CHAPTER 1 INTRODUCTION TO FINANCIAL STATEMENTS Item 1. 2. 3. 4. 5. 6. 7. 8. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 175. 176. 177. 178. 192. 193.
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY LO BT Item LO BT Item LO BT Item LO BT Item LO True-False Statements 1 9. 1 17. 2 25. 3 33. 3 K K K K 1 K 10. 1 K 18. 2 C 26. 3 K 34. 3 1 11. 1 19. 2 27. 3 35. 3 K K K K 1 12. 2 20. 3 28. 3 36. 3 K K K C 1 K 13. 2 K 21. 3 K 29. 3 C 37. 3 1 K 14. 2 K 22. 3 K 30. 3 C 38. 3 1 K 15. 2 K 23. 3 K 31. 3 C 39. 3 1 K 16. 2 K 24. 3 K 32. 3 C 40. 3 Multiple Choice Questions 1 68. 1 95. 3 122. 3 149. 3 K K AP AP 1 69. 1 96. 3 123. 3 150. 3 K K K AN 1 70. 1 97. 2 124. 3 151. 3 K K C AN 1 71. 1 98. 2 125. 3 152. 3 K K C K 1 K 72. 1 C 99. 3 K 126. 3 K 153. 3 1 K 73. 1 K 100. 3 K 127. 3 K 154. 3 1 K 74. 1 K 101. 3 K 128. 3 AP 155. 3 1 K 75. 1 C 102. 3 C 129. 3 AP 156. 3 1 76. 2 103. 3 130. 3 157. 3 K C K AP 1 77. 2 104. 3 131. 3 158. 3 K C C AP 1 78. 2 105. 3 132. 3 159. 3 C K K AN 1 79. 2 106. 3 133. 3 160. 3 C K K AN 1 80. 2 107. 3 134. 3 161. 3 K K K AN 1 81. 2 108. 3 135. 3 162. 3 K K K AN 1 82. 2 109. 3 136 3 163. 3 C K C AN 1 83. 2 110. 3 137. 3 164. 3 K K K K 1 K 84. 2 K 111. 3 K 138. 3 K 165. 3 1 K 85. 2 K 112. 3 K 139. 3 K 166. 3 1 K 86. 2 K 113. 3 C 140. 3 K 167. 3 1 K 87. 2 K 114. 3 K 141. 3 K 168. 3 1 88. 2 115. 3 142. 3 169. 3 K K C K 1 89. 2 116. 3 143. 3 170. 3 K K K K 1 90. 2 117. 3 144. 3 171. 3 K K K K 1 91. 2 118. 3 145. 3 172. 3 K K C K 1 92. 2 119. 3 146. 3 173. 3 K K AP K 1 93. 2 120. 3 147. 3 K K AP C 174. 3 1 94. 3 3 148. 3 K AP 121. AP K Brief Exercises 1 C 179. 3 AP 183. 3 AP 187. 3 C 191. 3 2 180. 3 184. 3 188. 3 C C AP AN AP 181. AP 185. K C 3 3 3 189. 3 3 AP 182. 3 K 186. 3 C 190. 3 AN Exercises 3 AP 194. 3 AP 196. 3 AN 198. 3 AP 200. 3 3 AP 195. 3 AP 197. 3 AP 199. 3 AN 201. 3
.
BT K K K K K K K C K C C C AP AP AP AP AP AP K K AN AN AN AN AN K K K K K K K C K
AN
AP AN
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
1-2
202. 203.
1 1
K K
210.
1-6
K
211. 212. 213.
1 1 1
K C C
204. 205.
2 3
K K
Completion Statements 206. 3 K 208. 207. 3 K 209.
3 3
K K
3 3 3
C E C
Matching
214. 215. 216.
1 3 3
K C C
Short Answer Essay 217. 3 AN 220. 218. 3 K 221. 219. 3 C 222.
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Item
Type
Item
Type
Learning Objective 1 Item Type Item Type
1.
TF
11.
TF
50.
MC
60.
MC
70.
MC
211.
SA
2.
TF
41.
MC
51.
MC
61.
MC
71.
MC
212.
SA
3.
TF
42.
MC
52.
MC
62.
MC
72.
MC
213.
SA
4.
TF
43.
MC
53.
MC
63.
MC
73.
MC
214.
SA
5.
TF
44.
MC
54.
MC
64.
MC
74.
MC
6.
TF
45.
MC
55.
MC
65.
MC
75.
MC
7.
TF
46.
MC
56.
MC
66.
MC
175.
BE
8.
TF
47.
MC
57.
MC
67.
MC
202.
CS
9.
TF
48.
MC
58.
MC
68.
MC
203.
CS
10.
TF
49.
MC
59.
MC
69.
MC
210.
Ma
Item
Type
Item
Type
Learning Objective 2 Item Type Item Type
Item
Type
Item
Type
12.
TF
18.
TF
80.
MC
86.
MC
92.
MC
204.
CS
13.
TF
19.
TF
81.
MC
87.
MC
93.
MC
210.
Ma
14.
TF
76.
MC
82.
MC
88.
MC
97.
MC
15.
TF
77.
MC
83.
MC
89.
MC
98.
MC
16.
TF
78.
MC
84.
MC
90.
MC
142.
MC
17.
TF
79.
MC
85.
MC
91.
MC
176.
BE
.
Item
Type
Item
Type
Introduction to Financial Statements Learning Objective 3 Type Item Type
Item Type
Item
Type
Item
20.
TF
99.
MC
123.
MC
147.
21.
TF
100.
MC
124.
MC
22.
TF
101.
MC
125.
23.
TF
102.
MC
24.
TF
103.
25.
TF
26. 27.
1-3
Item
Type
Item
Type
MC
171.
MC
197.
Ex
148.
MC
172.
MC
198.
Ex
MC
149.
MC
173.
MC
199.
Ex
126.
MC
150.
MC
174.
MC
200.
Ex
MC
127.
MC
151.
MC
177.
BE
201.
Ex
104.
MC
128.
MC
152.
MC
178.
BE
205.
CS
TF
105.
MC
129.
MC
153.
MC
179.
BE
206.
CS
TF
106.
MC
130.
MC
154.
MC
180.
BE
207.
CS
28.
TF
107.
MC
131.
MC
155.
MC
181.
BE
208.
CS
29.
TF
108.
MC
132.
MC
156.
MC
182.
BE
209.
CS
30.
TF
109.
MC
133.
MC
157.
MC
183.
BE
210.
Ma
31.
TF
110.
MC
134.
MC
158.
MC
184.
BE
215.
SA
32.
TF
111.
MC
135.
MC
159.
MC
185.
BE
216.
