed in calculating the accounts payable turnover that is NOT normally reported on the financial statements? A) purchases from suppliers B) cost of goods sold C) ending inventory D) beginning inventory Answer: A Diff: 1 LO: 8-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 9) How do you compute the purchases from suppliers: A) Cost of goods sold + ending inventory + beginning inventory. B) Cost of goods sold - ending inventory – beginning inventory. C) Cost of goods sold + ending inventory – beginning inventory. D) Cost of goods sold - ending inventory + beginning inventory. Answer: C Diff: 1 LO: 8-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

10) When calculating accounts payable turnover, if there is not a material difference between the company's beginning inventory and ending inventory, then: A) an adjustment still must be made for the difference to reduce or increase purchases. B) it should just be noted in the footnotes. C) it is not necessary to adjust for the inventory. D) an adjustment still must be made for the difference to reduce cost of goods sold. Answer: C Diff: 1 LO: 8-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 11) When calculating accounts payable turnover, if there is not a material difference between the company's beginning inventory and ending inventory, then the accounts payable turnover will be ________ whether purchases or cost of goods sold are used. A) similar B) unavailable C) drastically different D) noncomparable Answer: A Diff: 1 LO: 8-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 12) If the accounts payable turnover is 5.4, what is the days' payable outstanding? (Round your answer to the nearest day.) A) 58 days B) 18 days C) 68 days D) 55 days Answer: C Explanation: 365 / 5.4 = 68 days Diff: 1 LO: 8-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

13) If the accounts payable turnover is 7.9, what is the days' payable outstanding? (Round your answer to the nearest day.) A) 46 days B) 16 days C) 56 days D) 33 days Answer: A Explanation: 365 / 7.9 = 46 days Diff: 1 LO: 8-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 14) The accounts payable turnover is calculated by purchases from suppliers divided by: A) average accounts payable B) beginning accounts payable. C) ending accounts payable. D) average accounts receivable. Answer: A Diff: 1 LO: 8-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 15) The accounts payable turnover expressed in days is 365 divided by: A) accounts payable turnover. B) beginning accounts payable. C) ending accounts payable. D) average accounts payable. Answer: A Diff: 1 LO: 8-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

16) A typical credit period for payment is: A) 10 days. B) 15 days. C) 30 days. D) 45 days. Answer: C Diff: 1 LO: 8-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 17) If Cost of Goods Sold is $300,000, beginning inventory is $29,000, and ending inventory is $30,000, then the purchases from suppliers (assume all on account) would be: A) $359,000. B) $299,000. C) $301,000. D) $59,000. Answer: C Explanation: $300,000 + $30,000 - $29,000 = $301,000. Diff: 2 LO: 8-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 18) If Cost of Goods Sold is $240,000, beginning inventory is $57,000, and ending inventory is $40,000, then the purchases from suppliers (assume all on account) would be: A) $337,000. B) $257,000. C) $223,000. D) $240,000. Answer: C Explanation: $240,000 + $40,000 - $57,000 = $223,000. Diff: 2 LO: 8-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

19) On December 31st, Datton, Inc. has cost of goods sold of $550,000, ending inventory is $102,000, beginning inventory is $120,000; and average accounts payable is $114,000. What is the accounts payable turnover? (Round your answer two decimal places.) A) 4.98 B) 7.77 C) 4.67 D) 2.88 Answer: C Explanation: $550,000 + $102,000 - $120,000 = $532,000 / $114,000 = 4.67 Diff: 2 LO: 8-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 20) On December 31st, Datton, Inc. has cost of goods sold of $550,000, ending inventory is $112,000, beginning inventory is $129,000; and average accounts payable is $107,000. What is the accounts payable turnover expressed as days? (Round any intermediary calculations to two decimal places, and round your final answer to the nearest day.) A) 69 B) 73 C) 44 D) 126 Answer: B Explanation: $550,000 + $112,000 - $129,000 = $533,000 / $107,000 = 4.98 365/4.98 = 73 days Diff: 2 LO: 8-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 21) On December 31st, Baxtor, Inc. has cost of goods sold of $380,000, ending inventory is $12,000, beginning inventory is $28,000; and average accounts payable is $89,000. What is the accounts payable turnover? (Round your answer two decimal places.) A) 4.45 B) 5.72 C) 3.82 D) 4.09 Answer: D Explanation: $380,000 + $12,000 - $28,000 = $364,000 / $89,000 = 4.09 Diff: 1 LO: 8-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 10 Copyright © 2019 Pearson Education, Inc.

22) On December 31st, Baxtor, Inc. has cost of goods sold of $310,000, ending inventory is $18,000, beginning inventory is $23,000; and average accounts payable is $89,000. What is the accounts payable turnover expressed as days? A) 106 B) 103 C) 74 D) 121 Answer: A Explanation: $310,000 + $18,000 - $23,000 = $305,000 / $89,000 = 3.43 365/3.43 = 106 days Diff: 1 LO: 8-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 23) On December 31st, Goliath Corporation has cost of goods sold of $114,000, ending inventory is $15,000, beginning inventory is $18,000; and average accounts payable is $25,000. Required: 1. What is the accounts payable turnover (take all answers to two decimal places)? 2. What is the accounts payable turnover in days (take to the nearest day)? Answer: 1. ($114,000 + $15,000 - $18,000) / $25,000 = 4.44 2. 365 / 4.44 = 82 days Diff: 3 LO: 8-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 24) On December 31st, Smith Corporation has cost of goods sold of $124,000, ending inventory is $25,000, beginning inventory is $28,000; and average accounts payable is $15,000. Required: 1. What is the accounts payable turnover (take all answers to two decimal places)? 2. What is the accounts payable turnover in days (take to the nearest day)? Answer: 1. ($124,000 + $25,000 - $28,000) / $15,000 = 8.07 2. 365 / 8.07 = 45 days Diff: 3 LO: 8-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

Learning Objective 8-3 1) A note is a written promise to pay a certain amount of money at a given date in the future along with interest. Answer: TRUE Diff: 1 LO: 8-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 2) Short-term notes payable are notes payable due in more than one year. Answer: FALSE Diff: 1 LO: 8-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) Short-term notes payable to banks are often used to finance business operations. Answer: TRUE Diff: 1 LO: 8-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) Short-term notes payable typically increase liabilities and equity. Answer: FALSE Diff: 1 LO: 8-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) Short-term notes payable would typically be used to purchase inventory or pay operating expenses. Answer: TRUE Diff: 1 LO: 8-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

6) Most long-term debt agreements are structured to be paid in installments. Answer: TRUE Diff: 1 LO: 8-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 7) Interest expense on a note payable is only recorded at maturity. Answer: FALSE Diff: 1 LO: 8-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 8) The current portion of a long-term note payable refers to the amount of interest on a note payable that must be paid in the current year. Answer: FALSE Diff: 1 LO: 8-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 9) To record the accrued interest on a note payable at the end of the accounting period, a journal entry should be written to debit: A) Cash. B) Interest Payable. C) Notes Payable. D) Interest Expense. Answer: D Diff: 2 LO: 8-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

10) A current liability would include all EXCEPT: A) Wages Payable. B) Interest Payable. C) Notes Payable. D) Interest Expense. Answer: D Diff: 2 LO: 8-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 11) Which account would be reported on the income statement? A) Wages Payable B) Interest Payable C) Notes Payable D) Interest Expense Answer: D Diff: 2 LO: 8-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) Long-term notes payable are usually used to buy items such as: A) building. B) equipment. C) equity investments. D) all of the above. Answer: D Diff: 2 LO: 8-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13) Which is NOT an example of long-term debt? A) notes payable B) accounts payable C) bonds payable D) All of the above are examples of long-term debt. Answer: B Diff: 2 LO: 8-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 14 Copyright © 2019 Pearson Education, Inc.

14) To record the accrued interest on a note payable at the end of the accounting period, a journal entry should be written to credit: A) Cash. B) Interest Payable. C) Notes Payable. D) Interest Expense. Answer: B Diff: 2 LO: 8-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 15) Examples of long term debt would include: A) Notes Payable. B) Bonds Payable. C) Accounts Payable. D) A and B. Answer: D Diff: 2 LO: 8-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 16) At the end of the year, a company makes a journal entry to accrue the interest expense on a short-term note payable. As a result of this transaction: A) current liabilities increase and current assets increase. B) current liabilities increase and stockholders' equity increases. C) current liabilities decrease and stockholders' equity decreases. D) current liabilities increase and stockholders' equity decreases. Answer: D Diff: 2 LO: 8-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

17) Madison Bank lends Neenah Paper Company $120,000 on January 1, 2017. Neenah signs a $120,000, 10%, 6-month note. The journal entry made by Neenah on January 1, 2017 will debit: A) Cash for $108,000 and credit Note Payable for $108,000. B) Interest Expense for $12,000 and credit Cash for $12,000. C) Cash for $120,000 and credit Notes Payable for $120,000. D) Interest Expense for $12,000 and credit Interest Payable for $12,000. Answer: C Diff: 2 LO: 8-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 18) Wisconsin Bank lends Local Furniture Company $110,000 on November 1. Local Furniture Company signs a $110,000, 6%, 4-month note. The fiscal year end of Local Furniture Company is December 31. The journal entry made by Local Furniture Company on December 31 is: A) debit Interest Expense and credit Interest Payable for $1,100. B) debit Interest Payable and credit Interest Expense for $1,100. C) debit Interest Expense and credit Cash for $1,100. D) debit Interest Payable and credit Cash for $1,100. Answer: A Explanation: $110,000 × 6% × 2/12 = $1,100 Diff: 2 LO: 8-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 19) Michigan Bank lends Detroit Furniture Company $110,000 on December 1. Detroit Furniture Company signs a $110,000, 9%, 4-month note. The total cash paid for interest (only) at maturity of the note is: (Round your final answer to the nearest dollar.) A) $1,100. B) $3,300. C) $6,600. D) $9,900. Answer: B Explanation: $110,000 × 9% × 4/12 = $3,300 Diff: 2 LO: 8-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

20) Illinois Bank lends Lisle Furniture Company $90,000 on December 1. Lisle Furniture Company signs a $90,000, 10%, 4-month note. The total cash paid at maturity of the note is: (Round your final answer to the nearest dollar.) A) $90,000. B) $93,000. C) $94,500. D) $99,000. Answer: B Explanation: $90,000 + ($90,000 × 10% × 4/12) = $93,000 Diff: 2 LO: 8-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 21) The journal entry to record accrued interest on a short-term note payable includes a debit to: A) Interest Payable and a credit to Cash. B) Interest Expense and a credit to Cash. C) Interest Expense and a credit to Interest Payable. D) Interest Payable and a credit to Notes Payable. Answer: C Diff: 2 LO: 8-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

22) On July 1st, Smith Corporation purchased $10,000 of inventory using a short-term note payable due in one year at 10% interest. Smith Corporation's fiscal year ends on December 31. Required: 1. Journalize the purchase of the inventory. Omit explanation. 2. Journalize the accrued interest expense on December 31st. Omit explanation. 3. Journalize the payment of the note payable the following year on June 30th. Omit explanation. 1. Date

Account

Debit

Credit

2. Date

Account

Debit

Credit

3. Date

Account

Debit

Credit

Answer: 1. Date July 1

2. Date Dec. 31

3. Date June 30

Account Inventory Note Payable, Short-Term

Debit 10,000

Account Interest Expense ($10,000 × .10 × 6/12) Interest Payable

Debit

Account Note Payable, Short-Term Interest Payable Interest Expense ($10,000 × .10 × 6/12) Cash

Debit 10,000 500

Credit 10,000

Credit

500 500

Credit

500 11,000

Diff: 3 LO: 8-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

23) On April 1st, Jones Corporation purchased $15,000 of inventory using a short-term note payable due in one year at 8% interest. Jones Corporation's fiscal year ends on December 31. Required: 1. Journalize the purchase of the inventory. Omit explanation. 2. Journalize the accrued interest expense on December 31st. Omit explanation. 3. Journalize the payment of the note payable the following year on March 31st. Omit explanation. 1. Date

Account

Debit

Credit

2. Date

Account

Debit

Credit

3. Date

Account

Debit

Credit

Answer: 1. Date April 1

2. Date Dec. 31

3. Date Mar. 31

Account Inventory Note Payable, Short-Term

Debit 15,000

Account Interest Expense ($15,000 × .08 × 9/12) Interest Payable

Debit

Account Note Payable, Short-Term Interest Payable Interest Expense ($15,000 × .08 × 3/12) Cash

Debit 15,000 900

Credit 15,000

Credit

900 900

Credit

300 16,200

Diff: 3 LO: 8-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

24) On December 1, 2019, Goliath Corporation borrowed $120,000 on a three-month, 10% note. Goliath Corporation's year end is December 31. Required: 1. Prepare the journal entries in 2019 and 2020 for Goliath Corporation. Omit explanations. 2. At December 31, 2019, what is reported on the balance sheet as current liabilities? 1. Date

Accounts

Debit

Credit

Debit 120,000

Credit

2. Current Liabilities:

Answer: 1. Date Dec. 1, 2019 Cash

Accounts Notes Payable, Short-Term

120,000

Dec. 31, 2019 Interest Expense ($120,000 × 10% × 1/12) Interest Payable

1,000

Mar. 1, 2020 Interest Payable Interest Expense ($120,000 × 10% × 2/12) Notes Payable, Short-Term Cash

1,000 2,000 120,000

1,000

2. Current Liabilities: Interest Payable $1,000 Notes Payable $120,000 Diff: 3 LO: 8-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 22 Copyright © 2019 Pearson Education, Inc.

123,000

25) Davies Accessories Company entered into the following transactions relating to notes payable: August 1 Purchased inventory costing $42,000 by signing an 8-month, 5% note payable. October 1 Purchased inventory costing $15,000 by signing a 1-year, 6% note payable. Required: Prepare journal entries to record the above transactions. Also, prepare journal entries needed on December 31, the company's fiscal year end. Omit explanations. Answer: 1. Date Accounts Debit Credit August 1 Inventory 42,000 Notes Payable, Short-Term 42,000 October 1

Inventory Notes Payable, Short-Term

15,000

December 31 Interest Expense Interest Payable ($42,000 × 5% × 5/12) + ($15,000 × 6% × 3/12)

1,100

15,000

1,100

Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement Learning Objective 8-4 1) Employee compensation is the major expense for most service companies. Answer: TRUE Diff: 1 LO: 8-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 2) The accrual method of accounting requires that expenses be recognized as they are incurred and matched against revenues earned in the same period or in the next period. Answer: FALSE Diff: 1 LO: 8-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 23 Copyright © 2019 Pearson Education, Inc.

3) Some accrued liabilities, such as sales taxes and commissions, are incurred at the point of sale and must be recognized in the same period as those sales are made. Answer: TRUE Diff: 1 LO: 8-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) The balance of the Unearned Revenue account becomes zero when a company has earned all of the revenue it had collected in advance. Answer: TRUE Diff: 1 LO: 8-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) Warranties and income taxes are examples of expenses that must be estimated. Answer: TRUE Diff: 1 LO: 8-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 6) Some liabilities, such as accrued salaries and rent, are recognized at the end of the next accounting period in the form of adjustments to the financial statements. Answer: FALSE Diff: 1 LO: 8-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 7) Payroll is also called employee compensation. Answer: TRUE Diff: 1 LO: 8-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

8) For a service organization, compensation is not generally a major operating expense. Answer: FALSE Diff: 1 LO: 8-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 9) For a merchandising company, cost of goods sold is generally the largest expense. Answer: TRUE Diff: 1 LO: 8-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 10) A wage is employee pay at a monthly or yearly rate. Answer: FALSE Diff: 1 LO: 8-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 11) A bonus is an amount over and above regular compensation. Answer: TRUE Diff: 1 LO: 8-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 12) The journal entry to accrue salaries earned by employees will debit: A) Salary Expense and credit Salary Payable for net pay. B) Salary Expense and credit Salary Payable for gross pay. C) Salary Expense for gross pay, credit FICA Tax Payable, credit Employee Income Tax Payable and credit Salary Payable for net pay. D) Salary Expense for net pay, debit FICA Tax Payable, debit Employee Income Tax Payable, and credit Salary Payable for gross pay. Answer: C Diff: 2 LO: 8-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

13) Which account is NOT an example of an accrued liability? A) sales tax payable B) wages payable C) interest payable D) accounts payable Answer: D Diff: 1 LO: 8-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 14) FICA tax includes: A) social security and medicare. B) social security and income tax. C) income tax and medicare. D) medicare and salaries payable Answer: A Diff: 1 LO: 8-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 15) Employers must match employee contributions (up to a maximum amount) for: A) social security. B) income tax. C) medicare. D) A and C. Answer: D Diff: 1 LO: 8-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

16) When a business receives cash from customers before earning the revenue, the ________ account is credited. A) Accounts Receivable B) Sales Tax Payable C) Accounts Payable D) Unearned Revenue Answer: D Diff: 1 LO: 8-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 17) Failure to record an accrued liability for wages earned by employees causes a company to: A) understate net income. B) overstate assets. C) overstate liabilities. D) overstate stockholders' equity. Answer: D Diff: 2 LO: 8-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 18) On December 31, 2019, Accrued Warranty Payable is reported on the balance sheet for White and Decker Company. The liability pertains to products sold, in 2019, with five-year warranties. The Accrued Warranty Payable should be reported on the balance sheet at December 31, 2019 as a: A) part of stockholders' equity. B) long-term liability only. C) current liability only. D) current liability and a long-term liability. Answer: D Diff: 2 LO: 8-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

19) The accounting principle that requires a company to record warranty expense in the same period that it records sales revenue is the: A) going concern principle. B) expense recognition principle. C) conservatism principle. D) consistency principle. Answer: B Diff: 1 LO: 8-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 20) Aisha Company paid $1,500 cash to replace a wheel on equipment sold under a two-year warranty in the prior year. The entry to record the payment will debit: A) Warranty Expense and credit Cash. B) Repair Expense and credit Cash. C) Estimated Warranty Payable and credit Cash. D) Operating Expense and credit Cash. Answer: C Diff: 2 LO: 8-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 21) Mariano Corporation sells 11,000 units of inventory during the first year of operations for $500 each. Mariano provides a one-year warranty on parts. It is estimated that 4% of the units will be defective and that repair costs are estimated to be $50 per unit. In the year of sale, warranty contracts are honored on 100 units for a total cost of $5,000. What amount will be reported as Estimated Warranty Liability at the end of the year? A) $5,000 B) $10,000 C) $17,000 D) $22,000 Answer: C Explanation: 11,000 × 4% = 440 (440- 100) × $50 = $17,000 Diff: 2 LO: 8-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

22) Kathy's Corner Store has total cash sales for the month of $40,000 excluding sales taxes. If the sales tax rate is 5%, which journal entry is needed? (Ignore Cost of Goods Sold.) A) debit Cash $42,000, credit Sales Revenue $42,000 B) debit Cash $40,000 and credit Sales Revenue $40,000 C) debit Cash $38,000, debit Sales Tax Receivable for $2,000 and credit Sales Revenue for $40,000 D) debit Cash $42,000, credit Sales Revenue $40,000 and credit Sales Tax Payable $2,000 Answer: D Diff: 2 LO: 8-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 23) Sales taxes collected from customers are sent to the state at the end of each month. What journal entry is prepared? A) debit Accounts Receivable and credit Sales B) debit Sales Tax Payable and credit Sales C) debit Accounts Payable and credit Cash D) debit Sales Taxes Payable and credit Cash Answer: D Diff: 1 LO: 8-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 24) Montana Company sold merchandise with a retail price of $30,000 for cash. Montana Company is required to collect 8% state sales tax. The total cash received from customers was: A) $2,400. B) $27,600. C) $30,000. D) $32,400. Answer: D Explanation: $30,000 + ($30,000 × 8%) Diff: 2 LO: 8-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

25) Mike's Pharmacy sold inventory with a selling price of $2,900 to customers for cash. They also collected sales taxes of $290. The journal entry to record this information includes a: A) debit to Cash of $3,190. B) debit to Sales Tax Expense $290. C) credit to Sales $3,190. D) debit to Sales Tax Payable $290. Answer: A Diff: 2 LO: 8-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 26) Total wages employees earned for the payroll period are called ________. The amount of wages the employees take home is the ________. A) gross pay; withholding amount B) gross pay; net pay C) net pay; gross pay D) net pay; taxes withheld amount Answer: B Diff: 1 LO: 8-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 27) Nationwide Magazine sells 64,000 subscriptions on account in March. The subscription price is $15 each. The subscriptions start in April. The journal entry in March would include a: A) debit to Unearned Subscription Revenue for $960,000. B) debit to prepaid subscriptions for $960,000. C) credit to Cash for $960,000. D) credit to Unearned Subscription Revenue for $960,000. Answer: D Diff: 2 LO: 8-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

28) At January 1, 2019, the Accrued Warranty Payable is $1,000. During 2019, the company recorded Warranty Expense of $19,100. During 2019, the company replaced defective products in accordance with product warranties at a cost of $12,400. What is the Accrued Warranty Payable at December 31, 2019? A) $6,700 B) $7,700 C) $20,100 D) $19,100 Answer: B Explanation: Beginning Balance $1,000 + Warranty Expense $19,100 - Warranties Met $12,400 = $7,700 Diff: 2 LO: 8-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 29) Monthly sales are $530,000. Warranty costs are estimated at 5% of monthly sales. Warranties are honored with replacement products. No defective products are returned during the month. At the end of the month, the company should record a journal entry with a credit to: A) Estimated Warranty Payable for $26,500. B) Warranty Expense for $26,500. C) Sales for $26,500. D) Inventory for $26,500. Answer: A Explanation: $530,000 × 5% = $26,500 Diff: 2 LO: 8-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

30) At December 31, 2018,Lansing Company's general ledger shows the following balances after posting adjusting entries: Accounts Payable 3% Notes Payable, due March 31, 2019 Salaries Payable Accumulated Depreciation 8% Notes Payable, due December 31, 2023 Estimated Warranty Liability Interest Payable FICA Tax Payable 10% Bonds Payable, due December 31, 2019 5% Bonds Payable, due December 31, 2024 Sales Tax Payable Unearned Service Revenue

$150,000 180,000 127,000 114,000 150,000 200,000 13,000 10,000 1,000,000 1,000,000 1,000 5,000

Additional information: 1. $50,000 of the 8% note due December 31, 2021 is due on December 31, 2019. 2. The Estimated Warranty Liability relates to a multiple year product warranty. One-half of the liability will be honored in 2019, and one-half in 2020. 3. The Unearned Service Revenue pertains to a service contract to be performed in 2020. Required: Prepare the liability section of Lansing Company's balance sheet at December 31, 2018.

Answer: Current Liabilities: Accounts Payable 3% Notes Payable, due March 31, 2019 Salaries Payable 8% Notes Payable, due December 31, 2019 Estimated Warranty Liability Interest Payable FICA Tax Payable Sales Tax Payable 10% Bonds Payable, due December 31, 2019 Total Current Liabilities

$150,000 180,000 127,000 50,000 100,000 13,000 10,000 1,000 1,000,000 $1,631,000

Long-Term Liabilities: Estimated Warranty Liability 100,000 Unearned Service Revenue 5,000 8% Notes Payable, due December 31, 2023 100,000 5% Bonds Payable, due December 31, 2024 1,000,000 Total Long-Term Liabilities $1,205,000 Diff: 3 LO: 8-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

31) Devin's Animal Shop has the following information for the pay period of March 15 to March 31: Gross payroll $20,000 FICA tax rate 7.65% Federal income tax withheld 15% Required: Prepare the journal entry to record the accrued payroll on March 31 and the journal entry to remit the payroll taxes to the government on April 15. Omit explanations. Do not record employer payroll taxes. Answer: Date Account Debit Credit March 31 Salary Expense 20,000 FICA Tax Payable (20,000 × 7.65%) 1,530 Employee Income Tax Payable (20,000 × 15%) 3,000 Salary Payable 15,470 April 15

FICA Tax Payable Employee Income Tax Payable Cash

Diff: 2 LO: 8-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

1,530 3,000 4,530

32) The following information is available for a retail store for the month of February: 1. Wahlberg Computers sells computers for $2,500 each on account. On February 1, Wahlberg sold 20 computers. The cost of each computer sold was $1,000. The store uses the perpetual inventory system. 2. It is estimated that the warranty expense is 5% of gross sales. A journal entry is prepared February 1. 3. During February, Wahlberg replaced two computers due to product warranty complaints for products purchased in a prior month. 4. A customer fell in the store and is seeking $100,000 in damages. Wahlberg's attorney believes the case is frivolous because the customer has similar lawsuits pending against other retail stores. 5. A customer is suing Wahlberg Computers for $100,000 because the customer's computer purchased from Wahlberg Computers started a fire and destroyed the customer's residence. Wahlberg's attorney believes the customer will probably win the case and receive $100,000. Required: Prepare the journal entries to record the transactions above. Omit explanations. Answer: Date Account Debit Credit 1. Accounts Receivable 50,000 Sales Revenue 50,000 ($2,500 × 20)

Cost of Goods Sold Inventory($1,000 × 20)

20,000

Warranty Expense Estimated Warranty Payable ($50,000 × 5%)

2,500

Estimated Warranty Payable Inventory ($1,000 × 2)

2,000

No journal entry

Estimated Lawsuit Loss Estimated Lawsuit Liability

20,000

2,500

2,000

100,000 100,000

Diff: 2 LO: 8-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

Learning Objective 8-5 1) A potential obligation that depends on the future outcome of past events is a contingent liability. Answer: TRUE Diff: 1 LO: 8-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 2) An example of a contingent liability may be a lawsuit. Answer: TRUE Diff: 1 LO: 8-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 3) Contingent liabilities can never be long term. Answer: FALSE Diff: 1 LO: 8-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 4) A potential obligation that depends on the future outcome of past events is a contingent liability. Answer: TRUE Diff: 1 LO: 8-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 5) A contingent liability should be disclosed in the notes to the financial statements if there is a reasonable possibility that a loss (or expense) will occur. Answer: TRUE Diff: 1 LO: 8-5 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

6) All contingent liabilities should be reported as liabilities on the financial statements, even those that are unlikely to occur. Answer: FALSE Diff: 1 LO: 8-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 7) Potential liabilities that depend on future events arising out of past events are called: A) long-term liabilities. B) estimated liabilities. C) contingent liabilities. D) current liabilities. Answer: C Diff: 2 LO: 8-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 8) The principle of representational faithfulness requires that companies: A) disclose their financial positions and operational results. B) when in doubt, disclose a contingent liability. C) ignore contingent liabilities. D) A and B. Answer: D Diff: 2 LO: 8-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 9) A company has a pending lawsuit that has a remote possibility of being settled in favor of the plaintiff who is a former employee. What should the company do? A) Nothing. B) Make a disclosure in a financial statement footnote. C) Prepare a journal entry. D) Make a note to the financial statements and prepare a journal entry. Answer: A Diff: 2 LO: 8-5 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

10) The international accounting standard for loss contingencies: A) contains the same language and requirements as the U.S. standard. B) defines the term contingency as a probable obligation that arises from a past event. C) states that contingencies can, by definition, only be disclosed in the financial statement footnotes. D) never allows a provision to be recorded. Answer: C Diff: 1 LO: 8-5 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 11) The FASB provides guidelines to account for contingent liabilities by: A) adjusting journal entries only. B) footnote disclosures only. C) journal entries and footnote disclosures. D) preparing a new financial statement. Answer: C Diff: 1 LO: 8-5 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 12) To accrue a contingent liability means to: A) report it as a footnote only. B) disclose estimates of the liability. C) make an adjusting journal entry. D) do nothing. Answer: C Diff: 1 LO: 8-5 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

13) To disclose a contingent liability means: A) report it as a footnote. B) disclose and make a journal entry. C) make an adjusting journal entry. D) do nothing. Answer: A Diff: 1 LO: 8-5 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 14) According to FASB, when should a company journalize a contingent liability? A) Journalize the contingent liability, even though you will probably win the lawsuit. B) Journalize the contingent liability only if the amount can be estimated and the probability of loss is reasonably possible. C) Journalize the contingent liability if it is probable that the loss will occur, and the amount of the loss can be reasonably estimated. D) Do not journalize the contingent liability under any circumstances. Answer: C Diff: 1 LO: 8-5 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 15) According to FASB, when should a contingent liability be disclosed? A) If it is reasonably possible you will lose the lawsuit. B) Only if the amount can be estimated and the loss is remote. C) If it is probable that the loss will occur, and the amount of the loss can be reasonably estimated. D) A contingent liability should never be disclosed. Answer: A Diff: 1 LO: 8-5 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

16) Under IFRS, if it is greater than ________ probability that an obligation is going to arise, and the amount can be estimated, then a "provision" should be recorded by making a journal entry. A) 25% B) 33% C) 50% D) 67% Answer: C Diff: 1 LO: 8-5 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

Financial Accounting, 12e (Thomas/Tietz/Harrison) Chapter 9 Long-Term Liabilities Learning Objective 9-1 1) Corporations borrow large amounts of money by issuing (selling) bonds to the public. Answer: TRUE Diff: 1 LO: 9-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 2) If bonds are issued at a premium, the carrying value of the bonds will be greater than the face value of the bonds for all interest periods prior to the bond's maturity date. Answer: TRUE Diff: 1 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 3) If bonds are issued at a discount, the issuing corporation will pay an amount greater than the face amount of the bonds on the maturity date. Answer: FALSE Diff: 1 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 4) The account Premium on Bonds Payable increases the issuer's liabilities. Answer: TRUE Diff: 2 LO: 9-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 5) If the market interest rate is greater than the stated interest rate, the bonds will sell at a discount. Answer: TRUE Diff: 2 LO: 9-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 1 Copyright © 2019 Pearson Education, Inc.

6) If $500,000, 6% bonds are issued on January 1 and pay interest semiannually, the amount of the interest payment on July 1 will be $15,000. Answer: TRUE Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 7) If $120,000 face value bonds are issued at 104, the proceeds received will be $104,000. Answer: FALSE Explanation: It would be $124,800 ($120,000 × 1.04) Diff: 1 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 8) The carrying amount of bonds is calculated by adding the balance of the Discount on Bonds Payable account to the balance in the Bonds Payable account. Answer: FALSE Diff: 1 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 9) At maturity, the carrying amount of bonds should equal the face value of the bonds. Answer: TRUE Diff: 1 LO: 9-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 10) If the stated interest rate on a bond is 8% and the market interest rate is 7%, the bond will be issued at a price above the par value of the bond. Answer: TRUE Diff: 1 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

11) The straight-line amortization method keeps interest expense at the same dollar amount for each interest payment over the bond's life. Answer: TRUE Diff: 1 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 12) The stated interest rate is always equal to the market interest rate on the date the bonds are issued. Answer: FALSE Diff: 1 LO: 9-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 13) The carrying value of bonds decreases over the term of the bonds if the bonds were issued at a discount. Answer: FALSE Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 14) Premium on bonds payable is a contra account to bonds payable. Answer: FALSE Diff: 1 LO: 9-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 15) At maturity, the premium on bonds payable will have been amortized to zero, and the bonds carrying value will be the face value of the bond. Answer: TRUE Diff: 1 LO: 9-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

16) Bonds that are secured by real estate are called: A) term bonds. B) secured bonds. C) mortgage bonds. D) B and C. Answer: D Diff: 1 LO: 9-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 17) Bonds in a particular issue which mature in installments over a period of time are called: A) serial bonds. B) term bonds. C) callable bonds. D) convertible bonds. Answer: A Diff: 1 LO: 9-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 18) Bonds which are backed only by the good faith of the borrower are referred to as: A) junk bonds. B) uncertified bonds. C) debenture bonds. D) callable bonds. Answer: C Diff: 1 LO: 9-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 19) If the market interest rate is greater than the stated interest rate on bonds, the bonds will sell: A) at face value. B) at a discount. C) at a premium. D) at the stated interest rate. Answer: B Diff: 1 LO: 9-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 4 Copyright © 2019 Pearson Education, Inc.