SA
33.
TF
112.
MC
136.
MC
160.
MC
186.
BE
217.
SA
34.
TF
113.
MC
137.
MC
161.
MC
187.
BE
218.
SA
35.
TF
114.
MC
138.
MC
162.
MC
188.
BE
219.
SA
36.
TF
115.
MC
139.
MC
163.
MC
189.
BE
220.
SA
37.
TF
116.
MC
140.
MC
164.
MC
190.
BE
221.
SA
38.
TF
117.
MC
141.
MC
165.
MC
191.
BE
222.
SA
39.
TF
118.
MC
142.
MC
166.
MC
192.
Ex
40.
TF
119.
MC
143.
MC
167.
MC
193.
Ex
94.
MC
120.
MC
144.
MC
168.
MC
194.
Ex
95.
MC
121.
MC
145.
MC
169.
MC
195.
Ex
96.
MC
122.
MC
146.
MC
170.
MC
196.
Ex
Note: TF = True-False MC = Multiple Choice Ma = Matching
C = Completion Ex = Exercise SA = Short Answer Essay
.
1-4
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
CHAPTER LEARNING OBJECTIVES 1. Describe the forms of business organization and the uses of accounting information. A sole proprietorship is a business owned by one person. A partnership is a business owned by two or more people associated as partners. A corporation is a separate legal entity for which evidence of ownership is provided by shares of stock. Internal users are managers who need accounting information to plan, organize, and run business operations. The primary external users are investors and creditors. Investors (stockholders) use accounting information to decide whether to buy, hold, or sell shares of a company’s stock. Creditors (suppliers and bankers) use accounting information to assess the risk of granting credit or loaning money to a business. Other groups who have an indirect interest in a business are taxing authorities, customers, labor unions, and regulatory agencies. 2. Explain the three principal types of business activity. Financing activities involve collecting the necessary funds to support the business. Investing activities involve acquiring the resources necessary to run the business. Operating activities involve putting the resources of the business into action to generate a profit. 3. Describe the four financial statements and how they are prepared. An income statement presents the revenues and expenses of a company for a specific period of time. A retained earnings statement summarizes the changes in retained earnings that have occurred for a specific period of time. A balance sheet reports the assets, liabilities, and stockholders’ equity of a business at a specific date. A statement of cash flows summarizes information concerning the cash inflows (receipts) and outflows (payments) for a specific period of time. Assets are resources owned by a business. Liabilities are the debts and obligations of the business. Liabilities represent claims of creditors on the assets of the business. Stockholders’ equity represents the claims of owners on the assets of the business. Stockholders’ equity is subdivided into two parts: common stock and retained earnings. The basic accounting equation is: Assets = Liabilities + Stockholders’ Equity. Within the annual report, the management discussion and analysis provides management’s interpretation of the company’s results and financial position as well as a discussion of plans for the future. Notes to the financial statements provide additional explanation or detail to make the financial statements more informative. The auditor’s report expresses an opinion as to whether the financial statements present fairly the company’s results of operations and financial position.
.
Introduction to Financial Statements
1-5
TRUE-FALSE STATEMENTS 1.
A business organized as a separate legal entity owned by stockholders is a partnership.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
2.
Corporate stockholders generally pay higher taxes but have no personal liability.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
3.
The liability of corporate stockholders is limited to the amount of their investment.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
4.
The majority of U.S. business is transacted by proprietorships.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
5.
Proprietorships in the United States generate more revenue than the other two forms of business enterprise.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
6.
Owners of business firms are the only people who need accounting information.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
7.
Management of a business enterprise is the major external user of information.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
8.
External users of accounting information are managers who plan, organize, and run a business.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
9.
The information needs and questions of external users vary considerably.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
10.
Accounting communicates financial information about a business to both internal and external users.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
11.
Two primary external users of accounting information are investors and creditors.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
12.
Financing activities for corporations include borrowing money and selling shares of their own stock.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
13.
Investing activities involve collecting the necessary funds to support the business.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
1-6 14.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The purchase of equipment is an example of a financing activity.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
15.
Assets are resources owned by a business and provide future services or benefits to the business.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
16.
Payments to owners are operating activities.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
17.
The economic resources that are owned by a business are called stockholders’ equity.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
18.
Operating activities involve putting the resources of the business into action to generate a profit.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
19.
A business is usually involved in two types of activity—financing and investing.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
20.
Net income for the period is determined by subtracting total expenses and dividends from revenues.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
21.
A different set of financial statements usually is prepared for each user.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
22.
The heading for the income statement might include the line “As of December 31, 20xx.”
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
23.
Net income is another term for revenue.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
24.
Cash is another term for stockholders’ equity.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
25.
The primary purpose of the statement of cash flows is to provide information about the cash receipts and cash payments of a company for a specific period of time.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
26.
The balance sheet reports assets and claims to those assets at a specific point in time.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Introduction to Financial Statements 27.
1-7
The basic accounting equation states that Assets = Liabilities.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
28.
One way of stating the accounting equation is: Assets + Liabilities = Stockholders’ Equity.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
29.
The accounting equation can be expressed as Assets - Stockholders’ Equity = Liabilities.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
30.
The accounting equation can be expressed as Assets - Liabilities = Stockholders’ Equity.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
31.
If the assets owned by a business total $150,000 and liabilities total $105,000, stockholders’ equity totals $45,000.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
32.
If the assets owned by a business total $100,000 and liabilities total $65,000, stockholders’ equity totals $25,000.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
33.
Claims of creditors and owners on the assets of a business are called liabilities.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
34.
Creditors’ rights to assets supersede owners’ rights to the assets.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
35.
All publicly traded U.S. companies must provide their stockholders with an annual report each year.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
36.
Information in the notes to the financial statements has to be quantifiable (numeric).
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
37.
An auditor is an accounting professional who conducts an independent examination of the accounting data presented by a company.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Professional Demeanor, IMA: Reporting
38.
The management discussion and analysis (MD & A) section of an annual report covers various financial aspects of a company.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
39.
Explanatory notes and supporting schedules are an optional part of an annual report.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
1-8 40.
Examples of notes are descriptions of the significant accounting policies and methods used in preparing the statements, explanations of contingencies, and various statistics.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Answers to True-False Statements 1. F 2. T
9. T 10. T
17. F 18. T
25. T 26. T
33. F 34. T
3. 4. 5. 6. 7. 8.
11. 12. 13. 14. 15. 16.
19. 20. 21. 22. 23. 24.
27. 28. 29. 30. 31. 32.
35. 36. 37. 38. 39. 40.
T F F F F F
T T F F T F
F F F F F F
F F T T T F
T F T T F T
MULTIPLE CHOICE QUESTIONS 41.
The proprietorship form of business organization a. must have at least two owners in most states. b. generally receives favorable tax treatment relative to a corporation. c. combines the records of the business with the personal records of the owner. d. is classified as a separate legal entity.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
42.
A business organized as a corporation a. is not a separate legal entity in most states. b. requires that stockholders be personally liable for the debts of the business. c. is owned by its stockholders. d. has tax advantages over a proprietorship or partnership.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
43.
The partnership form of business organization a. is a separate legal entity. b. is a common form of organization for service-type businesses. c. enjoys an unlimited life. d. has limited liability.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
44.
Which of the following is not one of the three forms of business organization? a. Corporations b. Partnerships c. Proprietorships d. Investors
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Introduction to Financial Statements 45.
1-9
Most business enterprises in the United States are a. proprietorships and partnerships. b. partnerships. c. corporations. d. government units.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
46.
A business organized as a separate legal entity is a a. corporation. b. proprietor. c. government unit. d. partnership.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
47.
Which of the following is not an advantage of the corporate form of business organization? a. No personal liability b. Easy to transfer ownership c. Favorable tax treatment d. Easy to raise funds
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
48.
An advantage of the corporate form of business is that a. it has limited life. b. its owner’s personal resources are at stake. c. its ownership is easily transferable via the sale of shares of stock. d. it is simple to establish.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
49.
Which of the following is an advantage of corporations relative to partnerships and sole proprietorships? a. Reduced legal liability for investors b. Harder to transfer ownership c. Lower taxes d. Most common form of organization
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
50.
A corporation has which of the following set of characteristics? a. Shared control, tax advantages, increased skills and resources b. Simple to set up and maintains control with founder c. Easier to transfer ownership and raise funds, no personal liability d. Harder to raise funds and gives owner control
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
1-10 51.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
A small neighborhood barber shop that is operated by its owner would likely be organized as a a. joint venture. b. partnership. c. corporation. d. proprietorship.
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
52.
A local retail shop has been operating as a sole proprietorship. The business is growing and now the owner wants to incorporate. Which of the following is not a reason for this owner to incorporate? a. Ability to raise capital for expansion b. Desire to limit the owner’s personal liability c. The prestige of operating as a corporation d. The ease in transferring shares of the corporation’s stock
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
53.
All of the following are advantages for choosing a proprietorship for a business except a. a proprietorship is a simple form of business to set up. b. a proprietorship gives the owner control of the business. c. proprietorship receive more favorable tax treatment. d. transfer of ownership is easily achieved through stock sales.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
54.
Jack and Jill form a partnership. Jack runs the business in New York, while Jill vacations in Hawaii. During the time Jill is away from the business, Jack increases the debts of the business by $20,000. Which of the following statements is true regarding this debt? a. Only Jack is personally liable for the debt, since he has been the managing partner during that time. b. Only Jill is personally liable for the debt of the business, since Jack has been working and she has not. c. Both Jack and Jill are personally liable for the business debt. d. Neither Jack nor Jill is personally liable for the business debt, since the partnership is a separate legal entity.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
55.
Which one of the following questions is most likely asked by an internal human resources director for the company? a. Which product line is most profitable? b. What price for our product will maximize the company income? c. What average pay raise is affordable for employees this year? d. Should any product lines be eliminated?
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
Introduction to Financial Statements 56.
1-11
Which of the following are internal reports that accounting provides to internal users? a. Forecasts of cash needs for next year. b. Financial comparisons of operating activity alternatives. c. Both forecasts of cash needs and financial comparisons are internal reports. d. Neither forecasts of cash needs or financial comparisons is an internal report.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
57.
Which of the following is the best definition of an internal user of accounting information? a. Investors who use accounting information to decide whether to buy or sell stock. b. Creditors like banks that use accounting information to evaluate the risk of lending money. c. Labor unions who use accounting information to examine the ability of the company to pay increased wages and benefits. d. Managers who use accounting information to plan, organize, and run a business.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
58.
External users of accounting information, like the Internal Revenue Service, are most commonly known as a. taxing authorities. b. labor unions. c. customers. d. regulatory agencies.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
59.
Which of the following statements is not true regarding the Sarbanes-Oxley Act (SOX)? a. The Act calls for increased oversight responsibilities for boards of directors. b. The Act has resulted in increased penalties for financial fraud by top management. c. The Act calls for decreased independence of outside auditors reviewing corporate financial statements. d. The Act is meant to decrease the likelihood of unethical corporate behavior.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
60.
Which of the following is not a step for solving an ethical dilemma? a. Identifying the alternatives and weighing the impact of each alternative on various stakeholders. b. Certifying the ethical accuracy of the financial information. c. Identifying and analyzing the principal elements in the situation. d. Recognizing the ethical situation and issues involved.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Professional Demeanor, IMA: Reporting
61.
Which of the following is the most appropriate and modern definition of accounting? a. The information system that identifies, records, and communicates the economic events of an organization to interested users. b. A means of collecting information. c. The interconnected network of subsystems necessary to operate a business. d. Electronic collection, organization, and communication of vast amounts of information.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
1-12 62.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Which of the following would not be considered an internal user of accounting data for the Xanadu Company? a. President of the company b. Production manager c. Merchandise inventory clerk d. President of the employees' labor union
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
63.
Which of the following groups uses accounting information primarily to insure the entity is operating within prescribed rules? a. Taxing authorities b. Regulatory agencies c. Labor Unions d. Management
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Professional Demeanor, IMA: Reporting
64.
The group of users of accounting information charged with achieving the goals of the business is its a. auditors. b. investors. c. managers. d. creditors.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics
65.
Which of the following external groups uses accounting information to determine whether the company can pay its obligations? a. Investors in common stock b. Marketing managers c. Creditors d. Chief Financial Officer
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
66.
Which of the following groups uses accounting information to determine whether the company’s net income will result in a stock price increase? a. Investors in common stock b. Marketing managers c. Creditors d. Chief Financial Officer
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
67.
Which of the following groups uses accounting information to determine whether a marketing proposal will be cost effective? a. Investors in common stock b. Marketing managers c. Creditors d. Chief Financial Officer
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Business Economics
.
Introduction to Financial Statements 68.
1-13
Which of the following would not be considered an external user of accounting data for the Julian Company? a. Internal Revenue Service agent b. Management c. Creditors d. Customers
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
69.
Which of the following would not be considered an internal user of accounting data for a company? a. The president of a company b. The controller of a company c. Creditor of a company d. Salesperson of a company
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
70.
Which of the following is a primary user of accounting information with a direct financial interest in the business? a. Taxing authority b. Creditor c. Regulatory agency d. Labor union
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
71.