20) If bonds are issued at a discount, it means that the: A) market interest rate is higher than the stated interest rate. B) market interest rate is lower than the stated interest rate. C) financial strength of the issuer is weak. D) bond is convertible. Answer: A Diff: 1 LO: 9-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 21) The market interest rate is also referred to as the: A) contractual rate. B) coupon rate. C) effective rate. D) stated rate. Answer: C Diff: 1 LO: 9-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 22) The carrying amount of bonds issued at a discount is calculated by: A) subtracting Discount on Bonds Payable from Bonds Payable. B) subtracting the sum of Discount on Bonds Payable and Interest Payable from Bonds Payable. C) subtracting Interest Payable from Bonds Payable. D) subtracting Interest Expense from Bonds Payable. Answer: A Diff: 1 LO: 9-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

23) The interest rate that investors demand for loaning their money is referred to as: A) the coupon rate of interest. B) the market rate of interest. C) the stated rate of interest. D) the debenture rate of interest. Answer: B Diff: 1 LO: 9-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 24) Bonds with a 7% stated interest rate were issued when the market rate of interest was 6%. This bond was issued at: A) par value. B) a premium. C) a discount. D) face value. Answer: B Diff: 1 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 25) If the market interest rate is 6%, a $10,000, 7%, 5-year bond, that pays interest semiannually would sell at an amount: A) less than face value. B) equal to face value. C) greater than face value. D) less than the maturity value. Answer: C Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

26) A bond will sell at a premium when: A) the coupon rate is equal to the effective rate. B) the coupon rate is greater than the effective rate. C) the coupon rate is less than the effective rate. D) the stated rate is less than the market rate of interest. Answer: B Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 27) Bonds with a 6% interest rate were issued when the market rate of interest was 7%. The quoted bond price will be: A) greater than 100. B) less than 100. C) 100. D) greater than 1000. Answer: B Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 28) A bond with a face value of $80,000 and a quoted price of 104 has a selling price of: (Round your final answer to the nearest dollar.) A) $76,923. B) $80,000. C) $83,200. D) $88,000. Answer: C Explanation: $80,000 × 1.04 = $83,200 Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

29) A $4,000, 6% bond is sold at 93. When the bond is issued, the Cash account will be increased by: A) $3,720. B) $4,000. C) $3,960. D) $4,280. Answer: A Explanation: $4,000 × 0.93 = $3,720 Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 30) On January 1, Hanley Corporation issued $2,300,000, 10-year, 9% bonds at 103. The journal entry to record this transaction would include a: A) credit to Bonds Payable $2,369,000. B) debit to Discount on Bonds Payable $69,000. C) debit to Cash $2,300,000. D) credit to Premium on Bonds Payable $69,000. Answer: D Explanation: $2,300,000 × 3% = $69,000 Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 31) In the balance sheet, the account, Premium on Bonds Payable, is: A) added to bonds payable. B) deducted from bonds payable. C) classified as a liability account. D) A and C. Answer: D Diff: 1 LO: 9-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

32) Maybelline Corporation issues $2,700,000, 10-year, 8% bonds dated January 1 at 101. The journal entry to record the issuance will include a: A) credit to Cash for $2,727,000. B) debit to Cash for $2,700,000. C) credit to Premium on Bonds Payable for $27,000. D) credit to Bonds Payable for $2,727,000. Answer: C Explanation: $2,700,000 × 1% = $27,000 Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 33) Bonds with a face value of $200,000 were sold at an effective interest rate of 8% to yield cash proceeds in excess of $200,000. It is apparent that the bonds had a: A) stated interest rate less than the market rate. B) stated interest rate greater than the market rate. C) effective interest rate less than the stated rate. D) effective interest rate greater than the market rate. Answer: B Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 34) Smith Corporation issues $1,800,000, 10-year, 6% bonds payable at a price of 95. The journal entry to record the issuance will include a: A) debit to Cash of $1,800,000. B) credit to Discount on Bonds Payable for $90,000. C) credit to Bonds Payable for $1,710,000. D) debit to Cash for $1,710,000. Answer: D Explanation: $1,800,000 × 0.95 = $1,710,000 Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

35) The carrying value of a bond immediately after the bond was issued was $225,000. The bond price was 96. The face value of the bond was: (Round your final answer to the nearest dollar.) A) $216,000. B) $225,000. C) $234,000. D) $234,375. Answer: D Explanation: $225,000 ÷ 0.96 = $234,375 Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 36) Premium on Bonds Payable: A) has a debit balance. B) is a contra account to bonds payable. C) has a credit balance. D) is deducted from bonds payable on the balance sheet. Answer: C Diff: 2 LO: 9-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 37) If bonds have been issued at a premium, over the life of the bonds, the: A) carrying value of the bonds will decrease. B) carrying value of the bonds will increase. C) interest expense will increase. D) interest payment will increase. Answer: A Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

38) The journal entry to record a semiannual interest payment on a bond payable issued at par: A) debits Interest Expense and credits Bonds Payable. B) debits Interest Expense and credits Cash. C) debits Cash and credits Interest Payable. D) debits Cash and credits Interest Expense. Answer: B Diff: 1 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 39) Basil Company issued $610,000, 8%, 5-year bonds for 107, with interest paid annually. Assuming straight-line amortization, what is the carrying value of the bonds after one year? A) $652,700 B) $610,000 C) $644,160 D) $658,800 Answer: C Explanation: $610,000 × 1.07 = $652,700 $652,700 - $610,000= $42,700 premium $42,700 ÷ 5 years = $8,540 reduction of premium $652,700 - $8,540 = $644,160 Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 40) A bond was issued at par. The journal entry to record payment of this bond payable at maturity will include a: A) debit to Bonds Payable, credit to Discount on Bonds Payable and a credit to Cash. B) debit to Cash and a credit to Bonds Payable. C) debit to Bonds Payable and a credit to Cash. D) debit to Bonds Payable, debit to Discount on Bonds Payable and a credit to Cash. Answer: C Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

41) Over the term of the bonds, the balance in the Premium on Bonds Payable account will: A) increase or decrease if the market is unstable. B) increase. C) decrease. D) not change until the bonds mature. Answer: C Diff: 1 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 42) Over the term of a bond, the amortization of the premium on bonds payable: A) increases the amount of cash paid to bondholders annually. B) decreases the amount of cash paid to bondholders annually. C) increases interest expense. D) decreases interest expense. Answer: D Diff: 1 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 43) Fenway Corporation issued a $24,000, 10-year, 11% bond dated January 1, at 102. The journal entry to record the issuance of the bond will include a: A) debit to Cash for $24,000. B) debit to Cash for $24,480. C) credit to Bonds Payable for $24,480. D) debit to Discount on Bonds Payable for $480. Answer: B Explanation: 24,000 × 1.02 = 24,480 Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

44) On January 1, 2019, Brewers Corporation issued $600,000 of 6%, 5-year bonds at 99, with interest paid annually. Using the straight-line amortization method, what is the carrying value of the bonds on January 1, 2019? (Round your final answer to the nearest dollar.) A) $594,000 B) $606,061 C) $595,200 D) $636,000 Answer: A Explanation: $600,000 × 0.99 = $594,000 Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 45) On January 1, 2019, Anthony Corporation issued $1,000,000 of 6%, 5-year bonds at 98, with interest paid annually. Using the straight-line amortization method, what is the carrying value of the bonds one year later on January 1, 2020? (Round any intermediary calculations to two decimal places and your final answer to the nearest dollar.) A) $980,000 B) $992,000 C) $984,000 D) $1,016,408 Answer: C Explanation: $1,000,000 × 0.98 = $980,000 $1,000,000 - $980,000 = $20,000 discount $20,000 ÷ 5 years = $4,000 $980,000 + $4,000 = $984,000 Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 46) On January 1, 2018, a bond was issued at a discount. The journal entry to record the semiannual interest payment on July 1, 2018 would include a: A) debit to Interest Expense, a credit to Discount on Bonds Payable and a credit to Cash. B) debit to Interest Expense, a debit to Discount on Bonds Payable and a credit to Cash. C) debit to Interest Expense, a debit to Cash and a credit to Discount on Bonds Payable. D) debit to Discount on Bonds Payable and a credit to Cash. Answer: A Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 13 Copyright © 2019 Pearson Education, Inc.

47) Cubs Corporation issues $550,000, 10%, 5-year bonds on January 1, 2019 for $489,000. Interest is paid annually on January 1. If Cubs Corporation uses the straight-line method of amortization of bond discount, the amount of interest expense recorded at December 31, 2019 would be: A) $61,000. B) $42,800. C) $55,000. D) $67,200. Answer: D Explanation: Discount = $550,000 - $489,000 = $61,000 ($550,000 × 10%) + ($61,000 ÷ 5) = $67,200 Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 48) Schmid Corporation issues $450,000, 12%, 5-year bonds on January 1, 2019 for $439,000. Interest is paid semiannually on January 1 and July 1. If Schmid uses the straight-line method of amortization of bond discount, the amount of bond interest expense on July 1, 2019 is: A) $25,900. B) $27,000. C) $28,100. D) $55,100. Answer: C Explanation: $450,000 × 6% = $27,000 $450,000 - $439,000 = $11,000 discount $11,000 ÷ 10 semiannual periods = $1,100 Total interest expense: $27,000 + $1,100 = $28,100 Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

49) On July 1, 2019, Brownlee Corporation issues $1,200,000 of 10-year, 9% bonds dated July 1, 2019 at 88. Brownlee uses the straight-line method of amortization. Interest is paid each July 1 and January 1. Brownlee Corporation's fiscal year end is June 30. The interest expense recognized for the first semiannual interest payment on January 1, 2020 is: A) $46,800. B) $54,000. C) $61,200. D) $108,000. Answer: C Explanation: 1,200,000 × 0.88 = 1,056,000 selling price of bonds 1,200,000 - 1,056,000 = 144,000 discount 144,000 ÷ 20 (10 years × 2 payments per year)= 7,200 discount amortization per period 1,200,000 × 0.09 × 6/12 = 54,000 cash paid Interest Expense = Cash Paid + Amortized Discount = 54,000 + 7,200 = 61,200 Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 50) On January 1, 2019, Always Corporation issues $2,800,000, 5-year, 11% bonds for $2,720,000. Interest is paid semiannually on January 1 and July 1. Always Corporation uses the straight-line method of amortization. The company's fiscal year ends on December 31. The amount of discount amortized on July 1, 2019 is: A) $4,000. B) $8,000. C) $16,000. D) $80,000. Answer: B Explanation: $2,800,000 - $2,720,000 = $80,000 discount $80,000 ÷ 5 year × 6/12 = $8,000 discount amortization per period Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

51) Secured bonds are: A) also called mortgage bonds. B) also called serial bonds. C) bonds that give the bondholder the right to take specified assets of the issuer in the event the issuer fails to pay interest or principal. D) A and C. Answer: D Diff: 2 LO: 9-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 52) Bonds that mature on a single date are called ________. Bonds that mature on multiple dates are called ________. A) mortgage bonds; serial bonds B) serial bonds; mortgage bonds C) debentures; special bonds D) term bonds; serial bonds Answer: D Diff: 2 LO: 9-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 53) Unsecured bonds are called ________. Secured bonds are called ________. A) convertible bonds; callable bonds B) term bonds; serial bonds C) debentures; mortgage bonds D) regular bonds; special bonds Answer: C Diff: 2 LO: 9-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

54) Darla's Cookie Emporium borrowed money by issuing $200,000 of bonds at 96 on January 1, 2019. The bonds pay interest on January 1 and July 1. The stated rate of interest is 5% and the bonds mature in 10 years. Any discount or premium is amortized using the straight-line method. Required: Prepare journal entries on the following dates: 1. January 1, 2019. 2. July 1, 2019. 3. December 31, 2019, the fiscal year end. 4. January 1, 2020. 5. January 1, 2029. Omit explanations. Date

Account

Debit

Credit

Answer: Date Jan. 1, 2019

July 1, 2019

Account Cash($200,000 × 0.96) Discount on Bonds Payable Bonds Payable Interest Expense Discount on Bonds Payable($8,000 ÷ 20) Cash($200,000 × 5% × 1/2)

Debit Credit 192,000 8,000 200,000 5,400 400 5,000

Dec. 31, 2019 Interest Expense Discount on Bonds Payable Interest Payable

5,400

Jan. 1, 2020

Interest Payable Cash

5,000

Interest Payable Cash

5,000

Bonds Payable Cash

200,000

Jan. 1, 2029

400 5,000

5,000

200,000

Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

55) On January 1, 2019, Paulsen Company issued $600,000, 6%, 5-year bonds at face value. Interest is payable semiannually on July 1 and January 1. Required: Prepare journal entries on: 1. January 1, 2019 2. July 1, 2019 3. December 31, 2019, the fiscal year end Omit explanations. Date

Answer: Date Jan. 1, 2019

July 1, 2019

Account

Debit

Account Cash Bonds Payable

Debit Credit 600,000 600,000

Interest Expense Cash($600,000 × 6% × 1/2)

Dec. 31, 2019 Interest Expense Interest Payable Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

Credit

18,000 18,000 18,000

18,000

56) On April 1, 2020, Eiche Company issues $2,500,000 of 6%, 5-year bonds, with interest payments made each October 1 and April 1. The bonds are issued at 98. Eiche Company amortizes any premium or discount using the straight-line method. Required: Prepare journal entries on the following dates: 1. April 1, 2020. 2. October 1, 2020. 3. December 31, 2020, the fiscal year end. Omit explanations. Date

Account

Debit

Credit

Answer: Date Account April 1, 2020 Cash Discount on Bonds Payable Bonds Payable (2,500,000 × .98 = 2,450,000) Oct. 1, 2020

Interest Expense Discount on Bonds Payable Cash 2,500,000 × .06 × 6/12 = 75,000 50,000 ÷ 10 = 5,000

Dec. 31, 2020 Interest Expense Discount on Bonds Payable Interest Payable 2,500,000 × .06 × 3/12 = 37,500 50,000 ÷ 10 = 5,000 × 1/2 = 2,500 Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

Debit Credit 2,450,000 50,000 2,500,000

80,000 5,000 75,000

40,000

2,500 37,500

57) On January 1, 2019, Las Vegas Company issued 8%, 20-year bonds with a face amount of $3,000,000 at 101. Interest is payable semiannually on June 30 and December 31. Las Vegas Company uses the straight-line method to amortize bond premium or discount. The company's fiscal year ends December 31. Required: Prepare the journal entries to record the issuance of the bonds and the first semiannual interest payment. Omit explanations. Date

Answer: Date Jan. 1, 2019

Account

Debit

Account Cash Premium on Bonds Payable Bonds Payable 3,000,000 × 1.01 = 3,030,000

June 30, 2019 Interest Expense Premium on Bonds Payable Cash 3,000,000 × .08 × 6/12 = 120,000 30,000 ÷ 40 = 750 Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

Credit

Debit Credit 3,030,000 30,000 3,000,000

119,250 750

120,000

58) On January 1, 2019, Tarantino Corporation issued $4,000,000, 9%, 5-year bonds at 96. The bonds pay semiannual interest on January 1 and July 1. Tarantino uses the straight-line method of amortization and has a calendar year end. Required: Prepare all the journal entries that Tarantino Corporation would make related to this bond issue through January 1, 2020. Omit explanations. Date

Account

Debit

Credit

Answer: Date Jan. 1, 2019

July 1, 2019

Account Cash Discount on Bonds Payable Bonds Payable (4,000,000 × .96 = 3,840,000) Interest Expense Discount on Bonds Payable Cash (4,000,000 × .09 × 6/12 = 180,000) (160,000/5 × 6/12 = 16,000)

Debit Credit 3,840,000 160,000 4,000,000

196,000 16,000 180,000

Dec. 31, 2019 Interest Expense Discount on Bonds Payable Interest Payable

196,000

Jan. 1, 2020

180,000

Interest Payable Cash

16,000 180,000

180,000

Diff: 2 LO: 9-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement Learning Objective 9-2 1) The effective-interest method of amortizing a bond discount or premium results in different amounts of interest expense for every interest payment over the bond's life. Answer: TRUE Diff: 1 LO: 9-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 2) Generally accepted accounting principles (GAAP) allow businesses to use the straight-line amortization method for bond discounts and premiums only when the amounts calculated do not differ significantly from the amounts calculated using the effective-interest method. Answer: TRUE Diff: 1 LO: 9-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 24 Copyright © 2019 Pearson Education, Inc.

3) The straight-line amortization method is the most theoretically correct way to amortize bond discount and premium because it recognizes the impact that the time value of money has on the interest expense recognized each interest payment period. Answer: TRUE Diff: 1 LO: 9-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 4) Solderman Company issued $510,000, 7%, 10-year bonds for $422,800 with a market rate of 9%. The effective interest method of amortization is used and interest is paid annually. The journal entry on the first interest payment date would include a: A) credit to Interest Expense of $35,700. B) credit to Cash of $38,052. C) credit to Cash of $35,700. D) credit to Interest Expense of $38,052. Answer: C Explanation: Cash paid is credited for: $510,000 × 7% = $35,700 Diff: 2 LO: 9-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 5) Under the effective-interest method, the amount of bond discount amortized each interest period is equal to the: A) amount of interest expense less the cash paid for interest. B) amount of interest expense plus the cash paid for interest. C) face value of the bond times the stated interest rate. D) face value of the bond times the market interest rate at the date of issue. Answer: A Diff: 2 LO: 9-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

6) NBC Corporation issued $610,000, 9%, 5-year bonds on January 1, 2019 for $660,731 when the market interest rate was 7%. Interest is paid semiannually on January 1 and July 1. The corporation uses the effective-interest method to amortize bond premium. The total amount of bond interest expense recognized on July 1, 2019 is: A) $21,350. B) $23,126. C) $29,733. D) $27,450. Answer: B Explanation: $660,731 × 3.5% = $23,126 Diff: 2 LO: 9-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 7) Under the effective-interest method of amortization, the bond cash payment on each interest date is calculated by multiplying the: A) face value of the bonds times the effective-interest rate for the appropriate time period. B) face value of the bonds times the stated interest rate for the appropriate time period. C) carrying value of the bonds times the stated interest rate for the appropriate time period. D) carrying value of the bonds times the effective-interest rate for the appropriate time period. Answer: B Diff: 2 LO: 9-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 8) On January 1, 2019, Chin Corporation issued $2,900,000, 16%, 5-year bonds. The bond interest is payable on January 1 and July 1. The bonds sold for $3,119,600. The market rate of interest for these bonds was 14%. Under the effective-interest method, what is the interest expense for the six months ending July 1, 2019? A) $203,000 B) $249,568 C) $218,372 D) $232,000 Answer: C Explanation: $3,119,600 × 7% = $218,372 Diff: 2 LO: 9-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

9) Under the effective-interest method, if bonds are issued at a discount, the amount of interest expense: A) increases each period as the bonds move towards maturity. B) decreases each period as the bonds move towards maturity. C) remains the same over the term of the bonds. D) is less than the cash interest payment. Answer: A Diff: 2 LO: 9-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 10) Which is the most theoretically correct method to use when amortizing a bond discount or premium? A) market-interest rate method of amortization B) straight-line method of amortization C) effective-interest method of amortization D) Both straight-line and market-interest rate methods of amortization are equally preferred. Answer: C Diff: 2 LO: 9-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 11) Under the effective-interest method of amortization, interest expense for each interest period can be calculated by multiplying the: A) face value of the bonds times the effective-interest rate for the appropriate time period. B) carrying value of the bonds times the effective-interest rate for the appropriate time period. C) face value of the bonds times the stated interest rate for the appropriate time period. D) carrying value of the bonds times the stated interest rate for the appropriate time period. Answer: B Diff: 2 LO: 9-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

12) On January 1, 2019, Naperville Corporation issued $2,300,000, 12%, 5-year bonds with interest payable on January 1 and July 1. The bonds sold for $2,446,400. The market rate of interest was 10%. Using the effective-interest method, the debit entry to interest expense on July 1, 2019 is (round to the nearest dollar): A) $115,000. B) $146,784. C) $122,320. D) $138,000. Answer: C Explanation: $2,446,400 × 5% = $122,320 Diff: 2 LO: 9-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 13) Lisle Corporation issued $200,000 of 10% bonds on January 1, 2019. The bonds pay interest semiannually on January 1 and July 1. The company has a fiscal year end of May 31. On May 31, 2019, the Lisle Corporation will: A) make a journal entry to accrue interest expense from July 1 through December 31. B) make a journal entry to accrue interest expense from January 1 through July 1. C) make a journal entry to accrue interest expense from January 1 through May 31. D) make a journal entry to record cash interest paid on May 31. Answer: C Diff: 2 LO: 9-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 14) If bonds have been issued at a discount and the effective-interest method is used, the ________ over the life of the bonds. A) carrying value of the bonds will decrease B) interest payment will increase C) interest expense will decrease D) interest expense will increase Answer: D Diff: 2 LO: 9-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

15) If bonds have been issued at a discount and the effective-interest method is used, the journal entry for payment of bond interest would include: A) a debit to cash. B) a debit to discount on bonds payable. C) a credit to interest expense. D) a debit to interest expense. Answer: D Diff: 2 LO: 9-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

16) On January 1, 2019, Fleming Corporation issued 9%, 10-year bonds with a face value of $900,000 at 93.78. Interest is payable semiannually on January 1 and July 1. The effectiveinterest rate when the bonds were issued was 10%. Any discount or premium is amortized using the effective-interest method. Required: Prepare journal entries on: 1. January 1, 2019 2. July 1, 2019 Omit explanations. Date

Account

Answer: Date Jan. 1, 2019

July 1, 2019

Debit

Account Cash Discount on Bonds Payable Bonds Payable (900,000 × .9378 = 844,020) Interest Expense Discount on Bonds Payable Cash (844,020 × .1 × 6/12 = 42,201) (900,000 × .09 × 6/12 = 40,500)

Credit

Debit Credit 844,020 55,980 900,000

42,201

1,701 40,500

17) On January 1, 2019, Patterson Corporation issued $100,000, 9%, 5-year bonds with semiannual interest payments on June 30 and December 31. The bonds were issued at $96,149 yielding an effective-interest rate of 10%. Patterson uses the effective-interest method of amortization. The company's fiscal year ends on December 31. Required: Prepare the journal entries that Patterson would make on January 1, June 30 and December 31, 2019. Round all amounts to the nearest dollar. Omit explanations. Date

Account

Answer: Date Jan. 1, 2019

Debit

Account Cash Discount on Bonds Payable Bonds Payable

Credit

Debit Credit 96,149 3,851 100,000

June 30, 2019 Interest Expense Discount on Bonds Payable Cash 100,000 × .09 × 6/12 = 4,500 96,149 × .1 × 6/12 = 4,807

4,807

Dec. 31, 2019 Interest Expense Discount on Bonds Payable Cash 100,000 × .09 × 6/12 = 4,500 (96,149 + 307) × .1 × 6/12 = 4,823 Diff: 3 LO: 9-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

4,823

307 4,500

323 4,500

18) On July 1, 2019, Bobby's Building Corp. issued $1,000,000 of 11% bonds dated July 1, 2019 for $1,062,771. The bonds were sold to yield 10% and pay interest semiannually on July 1 and January 1. Bobby's Building Corp. uses the effective interest method of amortization. The company's fiscal year ends on February 28. Required: 1. Prepare the journal entry on July 1, 2019. 2. Prepare the amortization table for the first two interest periods. 3. Prepare the journal entry on January 1, 2020. Round all amounts to the nearest dollar. Omit explanations for all journal entries. 1. Date

Account

Debit

Interest Payment

Interest Discount Expense Amortization

Credit

Date

3. Date

Account

Debit

Discount Balance

Credit

Bond Carrying Amount

Answer: 1. Date July 1, 2019

Account Debit Credit Cash 1,062,771 Discount on Bonds Payable 62,771 Bonds Payable 1,000,000

Date July 1, 2019

Jan. 1, 2020

July 1, 2020 3. Date Jan. 1, 2020

Interest Payment

Interest Discount Expense Amortization

53,139 (1,062,771 55,000 × .05) 53,046 (1,060,910 55,000 × .05)

1,861 (55,000 – 53,139) 1,954 (55,000 – 53,046)

Bond Discount Carrying Balance Amount 62,771 1,062,771 60,910 1,060,910 (62,771 – (1,062,771 – 1,861) 1,861) 58,956 1,058,956 (60,910 – (1,060,910 – 1,954) 1,954)

Account Debit Credit Interest Expense 53,139 Discount on Bonds Payable 1,861 Cash 55,000

Diff: 3 LO: 9-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement Learning Objective 9-3 1) When a corporation converts bonds payable into common stock, its equity increases. Answer: TRUE Diff: 2 LO: 9-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 2) Callable bonds allow the issuer to pay off the bonds whenever the issuer chooses. Answer: TRUE Diff: 1 LO: 9-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 33 Copyright © 2019 Pearson Education, Inc.

3) If a bond is retired before maturity, the journal entry to record the retirement by the issuer will include a credit to Cash. Answer: TRUE Diff: 1 LO: 9-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 4) Bonds that the issuer may pay off at a prearranged price whenever the issuer chooses before the maturity date are: A) serial bonds. B) callable bonds. C) convertible bonds. D) debenture bonds. Answer: B Diff: 1 LO: 9-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 5) Miller Corporation has $1,800,000 of bonds outstanding. The unamortized premium is $57,000. If the company retired the bonds at 102, what would be the gain or loss on the retirement? Ignore any interest due. A) $36,000 gain B) $36,000 loss C) $21,000 gain D) $57,000 gain Answer: C Explanation: Par Value of bonds retired + unamortized premium = Carrying Value of bonds 1,800,000 + 57,000 = 1,857,000 Carrying value - market price = gain 1,857,000 - (1,800,000 × 1.02) = 1,857,000 - 1,836,000 = 21,000 gain Diff: 2 LO: 9-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

6) The journal entry to record the conversion of bonds payable into common stock will include a: A) debit to Bonds Payable and a credit to Common Stock. B) debit to Bonds Payable and a credit to Cash. C) debit to Cash and a credit to Common Stock. D) debit to Cash and a credit to Paid-in Capital in Excess of Par. Answer: A Diff: 1 LO: 9-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 7) If convertible notes payable are converted into common stock, the entry to record the conversion would include a debit to: A) convertible notes payable. B) common stock. C) paid-in capital in excess of par. D) cash. Answer: A Diff: 2 LO: 9-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 8) Immediately after the last interest payment, Henry Company converted $3,300,000 of its bonds into 330,000 shares of $10 par value common stock. The unamortized premium on the bonds at the date of the conversion was $890,000. As a result of this conversion: A) liabilities decreased by $4,190,000 and stockholders' equity decreased by $4,190,000. B) liabilities decreased by $3,300,000 and stockholders' equity increased by $3,300,000. C) liabilities decreased by $4,190,000 and stockholders' equity increased by $4,190,000. D) liabilities decreased by $890,000 and stockholders' equity increased by $890,000. Answer: C Explanation: Bonds Payable $3,300,000 + Premium $890,000 = $4,190,000 reduction to liabilities Common Stock $3,300,000 (330,000 × $10) + Paid-in Capital in Excess of Par $890,000 = $4,190,000 increase to stockholders' equity Diff: 2 LO: 9-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

9) Marshall Corporation has $31,000 of bonds outstanding with a carrying value of $39,400. The bonds are converted into 15,500 shares of $1 par value common stock immediately after the last interest payment. The common stock had a market value of $4 per share on the date of conversion. The entry to record the conversion would include a credit to: A) Common Stock for $15,500 and credit to Paid-in Capital in Excess of Par for $8,400. B) Bonds Payable for $31,000 and credit to Premium on Bonds Payable for $8,400. C) Cash for $39,400. D) Common Stock for $15,500 and credit to Paid-in Capital in Excess of Par for $23,900. Answer: D Explanation: credit Common Stock 15,500 (15,500 × $1), credit Paid-in Capital in Excess of Par $23,900 ($39,400 - $15,500) Diff: 2 LO: 9-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 10) ________ give the issuer the benefit of being able to pay off the bonds whenever it is most favorable to do so. A) Convertible bonds B) Convertible notes C) Retirement bonds D) Callable bonds Answer: D Diff: 1 LO: 9-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 11) Godwin Corporation retires its bonds at 105 on January 1, after the payment of interest. The face value of the bonds is $560,000. The carrying value of the bonds at retirement is $579,500. The entry to record the retirement will include a: A) debit of $28,000 to Premium on Bonds Payable. B) debit of $19,500 to Premium on Bonds Payable. C) credit of $8,500 to Gain on Retirement of Bonds. D) credit of $8,500 to Loss on Retirement of Bonds. Answer: B Diff: 2 LO: 9-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

12) On July 1, 2019, Bobby's Building Corp. issued $1,000,000 of 11% bonds dated July 1, 2019 for $1,062,771. The bonds were sold to yield 10% and pay interest semiannually on July 1 and January 1. Bobby's Building Corp. uses the effective interest method of amortization. The company's fiscal year ends on February 28. Required: 1. Prepare the journal entry on July 1, 2019. 2. Prepare the amortization table for the first two interest periods. 3. Prepare the journal entry on January 1, 2020. 4. Prepare the adjusting entry needed on February 28, 2020. Round all amounts to the nearest dollar. Omit explanations for all journal entries. 1. Date

Account

Debit

Interest Payment

Interest Discount Expense Amortization

Credit

Date

Discount Balance

3. Date

Account

Debit

Credit

4. Date

Account

Debit

Credit

Bond Carrying Amount

Answer: 1. Date July 1, 2019

Account Debit Credit Cash 1,062,771 Discount on Bonds Payable 62,771 Bonds Payable 1,000,000

Date July 1, 2019

Jan. 1, 2020

July 1, 2020 3. Date Jan. 1, 2020

Interest Payment

Interest Discount Expense Amortization

53,139 (1,062,771 55,000 × .05) 53,046 (1,060,910 55,000 × .05)

1,861 (55,000 – 53,139) 1,954 (55,000 – 53,046)

Bond Discount Carrying Balance Amount 62,771 1,062,771 60,910 1,060,910 (62,771 – (1,062,771 – 1,861) 1,861) 58,956 1,058,956 (60,910 – (1,060,910 – 1,954) 1,954)

Account Debit Credit Interest Expense 53,139 Discount on Bonds Payable 1,861 Cash 55,000

4. Date Account Debit Credit Feb. 28, 2020 Interest Expense (53,046 × 2/6) 17,682 Discount on Bonds Payable (1,954 × 2/6) 651 Interest Payable (55,000 × 2/6) 18,333 Diff: 3 LO: 9-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

Learning Objective 9-4 1) When accounting for a finance lease, the lessee capitalizes the asset even though the lessee may never take legal title to it. Answer: TRUE Diff: 1 LO: 9-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 2) An operating lease transfers title of the leased asset to the lessee at the end of the lease term. Answer: FALSE Diff: 1 LO: 9-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 3) Because operating leases require the lessee to make rent payments, a liability is created, and it must appear on the lessee's balance sheet. The lease is longer than one year. Answer: TRUE Diff: 1 LO: 9-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 4) For operating leases, the lessee obtains the risks and rewards of owning the leased asset. Answer: FALSE Diff: 1 LO: 9-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 5) For tax reporting purposes, a company must follow the rules set by the Internal Revenue Code (IRC) when determining income taxes payable and deferred income taxes. Answer: TRUE Diff: 1 LO: 9-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

6) Lease payments are paid by the lessor. Answer: FALSE Diff: 1 LO: 9-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 7) Operating leases are preferred over finance leases because operating leases that exceed one year do not increase a company's debt ratio. Answer: FALSE Diff: 1 LO: 9-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 8) If, as part of the accounting for a lease, the lessee debits an asset and credits a liability, then the lease must be a(n): A) finance lease. B) operating lease less than one year. C) operating lease greater than one year. D) A and C. Answer: D Diff: 1 LO: 9-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 9) A ________ may allow the company leasing the asset to own it after a period of time. A) operating lease B) convertible lease C) finance lease D) all of the above Answer: C Diff: 1 LO: 9-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

10) Which of the following statements regarding leases is CORRECT? A) Finance leases lower the debt ratio. B) A debit balance in the Leased Asset account on the balance sheet indicates an operating lease that is less than one year. C) Title is transferred to the lessee at the end of an operating lease term. D) If a lease does not meet one of the five criteria provided by U.S. GAAP guidelines, it is classified as an operating lease by default. Answer: D Diff: 1 LO: 9-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 11) Wayne Technical Corporation signed a lease for equipment, which requires lease payments of $50,000 per year for four years. The equipment has an estimated useful life of 7 years. This lease would be a finance lease if: A) the equipment is leased for 4 years. B) the present value of the lease payments equals $150,000 and the fair value of the equipment is $200,000. C) title to the equipment does not transfer to the lessee at the end of the lease term. D) the lease agreement allows Wayne to purchase the equipment for $5 at the end of the lease term. Answer: D Diff: 1 LO: 9-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 12) Which type of lease will NOT increase a company's assets or long-term liabilities? A) an operating lease that is less than one year B) a finance lease C) a lease that contains a purchase option that the lessee is expected to exercise D) a lease that transfers title of the leased asset to the lessee at the end of the lease term Answer: A Diff: 1 LO: 9-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

13) An airline has the following data about an airplane: Annual lease cost $11,000,000 Lease term: 12 years Useful life of airplane: 15 years Fair market value of leased asset: $85 million Present value of lease payments: $75 million Bargain purchase option: None Transfer to lessor at end of lease? Yes Is this a finance or operating lease? Why? A) This is an operating lease. It fails all the finance lease criteria. B) This is an operating lease because it meets at least one of the five operating lease criteria. C) This is a finance lease because it meets at least one of the five finance lease criteria. D) This is a finance lease because the leased asset cost exceeds $5 million. Answer: C Explanation: 15 years × 75% = 11.25 years; lease term(12 years) exceeds 75% of useful life(11.25 years) Diff: 2 LO: 9-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 14) The journal entry for deferred income taxes would include a: A) debit to income tax expense. B) a debit to income tax payable. C) a debit to cash. D) a debit to accounts receivable. Answer: A Diff: 1 LO: 9-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting Learning Objective 9-5 1) The times-interest-earned ratio is calculated by dividing operating income by operating expenses. Answer: FALSE Diff: 1 LO: 9-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 42 Copyright © 2019 Pearson Education, Inc.