Which of the following is a user of accounting information with an indirect financial interest in a business? a. A financial adviser b. Management c. Investor d. Creditor
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
72.
Which type of corporate information is readily available to investors? a. Financial comparison of operating alternatives b. Marketing strategies for a product that will be introduced in eighteen months c. Forecasts of cash needs for the upcoming year d. Amount of net income retained in the business
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
73.
Which of the following statements concerning users of accounting information is incorrect? a. Management is considered an internal user. b. Present creditors are considered external users. c. Regulatory authorities are considered internal users. d. Taxing authorities are considered external users.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
1-14 74.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
External users want answers to all of the following questions except a. Is the company earning satisfactory income? b. Will the company be able to pay its debts as they come due? c. Will the company be able to afford employee pay raises this year? d. How does the company compare in profitability with competitors?
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
75.
Which type of corporate information is not available to investors? a. Dividend history b. Forecast of cash needs for the upcoming year c. Cash provided by investing activities d. Beginning cash balance
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
76.
The liability created by a business when it purchases coffee beans and coffee cups on credit from suppliers is termed a(n) a. account payable. b. account receivable. c. revenue. d. expense.
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
77.
The right to receive money in the future is called a(n) a. account payable. b. account receivable. c. liability. d. revenue.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
78.
Which of the following is not a principal type of business activity? a. Operating b. Investing c. Financing d. Delivering
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
79.
Borrowing money is an example of a(n) a. delivering activity. b. financing activity. c. investing activity. d. operating activity.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
Introduction to Financial Statements 80.
1-15
Issuing shares of stock in exchange for cash is an example of a(n) a. delivering activity. b. investing activity. c. financing activity. d. operating activity.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
81.
Debt securities sold to investors that must be repaid at a particular date some years in the future are called a. accounts payable. b. notes receivable. c. taxes payable. d. bonds payable.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
82.
Which of the following activities involves collecting the necessary funds to support the business? a. Operating b. Investing c. Financing d. Delivering
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
83.
Buying assets needed to operate a business is an example of a(n) a. delivering activity. b. financing activity. c. investing activity. d. operating activity.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
84.
Which activities involve acquiring the resources to run the business? a. Delivering b. Financing c. Investing d. Operating
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
85.
Which activities involve putting the resources of the business into action to generate a profit? a. Delivering b. Financing c. Investing d. Operating
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
1-16 86.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The statement of cash flows would disclose the payment of a dividend a. nowhere on the statement. b. in the operating activities section. c. in the investing activities section. d. in the financing activities section.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
87
Buying and selling products are examples of a. operating activities. b. investing activities. c. financing activities. d. delivering activities.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
88.
The common characteristic possessed by all assets is a. long life. b. great monetary value. c. tangible nature. d. future economic benefit.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
89.
Expenses are incurred a. only on rare occasions. b. to produce assets. c. to produce liabilities. d. to generate revenues.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
90.
The cost of assets consumed or services used is also known as a. a revenue. b. an expense. c. a liability. d. an asset.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
91.
Resources owned by a business are referred to as a. stockholders’ equity. b. liabilities. c. assets. d. revenues.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
92.
The best definition of assets is the a. cash owned by the company. b. collections of resources belonging to the company and the claims on these resources. c. owners’ investment in the business. d. resources belonging to a company that have future benefit to the company.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
Introduction to Financial Statements 93.
1-17
Debts and obligations of a business are referred to as a. assets. b. equities. c. liabilities. d. expenses.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
94.
Jackson Company recorded the following cash transactions for the year: Paid $135,000 for salaries. Paid $60,000 to purchase office equipment. Paid $15,000 for utilities. Paid $6,000 in dividends. Collected $275,000 from customers. What was Jackson’s net cash provided by operating activities? a. $125,000 b. $65,000 c. $140,000 d. $119,000
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $275,000 − $135,000 − $15,000 = $125,000 (Cash coll. – sal. paid – util. paid)
95.
Gibson Company recorded the following cash transactions for the year: Paid $180,000 for salaries. Paid $80,000 to purchase office equipment. Paid $20,000 for utilities. Paid $8,000 in dividends. Collected $350,000 from customers. What was Gibson’s net cash provided by operating activities? a. $150,000 b. $70,000 c. $170,000 d. $142,000
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $350,000 − $180,000 − $20,000 = $150,000 (Cash coll. – sal. paid – util. paid)
96.
When expenses exceed revenues, which of the following is true? a. a net loss results b. a net income results c. assets equal liabilities d. assets are increased
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
97.
Which of the following is an asset? a. Mortgage payable b. Investments c. Common stock d. Retained earnings .
1-18
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
98.
Which of the following is not a liability? a. Unearned Service Revenue b. Accounts Payable c. Accounts Receivable d. Interest Payable
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
99.
Which of the following financial statements is divided into major categories of operating, investing, and financing activities? a. The income statement. b. The balance sheet. c. The retained earnings statement. d. The statement of cash flows.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
100.
The retained earnings statement shows all of the following except a. the amounts of changes in retained earnings during the period. b. the causes of changes in retained earnings during the period. c. the time period following the one shown for the income statement. d. beginning retained earnings on the first line of the statement.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
101.
Ending retained earnings for a period is equal to beginning a. Retained earnings + Net income + Dividends b. Retained earnings – Net income – Dividends c. Retained earnings + Net income – Dividends d. Retained earnings – Net income + Dividends
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
102.
Which of the following statements is true? a. Amounts received from issuing stock are revenues. b. Amounts paid out as dividends are not expenses. c. Amounts paid out as dividends are reported on the income statement. d. Amounts received from issued stock are reported on the income statement.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
103.
Dividends are reported on the a. income statement. b. retained earnings statement. c. balance sheet. d. income statement and balance sheet.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Introduction to Financial Statements 104.
1-19
Dividends paid a. increase assets. b. increase expenses. c. decrease revenues. d. decrease retained earnings.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
105.
The financial statement that summarizes the changes in retained earnings for a specific period of time is the a. balance sheet. b. income statement. c. statement of cash flows. d. retained earnings statement.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
106.
To show how successfully your business performed during a period of time, you would report its revenues and expenses in the a. balance sheet. b. income statement. c. statement of cash flows. d. retained earnings statement.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
107.
Net income results when a. Assets > Liabilities. b. Revenues = Expenses. c. Revenues > Expenses. d. Revenues < Expenses.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
108.
Net income will result during a time period when a. assets exceed liabilities. b. assets exceed revenues. c. expenses exceed revenues. d. revenues exceed expenses.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
109.
Retained earnings at the end of the period is equal to a. retained earnings at the beginning of the period plus net income minus liabilities. b. retained earnings at the beginning of the period plus net income minus dividends. c. net income. d. assets plus liabilities.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
1-20 110.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Which of the following financial statements is concerned with the company at a point in time? a. Balance sheet b. Income statement c. Retained earnings statement d. Statement of cash flows
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
111.
The company’s policy toward dividends and growth could best be determined by examining the a. balance sheet. b. income statement. c. retained earnings statement. d. statement of cash flows.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
112.
An income statement a. summarizes the changes in retained earnings for a specific period of time. b. reports the changes in assets, liabilities, and stockholders’ equity over a period of time. c. reports the assets, liabilities, and stockholders’ equity at a specific date. d. presents the revenues and expenses for a specific period of time.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
113.
If the retained earnings account increases from the beginning of the year to the end of the year, then a. net income is less than dividends. b. a net loss is less than dividends. c. additional investments are less than net losses. d. net income is greater than dividends.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
114.
The retained earnings statement would not show a. the retained earnings beginning balance. b. revenues and expenses. c. dividends. d. the ending retained earning balance.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
115.
If the retained earnings account decreases from the beginning of the year to the end of the year, then a. net income is less than dividends. b. there was a net income and no dividends. c. additional investments are less than net losses. d. net income is greater than dividends.
Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
.
Introduction to Financial Statements 116.
1-21
Which financial statement is prepared first? a. Balance sheet b. Income statement c. Retained earnings statement d. Statement of cash flows
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
117.
An income statement shows a. revenues, liabilities, and stockholders’ equity. b. expenses, dividends, and stockholders’ equity. c. revenues, expenses, and net income. d. assets, liabilities, and stockholders’ equity.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
118.
In a study session, a classmate makes this statement “Dividends are listed as expenses on the income statement.” What is your best response to this statement? a. I’ve been struggling with that concept and I feel that dividends should be shown on the balance sheet as assets. b. You are right. Revenues and expenses are shown on the income statement. Dividends are a cost of generating revenues and that makes them an expense. Why else would a corporation pay dividends? c. Dividends represent a portion of corporate profits that are paid to the shareholders. They belong on the retained earnings statement. d. Dividends are deducted from retained earnings on the balance sheet.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
119.
Henson Company began the year with retained earnings of $380,000. During the year, the company recorded revenues of $500,000, expenses of $380,000, and paid dividends of $40,000. What was Henson’s retained earnings at the end of the year? a. $540,000 b. $460,000 c. $840,000 d. $500,000
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $380,000 + ($500,000 − $380,000) − $40,000 = $460,000 Beg.(R/E + (rev.- exp.) – div.)
120.
Pinson Company began the year with retained earnings of $670,000. During the year, the company recorded revenues of $600,000, expenses of $380,000, and paid dividends of $140,000. What was Pinson’s retained earnings at the end of the year? a. $1,030,000 b. $750,000 c. $1,130,000 d. $600,000
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $670,000 + ($600,000 − $380,000) − $140,000 = $750,000 Beg.(R/E + (rev.- exp.) – div.)
.
1-22 121.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Finney Company began the year by issuing $80,000 of common stock for cash. The company recorded revenues of $740,000, expenses of $640,000, and paid dividends of $40,000. What was Finney’s net income for the year? a. $60,000 b. $140,000 c. $100,000 d. $180,000
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $740,000 − $640,000 = $100,000 (Rev. – exp.)
122.
Lankston Company began the year by issuing $120,000 of common stock for cash. The company recorded revenues of $1,100,000, expenses of $960,000, and paid dividends of $60,000. What was Lankston’s net income for the year? a. $80,000 b. $200,000 c. $140,000 d. $260,000
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,100,000 − $960,000 = $140,000 (Rev. – exp.)
123.
Gilkey Corporation began the year with retained earnings of $310,000. During the year, the company issued $420,000 of common stock, recorded expenses of $1,200,000, and paid dividends of $80,000. If Gilkey’s ending retained earnings was $330,000, what was the company’s revenue for the year? a. $1,220,000 b. $1,300,000 c. $1,640,000 d. $1,720,000
Ans: B, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $330,000 + $80,000 + $1,200,000 − $310,000 = $1,300,000 (End. R/E + div. paid + exp. – beg. R/E)
124.
Kilmer Corporation began the year with retained earnings of $930,000. During the year, the company issued $1,260,000 of common stock, recorded expenses of $3,600,000, and paid dividends of $240,000. If Kilmer’s ending retained earnings was $990,000, what was the company’s revenue for the year? a. $3,660,000 b. $3,900,000 c. $4,920,000 d. $50,160,000
Ans: B, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $990,000 + $240,000 + $3,600,000 − $930,000 = $3,900,000 (End. R/E + div. paid + exp. – beg. R/E)
125.
A balance sheet shows a. revenues, liabilities, and stockholders’ equity. b. expenses, dividends, and stockholders’ equity. c. revenues, expenses, and dividends. .
Introduction to Financial Statements
1-23
d. assets, liabilities, and stockholders’ equity. Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
1-24 126.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The accounting equation may be expressed as a. Assets = Stockholders’ Equity – Liabilities. b. Assets = Liabilities + Stockholders’ Equity. c. Assets + Liabilities = Stockholders’ Equity. d. Assets + Stockholders’ Equity = Liabilities.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
127.
Which of the following is not a satisfactory statement of the accounting equation? a. Assets = Stockholders’ Equity – Liabilities b. Assets = Liabilities + Stockholders’ Equity c. Assets - Liabilities = Stockholders’ Equity d. Assets - Stockholders’ Equity = Liabilities
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
128.
Jimmy’s Repair Shop started the year with total assets of $300,000 and total liabilities of $240,000. During the year the business recorded $630,000 in revenues, $330,000 in expenses, and dividends of $60,000. Stockholders’ equity at the end of the year was a. $360,000. b. $300,000. c. $240,000. d. $270,000.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($300,000 − $240,000) + ($630,000 − $330,000) − $60,000 = $300,000 [Beg. tot. assets – beg. tot. liab.) + (rev.- exp.) – div.]
129.
Jimmy’s Repair Shop started the year with total assets of $300,000 and total liabilities of $240,000. During the year the business recorded $630,000 in revenues, $330,000 in expenses, and dividends of $60,000. The net income reported by Jimmy’s Repair Shop for the year was a. $240,000. b. $300,000. c. $180,000. d. $570,000.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $630,000 − $330,000 = $300,000 (Rev. – exp)
130.