2) The times-interest-earned ratio indicates the company's ability to pay interest expense. Answer: TRUE Diff: 1 LO: 9-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 3) A leverage ratio of exactly 1.0 would mean that assets exactly equal total liabilities. Answer: FALSE Diff: 1 LO: 9-5 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 4) If net income is positive, the times-interest earned ratio is always negative. Answer: FALSE Diff: 1 LO: 9-5 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 5) The leverage ratio is equal to average total ________ divided by average ________. A) debt; total assets B) debt; common stockholders' equity C) long-term debt; common stockholders' equity D) assets; common stockholders' equity Answer: D Diff: 1 LO: 9-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

6) According to DuPont analysis, the impact of debt on a company's profitability is measured by the ________ ratio. A) net profit margin B) times-interest-earned C) return on equity D) leverage Answer: D Diff: 1 LO: 9-5 AACSB: Analytical Thinking AICPA Bus Persp: Leverage Technology AICPA Functional: Measurement 7) Frank's Boat Shop, Inc. reports operating income of $80,000 and interest expense of $15,000. The average number of shares of common stock outstanding during the year was 30,000 shares. What is the times-interest-earned ratio? (Round your final answer to two decimal places.) A) 3.87 B) 6.33 C) 5.33 D) 10.20 Answer: C Explanation: $80,000 ÷ $15,000 = 5.33 Diff: 3 LO: 9-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 8) Doug's Boat Shop, Inc. reports operating income of $260,000 and interest expense of $31,200. The average common stockholders' equity during the year was $50,000. The beginning assets balance is $115,000 and ending assets balance is $180,000. What is the leverage ratio? (Round your final answer to two decimal places.) A) 5.90 B) 9.42 C) 2.95 D) 8.89 Answer: C Explanation: [($115,000 + 180,000)/2] / $50,000 = 2.95 Diff: 3 LO: 9-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

9) Howser, Inc. reports operating income of $250,000 and interest expense of $20,000. The average number of shares of common stock outstanding during the year was 50,000 shares. The beginning assets balance is $90,000 and ending assets balance is $110,000. What is the timesinterest-earned ratio? (Round your final answer to two decimal places.) Answer: $250,000 / $20,000 = 12.50 Diff: 3 LO: 9-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) Taylor, Inc. reports operating income of $300,000 and interest expense of $20,000. The average common stockholders' equity during the year was $50,000. The beginning assets balance is $60,000 and ending assets balance is $100,000. What is the leverage ratio? (Round your final answer to two decimal places.) Answer: [($60,000 + $100,000)/2] / $50,000 = 1.60 Diff: 3 LO: 9-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement Learning Objective 9-6 1) Maturities of long-term debt due within one year of the balance sheet date are reported separately from long-term debt. Answer: TRUE Diff: 1 LO: 9-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 2) Details about a company's liabilities should be included in the notes to the financial statements. Answer: TRUE Diff: 1 LO: 9-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

3) Generally accepted accounting principles encourage companies to report the fair value of their long-term debt. Answer: TRUE Diff: 1 LO: 9-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 4) The retirement of callable bonds at an amount below face value would appear on a statement of cash flows as an: A) outflow in the financing activities section. B) inflow in the financing activities section. C) outflow in the operating activities section. D) inflow in the operating activities section. Answer: A Diff: 1 LO: 9-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 5) Bonds with a face value of $310,000 are issued at 103. The statement of cash flows would report a cash inflow of: A) $310,000 in the financing activities section. B) $319,300 in the financing activities section. C) $9,300 in the financing activities section. D) $310,000 in the investing activities section. Answer: B Diff: 1 LO: 9-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

6) David Corporation issued $80,000, 5-year bonds at 98 on January 1, 2016. On December 31, 2020, the bonds matured. The payment of the bonds at maturity would be reported on the statement of cash flows as a cash outflow of: A) $78,400 in the financing activities section. B) $78,400 in the investing activities section. C) $80,000 in the financing activities section D) $80,000 in the investing activities section. Answer: C Diff: 2 LO: 9-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 7) After posting the adjusting entries, Bing Corporation has the following account balances (partial listing) at December 31, 2019. Account Accounts Payable Notes Payable, 5-month, due February 1, 2020 Equipment Accumulated Depreciation—Equipment Notes Payable, 7-year, 7%, due February 1, 2024 Interest Expense Interest Payable Sales Tax Payable Bonds Payable, due December 31, 2022 Bonds Payable, due December 31, 2020

General Ledger Balance $29,000 58,000 85,000 16,000 120,000 7,000 3,000 24,000 1,000,000 1,000,000

Prepare the current liability section of Bing Corporation's balance sheet at December 31, 2019. The current portion of the note payable due February 1, 2024 is $15,000. Answer: Current Liabilities: Accounts Payable $29,000 Notes Payable, 5-month, due February 1, 2020 58,000 Sales Tax Payable 24,000 Current portion of long-term debt 15,000 Interest Payable 3,000 Bonds Payable, due December 31, 2020 1,000,000 Total Current Liabilities $1,129,000 Diff: 2 LO: 9-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 47 Copyright © 2019 Pearson Education, Inc.

8) After posting the adjusting entries, Bing Corporation has the following account balances (partial listing) at December 31, 2019. Account Accounts Payable Notes Payable, 5-month, due February 1, 2020 Equipment Accumulated Depreciation—Equipment Notes Payable, 7-year, 7%, due February 1, 2024 Interest Expense Interest Payable Sales Tax Payable Bonds Payable, due December 31, 2022 Bonds Payable, due December 31, 2020

General Ledger Balance $29,000 58,000 85,000 16,000 120,000 7,000 3,000 24,000 1,000,000 1,000,000

List the items and amounts to be included as long-term liabilities for the balance sheet at December 31, 2019. The current portion of the note payable due February 1, 2024 is $15,000. Answer: Long-term Liabilities: Notes Payable, 7-year, 7%, due February 1, 2024 (120,000 – 15,000) $105,000 Bonds Payable, due December 31, 2022 1,000,000 Total Long-term Liabilities $1,105,000 Diff: 2 LO: 9-6 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting

Financial Accounting, 12e (Thomas/Tietz/Harrison) Chapter 10 Stockholders' Equity Learning Objective 10-1 1) A corporation is an entity that is not separate from its owners. Answer: FALSE Diff: 1 LO: 10-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 2) A corporation acts under its own name and not the name of its stockholders. Answer: TRUE Diff: 1 LO: 10-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 3) If a corporation pays taxes on its income, then the stockholders will not have to pay taxes on the dividends received from that corporation. Answer: FALSE Diff: 1 LO: 10-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 4) Stockholders have limited liability for a corporation's debts. Answer: TRUE Diff: 2 LO: 10-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 5) A new corporation forms every time there is a change in ownership in the shares of common stock. Answer: FALSE Diff: 1 LO: 10-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 1 Copyright © 2019 Pearson Education, Inc.

6) A stockholder has the right to vote in the election of the board of directors. Answer: TRUE Diff: 1 LO: 10-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 7) The charter reveals the number of shares of common stock a corporation is authorized to issue. Answer: TRUE Diff: 1 LO: 10-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 8) Which of the following is NOT considered to be an advantage of forming a corporation? A) continuous life B) government regulation C) ability to raise more capital than a partnership or proprietorship D) limited liability of stockholders for corporation's debts Answer: B Diff: 1 LO: 10-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 9) Double taxation means that the: A) corporation's income tax is allocated to the shareholders based on ownership percentage. B) corporate earnings are subject to state and federal income tax. C) corporation pays taxes on its earnings and the shareholders pay taxes on the dividends received from the corporation. D) shareholders' dividends are taxed at the corporate tax rate. Answer: C Diff: 2 LO: 10-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

10) Stockholders of a corporation directly elect the: A) Board of directors. B) President of the corporation. C) Chief Financial Officer of the corporation. D) Chairperson of the Board. Answer: A Diff: 1 LO: 10-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 11) The chairperson of the board of directors often has the title of: A) Chief Financial Officer (CFO). B) President. C) Chief Executive Officer (CEO). D) Chief Operating Officer (COO). Answer: C Diff: 2 LO: 10-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 12) The basic form of capital stock is: A) a share of preferred stock. B) a share of common stock. C) par value stock. D) the corporate charter. Answer: B Diff: 1 LO: 10-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

13) Which one of the following is NOT a stockholder's right of ownership in a corporation? A) the right to participate in management by voting on matters that come before the stockholders B) the right to receive a proportionate share of the assets remaining after all liabilities are paid upon liquidation C) the right to maintain one's proportionate share of ownership in the corporation D) the right to decide if a dividend should be distributed Answer: D Diff: 1 LO: 10-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 14) Stockholders' equity is divided into: A) retained earnings and paid-in capital. B) retained earnings and common stock. C) assets and liabilities. D) common stock and preferred stock. Answer: A Diff: 2 LO: 10-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 15) If a corporation has only one class of stock, it is understood to be: A) preferred stock. B) common stock. C) participating stock. D) redeemable stock. Answer: B Diff: 1 LO: 10-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

16) Dividends are declared by the: A) Chief Accounting Officer. B) Chief Financial Officer. C) President. D) Board of directors. Answer: D Diff: 2 LO: 10-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 17) The arbitrary amount assigned by a company to a share of its stock is the: A) stated value per share. B) par value per share. C) book value per share. D) A and B Answer: D Diff: 2 LO: 10-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 18) Which statement is FALSE? A) Preferred stockholders receive dividends before the common stockholders only if the preferred stock is cumulative. B) Preferred stockholders receive dividends before the common stockholders. C) Preferred stockholders receive assets before the common stockholders if the corporation liquidates. D) Preferred stockholders have the same basic four rights as common stockholders, unless a right is taken away. Answer: A Diff: 2 LO: 10-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

19) Which statement about corporations is FALSE? A) The ease of transferring ownership is an advantage. B) A greater ability to raise capital than other forms of organizations is an advantage. C) Limited life is an advantage. D) Double taxation of distributed profits is a disadvantage. Answer: C Diff: 2 LO: 10-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 20) Preferred stock is: A) the most common type of stock issued. B) listed as long-term debt on the balance sheet. C) rarely issued by corporations. D) none of the above. Answer: C Diff: 2 LO: 10-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 21) Legal capital for a corporation equals: A) the selling price of stock that has been issued. B) the par value of stock that has been authorized. C) the par value of stock that has been issued. D) the par value of stock that is outstanding. Answer: C Diff: 2 LO: 10-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 22) Preferred stock is NOT similar to debt because: A) preferred dividends are not tax-deductible whereas interest expense is tax-deductible. B) preferred dividends do not have to be paid whereas interest expense must be paid. C) preferred stock does not have a maturity date whereas debt usually has a maturity date. D) all of the above. Answer: D Diff: 2 LO: 10-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 6 Copyright © 2019 Pearson Education, Inc.

Learning Objective 10-2 1) Corporations may either sell stock directly to the stockholders or use the service of an underwriter. Answer: TRUE Diff: 1 LO: 10-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 2) A company can issue common stock in exchange for assets other than cash. Answer: TRUE Diff: 1 LO: 10-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 3) When common stock is issued for services provided to the corporation, the corporation usually recognizes an expense for the fair market value of the services provided. Answer: TRUE Diff: 2 LO: 10-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 4) Another name for Paid-in Capital in Excess of Par is Additional Paid-in Capital. Answer: TRUE Diff: 2 LO: 10-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 5) Convertible preferred stock is usually convertible into the issuer's common stock at the discretion of the preferred stockholder. Answer: TRUE Diff: 2 LO: 10-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

6) When a corporation issues stock and receives an asset other than cash, the value of the asset received can create an ethical challenge. Answer: TRUE Diff: 2 LO: 10-2 AACSB: Ethical Understanding and Reasoning AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 7) When a company issues common stock at a price per share greater than its par value per share, the excess should be credited to: A) Retained Earnings. B) Common Stock. C) Paid-in Capital in Excess of Par—Common. D) Excess Capital. Answer: C Diff: 2 LO: 10-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 8) The difference between the issue price per share of common stock and the par value per share of the stock is credited to: A) Retained Earnings. B) Common Stock. C) Paid-in Capital in Excess of Par—Common. D) Goodwill. Answer: C Diff: 2 LO: 10-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

9) If a corporation issues 10,000 shares of $1 par value common stock for $9000, the journal entry would include a credit to: A) Common Stock for $9000. B) Paid-in Capital in Excess of Par—Common for $9000. C) Common Stock for $10,000. D) Retained Earnings for $10,000. Answer: C Explanation: Credit Common Stock 10,000 × $1 par value = $10,000 Diff: 2 LO: 10-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 10) If a corporation issues 5000 shares of $5 par value common stock for $85,000, the journal entry would include a credit to: A) Common Stock for $85,000. B) Paid-in Capital in Excess of Par—Common for $85,000. C) Common Stock for $60,000. D) Paid-in Capital in Excess of Par—Common for $60,000. Answer: D Explanation: Credit Common Stock 5000 × $5 = $30,000; Credit Paid-in Capital in Excess of Par–Common = $85,000 - $30,000 = $60,000 Diff: 2 LO: 10-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 11) The journal entry to record common stock issued at its par value includes a credit to: A) Paid-in Capital—Par Value. B) Common Stock. C) Paid-in Capital in Excess of Par–Common. D) Retained Earnings. Answer: B Diff: 2 LO: 10-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

12) When 200 shares of $1 par value Common Stock are issued at $28 per share, Paid-in Capital in Excess of Par—Common will: A) increase $200. B) decrease $5600. C) increase $5400. D) stay the same. Answer: C Explanation: 200 × ($28 - $1) = $5400 goes to Paid-in Capital in Excess of Par–Common. Diff: 2 LO: 10-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 13) If stock is issued for an asset other than cash, the asset should be recorded on the books of the corporation at the: A) current market value of the asset. B) book value of the asset. C) par value of the stock. D) fair market value of the stock minus the par value of the stock. Answer: A Diff: 2 LO: 10-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 14) Badger Corporation issued 5000 shares of its $5 par value common stock in payment for attorney services billed at $40,000. Badger Corporation's stock has been actively trading at $8 per share. The journal entry for this transaction would include a: A) debit to Legal Expense $25,000. B) debit to Legal Expense $40,000. C) credit to Common Stock $15,000. D) credit to Paid-in Capital in Excess of Par—Common $40,000. Answer: B Diff: 2 LO: 10-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

15) Miller Corporation issued 6000 shares of its $5 par value common stock in payment for attorney services billed at $54,000. Miller Corporation's stock has been actively trading at $9 per share. The journal entry for this transaction would include a credit to: A) Paid-in Capital in Excess of Par—Common for $54,000. B) Paid-in Capital in Excess of Par—Common for $24,000. C) Legal Expense for $54,000. D) Common Stock for $54,000. Answer: B Explanation: Credit Common Stock 6000 × $5 = $60,000; Credit Paid-in Capital in Excess of Par–Common $24,000 = $54,000 - $60,000 Diff: 2 LO: 10-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 16) When reporting stockholders' equity on the balance sheet, a corporation lists the accounts in the following order: A) Retained Earnings, Preferred Stock, Common Stock. B) Common Stock, Preferred Stock, Additional Paid-in Capital, Retained Earnings. C) Preferred Stock, Common Stock, Additional Paid-in Capital, Retained Earnings. D) Retained Earnings, Common Stock, Paid-in Capital in Excess of Par—Common. Answer: C Diff: 2 LO: 10-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 17) The number of shares of authorized stock of a corporation: A) changes every time stock is sold. B) is stated in the charter. C) has no limit. D) must be recorded as a journal entry. Answer: B Diff: 2 LO: 10-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

18) Apple Inc. issued 4 million shares of no-par common stock for $4 million. What journal entry is prepared? A) debit Cash $4 million and credit Paid-in Capital in Excess of Par $4 million B) debit Cash $4 million and credit Retained Earnings $4 million C) debit Cash $4 million and credit Paid-in Capital in Excess of Stated Value $4 million D) debit Cash $4 million and credit Common Stock $4 million Answer: D Diff: 2 LO: 10-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 19) Paltrowski Company issued 1 million shares of no-par common stock with a stated value of $9. The issue price was $40 per share. Which journal entry is prepared? A) debit Cash $40 million and credit Common Stock $40 million B) debit Cash $40 million, credit Common Stock $9 million and credit Paid-in Capital in Excess of Par—Common $31 million C) debit Cash $40 million, credit Common Stock $9 million and credit Paid-in Capital in Excess of Stated Value—Common $31 million D) debit Cash $40 million and credit Retained Earnings $40 million Answer: C Explanation: Debit Cash $54 million ($40 × 1 million); Credit Common Stock $9 × 1 million = $9 million; Credit Paid-in Capital in Excess of Stated Value–Common ($40 × 1 million) - $9 million = $31 million Diff: 2 LO: 10-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

20) Lewandowski Company reports the following information at the current fiscal year end of December 31: Common Stock, $0.10 par value per share Paid-in Capital in Excess of Par-Common Retained Earnings Total Stockholders' Equity

$98 million 200 million 800 million $1098 million

What is the total paid-in capital for this company at December 31 of the current year? A) $98 million B) $298 million C) $898 million D) $1098 million Answer: B Explanation: $200 million + $98 million= $298 million Diff: 2 LO: 10-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 21) Lisa Laskowski Company reports the following information at the current fiscal year end of December 31: Common Stock, $0.10 par value per share Paid-in Capital in Excess of Par-Common Retained Earnings Total Stockholders' Equity

$98 million 600 million 900 million $1598 million

What was the average selling price for the common stock issued? (Round your final answer to the nearest cent.) A) $0.61 per share B) $0.10 per share C) $0.71 per share D) $0.92 per share Answer: C Explanation: 88 million/0.10 = 880 million shares; Average selling price = ($600 million + $98 million)/880 million shares = $0.71 per share Diff: 2 LO: 10-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

22) Buetters Company reports the following information at the current fiscal year end of December 31: Common Stock, $0.10 par value per share Paid-in Capital in Excess of Par-Common Retained Earnings Total Stockholders' Equity

$94 million 900 million 600 million $1594 million

How many shares of common stock are currently issued? A) 9.4 million B) 94 million C) 994 million D) 940 million Answer: D Explanation: $94 million ÷ $0.10 par value per share = 940 million Diff: 2 LO: 10-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 23) A company issues 1,000,000 shares of $0.90 par value, cumulative preferred stock for $16,000,000. The stated dividend is $1 per share. Which journal entry is needed for the sale? A) debit Cash $16,000,000 and credit Preferred Stock $16,000,000 B) debit Cash $16,000,000, credit Preferred Stock $1,300,000 and credit Paid-in Capital in Excess of Par—Preferred $14,700,000 C) debit Cash $16,000,000 and credit Paid-in Capital in Excess of Par—Preferred $16,000,000 D) debit Cash $16,000,000 and credit Retained Earnings $16,000,000 Answer: B Explanation: 1,000,000 × $0.90 = $900,000 Preferred Stock; $16,000,000 - $900,000 = $14,700,000 Paid-in Capital in Excess of Par–Preferred Diff: 2 LO: 10-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

24) The calculation to determine the number of outstanding shares of stock is the number of: A) treasury stock shares plus number of issued shares. B) authorized shares minus number of issued shares. C) issued shares minus number of treasury shares. D) authorized shares minus treasury shares. Answer: C Diff: 2 LO: 10-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 25) Johnson Corporation had the following transactions: 1. Issued 7,000 shares of no-par common stock with a stated value of $15 per share for $155,000. 2. Issued 3,000 shares of $100 par value preferred stock at $117 per share for cash. Required: Prepare the journal entries for the above transactions. Omit explanations. Account

Debit

Credit

Answer: Account 1 Cash Common Stock (7,000 × $15) Paid-in Capital in Excess of Stated Value— Common 2

Cash (3,000 × $117) Preferred Stock (3,000 × $100) Paid-in Capital in Excess of Par—Preferred

Debit Credit 155,000 105,000 50,000 351,000

Diff: 2 LO: 10-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

300,000 51,000

26) During the month of February, B & B Builders, Inc. completed the following transactions related to its stock: ∙ February 2: Issued 3,000 shares of no-par, Class A common stock with a stated value of $1 for $15 cash per share. ∙ February 3: Issued 9,000 shares of no-par, Class B common stock with no stated value for $20 per share. ∙ February 20: Issued 600 shares of $4 par value preferred stock for equipment with a fair market value of $5,000. Required: Prepare journal entries for the above transactions. Omit explanations. Date Account Feb. 2

Debit

Credit

Debit 45,000

Credit

Feb. 3

Feb. 20

Answer: Date Account Feb. 2 Cash (3,000 × $15) Class A Common Stock (3,000 × $1) Paid-in Capital in Excess of Stated Value— Common (3,000 × $14) Feb. 3 Cash (9,000 × $20) Class B Common Stock Feb. 20

Equipment Preferred Stock (600 × $4) Paid-in Capital in Excess of Par—Preferred

3,000 42,000 180,000 180,000

5,000

Diff: 2 LO: 10-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

2,400 2,600

Learning Objective 10-3 1) The purchase of treasury stock by a corporation increases total assets and stockholders' equity. Answer: FALSE Diff: 1 LO: 10-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 2) The purchase of treasury stock has the same effect on stockholders' equity as issuing stock. Answer: FALSE Diff: 2 LO: 10-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 3) Treasury stock is a contra-stockholders' equity account. Answer: TRUE Diff: 2 LO: 10-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 4) The purchase of treasury stock decreases the number of shares outstanding. Answer: TRUE Diff: 2 LO: 10-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 5) Retired stock can be reissued. Answer: FALSE Diff: 2 LO: 10-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

6) A company never records gains or losses on transactions involving its own treasury stock. Answer: TRUE Diff: 2 LO: 10-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 7) U.S. GAAP prohibits companies from supplementing employee salaries by granting shares of stock rather than cash. Answer: FALSE Diff: 2 LO: 10-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 8) Treasury stock is reported in the stockholders' equity section of the balance sheet. Answer: TRUE Diff: 1 LO: 10-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 9) Previously issued stock that a corporation purchases from shareholders is called: A) outstanding stock. B) authorized stock. C) issued stock. D) treasury stock. Answer: D Diff: 2 LO: 10-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

10) Gruber Law Offices paid $57,000 to buy back 12,000 shares of its $1 par value common stock. The stock was sold later at a selling price of $13 per share. The journal entry to record the sale would include a: (Do not round intermediate calculations.) A) credit to Paid-in Capital from Treasury Stock Transactions $57,000. B) debit to Common Stock $57,000. C) credit to Paid-in Capital from Treasury Stock Transactions $99,000. D) credit to Common Stock $99,000. Answer: C Explanation: Debit Cash (12,000 × $13) = $240,000; Credit Treasury Stock ($4 × 15,000) = $60,000; Credit Paid-in Capital from Treasury Stock Transactions ($240,000 - $60,000) = $99,000 Diff: 2 LO: 10-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 11) Reasons that a company would purchase treasury stock include all of the following EXCEPT: A) management wants to avoid a takeover by an outside party. B) it needs the stock for distribution to employees under stock purchase plans. C) it wants to increase net assets by buying its stock low and reselling it at a higher price. D) management wants to decrease earnings per share of common stock. Answer: D Diff: 2 LO: 10-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 12) Peter's Computers purchased 1000 shares of its own $3 par value common stock for $92,000. As a result of this transaction: A) Peter's stockholders' equity increased $89,000. B) Peter's stockholders' equity increased $3000. C) Peter's stockholders' equity decreased $92,000. D) Peter's stockholders' equity increased $92,000. Answer: C Diff: 2 LO: 10-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

13) Treasury stock accounts for the difference between the number of: A) issued shares and authorized shares. B) issued shares and preferred shares. C) outstanding shares and issued shares. D) authorized shares and outstanding shares. Answer: C Diff: 2 LO: 10-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 14) Amber Corporation purchases 40,000 shares of its own $20 par value common stock for $80 per share. What will be the effect on stockholders' equity? A) increase $800,000 B) increase $3,200,000 C) decrease $800,000 D) decrease $3,200,000 Answer: D Explanation: 40,000 shares × $80 purchase price = $3,200,000 Diff: 2 LO: 10-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 15) If treasury stock is sold at a price greater than its reacquisition cost, the difference is: A) debited to Paid-in Capital from Treasury Stock Transactions. B) credited to Paid-in Capital from Treasury Stock Transactions. C) debited to Retained Earnings. D) credited to Retained Earnings. Answer: B Diff: 2 LO: 10-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

16) Smith Corporation purchases 50,000 shares of its own $10 par value common stock for $60 per share. What will be the effect on stockholders' equity? A) increase $500,000 B) decrease $500,000 C) increase $3,000,000 D) decrease $3,000,000 Answer: D Explanation: 50,000 shares × $60 purchase price = $3,000,000 Diff: 2 LO: 10-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 17) Treasury stock has a: A) debit balance, the opposite of other stockholders' equity accounts. B) credit balance, the same as other stockholders' equity accounts. C) credit balance, the opposite of other stockholders' equity accounts. D) debit balance, the same as other stockholders' equity accounts. Answer: A Diff: 2 LO: 10-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 18) Marvin Corporation has the following information reported on the balance sheet as of December 31 of the current year: Common Stock, $10 par value (authorized 20,000 shares) Treasury Stock (2000 shares)

$50,000 $30,000

Based on the information above, how many shares of common stock are outstanding? A) 20,000 B) 5000 C) 3000 D) 2000 Answer: C Explanation: $50,000 ÷ $10 par = 5000 shares issued 5000 shares issued - 2000 treasury shares = 3000 shares outstanding Diff: 2 LO: 10-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 21 Copyright © 2019 Pearson Education, Inc.