Ashley’s Accessory Shop started the year with total assets of $210,000 and total liabilities of $120,000. During the year the business recorded $330,000 in revenues, $165,000 in expenses, and dividends of $60,000. Stockholders’ equity at the end of the year was a. $180,000. b. $165,000. c. $195,000. d. $105,000.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($210,000 − $120,000) + ($330,000 − $165,000) − $60,000 = $195,000 [Beg. tot. assets – beg. tot. liab.) + (rev.- exp.) – div.]
.
Introduction to Financial Statements 131.
1-25
Ashley’s Accessory Shop started the year with total assets of $210,000 and total liabilities of $120,000. During the year the business recorded $330,000 in revenues, $165,000 in expenses, and dividends of $60,000. The net income reported by Ashley’s Accessory Shop for the year was a. $120,000. b. $150,000. c. $195,000. d. $165,000.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $330,000 − $165,000 = $165,000 (Rev. – exp.)
132.
If total liabilities increased by $90,000 and stockholders’ equity increased by $30,000 during a period of time, then total assets must change by what amount and direction during that same period? a. $120,000 decrease b. $120,000 increase c. $150,000 increase d. $180,000 increase
Ans: B, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $90,000 + $30,000 = $120,000 (Tot. liab. inc. + st. eq inc.)
133.
If total liabilities decreased by $90,000 and stockholders’ equity increased by $30,000 during a period of time, then total assets must change by what amount and direction during that same period? a. $120,000 increase b. $60,000 decrease c. $60,000 increase d. $90,000 decrease
Ans: B, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($90,000) + $30,000 = ($60,000) (Tot. liab. dec. + st. eq. inc.)
134.
If total liabilities decreased by $75,000 and stockholders’ equity increased by $15,000 during a period of time, then total assets must change by what amount and direction during that same period? a. $60,000 decrease b. $60,000 increase c. $75,000 increase d. $90,000 increase
Ans: A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($75,000) + $15,000 = ($60,000) (Tot. liab. dec. + st. eq. inc.)
.
1-26 135.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
If total liabilities decreased by $105,000 and stockholders’ equity decreased by $35,000 during a period of time, then total assets must change by what amount and direction during that same period? a. $140,000 increase b. $70,000 decrease c. $140,000 decrease d. $70,000 decrease
Ans: C, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($105,000) + ($35,000) = ($140,000) (Tot. liab. dec. + st. eq. dec.)
136.
If total liabilities increased by $69,000 during a period of time and stockholders’ equity decreased by $27,000 during the same period, then the amount and direction (increase or decrease) of the period’s change in total assets is a(n) a. $69,000 increase. b. $96,000 increase. c. $42,000 decrease. d. $42,000 increase.
Ans: D, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $69,000 − $27,000 = $42,000 increase. (Tot. liab. dec. - st. eq. dec.)
137.
The balance sheet a. summarizes the changes in retained earnings for a specific period of time. b. reports the changes in assets, liabilities, and stockholders’ equity over a period of time. c. reports the assets, liabilities, and stockholders’ equity at a specific date. d. presents the revenues and expenses for a specific period of time.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
138.
The retained earnings statement a. summarizes the changes in retained earnings for a specific period of time. b. reports the changes in assets, liabilities, and stockholders’ equity over a period of time. c. reports the assets, liabilities, and stockholders’ equity at a specific date. d. presents the revenues and expenses for a specific period of time.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
139.
Liabilities a. are future economic benefits. b. are debts and obligations. c. possess service potential. d. are things of value owned by a business.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
Introduction to Financial Statements 140.
1-27
Liabilities of a company are owed to a. debtors. b. owners. c. creditors. d. stockholders.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
141.
Stockholders’ equity can be described as claims of a. creditors on total assets. b. owners on total assets. c. customers on total assets. d. debtors on total assets.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
142.
Payments to stockholders are called a. expenses. b. liabilities. c. dividends. d. distributions.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
143.
Common stock is reported on the a. statement of cash flows. b. retained earnings statement. c. income statement. d. balance sheet.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
144.
Stockholders’ equity is comprised of a. common stock and dividends. b. common stock and retained earnings. c. dividends and retained earnings. d. net income and retained earnings.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
145.
Stockholders’ equity a. is usually equal to cash on hand. b. is equal to liabilities and retained earnings. c. includes retained earnings and common stock. d. is shown on the income statement.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
146.
Retained earnings is a. the stockholders’ claim on total assets. b. equal to cash. c. equal to revenues. d. the amount of net income kept in the corporation for future use.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
1-28 147.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Which financial statement would best indicate whether the company relies on debt or stockholders’ equity to finance its assets? a. Statement of cash flows b. Retained earnings statement c. Income statement d. Balance sheet
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
148.
The primary purpose of the statement of cash flows is to report a. a company's investing transactions. b. a company's financing transactions. c. information about cash receipts and cash payments of a company. d. the net increase or decrease in cash.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
149.
Claims of owners are called a. dividends. b. stockholders’ equity. c. liabilities. d. income payable.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
150.
Which of the following is not a common way that managers use the balance sheet? a. To analyze the balances of assets, liabilities, and stockholders’ equity throughout the accounting period b. To determine if the cash balance is sufficient for future needs c. To analyze the balance between debt and common stock financing d. To analyze the balance of accounts receivable on the last day of the accounting period
Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
151.
Why are financial statement users interested in the statement of cash flows? a. It is the easiest financial statement to evaluate. b. It provides information about an important company resource. c. It is the first statement that is presented to users. d. It helps users decide whether assets such as office equipment should be replaced.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
152.
Why should the income statement be prepared first? a. The statement of cash flows should be prepared first because it determines the sources of cash. That information is then used in preparing the income statement. b. Net income from the income statement flows into the retained earnings statement. The ending retained earnings balance then flows into the balance sheet. c. The income statement does not have to be prepared first. Financial statements can be prepared in any order. d. None of these answer choices are correct.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Introduction to Financial Statements 153.
1-29
Elston Company compiled the following financial information as of December 31, 2017: Service revenue $840,000 Common stock 180,000 Equipment 240,000 Operating expenses 750,000 Cash 210,000 Dividends 60,000 Supplies 30,000 Accounts payable 120,000 Accounts receivable 90,000 Retained earnings, 1/1/17 450,000 Elston’s assets on December 31, 2017 are a. $1,410,000. b. $1,020,000. c. $480,000. d. $570,000.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $240,000 + $210,000 + $30,000 + $90,000 = $570,000 (Equip + cash + sup. + A/R)
154.
Elston Company compiled the following financial information as of December 31, 2017: Service revenue $840,000 Common stock 180,000 Equipment 240,000 Operating expenses 750,000 Cash 210,000 Dividends 60,000 Supplies 30,000 Accounts payable 120,000 Accounts receivable 90,000 Retained earnings, 1/1/17 450,000 Elston’s retained earnings on December 31, 2017 are a. $450,000. b. $540,000. c. $480,000. d. $ 30,000.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $450,000 + ($840,000 − $750,000) − $60,000 = $480,000
(Beg. R/E + (ser. rev. – oper. exp.) – div.)
.
1-30 155.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Elston Company compiled the following financial information as of December 31, 2017: Service revenue $840,000 Common stock 180,000 Equipment 240,000 Operating expenses 750,000 Cash 210,000 Dividends 60,000 Supplies 30,000 Accounts payable 120,000 Accounts receivable 90,000 Retained earnings, 1/1/17 450,000 Elston’s stockholders’ equity on December 31, 2017 is a. $630,000. b. $660,000. c. $480,000. d. $720,000.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $180,000 + [$450,000 + ($840,000 − $750,000) − $60,000] = $660,000 (Com. st. + beg. R/E + (ser. rev. – oper. exp.) – div.)
156.
Benedict Company compiled the following financial information as of December 31, 2017: Service revenue $1,120,000 Common stock 240,000 Equipment 320,000 Operating expenses 1,000.000 Cash 280,000 Dividends 80,000 Supplies 40,000 Accounts payable 160,000 Accounts receivable 120,000 Retained earnings, 1/1/17 600,000 Benedict’s assets on December 31, 2017 are a. $1,880,000. b. $1,360,000. c. $640,000. d. $760,000.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $320,000 + $280,000 + $40,000 + $120,000 = $760,000 (Equip. + cash + sup. + A/R)
.
Introduction to Financial Statements 157.
1-31
Benedict Company compiled the following financial information as of December 31, 2017: Service revenue $1,120,000 Common stock 240,000 Equipment 320,000 Operating expenses 1,000,000 Cash 280,000 Dividends 80,000 Supplies 40,000 Accounts payable 160,000 Accounts receivable 120,000 Retained earnings, 1/1/17 600,000 Benedict’s retained earnings on December 31, 2017 are a. $600,000. b. $720,000. c. $640,000. d. $ 40,000.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $600,000 + ($1,120,000 − $1,000,000) − $80,000 = $640,000 (Beg. R/E + (ser. rev. – oper. exp.) – div.)
158.
Benedict Company compiled the following financial information as of December 31, 2017: Service revenue $1,120,000 Common stock 240,000 Equipment 320,000 Operating expenses 1,000,000 Cash 280,000 Dividends 80,000 Supplies 40,000 Accounts payable 160,000 Accounts receivable 120,000 Retained earnings, 1/1/17 600,000 Benedict’s stockholders’ equity on December 31, 2017 is a. $840,000. b. $880,000. c. $640,000. d. $960,000.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $240,000 + [$600,000 + ($1,120,000 − $1,000,000) − $80,000] = $880,000 (Com. st. + beg. R/E + (ser. rev – oper. exp.) – div.)
159.
The heading on the statement of cash flows identifies all of the following except a. the preparer of the statement. b. the company c. the time period covered by the statement. d. the type of statement.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
1-32 160.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
All of the following are interrelationships that are important to understand when preparing financial statements except a. the net income from the income statement is used in the retained earnings statement. b. the ending retained earnings from the retained earnings statement is used in the stockholder's equity section of the balance sheet. c. the cash on the balance sheet should be equal to the cash at the end of the period on the statement of cash flows. d. all of the payments on the balance sheet should be equal to the cash payments for operating activities on the statement of cash flows.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
161.
Marvin Services Corporation had the following accounts and balances: Accounts payable Accounts receivable Buildings Cash
$30,000 5,000 ? 15,000
Equipment Land Unearned service revenue Total stockholders' equity
$35,000 35,000 10,000 ?
If the balance of the Buildings account was $70,000 and $5,000 of Accounts Payable were paid in cash, what would be the balance of the total stockholders' equity? a. $135,000 b. $120,000 c. $170,000 d. $130,000 Ans: B, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($5,000 + $70,000 + $10,000 + $35,000 + $35,000) − ($25,000 + $10,000) = $120,000 [A/R + Bldg. bal. + (cash bal. – A/P pd.) + equip. + land] – [(A/P bal – A/P pd.) + un. ser. rev.]
162.
Marvin Services Corporation had the following accounts and balances: Accounts payable Accounts receivable Buildings Cash
$30,000 5,000 ? 15,000
Equipment Land Unearned service revenue Total stockholders' equity
$35,000 35,000 10,000 ?
If the balance of the Buildings account was $40,000 and $10,000 of Accounts Payable were paid in cash, what would be the total liabilities and stockholders' equity? a. $90,000 b. $78,000 c. $80,000 d. $120,000 Ans: D, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $5,000 + $40,000 + $5,000 + $35,000 + $35,000 = $120,000 [A/R + Bldg. bal. + (Cash bal. – A/P pd.) + equip. + land]
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Introduction to Financial Statements 163.
1-33
Marvin Services Corporation had the following accounts and balances:
Accounts payable Accounts receivable Buildings Cash
$30,000 5,000 ? 15,000
Equipment Land Unearned service revenue Total stockholders' equity
$35,000 35,000 10,000 ?
If total stockholder's equity was $95,000, what would be the balance of the Buildings Account? a. $35,000 b. $135,000 c. $145,000 d. $45,000 Ans: D, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($30,000 + $10,000 + $95,000) − ($5,000 + $15,000 + $35,000 + $35,000) = $45,000 (A/P + un. ser. rev. + tot. st eq.) – (A/R + cash + equip. + land)
164.
Marvin Services Corporation had the following accounts and balances: Accounts payable Accounts receivable Buildings Cash
$30,000 5,000 ? 15,000
Equipment Land Unearned service revenue Total stockholders' equity
$35,000 35,000 10,000 ?
If the balance of the Buildings account was $75,000 and the equipment was sold for $35,000, what would be the total of stockholders' equity? a. $65,000 b. $90,000 c. $115,000 d. $125,000 Ans: D, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $5,000 + $75,000 + ($15,000 + $35,000) + $35,000 − ($30,000 + $10,000) = $125,000 (A/R + Bldg. bal. + cash + equp. + land) - (A/P + un. ser. rev.)
165.
Marvin Services Corporation had the following accounts and balances: Accounts payable Accounts receivable Buildings Cash
$30,000 5,000 ? 15,000
Equipment Land Unearned service revenue Total stockholders' equity
$35,000 35,000 10,000 ?
If the balance of the Buildings account was $85,000, what would be the total of liabilities and stockholders' equity? a. $170,000 b. $175,000 c. $135,000 d. $125,000 Ans: B, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $5,000 + $85,000 + $15,000 + $35,000 + $35,000 = $175,000 (A/R + Bldg. bal. + cash + equip. + land)
.