19) Mews Corporation has the following information reported on the balance sheet as of December 31 of the current year: Common Stock, $10 par value (authorized 20,000 shares) Treasury Stock (1000 shares)

$60,000 $30,000

Based on the information above, how many shares of common stock have been issued? A) 7000 B) 6000 C) 5000 D) 1000 Answer: B Explanation: $60,000 ÷ $10 = 6000 shares Diff: 2 LO: 10-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 20) Kunze Corporation has $1 par value Common Stock with 100,000 shares authorized and 25,000 shares issued. The journal entry to record Kunze's purchase of 10,000 shares of common stock at $4 per share would be: A) debit Common Stock for $10,000, debit Paid-in Capital in Excess of Par—Common for 30,000 and credit Cash for $40,000. B) debit Common Stock for $40,000 and credit Cash for $40,000. C) debit Cash for $40,000, credit Common Stock for $10,000 and credit Paid-in Capital in Excess of Par—Common for $30,000. D) debit Treasury Stock for $40,000 and credit Cash for $40,000. Answer: D Explanation: Debit Treasury Stock $40,000 (10,000 shares × $4) Diff: 2 LO: 10-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting

21) Orlando Corporation incorporated on January 2 of the current year. During the year, Orlando had the following transactions: ∙ issued 60,000 shares of common stock at $45 per share. The par value per share is $1. ∙ purchased 4000 shares of treasury stock at $27 per share ∙ had net income of $400,000. What is the total amount of stockholders' equity as of December 31 of the current year? A) $2,808,000 B) $2,700,000 C) $2,992,000 D) $3,100,000 Answer: C Explanation: (60,000 × $45 ) - (4000 × $27) + $400,000 = $2,992,000 Diff: 2 LO: 10-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 22) Bloom Corporation issued 60,000 shares of common stock. Bloom purchased 9000 shares and later reissued 900 shares. How many shares are issued and outstanding? A) 51,000 issued and 51,000 outstanding B) 60,000 issued and 51,000 outstanding C) 51,900 issued and 51,900 outstanding D) 60,000 issued and 51,900 outstanding Answer: D Explanation: 40,000 shares are issued; 60,000 — 9000 + 900 = 51,900 shares are outstanding Diff: 2 LO: 10-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 23) When treasury stock is purchased, accountants record treasury stock at: A) the stock's par value. B) the stock's original selling price. C) the stock's cost which is current market value. D) the difference between the original selling price and the par value. Answer: C Diff: 2 LO: 10-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

24) The purchase of treasury stock returns ________ to the stockholders but also ________. A) stock; increases their ownership of the company. B) stock; decreases their ownership of the company. C) cash; increases their ownership of the company. D) cash; decreases their ownership of the company. Answer: D Diff: 2 LO: 10-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 25) A company buys treasury stock for $10 per share. The company later sells the treasury stock for $11 per share. What is the difference between the resale price and the cost of the treasury stock called? A) Gain on Sale of Treasury Stock B) Loss on Sale of Treasury Stock C) Paid-in Capital in Excess of Par D) Paid-in Capital from Treasury Stock Transactions Answer: D Diff: 2 LO: 10-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 26) Which of the following statements regarding treasury stock is CORRECT? A) Treasury Stock is reported beneath the Retained Earnings account on the balance sheet as a positive amount. B) If the amounts received from resale of treasury stock are less than amounts originally paid, the difference is shown on the income statement as a loss on treasury stock transactions. C) Treasury stock is recorded as an asset at the stock's market value on the date of purchase. D) Repurchasing treasury stock provides a way for public companies to return cash to shareholders other than through dividends. Answer: D Diff: 2 LO: 10-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting

27) Sometimes companies supplement employee salaries by granting ________ rather than giving them cash. A) dividends. B) a portion of retained earnings. C) a portion of paid-in capital. D) shares of stock. Answer: D Diff: 2 LO: 10-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 28) On February 3, 2019, Bombard Corporation acquired 4,000 shares of its own $1 par value common stock for $30 per share. On May 24, 2019, 1,500 shares of the treasury stock were sold for $35 per share. Required: Prepare the journal entries to record the purchase and sale of the treasury stock. Omit explanations. Date Feb. 3

Account

Debit

Credit

Account Treasury Stock (4,000 × $30) Cash

Debit Credit 120,000 120,000

May 24

Answer: Date Feb. 3

May 24

Cash (1,500 × $35) Treasury Stock (1,500 × $30) Paid-in Capital from Treasury Stock Transactions

52,500

Diff: 2 LO: 10-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

45,000 7,500

29) On February 1, United Delivery Services reports Common Stock of $1 million, Paid-in Capital in Excess of Par—Common of $9 million and Retained Earnings of $10 million. On February 2, United Delivery Services reacquired 10,000 shares of its $10 par value common stock at $50 per share. On February 23, United Delivery Services sold 1,000 of the reacquired shares at $65 per share. On February 27, the remaining 9,000 shares were sold at $40 per share. Required: Prepare the journal entries necessary to record these transactions. Omit explanations. Answer: Date Account Debit Credit Feb. 2 Treasury Stock 500,000 Cash 500,000 (10,000 shares × $50) Feb. 23

Feb. 27

Cash (1,000 × $65) Treasury Stock (1,000 × $50) Paid-in Capital from Treasury Stock Transactions

65,000

Cash (9,000 × $40) Paid-in Capital from Treasury Stock Transactions Retained Earnings Treasury Stock (9,000 × $50)

360,000 15,000 75,000

50,000 15,000

450,000

Diff: 2 LO: 10-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 30) List three reasons why corporations purchase their own stock. Answer: 1. The company has issued all its authorized stock and needs some stock for distributions to employees under stock purchase plans or compensation plans.2. The business wants to increase net assets by buying its stock low and hoping to resell it for a higher price.3. Management wants to avoid a takeover by an outside party.4. Management wants to increase its reported earnings per share of common stock.5. Management uses a share repurchase program as a way to return excess cash to shareholders, in a manner similar to a dividend. Diff: 2 LO: 10-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Decision Modeling

31) Bryant Corporation issued 10,000 new shares of its $5 par common stock in conjunction with an employee stock compensation plan. On the date of issuance, the market value of the stock was $50 per share. Prepare the journal entry to record this transaction. Omit explanations. Account

Debit

Answer: Account Compensation Expense Common Stock Paid-in Capital in Excess of Par Common

Credit

Debit Credit 500,000 50,000 450,000

Compensation expense: 10,000 shares × $50 = $500,000 Common stock: 10,000 shares × $5 = $50,000 Paid-in capital in excess of par - common: $500,000 - $50,000 = $450,000 Diff: 2 LO: 10-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting Learning Objective 10-4 1) A credit balance in Retained Earnings indicates that a company's lifetime earnings exceeded its lifetime losses and dividends declared. Answer: TRUE Diff: 1 LO: 10-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 2) The Retained Earnings account contains cash for paying dividends to the stockholders. Answer: FALSE Diff: 1 LO: 10-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

3) A debit balance in the Retained Earnings account indicates a deficit in Retained Earnings. Answer: TRUE Diff: 1 LO: 10-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 4) Passed dividends on cumulative preferred stock are recorded as a liability. Answer: FALSE Diff: 1 LO: 10-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 5) Common stockholders receive dividends even if the total dividend is not large enough to pay the preferred stockholders first. Answer: FALSE Diff: 1 LO: 10-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 6) For cash dividends, no journal entry is made on the date of record. Answer: TRUE Diff: 2 LO: 10-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 7) Only stockholders holding stock on the record date will receive a dividend. Answer: TRUE Diff: 2 LO: 10-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

8) Small stock dividends are recorded at market value per share and large stock dividends are recorded at par value per share. Answer: TRUE Diff: 2 LO: 10-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 9) The Vice President of Finance has the authority to declare a dividend. Answer: FALSE Diff: 2 LO: 10-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 10) The total stockholders' equity remains the same before and after a stock split. Answer: TRUE Diff: 2 LO: 10-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 11) A 2-for-1 stock split will decrease total assets. Answer: FALSE Diff: 2 LO: 10-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 12) If a company has a deficit in retained earnings: A) then retained earnings has a credit balance. B) the deficit is subtracted to determine total stockholders' equity on the balance sheet. C) the deficit is added to determine total stockholders' equity on the balance sheet. D) then the corporation's lifetime earnings exceed lifetime losses and dividends. Answer: B Diff: 2 LO: 10-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

13) The authority to declare a dividend lies with the: A) Chief Financial Officer. B) President of the company. C) Chief Executive Officer. D) Board of Directors. Answer: D Diff: 2 LO: 10-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 14) How does the declaration of a cash dividend affect the accounting equation? A) increase to liabilities and a decrease to stockholders' equity B) increase to liabilities and a decrease to assets C) increase to assets and a decrease to liabilities D) increase to stockholders' equity and a decrease to assets Answer: A Diff: 2 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 15) The date on which a cash dividend becomes a legal obligation is the: A) date of record. B) declaration date. C) last day of the fiscal year. D) payment date. Answer: B Diff: 2 LO: 10-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

16) If a corporation declares a $100,000 cash dividend, the account to be debited on the date of declaration is: A) Common Stock. B) Dividends Payable. C) Retained Earnings or Dividends. D) Paid-in Capital in Excess of Par. Answer: C Diff: 2 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 17) For cash dividends, the journal entry on the date of record is: A) non-existent. No journal entry is required on the date of record. B) debit Retained Earnings and credit Dividends Payable. C) debit Dividends and credit Cash. D) debit Dividends Payable and credit Cash. Answer: A Diff: 2 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 18) Before a company can pay dividends to the common stockholders, the owners of cumulative preferred stock must receive: A) the current year's dividends, but not dividends in arrears. B) neither the current year's dividends nor dividends in arrears. C) all dividends in arrears plus the current year's dividends. D) all dividends in arrears, but not the current year's dividends. Answer: C Diff: 2 LO: 10-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

19) A share of 5% preferred stock has a par value of $30 and market value of $100. The owners of the preferred stock will receive a cash dividend of: (Round your answer to the nearest cent.) A) $1.50 per share. B) $70 per share. C) $5.00 per share. D) $30.00 per share. Answer: A Explanation: 5% × $30 = $1.50 Diff: 2 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 20) Wininger Corporation has 1000 shares of 6%, $50 par value, cumulative preferred stock and 25,000 shares of $1 par value common stock outstanding on December 31, 2019 and December 31, 2020. The board of directors declared and paid a $2,000 dividend in 2019. In 2020, $23,000 of dividends are declared and paid. What are the dividends received by the common stockholders in 2020 (there were no dividends in arrears prior to 2019)? A) $3000 B) $19,000 C) $1000 D) $23,000 Answer: B Explanation: 1000 × $50 × 6% = $3000 Preferred Dividend per year For 2019: $3000 - Amount paid $2,000 = $1000 to be paid to preferred in 2020 (in arrears). For 2020: $23,000 amount paid -$3000 preferred dividend for current year- $1000 preferred dividend in arrears from 2019 = $19,000 to common stockholders in 2020 Diff: 3 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

21) Wetzel, Inc. has 20,000 shares of cumulative preferred stock outstanding, with annual dividends paid at a rate of $2 per share. Wetzel, Inc. also has 40,000 shares of common stock outstanding. Preferred dividends are in arrears from the prior year and the number of shares remained the same for this year and last year. If Wetzel, Inc. declares a $400,000 dividend in the current year, each outstanding share of common stock would receive: (Round your answer to the nearest cent.) A) $2.00. B) $8.00. C) $9.00. D) $10.00. Answer: B Explanation: Preferred = $2 × 20,000 = $40,000 to preferred $40,000 × 2 years = $80,000 Common = $400,000- $80,000 = $320,000 to common $320,000 ÷ 40,000 shares = $8.00 per share Diff: 3 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 22) Nichols, Inc. has 1000 shares of 4%, $100 par value, cumulative preferred stock and 75,000 shares of $1 par value common stock outstanding at December 31 of the current year. What is the annual dividend that will be paid to the preferred stockholders? A) $1000 B) $4000 C) $100,000 D) $0. Preferred stockholders are not guaranteed an annual dividend payment. Answer: B Explanation: 1000 × 4% × $100 = $4000 Diff: 3 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

23) Corrao Foods Corporation has 5000 shares of 7%, $15 par value, cumulative preferred stock and 150,000 shares of $1 par value common stock outstanding at December 31, 2019 and December 31, 2020. In 2019, a $2000 dividend was declared and paid. In 2020, $33,000 of dividends are declared and paid. What are the dividends received by the preferred stockholders in 2020 (assuming no dividends in arrears prior to 2019)? A) $33,000 B) $5250 C) $8500 D) $10,500 Answer: C Explanation: 2019 = 7% × $15 × 5000 = $5,250; $2000 — $5,250 = $3,250 in arrears 2020 = 7% × $15 × 5000 = $5,250 + $3,250 in arrears = $8500 Diff: 3 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 24) Declaring and distributing stock dividends: A) increases retained earnings. B) increases the total liabilities of the corporation and decreases the total stockholders' equity. C) reduces the total assets of the corporation. D) has no effect on total stockholders' equity. Answer: D Diff: 2 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 25) Corporations may choose to distribute stock dividends in order to: A) increase the per-share market price of its stock. B) reduce the per-share market price of its stock. C) continue dividends but conserve cash. D) Both B and C are correct. Answer: D Diff: 2 LO: 10-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

26) Mr. Jorgensen, a shareholder in the Best Corporation, owns 2000 shares of its common stock. Mr. Jorgensen receives a 7% stock dividend. After the stock dividend, Mr. Jorgensen will have a: A) total of 140 shares of Best Corporation's common stock. B) total of 1860 shares of Best Corporation's common stock. C) total of 2000 shares of Best Corporation's common stock. D) total of 2140 shares of Best Corporation's common stock. Answer: D Diff: 2 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 27) Mr. Seider, a shareholder in the Greenfield Corporation, owns 2000 shares of their common stock, which represents 24% of the outstanding common stock of Greenfield Corporation. Mr. Seider receives a 5% stock dividend. After the stock dividend, what is Mr. Seider's ownership in Greenfield Corporation's common stock? A) 5% ownership B) 19% ownership C) 24% ownership D) 29% ownership Answer: C Diff: 2 LO: 10-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 28) A stock dividend is considered small when it is a dividend of: A) less than 30% but greater than 25% of the corporation's outstanding stock. B) between 20% and 50% of the corporation's outstanding stock. C) more than 30% of the corporation's outstanding stock. D) 25% or less of the corporation's outstanding stock. Answer: D Diff: 2 LO: 10-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

29) A small stock dividend will: A) reduce total assets. B) reduce total stockholders' equity. C) increase total stockholders' equity. D) have no effect on total assets or total stockholders' equity. Answer: D Diff: 2 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 30) Arnold, Inc. declares and distributes a 10% common stock dividend when it has 10,000 shares of $10 par value common stock outstanding. If the market value of the common stock is $20, the journal entry to record the stock dividend would include a: A) debit to Retained Earnings $20,000. B) debit to Retained Earnings $1000. C) credit to Paid-in Capital in Excess of Par—Common $20,000. D) credit to Paid-in Capital in Excess of Par—Common $1000. Answer: A Explanation: $20 × 10,000 × 10% = $20,000 Diff: 2 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 31) Zeman, Inc. declares and distributes a 10% common stock dividend when it has 30,000 shares of $10 par value common stock outstanding. If the market value of the common stock is $30, the journal entry to record the stock dividend would include a: A) credit to Common Stock $120,000. B) credit to Common Stock $60,000. C) credit to Paid-in Capital in Excess of Par—Common $60,000. D) credit to Paid-in Capital in Excess of Par—Common $30,000. Answer: C Explanation: Debit Retained Earnings 20,000 × 10% × $30 = $60,000; credit Common Stock 20,000 × 10% × $20 par = $40,000; credit Paid-in Capital in Excess of Par–Common $60,000 $40,000 = $20,000 Diff: 2 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

32) Williamson Company declared and distributed a 10% stock dividend when it had 800,000 shares of $1 par value common stock outstanding. The market price per share of common stock was $60 per share when the dividend was declared. The journal entry to record the stock dividend would include a credit to: A) Retained Earnings $800,000. B) Paid-in Capital in Excess of Par—Common $4,720,000. C) Common Stock $800,000. D) Retained Earnings $80,000. Answer: B Explanation: Debit Retained Earnings 800,000 × 10% × $60 = $1,200,000; Credit Common Stock 200,000 × 10% × $1 par = $20,000; Credit Paid-in Capital in Excess of Par–Common $1,200,000 - $20,000 = $1,180,000 Diff: 2 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 33) An increase in the number of issued and outstanding shares of stock along with a proportional reduction in the stock's par value per share is a: A) deficit. B) stock dividend. C) stock split. D) cash dividend. Answer: C Diff: 2 LO: 10-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 34) A stock split: A) increases assets and decreases stockholders' equity. B) decreases assets and increases stockholders' equity. C) increases assets and stockholders' equity. D) has no effect on total stockholders' equity. Answer: D Diff: 2 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

35) Regarding the retained earnings account, which of the following statements is INCORRECT? A) Net income is the only item that increases retained earnings. B) Stock dividends decrease retained earnings. C) Other adjustments to retained earnings are usually relatively minor and relatively rare. D) Net losses are the only item that decreases retained earnings. Answer: D Diff: 2 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 36) Burkert Company has 50,000 shares of $1 par value common stock issued and outstanding. The company also has 5000 shares of $100 par value, 6% cumulative preferred stock outstanding. Burkert did not pay the preferred dividends in 2018 and 2019. For the common stockholders to receive a dividend in 2020, the board of directors must declare dividends in excess of: A) $30,000. B) $60,000. C) $90,000. D) $120,000. Answer: C Explanation: $100 × 0.06 × 5000 = $30,000 dividend per year promised to preferred stock. $30,000 × 3 years = $90,000 Diff: 2 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

37) On February 1, a corporation has 40,000 shares of $1 par value common stock issued and outstanding. The corporation also has Additional Paid-in Capital of $200,000 and Retained Earnings of $200,000. On February 1, the corporation declared a 2-for-1 stock split. After the split, what is the total par value of the common stock and the total stockholders' equity, respectively? A) $80,000; $440,000 B) $40,000; $440,000 C) $20,000; $440,000 D) $40,000; $240,000 Answer: B Explanation: 80,000 shares × $0.5 par = $40,000 Common Stock $40,000 + Additional Paid-in Capital $200,000 + Retained Earnings $200,000 = $440,000 Diff: 2 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 38) The chronological order of dates for cash dividends are: A) date of record, date of declaration, date of payment. B) date of annual Board of Directors meeting, date of payment, date of record, date of declaration. C) date of annual Board of Directors meeting, date of record, date of declaration, date of payment. D) date of declaration, date of record, date of payment. Answer: D Diff: 2 LO: 10-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

39) On December 31 of the current year, Pilozzi Company has the following information available: Common Stock Additional Paid-in Capital Retained Earnings Cash Investment in Trading Securities

$5 million $4 million $5 million $5 million $50,000

On December 31 of the current year, can the Board of Directors declare and pay a cash dividend of $6 million? A) Yes, if they can borrow some money, or liquidate some assets. B) No, the cash balance is below $6 million. C) No, Retained Earnings is below $6 million. D) No, Cash and Retained Earnings are both below $6 million. Answer: D Diff: 2 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 40) How does the declaration and payment of cash dividends affect the accounting equation? A) increase assets and stockholders' equity B) decrease assets and stockholders' equity C) increase assets and decrease stockholders' equity D) decrease assets and increase stockholders' equity Answer: B Diff: 2 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

41) The Home Store reported the following figures: Retained Earnings, February 1, 2019...........$14 million Retained Earnings, February 1, 2018...........$23 million The company's fiscal year ends on February 1 each year. Net income for the fiscal year ending February 1, 2017 is $26 million. What is the amount of dividends declared for the fiscal year ending February 1, 2017? A) $23 million B) $35 million C) $3 million D) $26 million Answer: B Explanation: Retained Earnings, Feb. 1, 2018 is $23 million + Net Income of $26 million - x = Retained Earnings, Feb. 1, 2019 of $14 million x = $35 million Diff: 2 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 42) The Good Word Store reported the following figures: Retained Earnings, January 31, 2019.........................$39,000,000 Retained Earnings, January 31, 2020.........................$22,000,000 Total Stockholders' Equity, January 31, 2019...........$30,000,000 Total Stockholders' Equity, January 31, 2020...........$26,000,000 The company's fiscal year ends on January 31 each year. Dividends declared for the fiscal year ending January 31, 2020 are $14,000,000. What is the net loss for the fiscal year ending January 31, 2020? A) $14,000,000 net loss B) $3,000,000 net loss C) $17,000,000 net loss D) $8,000,000 net loss Answer: B Explanation: Retained Earnings, Jan. 31, 2019 = $39,000,000 - Dividends $14,000,000 - Net Loss = Retained Earnings, Jan. 31, 2020 = $22,000,000 Net loss = $3,000,000 Diff: 2 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

43) A company has 400,000 shares issued and outstanding of $1 par common stock. After a 2for-1 stock split, which of the following statements is FALSE? A) The par value per share decreases to $0.50 per share. B) The number of shares issued is 800,000. C) The number of shares outstanding is 800,000. D) The number of shares issued is 200,000. Answer: D Diff: 2 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 44) How does the declaration and distribution of a 15% stock dividend affect stockholders' equity? A) The total amount of stockholders' equity will increase. B) The total amount of stockholders' equity will decrease. C) The balances of different accounts in stockholders' equity will change, but total stockholders' equity is unchanged. D) There is no change. Answer: C Diff: 2 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 45) Pillsbury Company declares and distributes a 30% common stock dividend when it has 90,000 shares of $10 par common stock outstanding. The market price per share is $35 at the date of declaration. Which journal entry is prepared? A) debit Retained Earnings $945,000, credit Common Stock $270,000 and credit Paid-in Capital in Excess of Par—Common $675,000 B) debit Retained Earnings $945,000, credit Paid-in Capital in Excess of Par—Common $945,000 C) debit Retained Earnings $945,000 and credit Common Stock $945,000 D) debit Retained Earnings $270,000 and credit Common Stock $270,000 Answer: D Explanation: 90,000 × 30% × $10 par = $270,000 debit to retained earnings and credit to common stock. Since it is above 25% dividend, it is recorded at par. Diff: 2 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

46) Dolanski Company declares and distributes a 30% common stock dividend when it has 60,000 shares of $10 par common stock outstanding. The market price per share is $75 at the date of declaration. Which journal entry is prepared? A) debit Retained Earnings $1,350,000, credit Common Stock $180,000 and credit Paid-in Capital in Excess of Par—Common $1,170,000 B) debit Retained Earnings $1,350,000, credit Paid-in Capital in Excess of Par—Common $500,000 C) debit Retained Earnings $1,350,000 and credit Common Stock $1,350,000 D) debit Retained Earnings $180,000 and credit Common Stock $180,000 Answer: D Explanation: 60,000 × $10 par × 30% = $180,000 debit to retained earnings and credit to common stock. Since it is above 25% dividend, it is recorded at par. Diff: 2 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 47) To record a 6% stock dividend, accountants use ________. To record a 55% stock dividend, accountants use ________. A) market price per share; market price per share B) par value per share; par value per share C) par value per share; market price per share D) market price per share; par value per share Answer: D Diff: 2 LO: 10-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

48) On May 15, the board of directors declared a cash dividend of $75,000. The date of record is June 1 and the payment date is June 20. Prepare the journal entries to record this cash dividend. Omit explanations. Date

Account

Debit

Answer: Date Account May 15 Retained Earnings Dividends Payable June 1

Credit

Debit Credit 75,000 75,000

No entry is needed.

June 20 Dividends Payable Cash Diff: 2 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

75,000

49) During the first year of operations, New York Corporation had the following transactions: ∙ Jan. 1 — Issued 50,000 shares of $1 par value common stock at $20 per share. ∙ May 24 — Reacquired 5,000 shares of common stock sold on Jan. 1 for $23 per share. ∙ Aug. 31 — Sold 500 shares of its treasury stock purchased on May 24 for $25 per share. ∙ Oct. 18 — The board of directors declared and distributed a 10% common stock dividend. The market price of the common stock was $26 per share at the time of the declaration. ∙ Nov. 24 — The board of directors declared a cash dividend of $0.50 per share payable to stockholders on December 8. ∙ Dec. 8 — Paid the cash dividends declared on November 24. Required: Prepare the journal entries for the above transactions. Omit explanations.

Answer: Date Account Jan. 1 Cash (50,000 × $20) Common Stock (50,000 × $1) Paid-in Capital in Excess of Par— Common

Debit Credit 1,000,000 50,000 950,000

May 24 Treasury Stock (5,000 × $23) Cash

115,000

Aug. 31 Cash (500 × $25) Treasury Stock (500 × $23) Paid-in Capital from Treasury Stock Transactions Oct. 18 Retained Earnings (45,500 × 10% × $26) Common Stock (45,500 × 10% × $1) Paid-in Capital in Excess of Par— Common (45,500 shares = 50,000 sold — 5,000 Treasury stock + 500 resold)

12,500

115,000

11,500 1,000 118,300 4,550 113,750

Nov. 24 Retained Earnings Dividends Payable (50,000 - 5,000 + 500) = 45,500 shares [(45,500 + 4,550) × $0.50] = $25,025

25,025

Dec. 8

25,025

Dividends Payable Cash

25,025

Diff: 3 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

50) On February 4, Osterheld Corporation's stockholders' equity section appears as follows: Common Stock, $1 par value Paid-in Capital in Excess of Par—Common Retained Earnings

$50,000 15,000 100,000

On February 4, Osterheld Corporation declares and distributes a 10% stock dividend when the market value of the stock is $5. Required: Prepare the journal entry for the stock dividend. Show the balances in the stockholders' equity accounts after the stock dividend has been distributed. Answer: Journal entry: Account Debit Credit Retained Earnings [($50,000 / $1) × 10% × $5] 25,000 Common Stock (50,000 × 10% × $1) 5,000 Paid-in Capital in Excess of Par—Common 20,000 Ending Balances in Accounts: Common Stock = $50,000 + ($50,000 × 10% × $1) = $55,000 Paid-in Capital in Excess of Par—Common = $15,000 + ($50,000 × 10% × $4) = $35,000 Retained Earnings = $100,000 - ($50,000 × 10% × $5) = $75,000 Diff: 2 LO: 10-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting Learning Objective 10-5 1) The price-earnings ratio is the same amount as the market value per share. Answer: FALSE Diff: 1 LO: 10-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 2) In most cases, stockholders are more concerned about the par value of a stock than any other value. Answer: FALSE Diff: 1 LO: 10-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 47 Copyright © 2019 Pearson Education, Inc.

3) On December 31, Clorine Corporation has the following data available: Net Income Interest expense Total assets at the beginning of the year Total assets at the end of the year Total stockholders' equity at the beginning of the year Total stockholders' equity at the end of the year

$200,000 20,000 840,000 740,000 530,000 510,000

What is return on assets? (Round your final answer to two decimal places, X.XX%) A) 25.32% B) 27.85% C) 42.31% D) 34.62% Answer: A Explanation: Average total assets = ($840,000 + $740,000) ÷ 2 = $790,000 (Net income of $200,000) ÷ Average total assets of $790,000 = 25.32% Diff: 2 LO: 10-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) On December 31, Mercury Corporation has the following data available: Net Income Interest expense Total assets at the beginning of the year Total assets at the end of the year Total common stockholders' equity at the beginning of the year Total common stockholders' equity at the end of the year

$180,000 10,000 810,000 740,000 520,000 510,000

What is return on equity? (Round your final answer to two decimal places, X.XX%) A) 34.95% B) 36.89% C) 33.01% D) 21.94% Answer: A Explanation: Average total common stockholders' equity =$520,000 + $510,000) ÷ 2 = $515,000 (Net income of $180,000) ÷ Average total common stockholders' equity of $515,000 = 34.95% Diff: 2 LO: 10-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 48 Copyright © 2019 Pearson Education, Inc.

5) On December 31, Copper Corporation has the following data available: Net Income Interest expense Preferred dividends Total assets at the beginning of the year Total assets at the end of the year Total common stockholders' equity at the beginning of the year Total common stockholders' equity at the end of the year

$200,000 20,000 10,000 820,000 760,000 570,000 500,000

What is the leverage ratio? (Round your final answer to two decimal places.) A) 0.68 B) 1.52 C) 1.48 D) 0.37 Answer: C Explanation: Average total assets = ($820,000 + $760,000) ÷ 2 = $790,000 Average total common stockholders' equity = ($570,000 + $500,000) ÷ 2 = $535,000 Leverage ratio = $790,000 ÷ $535,000 = 1.48% Diff: 2 LO: 10-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 6) On December 31, Sulfur Corporation has the following data available: Net Income Interest expense Total assets at the beginning of the year Total assets at the end of the year Total stockholders' equity at the beginning of the year Total stockholders' equity at the end of the year

$140,000 30,000 760,000 840,000 490,000 250,000

What is return on assets? (Round your final answer to two decimal places, X.XX%) A) 11.25% B) 15.00% C) 32.43% D) 17.50% Answer: D Explanation: Average assets = ($760,000 + $840,000) ÷ 2 = $800,000(Net income of $140,000) ÷ Average total assets of $800,000 =17.50% Diff: 2 LO: 10-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 49 Copyright © 2019 Pearson Education, Inc.

7) On December 31, Sulfur Corporation has the following data available: Net Income Interest expense Total assets at the beginning of the year Total assets at the end of the year Total common stockholders' equity at the beginning of the year Total common stockholders' equity at the end of the year

$140,000 30,000 740,000 870,000 440,000 260,000

What is return on equity? (Round your final answer to two decimal places, X.XX%.) A) 14.91% B) 34.29% C) 25.71% D) 40.00% Answer: D Explanation: Average common stockholders' equity = ($440,000 + 260,000) ÷ 2 = $350,000(Net income of $140,000) ÷ Average common stockholders' equity of $350,000 = 40.00% Diff: 2 LO: 10-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

8) On December 31, Sulfur Corporation has the following data available: Net Income Interest expense Preferred dividends Total assets at the beginning of the year Total assets at the end of the year Total common stockholders' equity at the beginning of the year Total common stockholders' equity at the end of the year

$170,000 40,000 10,000 780,000 870,000 460,000 230,000

What is the leverage ratio? (Round your final answer to two decimal places.) A) 5.12 B) 3.78 C) 2.39 D) 1.35 Answer: C Explanation: Leverage Ratio = Average assets ÷ Average common stockholders' equity Average assets = ($780,000 + $870,000 )÷ 2 = $825,000 Average common stockholders' equity = ($460,000 + $230,000) ÷ 2 = $345,000 Leverage ratio = $825,000 ÷ $345,000 = 2.39 Diff: 2 LO: 10-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

9) On December 31, Sulfur Corporation has the following data available: Net Income Market price of one share of common stock Preferred dividends Weighted-average number of shares of common stock outstanding Total common stockholders' equity at the beginning of the year Total common stockholders' equity at the end of the year

$140,000 $5 36,000 20,000 shares 360,000 160,000

What is the earnings per share? (Round the final answer to two decimal places.) A) 1.86 B) 2.57 C) 5.20 D) 0.54 Answer: C Explanation: (Net income of $140,000 — Preferred dividends of $36,000) / weighted-average number of shares of common stock outstanding of 20,000 = $5.20 earnings per share Diff: 2 LO: 10-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) On December 31, Sulfur Corporation has the following data available: Net Income $120,000 Market price of one share of common stock $4 Preferred dividends 20,000 Weighted-average number of shares of common stock outstanding 20,000 shares Total common stockholders' equity at the beginning of the year 420,000 Total common stockholders' equity at the end of the year 220,000 What is the price-earnings ratio? (Round the final answer to two decimal places.) A) 0.38 B) 5.00 C) 0.80 D) 3.50 Answer: C Explanation: (Net income of $120,000 — Preferred dividends of $20,000) / weighted-average number of shares of common stock outstanding of 20,000 = $5.00 earnings per share Market price of $4/ Earnings per share of $5.00 = 0.80 Diff: 2 LO: 10-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 52 Copyright © 2019 Pearson Education, Inc.

11) What is the formula for the price-earnings ratio? What does this ratio measure? Answer: Price-earnings ratio = Market price of one share of common stock/Earnings per share of common stock. This is a measure of the overall market assessment of the worth of a share of common stock. Diff: 2 LO: 10-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Decision Modeling Learning Objective 10-6 1) The purchase of treasury stock is reported on the statement of cash flows as a financing activity. Answer: TRUE Diff: 1 LO: 10-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 2) Dividend payments are a type of financing activity because the company is paying stockholders for the use of their money. Answer: TRUE Diff: 2 LO: 10-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 3) On the stockholders' equity section of the Balance Sheet, Common Stock is listed before Preferred Stock. Answer: FALSE Diff: 2 LO: 10-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 4) The sale of treasury stock is reported as a cash inflow in the financing activities section of a statement of cash flows. Answer: TRUE Diff: 2 LO: 10-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 53 Copyright © 2019 Pearson Education, Inc.