1-34 166.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Notes to the financial statements include all of the following except a. descriptions of significant accounting policies used. b. explanations of uncertainties. c. projected accounting information. d. statistics needed to understand the statements.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
167.
The management discussion and analysis (MD&A) section of the annual report covers all of the following aspects except the a. ability of the company to pay near-term obligations. b. certification criteria of the company's auditors. c. company's ability to fund operations and expansion. d. results of the company operations.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
168.
An annual report includes all of the following except a. management discussion and analysis section. b. notes to the financial statements. c. an auditor’s report. d. salary information for all the executives.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
169.
Which of the following clarifies information presented in the financial statements, as well as expanding upon it where additional detail is needed? a. Auditor’s report b. Management discussion and analysis section c. Notes to the financial statements d. President’s state of the company report
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
170.
The information needed to determine whether a company is using accounting methods similar to those of its competitors would be found in the a. auditor’s report. b. balance sheet. c. management discussion and analysis section. d. notes to the financial statements.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
171.
In the annual report, where would a financial statement reader find out if the company’s financial statements give a fair depiction of its financial position and operating results? a. Notes to the financial statements b. Management discussion and analysis section c. Balance sheet d. Auditor’s report
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Introduction to Financial Statements 172.
1-35
Management’s views on the company’s short-term debt paying ability, expansion financing, and results of operations are found in the a. auditor’s report. b. management discussion and analysis section. c. notes to the financial statements. d. president’s state of the company report.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
173.
Which of the following statements is true? a. Publicly traded U.S. companies must provide an annual report to their shareholders when operating conditions change significantly. b. An unqualified independent auditor’s report must be included in the annual report. c. Notes to the financial statements do not need to be included in the annual report because that information is only for internal users. d. None of these answer choices are correct.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
174.
Notes to the financial statements a. are optional. b. help clarify information presented in the financial statements. c. are generally brief and few in number. d. need not be read in detail if an unqualified opinion accompanies the financial statements.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Answers to Multiple Choice Questions 41. b 42. c 43. b 44. d 45. a 46. a 47. c 48. c 49. a 50. c 51. d 52. c 53. d 54. c 55. c 56. c 57. d 58. a 59. c 60. b
61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80.
a d b c c a b b c b a d c c b a b d b c
81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100.
d c c c d d a d d b c d c a a a b c d c
101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120.
.
c b b d d b c d b a c d d b a b c c b b
121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140.
c c b b d b a b b c d b b a c d c a b c
141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160.
b c d b c d d c b a b b d c b d c b a d
161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174.
b d d d b c b d c d d b d b
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
BRIEF EXERCISES Be. 175 Indicate in the space by letter whether each statement below applies to a sole proprietorship (S), partnership (P), or corporation (C). More than one answer may be appropriate. ____ a. Simple to establish. ____ b. Shared control. ____ c. Easy to transfer ownership. ____ d. No personal liability. ____ e. Tax advantage. ____ f.
Easier to raise funds.
Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
Solution 175
(5 min.)
a.
S&P
d.
C
b.
P
e.
S&P
c.
C
f.
C
Be. 176 Indicate in the space provided by each item whether it would appear on the statement of cash flows as a(n): (O) operating activity, (I) investing activity, or (F) financing activity. ____ a. Cash receipts from customers. ____ b. Issuance of common stock for cash. ____ c. Payment of cash dividends. ____ d. Cash purchase of equipment. ____ e. Cash payments to suppliers. ____ f.
Sale of old machine for cash.
Ans: N/A, LO: 2, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Introduction to Financial Statements Solution 176
1-37
(5 min.)
a.
O
d.
I
b.
F
e.
O
c.
F
f.
I
Be. 177 Use the following information to calculate for the year ended December 31, 2017 (a) net income (net loss), (b) ending retained earnings, and (c) total assets. Supplies $ 1,500 Other operating expenses 10,000 Accounts payable 11,000 Accounts receivable 4,000 Common stock 10,000 Retained earnings (beginning) 5,000
Service revenue Cash Dividends Notes payable Equipment
$19,000 15,000 6,000 1,000 9,500
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 177
(5 min.)
(a) $9,000
(b) $8,000
(c) $30,000
(Ser. rev. – Other oper. exp.)
(Beg. ret. earn. + Net inc. – dividends)
(Sup. + Acc. rec. + Cash + Equip.)
Be. 178 Use the following information to calculate for the year ended December 31, 2017 (a) net income (net loss), (b) ending retained earnings, and (c) total assets. Supplies $ 1,000 Other operating expenses 12,000 Accounts payable 9,000 Accounts receivable 3,000 Common stock 9,000 Retained earnings (beginning) 5,000
Service revenue Cash Dividends Notes payable Equipment
$18,000 15,000 1,000 1,000 13,000
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 178
(5 min.)
(a) $6,000
(b) $10,000
(c) $32,000
(Ser. rev. – Other oper. exp.)
(Beg. ret. earn. + Net inc. – dividends)
(Sup. + Acc. rec. + Cash + Equip.)
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Be. 179 Listed below in alphabetical order are the balance sheet items of Nolan Company at December 31, 2017. Prepare a balance sheet and include a complete heading. Accounts payable Accounts receivable Buildings Cash Common stock Land Equipment Retained earnings
$
11,000 15,000 65,000 11,000 80,000 31,000 10,000 41,000
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 179
(5 min.) NOLAN COMPANY Balance Sheet December 31, 2017
ASSETS Cash Accounts receivable Equipment Buildings Land Total assets (Acc. rec. + Build. + Cash + Land + Equip.)
$ 11,000 15,000 10,000 65,000 31,000 $132,000
LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities Accounts payable
$ 11,000
Stockholders’ equity Common stock Retained earnings Total liabilities and stockholders’ equity
.
$80,000 41,000
121,000 $132,000
Introduction to Financial Statements
1-39
Be. 180 Indicate in the space provided by each item whether it would appear on the income statement (IS), balance sheet (BS), or retained earnings statement (RE): a. ____
Service Revenue
g. __
Accounts Receivable
b. ____
Utilities Expense
h. ___
Common Stock
c.
Cash
i. ___
Equipment
d. ____
Accounts Payable
j. ___
Advertising Expense
e. ____
Supplies
k. ___
Dividends
f.
Salaries and Wages Expense
l.____
Notes Payable
____
____
Ans: N/A, LO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Solution 180 a. b. c. d. e. f.
(5 min.)
IS IS BS BS BS IS
g. h. i. j. k. l.
BS BS