5) The issuance of common stock in exchange for cash will be reported in: A) the noncash financing section of the statement of cash flows. B) the operating activities section of the statement of cash flows. C) the investing activities section of the statement of cash flows. D) the financing activities section of the statement of cash flows. Answer: D Diff: 2 LO: 10-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 6) The purchase of treasury stock is reported on the statement of cash flows as a: A) positive amount in the financing activities section. B) negative amount in the financing activities section. C) positive amount in the investing activities section. D) negative amount in the investing activities section. Answer: B Diff: 2 LO: 10-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 7) The payment of dividends will be reported on the statement of cash flows as a: A) positive amount in the investing activities section. B) negative amount in the investing activities section. C) positive amount in the financing activities section. D) negative amount in the financing activities section. Answer: D Diff: 2 LO: 10-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

8) In general, the order of reporting stockholders' equity on the balance sheet is: A) Common Stock, Preferred Stock, Paid-in Capital in Excess of Par, Retained Earnings, Treasury Stock. B) Preferred Stock, Common Stock, Treasury Stock, Paid-in Capital in Excess of Par, Retained Earnings. C) Preferred Stock, Common Stock, Paid-in Capital in Excess of Par, Retained Earnings, Treasury Stock. D) Retained Earnings, Preferred Stock, Common Stock, Paid-in Capital in Excess of Par, Treasury Stock. Answer: C Diff: 2 LO: 10-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 9) A company has Total Paid-in Capital of $100,000, Retained Earnings of $200,000, Treasury Stock of $10,000 and Accumulated Other Comprehensive Income of $200,000. What is the CORRECT statement about listing these accounts on the balance sheet? A) Retained Earnings should be the last line before Total Stockholders' Equity. B) Total Paid-in Capital should be the last line before Total Stockholders' Equity. C) Treasury Stock or Accumulated Other Comprehensive Income should be the last line before Total Stockholders' Equity. D) There is no specific order used by Generally Accepted Accounting Principles. Answer: C Diff: 2 LO: 10-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 10) The Statement of Stockholders' Equity does NOT include: A) Retained Earnings. B) Accumulated Other Comprehensive Income. C) Treasury Stock. D) Equity-Method Investments. Answer: D Diff: 2 LO: 10-6 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

11) On December 31, Sulfur Corporation has the following data available: Preferred stock $100,000 Common stock $250,000 Paid-in capital in excess of stated value - Common $239,500 Retained earnings $395,000 Treasury stock $8,000 Accumulated other comprehensive income $10,000 Prepare the Stockholders' equity section of the balance sheet in real-world format (ignore the par value per share and number of shares).

Answer: Preferred stock Common stock Paid-in capital in excess of stated value - Common Retained earnings Treasury stock Accumulated other comprehensive income Total stockholders' equity Diff: 2 LO: 10-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting

$100,000 $250,000 $239,500 $395,000 $8,000 $10,000 $986,500

Financial Accounting, 12e (Thomas/Tietz/Harrison) Chapter 11 The Statement of Cash Flows Learning Objective 11-1 1) The statement of cash flows is presented for a period of time. Answer: TRUE Diff: 1 LO: 11-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 2) The statement of cash flows is an optional statement. Answer: FALSE Diff: 1 LO: 11-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 3) The statement of cash flows explains why the cash balance changed over a period of time. Answer: TRUE Diff: 1 LO: 11-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 4) Cash equivalents do NOT include highly liquid short-term investments. Answer: FALSE Diff: 1 LO: 11-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 5) A statement of cash flows reports the cash inflows and cash outflows for a company at a point in time. Answer: FALSE Diff: 1 LO: 11-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

6) The statement of cash flows will NOT help predict future cash flows. Answer: FALSE Diff: 1 LO: 11-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 7) When preparing a statement of cash flows, cash equivalents are subtracted from cash in order to calculate the net change in cash during a period. Answer: FALSE Diff: 1 LO: 11-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 8) If a company reports high net income, it may still have difficulty paying its bills. Answer: TRUE Diff: 1 LO: 11-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 9) An example of a cash equivalent is a money-market account. Answer: TRUE Diff: 1 LO: 11-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 10) The income statement and the statement of cash flows often paint the same picture of the company. Answer: FALSE Diff: 2 LO: 11-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

11) Successful businesses need net income and strong cash flows. Answer: TRUE Diff: 2 LO: 11-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 12) Because income and cash flow usually move together, net income and cash flow also move together. Answer: FALSE Diff: 2 LO: 11-1 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 13) A statement of cash flows accomplishes all of the following EXCEPT: A) determines the ability of the company to pay dividends and interest. B) provides information about the cash receipts and cash payments during a period. C) lists revenues and expenses. D) predicts future cash flows. Answer: C Diff: 1 LO: 11-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 14) Highly liquid short-term investments that can be immediately converted into cash are called: A) trading securities. B) cash equivalents. C) current assets. D) accounts receivable. Answer: B Diff: 1 LO: 11-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

15) Creditors analyze the statement of cash flows to determine: A) total interest earned during the period. B) the quality of the company's earnings. C) whether or not the company can pay principal and interest on its debt. D) if management was overpaid. Answer: C Diff: 1 LO: 11-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 16) The statement of cash flows does NOT report: A) cash payments in the current year. B) cash receipts in the current year. C) noncash investing and financing activities. D) revenues and expenses for the current year. Answer: D Diff: 1 LO: 11-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 17) The statement of cash flows is designed to fulfill all the following purposes EXCEPT to: A) show the relationship of net income to changes in the company's cash. B) assess the collectability of accounts receivable. C) evaluate management decisions. D) help predict future cash flows. Answer: B Diff: 1 LO: 11-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

18) Which financial statements cover a period of time? A) Income Statement only B) Income Statement and Statement of Stockholders' Equity C) Income Statement, Statement of Stockholders' Equity and Statement of Cash Flows D) Income Statement, Statement of Stockholders' Equity, Statement of Cash Flows and Balance Sheet Answer: C Diff: 1 LO: 11-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 19) Which financial statements cover a period of time? A) Income Statement only B) Income Statement and Statement of Stockholders' Equity C) Income Statement, Statement of Stockholders' Equity and Statement of Cash Flows D) Income Statement, Statement of Stockholders' Equity, Statement of Cash Flows and Balance Sheet Answer: B Diff: 1 LO: 11-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 20) A good predictor of future cash flows includes: A) net income in past year. B) net income in current year. C) past cash receipts and past cash payments. D) cash receipts and cash payments in the current year. Answer: D Diff: 1 LO: 11-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

21) The statement of cash flows provides information about: A) a company's ability to pay interest and dividends. B) a company's future cash flows. C) decisions made by a company's management. D) all of the above. Answer: D Diff: 1 LO: 11-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting Learning Objective 11-2 1) The statement of cash flows classifies cash receipts and payments as operating, investing, or financing activities. Answer: TRUE Diff: 1 LO: 11-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 2) Of the three types of business activities reported on a statement of cash flows, investing activities are the most important when evaluating a business. Answer: FALSE Diff: 1 LO: 11-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 3) The sale of land for cash would be classified as a cash inflow from an operating activity on the statement of cash flows. Answer: FALSE Diff: 2 LO: 11-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

4) The Net cash provided by financing activities is the most important category on the statement of cash flows because it generates the most cash for most companies. Answer: FALSE Diff: 1 LO: 11-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 5) Collections on long-term loans are reported as investing activities on the statement of cash flows. Answer: TRUE Diff: 2 LO: 11-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 6) There are two ways to format operating activities on the statement of cash flows. Answer: TRUE Diff: 1 LO: 11-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 7) The three types of activities reported on the statement of cash flows are: A) operating, investments, and financing. B) operating, investing, and free flow. C) operating, investing, and financing. D) operating, indirect, and direct. Answer: C Diff: 1 LO: 11-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

8) The three types of activities reported on the statement of cash flows are presented in the following order: A) operating, investing, and financing. B) financing, operating, and investing. C) investing, operating, and financing. D) financing, investing, and operating. Answer: A Diff: 1 LO: 11-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 9) The financial statement that reports cash receipts and cash payments classified according to the company's operating, investing, and financing activities is the: A) income statement. B) balance sheet. C) statement of cash flows. D) statement of stockholders' equity. Answer: C Diff: 1 LO: 11-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 10) Which of the three types of activities reported on the statement of cash flows is the MOST critical for a company's long-term survival? A) investing activities B) operating activities C) financing activities D) noncash investing and financing activities Answer: B Diff: 2 LO: 11-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

11) On the statement of cash flows, financing activities involve: A) purchasing investments. B) acquiring long-term assets. C) lending money. D) borrowing by signing a long-term note. Answer: D Diff: 2 LO: 11-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 12) On the statement of cash flows, investing activities include: A) obtaining cash from creditors. B) collecting cash on long-term loans. C) selling stock to stockholders. D) repaying borrowed money. Answer: B Diff: 2 LO: 11-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 13) Usually, the most important category on the statement of cash flows is cash flows from: A) operating activities. B) investing activities. C) financing activities. D) noncash activities. Answer: A Diff: 1 LO: 11-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

14) Increases and decreases in the long-term assets are reported on the statement of cash flows as: A) operating activities. B) investing activities. C) financing activities. D) noncash activities. Answer: B Diff: 2 LO: 11-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 15) Increases and decreases in the long-term liability accounts are reported on the statement of cash flows as: A) operating activities. B) investing activities. C) financing activities. D) noncash activities. Answer: C Diff: 2 LO: 11-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 16) Cash received from the issuance of bonds would be reported on a statement of cash flows under: A) investing activities. B) financing activities C) operating activities. D) noncash activities. Answer: B Diff: 2 LO: 11-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

17) Purchases of treasury stock would be reported on a statement of cash flows as: A) operating activities. B) investing activities. C) financing activities. D) noncash investing and financing activities. Answer: C Diff: 2 LO: 11-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 18) Which of the following would be reported on a statement of cash flows as an investing activity? A) depreciation expense B) purchase of treasury stock C) sale of equipment for cash D) payment of cash dividends Answer: C Diff: 2 LO: 11-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 19) On the statement of cash flows, in which section would the purchase of land with cash appear? A) operating activities B) investing activities C) financing activities D) noncash investing and financing activities Answer: B Diff: 2 LO: 11-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

20) Which of the following would be reported on a statement of cash flows as a financing activity? A) Sale of equipment B) Amortization expense C) Collection of notes receivable D) Purchase of treasury stock Answer: D Diff: 2 LO: 11-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 21) Under the indirect method of preparing the operating section of the statement of cash flows, net cash provided by operating activities is $197,000. If the direct method of preparing the operating section of the statement of cash flows was used: A) net cash provided by operating activities would be the same, $197,000. B) net cash provided by operating activities would be more than $197,000. C) net cash provided by operating activities would be less than $197,000. D) net cash provided by financing and investing activities would equal $197,000. Answer: A Diff: 2 LO: 11-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 22) Under the direct method of preparing the operating section of the statement of cash flows, net cash provided by financing activities is $558,000. If the indirect method of preparing the statement of cash flows was used: A) net cash provided by financing activities would be less than $558,000. B) net cash provided by financing activities would be more than $558,000. C) net cash provided by financing activities would be the same, $558,000. D) net cash provided by operating activities would equal $558,000. Answer: C Diff: 2 LO: 11-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

23) A successful business must generate most of its cash from: A) investing activities. B) financing activities. C) operating activities. D) noncash investing and financing activities. Answer: C Diff: 2 LO: 11-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 24) The most important type of cash flows on the statement of cash flows is ________. The least important type of cash flows on the statement of cash flows is ________. A) operating activities; investing activities. B) investing activities; financing activities. C) financing activities; investing activities. D) operating activities; financing activities. Answer: D Diff: 2 LO: 11-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 25) Google Inc. paid $10.6 billion to acquire other companies. Google also paid $33 billion to purchase long-term securities. How are these cash outflows classified on the statement of cash flows? A) financing activities B) operating activities C) investing activities D) noncash investing and financing activities Answer: C Diff: 2 LO: 11-2 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

26) Net cash provided by operating activities under the indirect method must be ________ net cash provided by operating activities under the direct method. A) equal to B) larger than C) smaller than D) none of the above Answer: A Diff: 2 LO: 11-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 27) Positive signs of a successful company as seen on the statement of cash flows do NOT include: A) investments in property, plant and equipment. B) operating activities are the largest source of cash. C) banks are willing to lend money to the company. D) the sale of a majority of a company's plant assets. Answer: D Diff: 2 LO: 11-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 28) In 2019, Gary Kraen Company purchases $100,000 of equipment with cash. This purchase would be reported on Gary Kraen Company's 2019 statement of cash flows as: A) a financing activity. B) an operating activity. C) an investing activity. D) none of the above. Answer: C Diff: 2 LO: 11-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

29) Financing activities on a statement of cash flows relate to: A) current liabilities and long-term liabilities. B) current assets and long-term assets. C) long-term assets. D) long-term liabilities and stockholders' equity. Answer: D Diff: 2 LO: 11-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 30) Examples of financing activities on a statement of cash flows do NOT include: A) issuing stock. B) borrowing money. C) buying treasury stock. D) declaring stock dividends. Answer: D Diff: 2 LO: 11-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting Learning Objective 11-3 1) The change in cash on the comparative balance sheets is the "check figure" for the statement of cash flows. Answer: TRUE Diff: 1 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 2) A gain on sale of equipment is subtracted from net income when determining Net cash provided by operating activities under the indirect method of preparing the statement of cash flows. Answer: TRUE Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

3) The only financial statement used to prepare the statement of cash flows is the balance sheet. Answer: FALSE Diff: 1 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 4) Using the indirect method to prepare the statement of cash flows, an increase in accounts receivable is subtracted from net income in calculating Net cash provided by operating activities. Answer: TRUE Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 5) Under the indirect method to prepare the statement of cash flows, depletion expense must be subtracted from net income when calculating Net cash provided by operating activities. Answer: FALSE Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 6) Under the indirect method to prepare the statement of cash flows, a decrease in accounts payable is deducted from net income when calculating Net cash provided by operating activities. Answer: TRUE Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 7) Under the indirect method to prepare the statement of cash flows, a loss on the sale of longterm assets is added to net income when calculating Net cash provided by operating activities. Answer: TRUE Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

8) Operating income is typically equal to Net cash provided by operating activities on the statement of cash flows. Answer: FALSE Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 9) Under the indirect method to prepare the statement of cash flows, a decrease in a current asset other than cash indicates a deduction from net income when calculating Net cash provided by operating activities. Answer: FALSE Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 10) An increase in common stock sold for cash would be listed as an investing activity when preparing the statement of cash flows under the indirect method. Answer: FALSE Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 11) Most of the time, net income will be the same as net cash provided by operating activities. Answer: FALSE Diff: 1 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 12) Interest expense paid in cash is a cash outflow from operating activities on the statement of cash flows prepared under the indirect method as it is part of net income. Answer: TRUE Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

13) Using the indirect method, the operating section of the Statement of Cash Flows begins with Net income and is followed by Adjustments to reconcile net income to Net cash provided by operating activities. Answer: TRUE Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 14) Under the indirect method of preparing the statement of cash flows, the starting point to determine Net cash provided by operating activities is: A) the beginning cash balance. B) the ending cash balance. C) net income. D) sales. Answer: C Diff: 1 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 15) Which of the following transactions does NOT affect cash during a period? A) sale of treasury stock B) write-off of an uncollectible account C) purchase of property with cash D) payment of an accounts payable Answer: B Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 16) The purchase of treasury stock would be reported on a statement of cash flows as a: A) cash outflow under the financing activities. B) cash inflow under the investing activities. C) cash inflow under the operating activities. D) cash outflow under the investing activities. Answer: A Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 18 Copyright © 2019 Pearson Education, Inc.

17) Under the indirect method of preparing the statement of cash flows, a gain on the sale of equipment is: A) subtracted from net income in the operating activities section. B) added to net income in the operating activities section. C) subtracted from the book value of the equipment in the financing activities section. D) ignored since this transaction does not affect cash. Answer: A Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 18) When preparing the statement of cash flows using the indirect method, which statement is INCORRECT? A) Gains on the sale of long-term assets are subtracted from net income. B) Losses on the sale of long-term assets are subtracted from net income. C) Depreciation expense is added to net income. D) Increases in current liabilities are added to net income. Answer: B Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 19) The method of preparing the statement of cash flows that starts with net income and adjusts it for items that affect net income, but do NOT affect cash is called the: A) net income method. B) direct method. C) indirect method. D) non-cash method. Answer: C Diff: 1 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

20) All of the following may appear as an adjustment of net income when preparing the statement of cash flows using the indirect method EXCEPT: A) payment of cash dividends. B) depreciation expense. C) loss on sale of long-term assets. D) an increase in accounts payable. Answer: A Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 21) Using the indirect method to calculate net cash provided by operating activities, a decrease in prepaid expenses is: A) subtracted from net income. B) added to net income. C) ignored since it does not affect expenses. D) ignored since it does not affect net income. Answer: B Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 22) Under the indirect method of preparing a statement of cash flows, amortization expense for the current period is: A) added in the investing activities section. B) subtracted in the investing activities section. C) added in the financing activities section. D) added in the operating activities section. Answer: D Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

23) In computing net cash provided by operating activities using the indirect method, each of the following is added to net income EXCEPT: A) an increase in accrued expenses payable. B) a gain on sale of equipment. C) depreciation expense. D) a decrease in inventory. Answer: B Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 24) Using the indirect method to prepare the statement of cash flows, dividends paid during the year are: A) subtracted from net income in the operating activities section. B) added to net income in the operating activities section. C) shown as a cash outflow in the financing activities section. D) shown as a cash outflow in the investing activities section. Answer: C Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 25) Using the indirect method of preparing the statement of cash flows, which of the following would be added to net income? A) depletion expense B) an increase in accounts receivable C) a decrease in accounts payable D) gain on the sale of property Answer: A Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

26) On a statement of cash flows prepared using the indirect method, an increase in accounts payable during the period is: A) added to net income to determine net cash provided by operating activities. B) deducted from net income to determine net cash provided by operating activities. C) shown as a cash inflow in the investing activities section. D) shown as a cash inflow in the financing activities section. Answer: A Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 27) When converting net income to net cash provided by operating activities on the statement of cash flows, indirect method, which of the following is NOT added to net income? A) gain on sale of land B) decrease in inventory C) decrease in accounts receivable D) depreciation expense Answer: A Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 28) Salem, Inc. uses the indirect method to prepare its statement of cash flows. Salem's Accumulated Depreciation—Trucks account increased during the period. Salem did not purchase or sell trucks during the period. The increase in Accumulated Depreciation—Trucks is: A) subtracted from net income to determine net cash provided by operating activities. B) added to net income to determine net cash provided by operating activities. C) shown as a cash outflow on the investing activities section. D) shown as a cash outflow on the financing activities section. Answer: B Diff: 2 LO: 11-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

29) In 2019, Chen Corporation purchased treasury stock with a cost of $49,000. During the year, the company declared and paid dividends of $8000 and issued bonds payable for $1,100,000. Net cash provided by financing activities for 2019 is: A) $1,043,000. B) $1,051,000. C) $1,092,000. D) $1,100,000. Answer: A Explanation: Issue Bonds Payable $1,100,000 -Dividends Paid $8000 - purchased Treasury Stock $49,000 = $1,043,000 Diff: 2 LO: 11-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 30) In 2019, Forever Young, Inc. sold land for $130,000 cash, purchased equipment for $19,000 cash and issued bonds for $100,000 cash. The Net cash provided by investing activities is: A) $111,000. B) $149,000. C) $211,000. D) $230,000. Answer: A Explanation: Sale of Land $130,000 - Purchase Equipment $19,000 = $111,000. Issue of bonds affects financing activities. Diff: 2 LO: 11-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 31) Independent Support, Inc. issued common stock for $480,000 cash. The company declared and paid cash dividends of $52,000 and purchased treasury stock at a cost of $23,000. The financing section of the statement of cash flows will report Net cash provided by financing activities of: A) $405,000. B) $428,000. C) $480,000. D) $503,000. Answer: A Explanation: Issued Common Stock $480,000 - Paid Dividends $52,000 - purchased Treasury Stock $23,000 = $405,000 Diff: 2 LO: 11-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 23 Copyright © 2019 Pearson Education, Inc.

32) If $380,000 of bonds are issued during the year and $130,000 of bonds are retired during the year, the statement of cash flows (indirect method) will show a(n): A) net gain on retirement of bonds of $250,000 in the financing activities section. B) increase in cash of $380,000 in the financing activities section and a decrease in cash of $130,000 in the financing activities section. C) net increase in cash of $250,000 in the operating activities section. D) net decrease in cash of $250,000 in the operating activities section. Answer: B Diff: 2 LO: 11-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 33) On a statement of cash flows, activities that affect long-term assets are classified as: A) operating activities. B) investing activities. C) financing activities. D) stockholders' equity activities. Answer: B Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

34) Mary Andrews, Inc. had the following transactions: Cash proceeds on sale of land Cash proceeds on sale of equipment Purchase of treasury stock with cash Purchase of equipment with cash Issuance of common stock for cash

$430,000 140,000 53,000 48,000 70,000

On a statement of cash flows prepared under the indirect method, Net cash provided by investing activities is: A) $469,000. B) $539,000. C) $522,000. D) $570,000. Answer: C Explanation: Cash proceeds on sale of land $430,000 + Cash proceeds on sale of equipment $140,000 - Purchase of equipment with cash $48,000 = $522,000 Diff: 2 LO: 11-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 35) On the statement of cash flows prepared under the indirect method, activities that affect stockholders' equity and long-term debt are classified as: A) operating activities. B) investing activities. C) financing activities. D) free cash flows. Answer: C Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

36) Land was purchased by issuing common stock. This transaction would be reported on the statement of cash flows as a(n): A) operating activity. B) investing activity. C) financing activity. D) noncash investing and financing activity. Answer: D Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 37) On the statement of cash flows, cash used for financing activities include: A) issuing stock for property. B) sale of treasury stock. C) payment of notes payable. D) purchase of plant assets. Answer: C Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 38) During the year, Lady Liberty Corporation's Treasury Stock account increased $46,000 due to a cash purchase, cash dividends of $42,000 were paid and the company reported net income of $200,000. On the statement of cash flows (indirect method), Net cash used by financing activities is: A) ($88,000). B) ($112,000). C) ($154,000). D) ($158,000). Answer: A Explanation: Purchase treasury stock $46,000 + Dividends paid $42,000 = ($88,000) Diff: 2 LO: 11-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

39) Which statement about the statement of cash flows is FALSE? A) The statement of cash flows is based on information from several financial statements. B) The statement of cash flows is based on information from a company's income statement only. C) The change in the Cash account on the comparative balance sheets is the check figure for the statement of cash flows. D) The indirect method of preparing the statement of cash flows is used by the vast majority of companies in the United States. Answer: B Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 40) On a statement of cash flows prepared with the indirect method, adjustments to reconcile net income to net cash provided by operating activities do NOT include: A) gain on sale of equipment. B) patent amortization expense. C) depletion expense. D) changes in all of the current assets. Answer: D Explanation: The change in the Cash account is not used in the calculation of Net Cash Provided by Operating Activities. Cash is a current asset. Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 41) On a statement of cash flows prepared with the indirect method, financing activities do NOT include: A) payment of principal amounts of long-term debt. B) payment of interest on long-term debt. C) payment of dividends. D) sale of treasury stock. Answer: B Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

42) On a statement of cash flows prepared with the indirect method, investing activities do NOT include: A) sale of investments that are not cash equivalents. B) receipt of interest on investments. C) collection of note receivable. D) lending money to an employee. Answer: B Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 43) A company is adjusting net income to determine Net cash provided by operating activities for the statement of cash flows. The indirect method is used. Which statement is INCORRECT? A) An increase in a noncash current asset is subtracted from net income. B) A decrease in a noncash current asset is added to net income. C) A decrease in a current liability is added to net income. D) An increase in a current liability is added to net income. Answer: C Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 44) Depreciation expense is added to net income when reconciling net income to net cash provided by operating activities because it: A) represents a cash inflow. B) is a tax deduction that reduces the payment of taxes. C) conserves cash outflows for taxes. D) reduces net income but has no effect on cash, so we add depreciation expense to net income to cancel the deduction. Answer: D Diff: 2 LO: 11-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

45) On January 1, 2019, plant assets, net are $200,000. On December 31, 2019, plant assets, net are $250,000. Depreciation expense for the year is $20,000. During the year, plant assets were acquired for $155,000 with cash. There is a Gain on sale of plant asset of $8000. What is the book value of the plant asset sold during the year? A) $0 B) $77,000 C) $85,000 D) $105,000 Answer: C Explanation: Beginning Balance, Plant Assets, net $200,000 + Acquisitions $155,000 Depreciation Expense $20,000 - Book Value of Asset Sold = Ending Balance, Plant Assets, net $250,000 Book Value of Asset Sold = $85,000 Diff: 2 LO: 11-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting 46) On January 1, 2019, plant assets, net are $190,000. On December 31, 2019, plant assets, net are $290,000. Depreciation expense for the year is $20,000. During the year, plant assets were acquired for $155,000 with cash. There is a Gain on sale of plant asset of $10,000. What are the cash proceeds from the sale of the plant asset? A) $0 B) $25,000 C) $35,000 D) $45,000 Answer: D Explanation: Beginning Balance, Plant Assets, net $190,000 + Acquisitions $155,000 Depreciation Expense $20,000 - Book Value of Asset Sold = Ending Balance, Plant Assets, net $290,000 Book Value of Asset Sold = $35,000 Cash proceeds = Book Value of Asset Sold $35,000 + Gain on Sale $10,000 = $45,000 Diff: 2 LO: 11-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

47) On January 1, 2019, plant assets, net are $190,000 and on December 31, 2019, plant assets, net are $300,000. Depreciation expense for the year is $100,000. No plant assets were sold or exchanged during the year. What is the cost of the plant assets acquired during the year? A) $0 B) $90,000 C) $110,000 D) $210,000 Answer: D Explanation: Beginning Balance, Plant Assets, net $190,000 + Acquisitions - Depreciation Expense $100,000 = Ending Balance, Plant Assets, net $300,000 Acquisitions = $210,000 Diff: 2 LO: 11-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 48) On January 1, 2019, the Notes Receivable account has a balance of $11,000. On December 31, 2019, the Notes Receivable account has a balance of $120,000. No collections on notes receivable occurred in 2019. What is the amount of long-term notes that were made in 2019? A) $11,000 B) $109,000 C) $120,000 D) $131,000 Answer: B Explanation: $120,000 - $11,000 = $109,000 Diff: 2 LO: 11-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 49) On January 1, 2019, the Bonds Payable account has a balance of $730,000. On December 31, 2019, the Bonds Payable account has a balance of $820,000. During 2019, one bond of $9000 was retired. No discounts or premiums were amortized in 2019. What amount of new bonds were issued in 2019? A) $0 B) $81,000 C) $90,000 D) $99,000 Answer: D Explanation: $820,000 - $730,000 + $9000 = $99,000 Diff: 2 LO: 11-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 30 Copyright © 2019 Pearson Education, Inc.

50) A company reports the following balances: 12/31/2019 12/31/2020 $15,000 $159,000 110,000 93,000 10,000 10,000 63,000 79,000

Common Stock Treasury Stock Additional Paid-in Capital Retained Earnings

What is reported on the statement of cash flows prepared with the indirect method for the year ended December 31, 2020? Assume there were no retirements of common stock or additional purchases of Treasury Stock during 2020. No dividends were declared in 2020. A) Financing Activity of $144,000 B) Financing Activity of $161,000 C) Operating Activity $16,000 D) B and C Answer: D Explanation: Increase in Financing Activities of: Common Stock ($159,000 - $15,000) + Sale of Treasury Stock ($110,000 - $93,000) = $161,000 Increase in Operating Activities for Net Income = Retained Earnings $79,000 - Retained Earnings $63,000 = $16,000 Diff: 3 LO: 11-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 51) A company reports the following balances:

Common Stock Paid-in Capital in Excess of Par Retained Earnings

12/31/2018 12/31/2019 $14,000 $160,000 94,000 114,000 69,000 81,000

During 2019, dividends of $16,000 were declared and paid. What is net income for 2019? A) $4000 B) $12,000 C) $16,000 D) $28,000 Answer: D Explanation: Beginning Balance, Retained Earnings $69,000 + Net Income - Dividends $16,000 = Ending Balance, Retained Earnings $81,000 Net Income = $28,000 Diff: 2 LO: 11-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 31 Copyright © 2019 Pearson Education, Inc.

52) A company reports the following balances:

Common Stock Paid-in Capital in Excess of Par Land Retained Earnings Treasury Stock

12/31/2017 12/31/2018 $14,000 $165,000 10,000 10,000 93,000 109,000 60,000 76,000 16,000 18,000

During 2018, net income of $29,000 was reported. No treasury stock was sold during 2018. No common stock was retired during 2018. No land was sold during 2018. What financing activities are reported on the statement of cash flows prepared with the indirect method for the year ending December 31, 2018? A) sale of treasury stock $2000 and Payment of dividends $13,000 B) purchase of treasury stock $2000, Payment of dividends $13,000 and Sale of common stock $151,000 C) sale of treasury stock $2000, purchase of land $10,000. D) payment of dividends $16,000, Sale of common stock $167,000, and Purchase of treasury stock $2000 Answer: B Explanation: Purchase of treasury stock of $2000 ($18,000 - $16,000), Payment of dividends of $13,000 ($68,000 beginning retained earnings + $29,000 net income - $77,000 ending retained earnings), Sale of common stock $151,000 ($168,000 - $14,000). Purchase of land with cash appears with investing activities, not financing activities. Diff: 3 LO: 11-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

53) Serfleck Company reports the following data for the year ending December 31, 2019:

Common Stock Purchase of Land with cash Retained Earnings Treasury Stock Dividends Declared and Paid

December 31, 2019 $95,000 54,000 193,000 8,000 4,000

December 31, 2018 $52,000 37,000 217,000 0 4,000

There were no retirements of common stock in 2019. On the statement of cash flows (indirect method), what is the net cash provided by financing activities for the year ending December 31, 2019? A) $31,000 B) $39,000 C) $43,000 D) $35,000 Answer: A Explanation: Sale of Common Stock $43,000 - Purchase Treasury Stock $8,000 - Dividends Paid $4,000 = $31,000 Diff: 2 LO: 11-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

54) Anew Health Care Company reports net income of $220,000 and Depreciation Expense of $16,000 for the year ending December 31, 2019. No long-term assets were sold or exchanged during 2019. They also have the following data available: December 31, 2019

December 31, 2018

Current Assets: Cash Accounts Receivable Inventory Total Current Assets

$31,000 $158,000 $97,000 $286,000

$82,000 95,000 69,000 $246,000

Current Liabilities: Accounts Payable Salaries Payable Total Current Liabilities

$51,000 38,000 $89,000

$42,000 88,000 $130,000

Using the indirect method, what is the net cash provided by operating activities for the year ending December 31, 2019? A) $72,000 B) $104,000 C) $132,000 D) $208,000 Answer: B Explanation: Net income $220,000 + Depreciation Expense $16,000 - Increase Accounts Receivable $63,000 - Increase Inventory $28,000 + Increase Accounts Payable $9000 - Decrease Salaries Payable $50,000 = $104,000 Diff: 2 LO: 11-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

55) Cinderella Company reports net income of $100,000 and Depreciation Expense of $50,000 for the year ending December 31, 2019. There were no gains or losses from the sale of long-term assets. They also have the partial comparative balance sheet shown below: December 31, 2019

December 31, 2018

Current Assets: Cash Accounts Receivable Inventory Prepaid Rent Total Current Assets

$30,000 160,000 100,000 20,000 $310,000

$80,000 100,000 70,000 10,000 $260,000

Current Liabilities: Accounts Payable Salaries Payable Total Current Liabilities

$50,000 40,000 $90,000

$40,000 90,000 $130,000

Using the indirect method, prepare the operating activities section of the statement of cash flows for the year ending December 31, 2019. Answer: Cash flows from operating activities: Net income $100,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 50,000 Increase in Accounts Receivable (60,000) Increase in Inventory (30,000) Increase in Prepaid Rent (10,000) Increase in Accounts Payable 10,000 Decrease in Salaries Payable (50,000) Net cash provided by operating activities $10,000 Diff: 2 LO: 11-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

56) Prince Charming Inc. has the following selected accounts available at December 31, 2019: December 31, 2019 December 31, 2018 Notes Receivable, Long-term $200,000 $100,000 Plant Assets 300,000 100,000 Common Stock 350,000 100,000 Retained Earnings 200,000 150,000 Dividends Declared and Paid 28,000 8,000 Depreciation Expense(annual) 50,000 50,000 Additional information: 1. No plant assets were sold or exchanged during 2019. New plant assets were acquired with cash. 2. No notes receivable were collected during 2019. 3. No common stock was retired during 2019. Using the indirect method, prepare the investing and financing sections of the statement of cash flows for the year ending December 31, 2019. Cash Flows from Investing Activities:

Cash Flows from Financing Activities:

Answer: Cash Flows from Investing Activities: Cash loaned with notes receivable Plant assets purchased Net cash used by investing activities

($100,000) (200,000) ($300,000)

Cash Flows From Financing Activities: Dividends paid for 2019 ($28,000) Sale of common stock 250,000 Net cash provided by financing activities $222,000 Diff: 2 LO: 11-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 36 Copyright © 2019 Pearson Education, Inc.

57) Scheeler Company has the following comparative balance sheet data available: 12/31/2020 12/31/2019 $30,000 $80,000 160,000 100,000 100,000 70,000 20,000 10,000 $310,000 $260,000 $400,000 $200,000 (60,000) (50,000) $650,000 $410,000

Cash Accounts Receivable, net Inventory Prepaid Rent Total Current Assets Equipment Accumulated Depreciation Total Assets Accounts Payable Salaries Payable Bonds Payable Common Stock, $10 par Retained Earnings Total Liabilities & Stockholders' Equity

$50,000 40,000 0 350,000 210,000 $650,000

$40,000 40,000 50,000 100,000 180,000 $410,000

Additional information: 1. The company reports net income of $100,000 and depreciation expense of $20,000 for the year ending December 31, 2020. 2. Dividends declared and paid in 2020, $70,000. 3. Equipment with a cost of $20,000 and accumulated depreciation of $10,000 was sold for $3,000. 4. New equipment was purchased for cash. 5. No common stock was retired during 2020.

Using the indirect method, prepare the statement of cash flows for the year ending December 31, 2020. Scheeler Company Statement of Cash Flows Year Ended December 31, 2020

Answer:

Scheeler Company Statement of Cash Flows Year Ended December 31, 2018 Cash Flows from Operating Activities: Net Income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Expense Loss on sale of equipment Increase in Accounts Receivable Increase in Inventory Increase in Prepaid Rent Increase in Accounts Payable Net cash provided by operating activities

$100,000

20,000 7,000 (60,000) (30,000) (10,000) 10,000 $37,000

Cash Flows from Investing Activities: Proceeds from sale of equipment Purchase of equipment [$400,000 – ($200,000 - $20,000)] Net cash used by investing activities

(220,000) ($217,000)

Cash Flows from Financing Activities: Dividends paid Bonds payable paid Sale of common stock Net cash provided by financing activities

($70,000) (50,000) 250,000 $130,000

Net Decrease in Cash Cash balance December 31, 2019 Cash balance December 31 2020 Diff: 3 LO: 11-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

$3,000

($50,000) 80,000 $30,000

Learning Objective 11-4 1) Only the financing activities section of a statement of cash flows differs between the direct and indirect methods. Answer: FALSE Diff: 1 LO: 11-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 39 Copyright © 2019 Pearson Education, Inc.

2) ABC Corporation's income tax expense totaled $20,000 and income tax payable increased by $3,000; therefore, the cash paid for income taxes was $17,000. Answer: TRUE Diff: 2 LO: 11-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 3) The indirect method of preparing the statement of cash flows provides the clearest picture of the cash inflows and cash outflows from investing activities. Answer: FALSE Diff: 1 LO: 11-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 4) Depreciation expense is listed on the direct method statement of cash flows because it affects income. Answer: FALSE Diff: 1 LO: 11-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 5) An increase in interest payable during the reporting period indicates that the cash paid for interest exceeded interest expense on the income statement. Answer: FALSE Diff: 2 LO: 11-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 6) Investing and financing activities for the statement of cash flows may differ when using the direct method instead of the indirect method. Answer: FALSE Diff: 2 LO: 11-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

7) The FASB and IASB prefer the direct method of reporting operating cash flows on the statement of cash flows. Answer: TRUE Diff: 2 LO: 11-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 8) Free cash flow is the amount of cash available from investing activities after paying for planned investments in plant assets. Answer: FALSE Diff: 2 LO: 11-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 9) On a statement of cash flows prepared by using the direct method, cash receipts from interest and dividends are classified as: A) operating activities. B) investing activities. C) financing activities. D) noncash activities. Answer: A Diff: 2 LO: 11-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 10) Where would income taxes paid appear on the statement of cash flows prepared by using the direct method? A) operating activities B) investing activities C) financing activities D) noncash activities Answer: A Diff: 2 LO: 11-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

11) Interest paid on debt would be reported on a statement of cash flows, prepared by using the direct method, under: A) financing activities. B) investing activities. C) operating activities. D) noncash activities. Answer: C Diff: 2 LO: 11-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 12) The receipt of interest on loans would be reported on a statement of cash flows, prepared by the direct method, under: A) operating activities. B) investing activities. C) financing activities. D) noncash activities. Answer: A Diff: 2 LO: 11-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 13) The direct method of preparing the statement of cash flows: A) has an identical operating activities section as the indirect method. B) is used by a vast majority of companies. C) is preferred by FASB. D) is much easier for companies to compute. Answer: C Diff: 2 LO: 11-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

14) Under the direct method of preparing the statement of cash flows, all of the following would be reported under operating activities EXCEPT: A) collections from customers. B) interest received on notes receivable. C) dividends received on investments in stock. D) cash proceeds on sale of long-term investments. Answer: D Diff: 2 LO: 11-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 15) Under the direct method of preparing the statement of cash flows, cash receipts from operating activities do NOT include: A) collection of long-term note receivable. B) collections from customers. C) receipt of interest on investments. D) receipt of dividends on investments. Answer: A Diff: 2 LO: 11-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 16) Northwest Builders, Inc. reported Cost of Goods Sold for the current year of $330,000. During the same period, the Inventory account decreased $15,000 and the Accounts Payable account increased $26,000. The amount of cash paid to suppliers for inventory is: A) $289,000. B) $304,000. C) $315,000. D) $345,000. Answer: A Explanation: 330,000 - 15,000 - 26,000 = 289,000 Diff: 2 LO: 11-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

17) Under the direct method of preparing the statement of cash flows, cash payments from operating activities do NOT include: A) payments to suppliers. B) payments to employees. C) payment of dividends. D) payment of interest. Answer: C Diff: 1 LO: 11-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 18) Zimbalist Corporation reports a decrease in salaries payable of $3000. If salaries expense totaled $189,000 for the year, the cash paid to employees is: A) $3000. B) $186,000. C) $189,000. D) $192,000. Answer: D Explanation: $189,000 + $3000 = $192,000 Diff: 2 LO: 11-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 19) Sweeten Corporation had sales of $890,000. The beginning accounts receivable balance was $66,000 and the ending accounts receivable balance was $250,000. The cash collected from customers for this reporting period is: A) $640,000. B) $706,000. C) $956,000. D) $1,074,000. Answer: B Explanation: $890,000 - $184,000 increase in accounts receivable = $706,000 Diff: 2 LO: 11-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

20) Under the direct method of preparing the statement of cash flows, which statement is CORRECT regarding the method of computing cash payments to suppliers for inventory? A) Cost of goods sold less a decrease in inventory plus an increase in accounts payable. B) Cost of goods sold plus an increase in inventory less an increase in accounts payable. C) Cost of goods sold plus an increase in inventory plus an increase in accounts payable. D) Cost of goods sold plus a decrease in inventory plus an increase in accounts payable. Answer: B Diff: 2 LO: 11-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 21) Early Years Corporation reports a $17,000 increase in Inventory and a $27,000 increase in accounts payable for the year. If the cost of goods sold is $400,000 for the year, the cash paid to Early Years' suppliers for inventory is: A) $356,000. B) $373,000. C) $390,000. D) $444,000. Answer: C Explanation: $400,000 -$27,000 + $17,000 = $390,000 Diff: 2 LO: 11-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 22) Under the direct method of preparing the statement of cash flows, which statement is CORRECT regarding the calculation of cash collected from interest revenue? A) sales plus a decrease in interest receivable B) interest revenue plus a decrease in interest receivable C) interest revenue plus an increase in interest receivable D) interest revenue less a decrease in interest receivable Answer: B Diff: 2 LO: 11-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

23) During the year, Chappel Engineering Corporation has operating expenses of $50,000. There was an increase in prepaid expenses of $4000 and an increase in accrued liabilities of $6000. What were Chappel's cash payments for operating expenses? A) $44,000 B) $48,000 C) $54,000 D) $56,000 Answer: B Explanation: $50,000 + $4000 - $6000 = $48,000 Diff: 2 LO: 11-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 24) The direct method of preparing the statement of cash flows is preferred by the Financial Accounting Standards Board primarily because of the way it reports: A) operating activities. B) investing activities. C) financing activities. D) noncash activities. Answer: A Diff: 2 LO: 11-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 25) Which of the following would NOT be reported in the operating activities section of a statement of cash flows using the direct method? A) cash paid for income taxes B) interest received on notes receivable C) loss on sale of equipment D) payments to suppliers Answer: C Diff: 2 LO: 11-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

26) Newsome Corporation had accounts receivable of $120,000 at the beginning of the year and $135,000 at the end of the year. Sales for the year amounted to $565,000. Cash collections from customers are: A) $15,000. B) $445,000. C) $550,000. D) $565,000. Answer: C Explanation: 565,000 - (135,000 - 120,000) = $550,000 Diff: 2 LO: 11-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 27) Newton Corporation reported an increase in inventory of $85,000. The cost of goods sold for the year was $170,000. There was also a $4000 decrease in accounts payable from the beginning of the year to the end of the year. What is Newton's cash payment to suppliers for inventory? A) $174,000 B) $251,000 C) $255,000 D) $259,000 Answer: D Explanation: 170,000 + 85,000 + 4000 = 259,000 Diff: 2 LO: 11-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 28) Einstein Corporation reported a decrease in inventory of $13,000. The cost of goods sold for the year was $180,000. There was also a $4000 decrease in accounts payable from the beginning of the year to the end of the year. What is Einstein's cash payment to suppliers for inventory? A) $163,000 B) $171,000 C) $189,000 D) $197,000 Answer: B Explanation: $180,000 - $13,000 + $4000 = $171,000 Diff: 2 LO: 11-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

29) Jerome Smith, Inc. began the year with $259,000 in accounts receivable and ended the year with $252,700 in accounts receivable. Sales for the year were $3,770,000. The cash collected from customers during the year amounted to: A) $3,763,700. B) $3,776,300. C) $4,022,700. D) $4,281,700. Answer: B Explanation: $3,770,000 + ($259,000 - $252,700) = $3,776,300 Diff: 2 LO: 11-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 30) Income tax expense is $47,000 for the current year. Income tax payable increased $3000 during the year. Interest payable increased $4000 during the year. What is the cash paid for income taxes? A) $44,000 B) $47,000 C) $50,000 D) $51,000 Answer: A Explanation: $47,000 - $3000 = $44,000 Diff: 2 LO: 11-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 31) Interest expense for the current year is $310,000. Interest payable increased $55,000 during the year. Interest receivable increased $11,000 during the year. Interest expense includes $47,000 for the amortization of discount. What is the cash paid for interest? A) $208,000 B) $219,000 C) $310,000 D) $263,000 Answer: A Explanation: $310,000 - Interest Payable $55,000 - Discount Amortized $47,000 = $208,000 Diff: 2 LO: 11-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

32) Interest revenue for the current year is $90,000. Interest payable increased $41,000 during the year and Interest receivable increased $55,000 during the year. No discount or premium was amortized. What is the cash received for interest revenue? A) $35,000 B) $49,000 C) $90,000 D) $145,000 Answer: A Explanation: $90,000 - $55,000 = $35,000 Diff: 2 LO: 11-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 33) Under the direct method of preparing the statement of cash flows, the computation of payments to suppliers includes: A) payments for inventory only. B) payments for operating expenses only. C) payments for inventory and operating expenses (excluding employee's wages). D) payments for inventory, operating expenses, interest expense and income taxes. Answer: C Diff: 2 LO: 11-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 34) Free cash flow equals: A) net cash provided by investing activities minus cash payments earmarked for investments in plant assets. B) net cash provided by financing activities minus cash payments earmarked for investments in plant assets. C) net cash provided by operating activities minus cash payments earmarked for investments in plant assets. D) net change in cash minus cash payments earmarked for investments in plant assets. Answer: C Diff: 2 LO: 11-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

35) Net cash provided by operating activities is $2.9 million. Planned capital expenditures are $2.4 million. Depreciation expense is $1.2 million per year. What is free cash flow? A) ($700,000) B) $500,000 C) $1,200,000 D) $1,700,000 Answer: B Explanation: Net cash provided by operating activities $2.9 million - Planned capital expenditures $2.4 million = $500,000 Diff: 2 LO: 11-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 36) A company purchased a parcel of land using a long-term note payable. Using the direct method, where is this transaction reported on the statement of cash flows? A) operating activities B) investing activities C) financing activities D) noncash investing and financing activities Answer: D Diff: 2 LO: 11-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

37) Matthauson Company has the following comparative balance sheet data available: 12/31/2019 12/31/2018 $30,000 $80,000 160,000 100,000 100,000 70,000 20,000 10,000 $310,000 $260,000 $400,000 $200,000 (60,000) (50,000) $650,000 $410,000

Cash Accounts receivable, net Inventory Prepaid rent Total current assets Equipment Accumulated depreciation Total Assets Accounts payable Salaries payable Bonds payable Common stock, $10 par Retained earnings Total liabilities & stockholders' equity

$50,000 40,000 0 350,000 210,000 $650,000

$40,000 40,000 50,000 100,000 180,000 $410,000

Additional information: 1. The company reports net income of $100,000 and depreciation expense of $20,000 for the year ending December 31, 2019. 2. Dividends declared and paid in 2019, $70,000. 3. Equipment with a cost of $20,000 and accumulated depreciation of $10,000 was sold for $3,000. 4. New equipment was purchased for cash. 5. No common stock was retired during 2019. The company also reports the following income statement for the year ending December 31, 2019: Sales Expenses: Cost of goods sold Salaries expense Rent expense Depreciation expense Interest expense Loss on sale of equipment Total Expenses Income Before Taxes Income tax expense Net income

$1,000,000 600,000 200,000 40,000 20,000 3,000 7,000 -

870,000 130,000 30,000 $100,000

Using the direct method, prepare the statement of cash flows for the year ending December 31, 2019. Matthauson Company Statement of Cash Flows Year Ended December 31, 2019

Answer:

Matthauson Company Statement of Cash Flows Year Ended December 31, 2019 Cash flows From Operating Activities: Cash collected from customers ($1,000,000 Sales $60,000 increase in Accounts Receivable) Cash paid to employees Cash paid to suppliers* Cash paid for interest Cash paid for taxes Net cash provided by operating activities

$940,000 (200,000) (670,000) (3,000) (30,000) $37,000

Cash flows from investing activities: Proceeds from sale of equipment Purchase of equipment [$400,000 – ($200,000 $20,000)] Net cash used by investing activities

(220,000) ($217,000)

Cash flows from financing activities: Dividends paid Bonds payable paid Sale of common stock Net cash provided by financing activities Net Decrease in cash Cash at beginning of year Cash at end of year

($70,000) (50,000) 250,000 $130,000 ($50,000) $80,000 $30,000

$3,000

*Cash paid for inventory = COGS $600,000 + Increase Inventory $30,000 - Increase Accounts Payable $10,000 = $620,000 Cash paid for operating expenses (rent) = Rent Expense $40,000 + Increase Prepaid Rent $10,000 = $50,000 Total paid to suppliers = $620,000 + $50,000 = $670,000 Diff: 2 LO: 11-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

38) The income statement and other data for Davidson Carpet Town, Inc., follow: Davidson Carpet Town, Inc. Income Statement Year Ended December 31, 2019 Sales Cost of goods sold Gross margin Operating expenses Depreciation expense Income before taxes Income tax expense Net income

$460,000 190,000 270,000 $70,000 20,000

90,000 180,000 10,000 $170,000

The changes in the current assets and current liabilities for the year ending December 31, 2019 were: Accounts Receivable Decrease $10,000 Inventory Increase $8,000 Prepaid Insurance Increase $4,000 Accounts Payable Increase $14,000 Accrued Expenses Payable Increase $2,000 Income Tax Payable Increase $1,000 Using the direct method, prepare the operating activities section of the statement of cash flows for the year ending December 31, 2019. Please show calculations. Answer: Cash flows from operating activities: Cash collected from customers (Sales $460,000 + Decrease in Accounts Receivable $10,000) $470,000 Cash paid to suppliers (inventory)* (184,000) Cash paid to suppliers (operating expenses)** (72,000) Cash paid for taxes (Income tax expenses $10,000 Increase income tax payable $1,000) (9,000) Net cash provided by operating activities $205,000 *COGS $190,000 + Increase Inventory $8,000 - Increase Accounts Payable $14,000 **Operating Expenses $70,000 + Increase Prepaid Insurance $4,000 - Increase Accrued Expenses Payable $2,000 Please note: The two cash outflows to suppliers should be presented on one line but for clarity of exposition are shown separately here. Diff: 2 LO: 11-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 54 Copyright © 2019 Pearson Education, Inc.

Financial Accounting, 12e (Thomas/Tietz/Harrison) Chapter 12 Financial Statement Analysis Learning Objective 12-1 1) Financial analysis involves more than just looking at financial reports and doing some math. Answer: TRUE Diff: 1 LO: 12-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 2) A thorough analysis of a company begins with understanding a company's business and industry. Answer: TRUE Diff: 1 LO: 12-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) Every public company's annual report filed begins with the income statement. Answer: FALSE Diff: 1 LO: 12-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) In the Management's Discussion and Analysis section of the annual report, you will find management's explanation for trends in sales. Answer: TRUE Diff: 1 LO: 12-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

5) Learning about what's happening in the industry, markets, general economic conditions, trends in product development, and specific company strategies puts a company's numbers in context and helps you understand why they turned out as they did. Answer: TRUE Diff: 1 LO: 12-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 6) Declining income from operations indicates a slowdown in business activity. Answer: TRUE Diff: 1 LO: 12-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 7) A company's business section of the annual report provides vital information about the company's products, its marketing and promotion, sales and distribution strategies, product design and development, manufacturing and quality assurance, and inventory management. Answer: TRUE Diff: 2 LO: 12-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 8) Accounting data should paint a picture of the results of implementing a particular business strategy by a company. Answer: TRUE Diff: 2 LO: 12-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 9) Steadily increasing income from operations means that a company is growing its revenues but not controlling its costs, which usually signals expansion and growth in the business's value in future years. Answer: FALSE Diff: 1 LO: 12-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 2 Copyright © 2019 Pearson Education, Inc.

10) An annual report is filed by every public company with the: A) FASB. B) SEC. C) U.S. Treasury department. D) An annual report is not filed. Answer: B Diff: 2 LO: 12-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 11) The description section of a company's business in an annual report does NOT generally include information about: A) income taxes. B) the company's products. C) sales and distribution strategies. D) product design and development. Answer: A Diff: 2 LO: 12-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) MD&A stands for: A) Management's Discussion and Analysis. B) Management's Decisions and Analysis. C) Marketing Discussion and Analysis. D) Marketing Decisions and Analysis. Answer: A Diff: 2 LO: 12-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement Learning Objective 12-2 1) Trend percentages are a form of horizontal analysis that are computed only for balance sheet items. Answer: FALSE Diff: 1 LO: 12-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3 Copyright © 2019 Pearson Education, Inc.

2) Trend percentages are a form of horizontal analysis. Answer: TRUE Diff: 2 LO: 12-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) Trend analysis using income statement data is widely used for predicting the future. Answer: TRUE Diff: 2 LO: 12-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) Horizontal analysis compares a financial statement line item in the current year with the same line item in the prior year. Answer: TRUE Diff: 2 LO: 12-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) The percentage change in a financial statement line item over two years is computed by dividing the dollar amount of the line item in the most recent year by the prior year dollar amount of the line item. Answer: FALSE Diff: 2 LO: 12-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 6) If a company has sales of $250 in 2019 and $225 in 2020, the percentage decrease from 2019 to 2020 is 10%. Answer: TRUE Explanation: ($225 - $250) / $250 = .10 or 10% Diff: 2 LO: 12-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

7) If a company has sales of $150 in 2018 and $225 in 2019, the percentage change from 2018 to 2019 is 50%. Answer: TRUE Explanation: ($225 - $150) / $150 = .50 or 50% Diff: 2 LO: 12-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 8) Horizontal analysis highlights changes in financial statement line items over time and provides a complete picture of a business. Answer: FALSE Diff: 2 LO: 12-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 9) Year to year percentage changes in line items from comparative financial statements is called: A) benchmarking. B) horizontal analysis. C) vertical analysis. D) common-size financial statements. Answer: B Diff: 2 LO: 12-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) The primary focus of horizontal analysis is: A) percentage changes in line items from comparative financial statements. B) the balance sheet only. C) the amount of individual financial statement line items as a percentage of some related total, such as total assets. D) the income statement only. Answer: A Diff: 2 LO: 12-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

11) The percentage change in any individual item shown on comparative financial statements is calculated by dividing the dollar amount of the change from the base period to the current period by: A) the amount shown for the current period. B) the base-period amount. C) the average of the amounts shown for the base and the current periods. D) the amount estimated for the future period. Answer: B Diff: 2 LO: 12-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) Horizontal analysis is most closely related to: A) trend analysis. B) current ratio. C) vertical analysis. D) benchmarking. Answer: A Diff: 2 LO: 12-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13) A type of analysis that indicates the direction a business is taking is: A) benchmarking. B) current ratio. C) vertical analysis. D) trend percentages. Answer: D Diff: 2 LO: 12-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

14) The formula for the percentage change in a financial statement line item is the current year amount: A) divided by the base year amount. B) minus the base year amount divided by the base year amount. C) minus the base year amount divided by current year amount. D) added to the base year amount divided by the base year amount. Answer: B Diff: 2 LO: 12-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 15) When computing trend percentages: A) the current year is always equal to 100%. B) the base year is always the current year. C) the base year is always equal to 100%. D) the base year is equal to the current year plus the previous year divided by two. Answer: C Diff: 2 LO: 12-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

16) Zebra Company reports the following figures for the years ending December 31, 2019 and 2018:

Net Sales Cost of Goods Sold Gross Profit

2019 $61,000 44,000 $17,000

2018 $46,000 33,000 $13,000

What are the percentage changes from 2018 to 2019 for Net Sales, Cost of Goods Sold and Gross Profit, respectively? (Round your final answers to one decimal place, X.X%) A) 100%, 30.8%, 33.3% B) 100%, 0.8%, 0.8% C) 30.8%, 32.6%, 33.3% D) 32.6%, 33.3%, 30.8% Answer: D Explanation: Net Sales: ($61,000 - $46,000) ÷ $46,000 = 32.6% Cost of Goods Sold: ($44,000 - $33,000) ÷ $33,000 = 33.3% Gross Profit: ($17,000 - $13,000) ÷ $13,000 = 30.8% Diff: 2 LO: 12-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 17) For the period from 2019 to 2020, a company reports the following: Percentage change in sales Percentage change in cost of goods sold Percentage change in gross profit

40% increase 30% increase 35% increase

If sales are $8,000,000 in 2019, what are sales in 2020? A) $3,200,000 B) $8,000,000 C) $10,800,000 D) $11,200,000 Answer: D Explanation: $8,000,000 × 1.40 = $11,200,000 Diff: 2 LO: 12-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

18) Zemanowski Company reports the following sales figures (in millions): Year 2015 2016 2017 2018 2019 2020

Net Sales $105 $106 $109 $110 $114 $121

What is the trend percentage in 2017 if 2015 is the base year? (Round your final answer to the nearest whole percentage) A) 109% B) 101% C) 104% D) 105% Answer: C Explanation: (109 ÷ 105) × 100 = 104% Diff: 2 LO: 12-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 19) Nekich Company reports the following sales figures(in millions): Year 2015 2016 2017 2018 2019 2020

Net Sales $102 $106 $109 $111 $115 $98

What is the trend percentage in 2020 if 2015 is the base year? (Round your final answer to the nearest whole percentage) A) 92% B) 88% C) 85% D) 96% Answer: D Explanation: (98 ÷ 102) × 100 = 96% Diff: 2 LO: 12-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 9 Copyright © 2019 Pearson Education, Inc.

20) How is the trend percentage for sales in 2019 computed? The base year is 2012. A) Year 2019 sales ÷ Year 2012 sales B) (Year 2019 sales - Year 2012 sales) ÷ Year 2012 sales C) (Year 2019 sales - Year 2012 sales) ÷ Year 2019 sales D) (Year 2019 sales ÷ Year 2012 sales) × 100 Answer: D Diff: 2 LO: 12-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 21) How is the percentage change (for horizontal analysis) for sales from 2018 to 2019 computed? A) Year 2019 sales ÷ Year 2018 sales B) (Year 2019 sales - Year 2018 sales) ÷ Year 2018 sales C) (Year 2019 sales - Year 2018 sales) ÷ Year 2019 sales D) (Year 2019 sales ÷ Year 2018 sales) × 100 Answer: B Diff: 2 LO: 12-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 22) Bryanwood Company reports the following data:

Sales Cost of Goods Sold Gross Profit Operating Expenses

Percentage Change from 2018 to 2019 10% 7% 12% -4%

Based on the above information, what can be said about the company's business strategy? A) The company has lost control of operating expenses. B) The company has reduced cost of goods sold in total dollar amount. C) The company has successfully undertaken some cost-cutting measures for operating expenses. D) The company has fewer sales in 2019 than 2018. Answer: C Diff: 2 LO: 12-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

23) Goelzer Company reports the following trend percentages for net income: Year 2015 2016 2017 2018 2019

Trend Percentage 100% 135% 169% 101% 78%

Given the above data, which statement is FALSE assuming 2015 is the base year? A) When compared to 2017, net income is falling in 2018. B) Net income is increasing in 2016 and 2017. C) Net income is lower in 2019 than in 2015. D) Net income is higher in 2019 than in 2015. Answer: D Diff: 2 LO: 12-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

24) Goelzer Company reports the following information for 2020 and 2021. Calculate the amount and percentage of increase or decrease for each financial statement line item doing a horizontal analysis. Use one decimal place for percentages. Goelzer Company Comparative Income Statement For years ended December 31, 2020 and 2021 Increase or Decrease 2021 2020 Amount Percent Sales $ 955,500 $679,800 Cost of Goods Sold 400,400 264,000 Gross Profit 555,100 415,800 Selling Expenses 90,000 92,400 Administrative Expenses 72,800 66,000 Total Operating Expenses 162,800 158,400 Operating Income 392,300 257,400 Other Income 4,000 2,640 Income before income tax 396,300 260,040 Income Tax 127,400 92,400 Net Income $ 268,900 $ 167,640 Answer:

Goelzer Company Comparative Income Statement For years ended December 31, 2020 and 2021 Increase or Decrease 2021 2020 Amount Percent Sales $ 955,500 $679,800 $ 275,700 40.6% Cost of Goods Sold 400,400 264,000 136,400 51.7% Gross Profit 555,100 415,800 139,300 33.5% Selling Expenses 90,000 92,400 (2,400) -2.6% Administrative Expenses 72,800 66,000 6,800 10.3% Total Operating Expenses 162,800 158,400 4,400 2.8% Operating Income 392,300 257,400 134,900 52.4% Other Income 4,000 2,640 1,360 51.5% Income before income tax 396,300 260,040 136,260 52.4% Income Tax 127,400 92,400 35,000 37.9% Net Income $ 268,900 $ 167,640 $ 101,260 60.4% Diff: 2 LO: 12-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

Learning Objective 12-3 1) When comparing companies of different sizes, vertical analysis is a useful tool. Answer: TRUE Diff: 1 LO: 12-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 2) The ratio of the dollar amount of each individual asset to the dollar amount of total assets is an example of vertical analysis. Answer: TRUE Diff: 2 LO: 12-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) Vertical analysis compares a line item on the balance sheet, in a current period, to the same line item on the balance sheet in a prior period. Answer: FALSE Diff: 2 LO: 12-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) When performing a vertical analysis of the income statement, each line item is stated as a percentage of net income. Answer: FALSE Diff: 1 LO: 12-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) A company's net income as a percentage of sales is 15%. Using vertical analysis, the cost of goods sold as a percentage of sales must be 85%. Answer: FALSE Diff: 1 LO: 12-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

6) Common-size financial statements report only dollar amounts. Answer: FALSE Diff: 2 LO: 12-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 7) Benchmarking compares a company to some standard set by others. Answer: TRUE Diff: 2 LO: 12-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 8) Benchmarking common size variables against a key competitor provides meaningful information only if the companies are similar in size. Answer: FALSE Diff: 2 LO: 12-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 9) Which of the following would be most helpful in the comparison of different size companies? A) horizontal analysis B) comparison of their net incomes C) comparison of their working capital balances D) preparation of common-size financial statements Answer: D Diff: 2 LO: 12-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

10) A financial statement that shows each line item as a percentage of one key item on the statement is referred to as a: A) benchmarking. B) common-size statement. C) horizontal analysis. D) financial ratio analysis. Answer: B Diff: 2 LO: 12-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 11) On a common-size balance sheet, each line item is expressed as a percentage of: A) current assets. B) operating income. C) total assets. D) net income. Answer: C Diff: 2 LO: 12-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) On a common-size income statement, income taxes expense is expressed as a percentage of: A) net income. B) total stockholders' equity. C) total assets. D) net sales. Answer: D Diff: 2 LO: 12-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

13) You are using a leading competitor, Company B, for benchmarking your company, Company A. When benchmarking, the gross margin of Company A is expressed as a percentage of: A) the net sales of Companies A and B. B) Company B's net sales. C) Company A's net income. D) Company A's net sales. Answer: D Diff: 2 LO: 12-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 14) Walton Company's return on sales for the most recent year was 5%. The industry leader reports a return on sales of 7%. The comparison of Walton Company's return on sales to the industry leader is an example of: A) benchmarking. B) gross margin analysis. C) detail analysis. D) intercompany analysis. Answer: A Diff: 3 LO: 12-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 15) You are the CEO of Company A and you are using an industry leader (Leader Company) for benchmarking. Company A is much smaller than Leader Company in terms of total assets and total sales revenue. You should compare the: A) gross profit of Company A to the gross profit of Leader Company. B) net income of Company A to the net income of Leader Company. C) net sales of Company A to the net sales of Leader Company. D) net income to net sales ratio of Company A to net income to net sales ratio of Leader Company. Answer: D Diff: 3 LO: 12-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

16) Szidon Company reports the following data:

Net income Net income divided by net sales

Szidon Key Competitor $1,000,000 $500,000 2.1% 6.5%

Using benchmarking, what can be said about Szidon Company? A) Szidon is inferior to the key competitor because the key competitor's net income percentage is higher. B) Szidon is superior to the key competitor because net income is higher. C) There is not enough information to make any conclusions. D) There is conflicting information so no conclusions can be reached. Answer: A Diff: 3 LO: 12-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 17) Which of the following is typically used as the base in a vertical analysis of an income statement? A) gross profit B) operating income C) net income D) net sales Answer: D Diff: 2 LO: 12-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 18) Which of the following is typically used as the base in a vertical analysis of a balance sheet? A) total liabilities B) total stockholders' equity C) total assets D) net sales Answer: C Diff: 1 LO: 12-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

19) Expressing cash and cash equivalents as a percentage of total assets is an example of: A) horizontal analysis. B) current ratio. C) ratio analysis. D) vertical analysis. Answer: D Diff: 2 LO: 12-3 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 20) A vertical analysis is primarily concerned with: A) the dollar amount of the change in various financial statement line items from year to year. B) individual financial statement line items expressed as a percentage of a base (which represents 100%). C) percentage changes in the balances of line items from comparative financial statements. D) the change in key financial statement ratios over a specified period of time. Answer: B Diff: 2 LO: 12-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 21) Mussa Corporation reports the following data: Net sales Cost of goods sold Gross profit

$270,000 170,000 $100,000

In vertical analysis, the cost of goods sold percentage is closest to: (Round your final answer to the nearest whole percentage) A) 37%. B) 59%. C) 63%. D) 170%. Answer: C Explanation: $170,000 ÷ $270,000 = 63% Diff: 2 LO: 12-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

22) In vertical analysis: A) a base amount is optional. B) a base amount is required. C) line items from balance sheets are examined only. D) line items from income statements are examined only. Answer: B Diff: 2 LO: 12-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 23) A financial statement line item expressed as a percentage of a base amount is a result of: A) horizontal analysis. B) economic value added. C) vertical analysis. D) comparative analysis. Answer: C Diff: 2 LO: 12-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 24) In performing vertical analysis, the base for inventory is: A) total stockholders' equity. B) total assets. C) total cash and cash equivalents. D) total current assets. Answer: B Diff: 2 LO: 12-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 25) In performing vertical analysis, the base for operating expenses is: A) net sales. B) gross profit. C) net income. D) operating income. Answer: A Diff: 2 LO: 12-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 19 Copyright © 2019 Pearson Education, Inc.

26) Given the following data: Current liabilities Noncurrent liabilities Stockholders' equity Net sales Gross sales

$700,000 200,000 900,000 2,000,000 2,050,000

In vertical analysis, current liabilities would be expressed as: (Round your final answer to the nearest whole percent.) A) 35%. B) 39%. C) 34%. D) 50%. Answer: B Explanation: $700,000 ÷ ($700,000 + $200,000 + $900,000) = 39% Diff: 2 LO: 12-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 27) In performing vertical analysis, the base for income before taxes is: A) net income. B) gross sales. C) gross profit. D) net sales. Answer: D Diff: 2 LO: 12-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 28) In performing vertical analysis, the base for income tax expense is: A) net sales. B) gross revenues. C) net income. D) gross profit. Answer: A Diff: 2 LO: 12-3 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 20 Copyright © 2019 Pearson Education, Inc.

29) Given the following data: Accounts receivable, net Current assets Total assets Net sales

$200,000 900,000 2,000,000 6,000,000

In vertical analysis, Accounts Receivable, net would be expressed as: (Round your final answer to the nearest whole percent) A) 3%. B) 33%. C) 10%. D) 22%. Answer: C Explanation: $200,000 ÷ $2,000,000 = 10%. Diff: 2 LO: 12-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 30) A vertical analysis of a balance sheet shows that current assets have increased from 42% to 56%. This means that: A) current assets have increased as a percentage of total assets. B) the dollar amount of total assets has increased. C) the dollar amount of total assets has decreased. D) the dollar amount of long-term assets has increased. Answer: A Diff: 2 LO: 12-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

31) Given the following data: Net sales Cost of goods sold Gross profit Operating expenses Net income

$140,000 $90,000 $50,000 $40,000 $10,000

In vertical analysis, net income would be expressed as: (Round your final answer to the nearest whole percent) A) 7%. B) 36%. C) 64%. D) 29%. Answer: A Explanation: 10,000 ÷ 140,000 = 7% Diff: 2 LO: 12-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 32) Reimer Company reports the following data:

Sales Cost of Goods Sold Gross Profit Operating Expenses Net Income

2019 100% 21% 79% 45% 34%

2018 100% 11% 89% 35% 54%

When evaluating the results of operations, what can be said about Reimer Company? A) Using vertical analysis, the company's profitability declined in 2018. B) Using horizontal analysis, the company's profitability declined in 2018. C) Using vertical analysis, the company's profitability declined in 2019. D) Using horizontal analysis, the company's profitability declined in 2019. Answer: C Diff: 2 LO: 12-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

33) Wilhelm Company's gross profit percentages for the past 3 years are: Year 2020 2019 2018

Gross Profit Percentages 27% 23.4% 22.3%

Based on the above data, what can be said about the Wilhelm Company? A) The sales volume is decreasing. B) The company is decreasing the income tax expense. C) The company is controlling operating expenses. D) The company is controlling cost of goods sold. Answer: D Diff: 2 LO: 12-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 34) Hull Company reports the following data:

Year 2017 2018 2019 2019 Industry Average

Total Operating Expenses to Net Sales 18% 21% 24% 15%

Based on the above data, what can be said about the Hull Company? A) The company is controlling operating expenses. B) The company is doing better than the industry average. C) The company is losing control of operating expenses. D) The company is increasing sales over time. Answer: C Diff: 2 LO: 12-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

35) In 2018, the Zenon Company reported that property, plant and equipment were equal to 12% of total assets. In 2018, current assets were equal to 88% of total assets. In 2019 the company reported that property, plant and equipment were equal to 28% of total assets. In 2019, current assets were equal to 72% of total assets. What conclusion can be reached from this information? A) In 2019, the company is downsizing. B) In 2019, property, plant and equipment as a proportion of total assets increased. C) In 2019, the company is investing in the future. D) B and C. Answer: D Diff: 2 LO: 12-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 36) Prepare a vertical analysis for Katrina Corporation using the information shown below. Round percentages to one decimal place.

Sales Cost of goods sold Gross profit Operating expenses Net income

2019 $550,000 250,000 300,000 150,000 $150,000 2019

Percent

Answer: 2019 Percent Sales $550,000 100% Cost of goods sold 250,000 45.5% Gross profit 300,000 54.5% Operating expenses 150,000 27.3% Net income $150,000 27.3% Diff: 2 LO: 12-3 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

37) Dynasty Incorporated has the following data available at December 31, 2019: Total current assets Property, plant and equipment, net Intangible assets Total current liabilities Long-term debt Common stock Additional paid-in capital Retained earnings

900 1,200 300 600 500 400 800 100

Prepare a balance sheet with vertical analysis of for Dynasty. Round percentages to one decimal place. Dynasty Incorporated Balance Sheet December 31, 2019

Answer:

Dynasty Incorporated Balance Sheet December 31, 2019

Total current assets Property, plant and equipment, net Intangible asset Total assets Liabilities and Stockholders' Equity Total current liabilities Long-term debt Total liabilities Stockholders' equity Common stock Additional paid-in capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity

$ 900 1,200 300 $ 2,400

37.5 50 12.5 100

% % % %

600 500 $ 1,100

25 20.8 45.8

% % %

400 800 100 1,300 $ 2,400

16.7 33.3 4.2 54.2 100

% % % % %

Computations: Total current assets: 900/2,400 = 37.5%PPE, net: 1,200/2,400 = 50%Intangible assets: 300/2,400 = 12.5%Total current liabilities: 600/2,400 = 25%Long-term debt: 500/2,400 =20.8%Common stock: 400/2,400 = 16.7%Addl PIC: 800/2,400 = 33.3%Retained earnings: 100/2,400 = 4.2% Diff: 2 LO: 12-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement Learning Objective 12-4 1) A firm's ability to pay current liabilities can be evaluated using the quick ratio and the current ratio. Answer: TRUE Diff: 2 LO: 12-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 2) A company's debt ratio is computed as total assets minus total liabilities divided by total assets. Answer: FALSE Diff: 1 LO: 12-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 26 Copyright © 2019 Pearson Education, Inc.

3) The quick ratio reflects the company's percentage of total assets financed with debt. Answer: FALSE Diff: 1 LO: 12-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) A high inventory turnover may indicate that a company is experiencing difficulty selling its inventory. Answer: FALSE Diff: 2 LO: 12-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) In general, the larger the working capital, the better the ability to pay debts. Answer: TRUE Diff: 2 LO: 12-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 6) Cash, short-term investments and net current receivables are all components of the numerator of the quick ratio. Answer: TRUE Diff: 2 LO: 12-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 7) Inventory turnover is calculated by dividing the cost of goods sold by the average inventory. Answer: TRUE Diff: 2 LO: 12-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

8) Ratios that test liquidity include all of the following EXCEPT: A) acid-test ratio. B) current ratio. C) return on assets. D) inventory turnover. Answer: C Diff: 2 LO: 12-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 9) To compute the gross (profit) margin percentage, divide: A) sales by cost of goods sold. B) gross (profit) margin by net sales. C) net income by stockholders' equity. D) operating income by net sales. Answer: B Diff: 2 LO: 12-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) A measure of a company's ability to collect cash from credit customers is the: A) accounts receivable turnover. B) days' payable outstanding. C) inventory turnover. D) cash conversion cycle. Answer: A Diff: 2 LO: 12-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

11) Carey's Department Store had net sales of $20 million and cost of goods sold of $16 million for the year. The beginning inventory for the year was $3 million. The ending inventory for the year was $5 million. What was the days' inventory outstanding? (Round any intermediary calculations to two decimal places and your final answer to the nearest day.) A) 23 days B) 122 days C) 91 days D) 73 days Answer: C Explanation: 365 ÷ Inventory turnover = days' inventory outstanding Inventory turnover = $16 million ÷ [($3 million + $5 million) ÷ 2] = 2.6 365 ÷ 4.0 = 91 days Diff: 2 LO: 12-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) Marie's Clothing Store had an accounts receivable balance of $420,000 at the beginning of the year and a year-end balance of $580,000. Net credit sales for the year totaled $3,600,000. The average collection period of the receivables was: (Round any intermediary calculations to two decimal places and your final answer to the nearest day.) A) 43 days. B) 59 days. C) 51 days. D) 8 days. Answer: C Explanation: Average receivables = ($420,000 + $580,000) ÷ 2 = $500,000 Receivable turnover = $3,600,000 ÷ $500,000 = 6.92 Days' receivables outstanding = 365 ÷ 7.20 = 51 days Diff: 2 LO: 12-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

13) The ratio that provides an estimate of the number of days, on average, that it takes for customers to pay their accounts is the: A) days' sales in receivables. B) current ratio. C) accounts receivable turnover. D) acid-test ratio. Answer: A Diff: 2 LO: 12-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 14) The ratio that measures a company's success in using its assets to earn income for the persons who finance the business is the: A) leverage. B) rate of return on total assets. C) debt ratio. D) times-interest-earned ratio. Answer: B Diff: 2 LO: 12-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 15) The ratio that measures the number of times that operating income can cover interest expense is the: A) leverage. B) rate of return on total assets. C) debt ratio. D) times-interest-earned ratio. Answer: D Diff: 1 LO: 12-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

16) The amount of a company's net income earned for each share of its outstanding common stock is termed the: A) return on equity. B) price/earnings ratio. C) earnings per share. D) dividend yield. Answer: C Diff: 2 LO: 12-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 17) XYZ Company has an inventory turnover of 20 times per year. The industry average is 5.0 times per year. What does a high inventory turnover mean? A) The company has too much inventory on hand. B) The company may have obsolete inventory on hand. C) The company may not be keeping enough inventory on hand which can lead to lost sales. D) The company is having a difficult time selling the inventory. Answer: C Diff: 2 LO: 12-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 18) American Furniture Company has an accounts receivable turnover ratio of 20 while the industry average is 10. What can be said about American Furniture Company's accounts receivable turnover ratio? A) American Furniture Company collects accounts receivable slower than the industry average. B) American Furniture Company collects accounts receivable faster than the industry average. C) American Furniture Company may have a credit policy that is too lenient in granting credit to new customers. D) American Furniture Company may have a lax credit department. Answer: B Diff: 2 LO: 12-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

19) What is accounts payable turnover? A) A ratio calculated as Purchases divided by ending balance in Accounts Payable. B) A ratio calculated as Cost of Goods Sold divided by average Accounts Payable. C) A ratio calculated as Purchases divided by average Accounts Payable. D) B and C. Answer: D Diff: 2 LO: 12-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 20) How is the cash conversion cycle computed? A) days' inventory outstanding + days' sales outstanding - days' payable outstanding. B) days' inventory outstanding - days' sales outstanding - days' payable outstanding. C) days' inventory outstanding - days' sales outstanding + days' payable outstanding. D) days' inventory outstanding + days' sales outstanding + days' payable outstanding. Answer: A Diff: 2 LO: 12-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 21) What do the price-earnings ratio and dividend yield have in common? A) Earnings per share is the denominator for both ratios. B) Earnings per share is the numerators for both ratios. C) Dividends per share is in both ratios. D) Market price per share is in both ratios. Answer: D Diff: 2 LO: 12-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 22) How is the leverage ratio calculated? A) total debt divided by total assets B) total assets divided by total debt C) average total assets divided by average common stockholders' equity D) average total debt divided by average total assets Answer: C Diff: 2 LO: 12-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 32 Copyright © 2019 Pearson Education, Inc.

23) With regard to DuPont analysis, the leverage ratio measures: A) the impact of equity financing on a company's profitability. B) the impact of debt financing on a company's profitability. C) the impact of leverage on a company's financial position. D) the impact of equity financing on a company's financial position. Answer: B Diff: 2 LO: 12-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 24) The leverage ratio is a component of: A) return on assets under DuPont analysis. B) return on equity under DuPont analysis. C) return on sales under DuPont analysis. D) total asset turnover under DuPont analysis. Answer: B Diff: 2 LO: 12-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 25) A company has return on assets of -10%. Return on sales are -6%. The leverage ratio is 3.0. Following DuPont analysis, what is return on equity? A) -6% B) -10% C) -30% D) -48% Answer: C Explanation: Return on assets -10% × Leverage ratio 3.0 = -30% Diff: 2 LO: 12-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

26) A company has return on assets of 8%. Return on sales are 4%. The leverage ratio is 3.0. Following DuPont analysis, what is return on equity? A) 4% B) 8% C) 24% D) 12% Answer: C Explanation: Return on assets 8% × Leverage ratio 3.0 = 24% Diff: 2 LO: 12-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 27) Which of the following statements about financial ratios is FALSE? A) When calculating return on assets, preferred dividends are subtracted from net income. B) When calculating return on equity, preferred dividends are subtracted from net income. C) When calculating the price-earnings ratio, preferred dividends are subtracted from market price per share. D) When calculating earnings per share, preferred dividends are subtracted from net income. Answer: C Diff: 2 LO: 12-4 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

28) The balance sheet at December 31, 2019 for Zumba Company follows: Current Assets: Cash and Cash Equivalents Accounts Receivable, net Inventories Prepaid Rent Total Current Assets Land, buildings and equipment, net Investments Total assets

$2 4,800 2,200 898 $7,900 7,400 500 $15,800

Current Liabilities: Accounts Payable Current Portion Long-Term Debt Accrued Salaries Payable Total Current Liabilities Long-Term Debt Total Liabilities

$500 2,500 1,000 4,000 8,000 12,000

Stockholders' Equity: Common Stock Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity

2,800 1,000 3,800 $15,800

Additional information follows: 1. Net income for the year ended December 31, 2019 is $2,020. 2. Cost of goods sold for the year ended December 31, 2019 is $4,400. 3. Inventory on January 1, 2019 is $1,800. 4. Accounts Receivable, net on January 1, 2019 are $4,400. 5. Total assets on January 1, 2019 are $20,000. 6. Net credit sales for the year ended December 31, 2019 are $14,600. 7. Net income before interest and taxes for the year ended December 31, 2019 is $4,800. 8. Interest expense for the year ended December 31, 2019 is $550. 9. Total stockholders' equity on January 1, 2019 is $3,500. Compute the following ratios: 1. Current ratio 2. Quick ratio 3. Accounts receivable turnover 4. Days' inventory outstanding 5. Times interest earned 6. Return on assets 7. Return on equity 35 Copyright © 2019 Pearson Education, Inc.

Answer: 1. Current ratio = $7,900 ÷ $4,000 = 1.98 2. Quick ratio = ($2 + $4,800) ÷ $4,000 = 1.20 3. Accounts receivable turnover = $14,600 ÷ [($4,400 + $4,800) ÷ 2] = 3.17 4. Days' inventory outstanding = 365 ÷ Inventory turnover Inventory turnover = $4,400 ÷ [($1,800 + $2,200) ÷ 2] = 2.2 Days' inventory outstanding = 365 ÷ 2.2 = 165.9 days 5. Times interest earned = $4,800 ÷ $550 = 8.73 6. Return on assets = $2,020 ÷ [($15,800 + $20,000) ÷ 2] = 11.3% 7. Return on equity = $2,020 ÷ [($3,800 + $3,500) ÷ 2] = 55.3% Diff: 2 LO: 12-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting Learning Objective 12-5 1) A corporation's net earnings (including earnings per share), receive more attention than any other single item in a financial statement. Answer: TRUE Diff: 1 LO: 12-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 2) To stockholders, the larger the net income, the greater the likelihood of dividends. Answer: TRUE Diff: 1 LO: 12-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) An important component of earnings quality is the conservative recognition of net revenues. Answer: TRUE Diff: 1 LO: 12-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

4) A trend of high and persistently improving operating earnings in relation to a company's net sales reflects increasing earnings quality. Answer: TRUE Diff: 1 LO: 12-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) Operating earnings should NOT be separated from items that represent isolated or nonrecurring events, such as discontinued operations. Answer: FALSE Diff: 1 LO: 12-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 6) All revenue should be recorded conservatively and clearly, and: A) recorded only when cash is collected. B) quickly. C) faithfully represent the facts. D) All of the above. Answer: C Diff: 2 LO: 12-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 7) After revenue, the next two important earnings-quality components are: A) cost of goods sold and the resulting gross profit. B) operating expenses and the resulting net income. C) cost of goods sold and the resulting net income. D) operating expenses and the resulting total costs. Answer: A Diff: 2 LO: 12-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

8) Operating earnings are earnings from: A) interest revenue. B) the company's core business. C) dividend revenue. D) all of the above. Answer: B Diff: 2 LO: 12-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 9) All public companies are required to have their financial statements audited ________ by a firm of independent certified public accountants. A) monthly. B) quarterly. C) yearly. D) whenever financials are prepared. Answer: C Diff: 2 LO: 12-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) After verifying information on the financials by an independent auditor, the auditor issues an "opinion on the ________ of presentation of the financial statements." A) verification B) validation C) fairness D) properness Answer: C Diff: 2 LO: 12-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

11) The financial statements are the responsibility of ________, and the responsibility of the ________ is to express an opinion on the financial statements based on the audit. A) auditor, management B) SEC, auditor C) management, SEC D) management, auditor Answer: D Diff: 2 LO: 12-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) A "red flag" on a financial statement means: A) a potential financial trouble. B) a potential irregularity. C) a company has claimed bankruptcy. D) A and B. Answer: D Diff: 2 LO: 12-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13) A company can be a risky investment if: A) cash flows have increased. B) receivables are being collected early. C) there is too much debt. D) inventories are selling too quickly. Answer: C Diff: 2 LO: 12-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

14) When market prices fully reflect all information available to the public, it is referred to as: A) efficient pricing. B) efficient capital market. C) transparency. D) effective capital market. Answer: B Diff: 2 LO: 12-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 15) Financial analysis helps mainly to identify the risks of various stocks and then to: A) make selling decisions. B) manage the risk. C) make buying decisions. D) determine ratios. Answer: B Diff: 2 LO: 12-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 16) It is ________ and ________ to sell or buy shares of a company on the basis of information not available to the general public A) lawful; ethical B) risky; unlawful C) risky; unethical D) unlawful; unethical Answer: D Diff: 2 LO: 12-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

17) An auditors' report by independent accountants (auditors): A) gives investors assurance that the company's financial statements conform to GAAP. B) ensures that the financial statements are error-free. C) gives investors assurance that the company's stock is a safe investment. D) is ultimately the responsibility of the management of the client company. Answer: A Diff: 2 LO: 12-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 18) To stockholders, the larger the net income, the greater the likelihood of: A) dividends. B) the company will purchase treasury stock. C) the stock price decreasing. D) all of the above. Answer: A Diff: 2 LO: 12-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 19) A knowledgeable investor tries to assess: A) earnings quality. B) accounts receivable. C) accounts payable. D) All of the above. Answer: A Diff: 2 LO: 12-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

Financial Accounting, 12e (Thomas/Tietz/Harrison) Appendix E: Investments Learning Objective E-1 1) To be classified as a current asset, an investment must either be liquid or the investor must intend to use it to pay a current liability. Answer: FALSE Diff: 2 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 2) Investments with insignificant influence: A) are reported at amortized cost on the balance sheet. B) are more liquid than cash. C) are reported at historical cost on the balance sheet. D) are reported using the fair value method on the balance sheet. Answer: D Diff: 2 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement, Reporting 3) Investments with insignificant influence are reported on the: A) income statement using fair value method. B) balance sheet at cost. C) balance sheet using fair value method. D) income statement at cost. Answer: C Diff: 2 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Reporting

4) To be classified as a current asset, an investment must meet which of the following criteria: A) the investment must be liquid. B) the investor must intend to either convert the investment to cash within one year or current operating cycle, whichever is longer, or use it to pay a current liability. C) the investment must be easily convertible to cash. D) all of the above. Answer: D Diff: 2 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Decision Modeling 5) Marathon Corporation owns 500 shares of Mini Company's common stock. Mini Company has 100,000 shares of common stock outstanding. Marathon Corporation is the ________ and Mini Company is the ________. A) investee; investor B) investor; investee C) parent company; subsidiary company D) controlling company; noncontrolling company Answer: B Diff: 2 LO: E-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 6) When an investment is readily convertible to cash and the investor plans to convert the investment to cash within one year, the investment is reported on the balance sheet as: A) a current asset. B) a long-term asset. C) stockholders' equity. D) a cash equivalent. Answer: A Diff: 2 LO: E-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

7) Long-term investments include: A) stocks and bonds that are not liquid or readily convertible to cash. B) securities that the investor expects to hold longer than one year or operating cycle, whichever is longer. C) securities reported in the non-current asset section of the balance sheet. D) all of the above. Answer: D Diff: 2 LO: E-1 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement Learning Objective E-2 1) Unrealized gains and losses on equity securities when the investor has insignificant influence are reported on the income statement. Answer: TRUE Diff: 2 LO: E-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 2) Cash dividends received on stock investments with less than 20% ownership of the investee should be credited to the Equity-Method Investment account. Answer: FALSE Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) An unrealized gain on an equity security when the investor has insignificant influence: A) is recorded when an investment is sold for more than its cost. B) is recorded when an investment is sold for less than its cost. C) is recorded when the fair market value of the investment is more than its cost, but it has not been sold. D) is recorded when the fair market value of the investment is less than its cost, but it has not been sold. Answer: C Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3 Copyright © 2019 Pearson Education, Inc.

4) A company's investment with insignificant influence has a fair market value which exceeds its cost. When recording the year-end adjustment, the: A) Investment in Equity Securities account will be credited. B) Unrealized Gain on Equity Securities account will be credited. C) Unrealized Loss on Equity Securities account will be debited. D) Unrealized Loss on Equity Securities account will be credited. Answer: B Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) Unrealized gains on equity securities when the investor has insignificant influence are reported on the: A) statement of cash flows as investing activities. B) balance sheet as an element of other comprehensive income. C) statement of cash flows as financing activities. D) income statement as Other Income. Answer: D Diff: 2 LO: E-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 6) Investments in equity securities with insignificant influence were purchased for $400,000, and had a fair value of $410,000 at the end of the year. The adjusting entry to record this difference includes a credit to: A) Retained Earnings. B) Unrealized Gain on Equity Securities. C) Investment in Equity Securities. D) Unrealized Loss on Equity Securities. Answer: B Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

7) Michael Company's investment in equity securities with insignificant influence had a fair value of $31,700 at the end of the prior year. Management decided to sell the investment. The investment was purchased for $27,800. If Michael Company sold this investment for $50,200, Michael will have a(n): A) Gain on Sale of Equity Securities for $22,400. B) Gain on Sale of Equity Securities for $18,500. C) Unrealized Loss on Equity Securities of $18,500. D) Unrealized Gain on Equity Securities of $22,400. Answer: B Explanation: $50,200 - $31,700 = $18,500 gain Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 8) When a company receives a cash dividend from equity securities with insignificant influence, the journal entry is: A) debit to Investment in Equity Securities and credit Cash. B) debit to Cash and credit to Dividend Revenue. C) debit to Dividend Revenue and credit to Cash. D) debit to Cash and credit to Investment in Equity Securities. Answer: B Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 9) The Investment in Equity Securities account when the investor has insignificant influence is reported on the: A) income statement using the equity method. B) income statement using the fair value method. C) balance sheet using the equity method. D) balance sheet using the fair value method. Answer: D Diff: 2 LO: E-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

10) At the beginning of the year, an investment in equity securities with insignificant influence was purchased for $400,000, and it has a fair value of $420,000 at the end of the year. The yearend journal entry will have a credit to: A) Retained Earnings. B) Unrealized Gain on Equity Securities. C) Investment in Equity Securities. D) Gain on Sale of Equity Securities. Answer: B Diff: 2 LO: E-2 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 11) If an investor owns less than 20% of the common stock of another company as a long-term investment: A) the equity method of accounting should be used for the investment. B) the investor has a controlling interest in the investee. C) the investor usually has little or no influence on the investee. D) the investor has significant influence on the investee. Answer: C Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) For accounting purposes, the method used to account for long-term investments in common stock is determined by: A) the size of the investor. B) the size of the investor when compared to the size of the investee. C) vote by the Board of Directors of the investor. D) the investor's percentage ownership of the investee's stock. Answer: D Diff: 2 LO: E-2 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

13) If 15% of the common stock of an investee company is purchased as a long-term investment, the appropriate method of accounting for the investment is: A) the equity method. B) the consolidation method. C) the fair value method. D) the lower of cost or market method. Answer: C Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 14) The fair value method of accounting for long-term investments in stock should be used when the: A) investor owns less than 20% of the outstanding stock of the investee. B) investor has significant influence over the investee's operating decisions and policies. C) investor has little or no influence on the investee. D) A and C. Answer: D Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 15) An investor receives a cash dividend from an investment with 3% ownership and insignificant influence. Which journal entry is required? A) a debit to Cash and a credit to Dividend Revenue B) a debit to Cash and a credit to Interest Revenue C) a debit to Cash and credit to Equity-Method Investment D) a debit to Cash and credit to Interest Receivable Answer: A Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

16) Smith Corporation purchases $620,000 of TMI Corporation's stock on October 18, 2020 at cost. Smith owns less than 2% of TMI's outstanding shares, and thus has insignificant influence. On December 1, 2020, Smith Corporation received a cash dividend of $12,000 on the TMI Corporation's stock. On December 31, 2020, Smith Corporation's investment in TMI Corporation has a fair value of $600,000. Required: Prepare the necessary journal entries. Explanations are not required. Date Accounts

Debit

Answer: Date Accounts Oct. 18, 2020 Investment in Equity Securities Cash

Credit

Debit Credit 620,000 620,000

Dec. 1, 2020 Cash

12,000 Dividend Revenue

Dec. 31, 2020 Unrealized Loss on Equity Securities Investment in Equity Securities Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

12,000 20,000 20,000

17) Jones Corporation purchases $500,000 of Basic Corporation's stock on October 1, 2020 at cost. Jones owns less than 2% of Basic's outstanding shares, and thus has insignificant influence. On December 1, 2020 Jones Corporation received a cash dividend of $15,000 on the Basic Corporation's stock. On December 31, 2020, Jones Corporation's investment in Basic Corporation has a fair value of $550,000. Required: Prepare the necessary journal entries. Explanations are not required. Date Accounts

Debit

Answer: Date Accounts Oct. 18, 2020 Investment in Equity Securities Cash

Credit

Debit Credit 500,000 500,000

Dec. 1, 2020 Cash

15,000 Dividend Revenue

15,000 50,000 50,000

18) On January 1, 2018, Innocente Company purchased 1,000 shares of Entel common stock at $40 per share. Innocente owns 3% of the outstanding shares with insignificant influence. On June 1, 2018, Entel declares and distributes a cash dividend of $0.50 per share. On December 31, 2018, the market price of Entel's stock is $44 per share. On February 1, 2019, the Entel's stock is sold for $48 per share. Prepare the journal entries on: 1. January 1, 2018 2. June 1, 2018 3. December 31, 2018 4. February 1, 2019 Explanations are not required. Date Accounts

Debit

Credit

Answer: Date Accounts 2018 1/1 Investment in Equity Securities Cash (1,000 × $40 = $40,000) 6/1

Cash (1,000 × $0.5) Dividend Revenue

2018 12/31 Investment in Equity Securities Unrealized Gain on Equity Securities (1,000 × ($44 - $40)) 2019 2/1 Cash (1,000 × $48 = $48,000) Investment in Equity Securities Gain on Sale of Equity Securities Diff: 2 LO: E-2 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

Debit

Credit

40,000 40,000 500 500

4,000 4,000

48,000 44,000 4,000

Learning Objective E-3 1) When an investor owns 35% of the stock of another business, cash dividends received from the investee company are recorded by decreasing the Equity-method Investment account. Answer: TRUE Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 2) The equity method is used to account for stock investments in which the investor company owns less than 20% of the outstanding stock of the investee. Answer: FALSE Diff: 1 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

3) Investments accounted for by the equity method are recorded initially at cost. Answer: TRUE Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) If an investor owns between 20% and 50% of an investee's voting stock, it is assumed that the investor has significant influence over the investee. Answer: TRUE Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) Under the equity method, when the investee reports net income, the Equity-method Investment account increases. Answer: TRUE Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 6) Under the equity method, the investor applies his percentage of ownership in recording his share of the investee's net income, but not dividends. Answer: FALSE Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 7) Cash dividends received on stock investments with more than 20% ownership of the investee, but less than 50% ownership, should be credited to the Equity-method Investment Revenue account. Answer: FALSE Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

8) An investor receives a cash dividend from an investment with 48% ownership and significant influence. Which journal entry is required? A) a debit to Cash and a credit to Dividend Revenue B) a debit to Cash and a credit to Equity-Method Investment C) a debit to Equity-Method Investment and a credit to Dividend Revenue D) a memorandum entry only Answer: B Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 9) When an investor owns between 20% and 50% of the outstanding stock of another company, the ________ method is used to account for the stock investment. A) fair value B) equity C) consolidated D) available-for-sale Answer: B Diff: 1 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10) An investor who may significantly influence the business activities of the investee should report the investment using the: A) fair value method. B) consolidated method. C) equity method. D) available-for-sale method. Answer: C Diff: 1 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

11) Under the equity method, the Equity-method Investment account is debited when the: A) investee reports net income. B) investee reports net loss. C) investor receives a cash dividend. D) investment is sold. Answer: A Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) A company that owns 40% of the common stock of another business recognizes revenue from the investment when: A) the investor sells the shares in the investee company. B) the investee issues a cash dividend. C) the investee recognizes net income. D) the investee issues a stock dividend. Answer: C Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13) Wolverine Corporation owns 27% of Buckeye Corporation. Net income for Buckeye for the year is $300,000. The journal entry prepared by Wolverine Corporation is: A) debit Equity-method Investment for $81,000 and credit Cash for $81,000. B) debit Equity-method Investment for $81,000 and credit Equity-Method Investment Revenue for $81,000. C) debit Cash for $81,000 and credit Equity-method Investment for $81,000. D) debit Equity-method Investment for $300,000 and credit Equity-method Investment Revenue for $300,000. Answer: B Explanation: 27% × $300,000 = $81,000 Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

14) If an investor company owns 35% of the common stock of another business, the investor: A) receives 35% of the investee's net income in cash. B) reports the Equity-method Investment Revenue on the balance sheet. C) records dividends received as investment revenue. D) increases its Equity-method Investment account for 35% of net income reported by the investee company. Answer: D Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 15) Under the equity method of accounting for long-term investments in common stock, when a cash dividend is received from the investee company: A) the investor's Equity-method Investment account is increased. B) the Dividend Revenue account is increased. C) the investor's Equity-method Investment account is decreased. D) no entry is necessary. Answer: C Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 16) If the equity method is used to account for a long-term investment in common stock, cash dividends received from the investee are recorded by the investor as: A) a debit to Equity-method Investment and a credit to Equity-method Investment Revenue. B) a debit to Cash and a credit to Dividend Revenue. C) a debit to Dividend Receivable and a credit to Dividend Revenue. D) a debit to Cash and a credit to Equity-method Investment Answer: D Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

17) Acme Company owns 35% of Superior Company. Superior Company declared and paid $33,000 cash dividends for the year. Acme Company's journal entry to record the dividends includes a: A) credit to Equity-method Investment for $11,550. B) credit to Equity-method Investment for $33,000. C) credit to Dividend Revenue for $11,550. D) credit to Dividend Revenue for $33,000. Answer: A Explanation: $33,000 × 35% = $11,550 Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 18) Under the equity method, if the investee company has a net loss, the investor company will ________ for its share of the net loss. A) debit the Equity-method Investment account B) credit the Unrealized Loss on Equity-method Investment account C) credit the Equity-method Investment account D) debit the Unrealized Loss on Equity-method Investment account Answer: C Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 19) On January 1, 2019, Barry Corporation paid $750,000 for 100,000 shares of Oak Company's common stock, which represents 40% of Oak's outstanding common stock. For the year ending December 31, 2019, Oak reported net income of $190,000 and declared and paid cash dividends of $60,000. Barry should report the investment in Oak Company on its balance sheet at December 31, 2019 at: A) $750,000. B) $698,000. C) $774,000. D) $802,000. Answer: D Explanation: $750,000 + ($190,000 × 40%) - ($60,000 × 40%) = $802,000 Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

20) Daniel Company purchased 34% of the outstanding shares of Clooney Corporation on January 1 at a cost of $620,000. Clooney Corporation reported net income of $93,000 and declared and paid total dividends of $20,000 for the year. At the end of the year, Clooney shares had a current fair value of $614,000. After all necessary adjusting entries are made for the year, the balance in Daniel Company's Equity-method Investment account will be: A) $614,000. B) $644,820. C) $693,000. D) $687,000. Answer: B Explanation: $620,000 + ($93,000 × 34%) - ($20,000 × 34%) = $644,820 Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 21) On January 1 of the current year, Conner Corporation purchased 100,000 of the 400,000 shares of outstanding stock of JJ Company for $560,000. Net income reported by JJ Company for the year was $600,000. Dividends declared and paid by JJ Company during the year were $130,000. The Equity-method Investment will be reported on Conner Corporation's December 31 balance sheet for the current year in the amount of: A) $560,000. B) $592,500. C) $677,500. D) $742,500. Answer: C Explanation: $560,000 + ($600,000 × 0.25) - ($130,000 × 0.25) = $677,500 Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

22) On January 1, of the current year, Rod Corporation purchased 40% of the outstanding stock of Alamo Corporation for $480,000. Net income reported by Alamo for the year was $210,000. Dividends declared and paid by Alamo during the year were $40,000. The amount of investment revenue that Rod should recognize for the current year is: A) $16,000. B) $68,000. C) $84,000. D) $100,000. Answer: C Explanation: $210,000 × 40% = $84,000 Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 23) On January 1 of the current year, Gardner Corporation purchased 29% of the common stock outstanding of Lance Corporation for $300,000. During the year, Lance Corporation reported net income of $80,000 and declared and paid cash dividends of $37,000. The balance of the Equitymethod Investment account at December 31 for the current year, is: A) $300,000. B) $312,470. C) $323,200. D) $333,930. Answer: B Explanation: $300,000 + ($80,000 × 29%) - ($37,000 × 29%) = $312,470 Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 24) Milton Company owns a 26% interest in the stock of Darcy Corporation. During the year, Darcy declares and pays $23,000 in dividends to Milton, and reports $110,000 in net income. Milton Company will report Equity-method Investment Revenue of: A) $5980. B) $22,620. C) $28,600. D) $34,580. Answer: C Explanation: $110,000 × 26% = $28,600 Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 18 Copyright © 2019 Pearson Education, Inc.

25) An investor owns 28% of the outstanding common stock of Stokes Corporation. Stokes Corporation declares and pays a $60,000 dividend. Which journal entry should the investor prepare? A) debit Equity-method Investment for $16,800 and credit Cash for $16,800 B) debit Cash for $16,800 and credit Equity-method Investment for $16,800 C) debit Cash for $16,800 and credit Dividend Revenue for $16,800 D) debit Dividend Receivable for $16,800 and credit Dividend Revenue for $16,800 Answer: B Explanation: $60,000 × 28% = $16,800 Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 26) An investor owns 32% of the outstanding common stock of Leshan Company. Leshan Company reports net income of $90,000 for the current year. Which journal entry should the investor prepare? A) debit Cash for $28,800 and credit Equity-method Investment Revenue for $28,800 B) debit Cash for $28,800 and credit Equity-method Investment for $28,800 C) debit Equity-method Investment for $28,800 and credit Equity-method Investment Revenue for $28,800 D) debit Equity-method Investment Revenue for $28,800 and credit Equity-method Investment for $28,800 Answer: C Explanation: $90,000 × 32% = $28,800 Diff: 2 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

27) On January 1, 2019, Walker Company pays $10 million for 40% of the voting stock of a supplier, Dorglass, Inc. On December 1, 2019, Dorglass declared and paid cash dividends of $100,000. For the year ending December 31, 2019, Dorglass also reported net income of $1,000,000. At December 31, 2019, the fair value of 40% of Dorglass's stock was $9 million. On January 1, 2020, all the Dorglass stock was sold for $9 million. Required: Prepare journal entries on the following dates: 1. January 1, 2019 2. December 1, 2019 3. December 31, 2019 4. January 1, 2020 Explanations are not required. Date

Account

Debit

Credit

Answer: Date 1/1/2019

Account Equity-method Investment Cash

Debit Credit 10,000,000 10,000,000

12/1/2019 Cash ($100,000 × 40%) Equity-method Investment

40,000

12/31/2019 Equity-method Investment Equity-method Investment Revenue ($1,000,000 × 40%)

400,000

1/1/2020

Cash Loss on Sale of Equity-method Investment Equity-method Investment ($10,000,000 + $400,000 - $40,000)

40,000

400,000

9,000,000 1,360,000 10,360,000

Diff: 3 LO: E-3 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement Learning Objective E-4 1) The consolidation accounting method is appropriate when an investor controls an investee by ownership of more than 50% of the investee's voting stock. Answer: TRUE Diff: 1 LO: E-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 2) Consolidated financial statements combine the financial statements of the parent company and its subsidiaries. Answer: TRUE Diff: 1 LO: E-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting

3) In consolidation accounting, a year-end elimination entry is required to add the subsidiary company's stockholders' equity accounts to those of the parent company. Answer: FALSE Diff: 2 LO: E-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) A controlling interest enables the investor to elect a majority of the members of the investee's board of directors and thus control the investee's policies. Answer: TRUE Diff: 1 LO: E-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) After the work sheet is complete, the consolidated amount for each account represents the total asset, liability, and equity amounts controlled by the parent corporation. Answer: TRUE Diff: 1 LO: E-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 6) A noncontrolling interest arises in all consolidations, regardless of the parent's level of ownership. Answer: FALSE Diff: 1 LO: E-4 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

7) Consolidated financial statements are prepared when a company owns ________ of the common stock of another company. A) between 20% and 50% B) 50% or more C) more than 50% D) more than 90% Answer: C Diff: 1 LO: E-4 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 8) Consolidated financial statements are prepared for the: A) balance sheet and income statement only. B) statement of cash flows and statement of stockholders' equity only. C) balance sheet, income statement and statement of cash flows only. D) balance sheet, income statement, statement of cash flows and statement of stockholders' equity. Answer: D Diff: 2 LO: E-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 9) Consolidated financial statements: A) are prepared if the parent owns more than 20% of the investee's voting stock. B) do not include a consolidated statement of cash flows because investors need to understand the separate cash flows of the parent and each individual subsidiary. C) allow investors to gain a better perspective on total operations than they could by examining the reports of the parent and each individual subsidiary. D) do not identify the amount of noncontrolling interest in subsidiaries' stock because investors do not focus on that information. Answer: C Diff: 2 LO: E-4 AACSB: Analytical Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

Learning Objective E-5 1) Investments in debt securities may be divided into held-to-maturity securities, trading securities, and available-for-sale securities. Answer: TRUE Diff: 2 LO: E-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 2) Both trading and available-for-sale investments in debt securities are accounted for using the fair value method in a way that is similar to how investments in equity securities with insignificant influence are accounted for. Answer: TRUE Diff: 1 LO: E-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement 3) The amortized cost method determines the carrying value of held-to-maturity debt investments. Answer: TRUE Diff: 1 LO: E-5 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 4) An investment in bonds is categorized as a held-to-maturity investment if management intends to sell the investment before its maturity date. Answer: FALSE Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 5) The face interest rate of a bond determines the cash amount of interest the debtor company is expected to pay annually or semiannually. Answer: TRUE Diff: 1 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 24 Copyright © 2019 Pearson Education, Inc.

6) The market prices of bonds fluctuate inversely with market interest rates. Answer: TRUE Diff: 1 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 7) A quoted bond price of 103 means that the bonds were sold at a discount. Answer: FALSE Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 8) At maturity, the carrying amount of a bond should be equal to its face value. Answer: TRUE Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 9) Debt investments that are expected to be sold within the near term, with the intent of generating profits on the sale, are called: A) held-to-maturity debt investments. B) trading debt securities. C) available-for-sale debt securities. D) equity-method investments. Answer: B Diff: 2 LO: E-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

10) All investments in debt securities NOT classified as trading securities or held-to-maturity securities are classified as: A) debt securities. B) equity securities. C) marketable securities. D) available-for-sale securities. Answer: D Diff: 1 LO: E-5 AACSB: Reflective Thinking AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting 11) Matthew Company purchases held-to-maturity bonds for $12,000 cash. The journal entry to record this transaction will include a: A) debit to the Held-to Maturity Investment in Bonds account and a credit to Cash. B) debit to Cash and a credit to the Held-to Maturity Investment in Bonds account. C) debit to the Long-term Investment account and a credit to Cash. D) debit to the Unrealized Loss on Held-to Maturity Investment in Bonds account and a credit to Cash. Answer: A Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) When a company receives interest revenue from a held-to maturity bond, the journal entry includes: A) a debit to Interest Revenue and credit to Cash. B) a debit to Dividend Revenue and credit to Cash. C) a debit to Cash and credit to Dividend Revenue. D) a debit to Cash and credit to Interest Revenue. Answer: D Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

13) On January 1, 2019, Dodge Company purchases $106,000, 4% bonds at a price of 90.5 and a maturity date of January 1, 2029. Dodge Company intends to hold the bonds until their maturity date and has the ability to do so. Interest is paid semiannually, on January 1 and July 1. Dodge Company has a calendar year end. The entry to record the purchase of the bond investment on January 1, 2019, is: A) debit Held-to-Maturity Investment in Bonds for $106,000 and credit Cash for $106,000. B) debit Held-to-Maturity Investment in Bonds for $95,930 and credit Cash for $95,930. C) debit Cash for $106,000 and credit Bonds Payable for $106,000. D) debit Cash for $95,930 and credit Investment in Bonds for $95,930. Answer: B Explanation: $106,000 × = $95,930 Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 14) On January 1, 2019, Dooley Company purchases $92,000, 6% bonds at a price of 90.8 and a maturity date of January 1, 2029. Dooley Company intends to hold the bonds until their maturity date and has the ability to do so. Interest is paid semiannually, on January 1 and July 1. Dooley Company has a calendar year end. The entry for the receipt of interest on July 1, 2019 is: A) debit Cash for $2,760 and credit Interest Revenue for $2,760. B) debit Cash for $5,520 and credit Interest Revenue for $5,520. C) debit Investment in Bonds for $2,760 and credit Interest Revenue for 2,760. D) debit Investment in Bonds for $5,520 and credit Interest Revenue for $5,520. Answer: A Explanation: $92,000 × 6% × 0.5 = $2,760 Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

15) On January 1, 2019, Corbin Company purchases $176,000, 4% bonds at a price of 96 and a maturity date of January 1, 2029. Corbin Company intends to hold the bonds until their maturity date and has the ability to do so. Interest is paid semiannually, on January 1 and July 1. Corbin Company has a calendar year end and uses the straight-line amortization method for discounts and premiums. The entry to amortize the bond discount or premium on July 1, 2019 is: A) debit Held-to-Maturity Investment in Bonds for $352 and credit Interest Receivable for $352. B) debit Cash for $704 and credit Interest Revenue for $704. C) debit Held-to-Maturity Investment in Bonds for $352 and credit Interest Revenue for $352. D) debit Held-to-Maturity Investment in Bonds for $704 and credit Interest Revenue for $704. Answer: C Explanation: (100 - 96)% × $176,000 = $7,040 discount / 20 periods = $352 Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 16) On January 1, 2019, Benson Company purchases $120,000, 8% bonds at a price of 90 and a maturity date of January 1, 2024. Benson Company plans to hold the bonds until their maturity date and has the ability to do so. Interest is paid semiannually, on January 1 and July 1. Benson Company has a calendar year and uses the straight-line amortization method for discounts and premiums. The adjusting entry to amortize the discount and record interest revenue on December 31, 2019 is: A) debit Cash $1,200 and credit Interest Revenue $1,200. B) debit Cash $9,600 and credit Interest Revenue $9,600. C) debit to Interest Receivable $4,800, debit Held-to-Maturity Investment in Bonds for $1,200 and credit Interest Revenue $6,000. D) debit to Interest Receivable $9,600 and credit Interest Revenue $9,600. Answer: C Explanation: $120,000 × 8% × 1/2 = $4,800 ((100 - 90)/100) × $120,000 = $12,000 discount ÷ 10 interest payments = $1,200 Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

17) On January 1, 2019, Brooklyn Company purchases $82,000, 8% bonds at a price of 90 and a maturity date of January 1, 2029. Brooklyn Company intends to hold the bonds until maturity and has the ability to do so. Interest is paid semiannually, on January 1 and July 1. Brooklyn Company has a calendar year and uses the straight-line amortization method for discounts and premiums. The adjusting entry to amortize the bond discount or premium on December 31, 2019 is: A) debit Interest Receivable $3,280 and credit Interest Revenue $3,280. B) debit Interest Receivable $6,560 and credit Interest Revenue $6,560. C) debit Held-to-Maturity Investment in Bonds $410 and credit Interest Revenue $410. D) debit Held-to-Maturity Investment in Bonds $820 and credit Interest Revenue $820. Answer: C Explanation: Discount: ((100 - 90)/100) × $82,000 = $8,200 discount Amortization of discount: $8,200 ÷ 20 interest payments = $410 Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 18) On January 1, 2018, Winston Company purchased 6% bonds with a face value of $62,000 for par. Winston Company intends to hold the bonds until maturity and has the ability to do so. Interest is payable semiannually on July 1 and January 1. The company's fiscal year ends on December 31. The journal entry on July 1, 2018 is: A) debit Cash $3,720 and credit Interest Revenue $3,720. B) debit Cash $1,860 and credit Interest Revenue for $1,860. C) debit Cash $1,860 and credit Interest Receivable for $1,860. D) debit Cash $3,720 and credit Interest Receivable for $3,720. Answer: B Explanation: $62,000 × 6% × 1/2 = $1,860 Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

19) On January 1, 2018, Winston Company purchased 4% bonds with a face value of $80,000 for par. Winston Company intends to hold the bonds until maturity and has the ability to do so. Interest is payable semiannually on July 1 and January 1. The company's fiscal year ends on December 31. The company uses the straight-line amortization method for discounts and premiums. The journal entry on December 31, 2018 is: A) debit Interest Receivable for $3,200 and credit Held-to-Maturity Investment in Bonds $3,200. B) debit Cash for $1,600 and credit Interest Revenue for $1,600. C) debit Interest Receivable for $1,600 and credit Interest Revenue for $1,600. D) debit Interest Receivable for $1,600 and credit Held-to-Maturity Investment in Bonds $1,600. Answer: C Explanation: $80,000 × 4% × 1/2 = $1,600 Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 20) Held-to-maturity investments in bonds are initially reported at ________ on the purchase date. On a subsequent balance sheet date, the bonds are reported at ________. A) cost; fair value. B) amortized cost; fair value. C) cost; amortized cost. D) cost; lower of cost or market. Answer: C Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 21) On January 1, 2019, Carmody Corporation purchased 6% bonds with a face value of $66,000 for $68,000. Carmody Corporation intends to hold the bonds until the maturity date and has the ability to do so. Interest is paid semiannually on January 1 and July 1. The company uses the straight-line amortization method for discounts and premiums. The journal entry on January 1, 2019 is: A) debit Held-to-Maturity Investment in Bonds for $66,000, debit Premium on Bonds for $2,000 and credit Cash for $68,000. B) debit Held-to-Maturity Investment in Bonds for $68,000 and credit Cash for $68,000. C) debit Investment in Bonds for $68,000 and credit Interest Revenue for $68,000. D) debit Investment in Bonds for $66,000, debit Premium on Bonds for $2,000 and credit Interest Revenue $68,000. Answer: B Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 30 Copyright © 2019 Pearson Education, Inc.

22) On January 1, 2019, Exclusive Company purchases $10,000 of 6% bonds in Smiley Company at a price of 95. Exclusive Company intends to hold the bonds until the maturity date on January 1, 2029, and has the ability to do so. The interest dates are January 1 and July 1. Exclusive Company amortizes any discount or premium using the straight-line method. The fiscal year end of Exclusive Company is December 31. Required: Prepare the journal entries on: 1. January 1, 2019 2. July 1, 2019 3. December 31, 2019 4. January 1, 2020 Explanations are not required. Date

Account

Debit

Credit

Answer: Date Account Debit Credit Held-to-Maturity Investment in Bonds (10,000 × 1/1/2019 .95) 9,500 Cash 9,500 7/1/2019 Cash($10,000 × 3%) Interest Revenue

300

7/1/2019 Held-to-Maturity Investment in Bonds Interest Revenue ($10,000 × 0.05 × 1/20)

300

12/31/201 9 Interest Receivable Interest Revenue

300

12/31/201 9 Held-to-Maturity Investment in Bonds Interest Revenue

1/1/2020 Cash

300 Interest Receivable

Diff: 2 LO: E-5 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

300

Financial Accounting, 12e (Thomas/Tietz/Harrison) Appendix F: Time Value of Money Learning Objective F-1 1) The present value of a single amount in the future can be determined using a present value of $1 table. Answer: TRUE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 2) The process of determining the present value of a sum of money is called discounting because the present value of a sum of money is more than the future value of a sum of money. Answer: FALSE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 3) Ordinary annuity investments provide multiple receipts of an unequal amount at fixed yearend intervals over the investment's duration. Answer: FALSE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 4) When the market interest rate is equal to the face interest rate on bonds, the present value of the bonds will be less than the bond's face value at the date of sale of the bonds. Answer: FALSE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

5) Most business decision makers solve present-value problems with Excel because the presentvalue tables are limited to the interest rates in the columns and the number of periods in the rows. Answer: TRUE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 6) The difference between the future value of an investment and the original investment is the amount of interest revenue that will be earned. Answer: TRUE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 7) Interest, the cost of using money, is recorded as interest revenue by the borrower. Answer: FALSE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 8) The term time value of money refers to the fact that money earns interest over time. Answer: TRUE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 9) Most businesses ignore compound interest when calculating interest on debt or investments. Answer: FALSE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

10) The term future value means the sum of money that an investment will be "worth" at a specified time in the future, assuming a certain interest rate. Answer: TRUE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 11) Whether making investments or borrowing money, we don't need to recognize the interest we receive or pay. Answer: FALSE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 12) Interest is the cost of using money. Answer: TRUE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 13) The time value of money plays a key role in measuring the value of certain long-term investments as well as long-term debt. Answer: TRUE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 14) Compound interest is only the interest you earn on your principal amount. Answer: FALSE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

15) The term present value means today's value of a future payment or a series of future payments, assuming that those payments include interest at the current market rate. Answer: TRUE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 16) An ordinary annuity is an investment that provides multiple receipts of an equal amount at fixed year-end intervals over the investment's duration. Answer: TRUE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 17) The present value of a bond—its market price—is the present value of the future principal amount at maturity plus the present value of the future stated interest payments. Answer: TRUE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 18) The principal, when investing in a bond, is a single amount to be received by the investor and paid by the debtor at maturity. Answer: TRUE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 19) The interest paid on a bond is NOT an annuity because it occurs periodically. Answer: FALSE Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

20) All of the following are necessary to compute the future value of a single amount EXCEPT the: A) interest rate. B) length of time between investment and future payment or receipt. C) amount of initial payment or receipt. D) maturity value. Answer: D Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 21) To calculate the future value of an investment, you need ________ inputs. A) 2 B) 3 C) 4 D) 5 Answer: B Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 22) The future value of an investment that pays interest will always be: A) equal to the investment. B) greater than the investment. C) less than the investment. D) equal to the interest rate. Answer: B Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

23) In present value calculations, the process of determining the present value of a single sum of money is called: A) allocating. B) pricing. C) negotiating. D) discounting. Answer: D Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 24) A single amount of $4700 is to be received in 3 years. If the single amount is discounted at 6% for 3 periods, the present value is ________. The present value of $1 for 3 periods at 6% is 0.840. The present value of an ordinary annuity of $1 for 3 periods at 6% is 2.673. (Round your final answer to the nearest dollar.) A) $3948 B) $4418 C) $4700 D) $12,563 Answer: A Explanation: $4700 × 0.840 = $3948 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 25) A single amount of $6,400 is to be received in 4 years. If the single amount is discounted at 8% for 4 periods, the present value is ________. The present value of $1 for 4 periods at 8% is 0.735. The present value of an ordinary annuity of $1 for 4 periods at 8% is 3.312. (Round your final answer to the nearest dollar.) A) $4,704 B) $5,376 C) $6,400 D) $21,197 Answer: A Explanation: $6,400 × 0.735 = $4,704 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

26) A single amount of $10,500 is to be received in 3 years. If the single amount is discounted at 8% for 3 periods, the present value is ________. The present value of $1 for 3 periods at 8% is 0.794. The present value of an ordinary annuity of $1 for 3 periods at 8% is 2.577. (Round your final answer to the nearest dollar.) A) $8,316 B) $10,500 C) $8,337 D) $27,059 Answer: C Explanation: $10,500 × 0.794 = $8,337 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 27) Which of the following discount rates will produce the smallest present value of a single sum of money? A) 4% B) 6% C) 7% D) 9% Answer: D Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 28) Cooper Company has purchased equipment that requires annual payments of $18,000 to be paid at the end of each of the next 6 years. The discount rate is 8%. The present value of $1 for six periods at 8% is 0.630. The present value of an ordinary annuity of $1 for six periods at 8% is 4.623. What amount will be assigned to the equipment at the purchase date? (Round your final answer to the nearest dollar.) A) $3,894 B) $83,214 C) $94,554 D) $11,340 Answer: B Explanation: $18,000 × 4.623 = $83,214 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

29) On January 1, 2018, bonds with a face value of $72,000 were sold. The bonds mature on January 1, 2028. The face interest rate is 6%. The bonds pay interest semiannually on July 1 and January 1. The market rate of interest is 10%. What is the market price of the bonds on January 1, 2018? The present value of $1 for 20 periods at 5% is 0.377. The present value of an ordinary annuity of $1 for 20 periods at 5% is 12.462. The present value of $1 for 20 periods at 3% is 0.554. The present value of an ordinary annuity of $1 for 20 periods at 3% is 14.878. (Round your final answer to the nearest dollar.) A) $54,062 B) $74,160 C) $72,024 D) $72,000 Answer: A Explanation: ($72,000 × 0.377) + ($72,000 × 3% × 12.462) = $54,062 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 30) On January 1, 2019, bonds with a face value of $94,000 were sold. The bonds mature on January 1, 2029. The face interest rate is 8% annually. The bonds pay interest semiannually on July 1 and January 1. The market rate of interest is 10% annually. What is the market price of the bonds on January 1, 2019? The present value of $1 for 20 periods at 5% is 0.377. The present value of an ordinary annuity of $1 for 20 periods at 5% is 12.462. The present value of $1 for 10 periods at 10% is 0.463. The present value of an ordinary annuity of $1 for 10 periods at 10% is 6.145. (Round your final answer to the nearest dollar.) A) $82,295 B) $66,627 C) $94,000 D) $97,760 Answer: A Explanation: ($94,000 × 0.377) + ($94,000 × 4% × 12.462) = $82,295 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

31) Which of the following statements regarding the concept of present value is INCORRECT? A) Compound interest is not only interest earned on the principal amount but also the interest received on the interest already earned. B) Ordinary annuity investments provide multiple receipts of an equal amount at fixed year-end intervals over the investment's duration. C) When using the Present Value of Ordinary Annuity of $1 table, multiply the factor times the amount that will be received at the end of each year times the number of years the amount will be received. D) The present value of a bond is the present value of the principal amount at maturity plus the present value of the stated interest payments. Answer: C Diff: 2 LO: F-1 AACSB: Reflective Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting 32) What is the future value of a single $4,800 investment today that pays interest of 6% compounded annually for the next 3 years? (Round all intermediary calculations and final calculations to the nearest whole dollar.) A) $5,717 B) $5,088 C) $5,393 D) $4,800 Answer: A Explanation: $4,800 × (1 + 0.06) = $5,088 $5,088 × (1 + 0.06) = $5,393 $5,393 × (1 + 0.06) = $5,717 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 33) You are calculating the present value of $10,000 that you will receive five years from now. Which table will you use to calculate the present value of that $10,000? A) Present Value of $1 table B) Future Value of $1 table C) Present Value of Ordinary Annuity of $1 table D) Future Value of Ordinary Annuity of $1 table Answer: A Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 9 Copyright © 2019 Pearson Education, Inc.

34) You are calculating the present value of $15,000 that you will receive at the end of every year for the next ten years. Which table will you use to obtain the present value of those $15,000 payments you will be receiving? A) Present Value of $1 table B) Future Value of $1 table C) Present Value of Ordinary Annuity of $1 table D) Future Value of Ordinary Annuity of $1 table Answer: C Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 35) You have received a settlement offer from an automobile manufacturer due to mechanical problems with your automobile. The manufacturer will pay you $49,000 in one lump sum five years from now. You can earn 6% on your investments. The present value of $1 for 5 periods at 6% is 0.747. The present value of an ordinary annuity of $1 for 5 periods at 6% is 4.212. The present value of the manufacturer's settlement offer is closest to: A) $36,015. B) $49,000. C) $36,603. D) $206,388. Answer: C Explanation: $49,000 × 0.747 = $36,603 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 36) You have won $1,250,000 in a lottery. Your winnings will be paid to you in equal annual year-end installments of $250,000 over 5 years. You estimate that you can earn 4% on your investments. The present value of $1 for 5 periods at 4% is 0.822. The present value of an ordinary annuity of $1 for 5 periods at 4% is 4.452. The present value of your $1,250,000 winnings would be closest to: A) $1,113,000. B) $205,500. C) $1,027,500. D) $1,250,000. Answer: A Explanation: $260,000 × 4.329 = $1,125,540 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 10 Copyright © 2019 Pearson Education, Inc.

37) Smith Financing leases cars to car rental companies. Smith has just signed a 5-year lease agreement that requires annual year-end lease payments of $470,000. The present value of $1 for 5 periods at 6% is 0.747. The present value of an ordinary annuity of $1 for 5 periods at 6% is 4.212. What is the present value of the lease when the lease commences using a 6% interest rate? A) $1,979,640 B) $2,350,000 C) $$2,173,750 D) $1,588,600 Answer: A Explanation: $470,000 × 4.212 = $1,979,640 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 38) You have received a settlement offer from a restaurant for your medical expenses due to food poisoning. The restaurant will pay you $110,000 in one lump sum two years from now. You can earn 10% on your investments. The present value of $1 for 2 periods at 10% is 0.826. The present value of an ordinary annuity of $1 for 2 periods at 10% is 1.736. The present value of the settlement offer is closest to: A) $220,000. B) $110,000. C) $190,960. D) $90,860. Answer: D Explanation: $110,000 × 0.826 = $90,860 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

39) You have won $4,400,000 in a lottery. Your winnings will be paid to you in equal annual year-end installments of $440,000 over 10 years. You estimate that you can earn 6% on your investments. The present value of $1 for 10 periods at 6% is 0.558. The present value of an ordinary annuity of $1 for 10 periods at 6% is 7.36. The present value of your $4,400,000 winnings would be closest to: A) $4,400,000. B) $3,238,400. C) $2,978,800. D) $3,850,000. Answer: B Explanation: $440,000 × 7.36 = $3,238,400 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement 40) Tanko Financing leases phones to various companies for business use. Tanko has just signed a 2-year lease agreement that requires annual year-end lease payments of $340,000. The present value of $1 for 2 periods at 5% is 0.907. The present value of an ordinary annuity of $1 for 2 periods at 5% is 1.859. What is the present value of the lease when the lease commences using a 5% interest rate? A) $680,000 B) $340,000 C) $632,060 D) $308,380 Answer: C Explanation: $340,000 × 1.859 = $632,060 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

41) On January 1, 2018, bonds with a face value of $100,000 were sold. The bonds mature on January 1, 2028. The face interest rate is 6%. The bonds pay interest semiannually on July 1 and January 1. The market rate of interest is 10%. What is the market price of the bonds on January 1, 2018? The present value of $1 for 20 periods at 5% is 0.377. The present value of an ordinary annuity of $1 for 20 periods at 5% is 12.462. The present value of $1 for 20 periods at 3% is 0.554. The present value of an ordinary annuity of $1 for 20 periods at 3% is 14.877. (Please show all work and round your final answer to the nearest dollar.) Answer: PV of principal: ($100,000 × 0.377) = $37,700 PV of stated (cash) interest: ($100,000 × 3% × 12.462) = $37,386 PV (market price) of bonds: = $75,086 Diff: 2 LO: F-1 AACSB: Analytical Thinking AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement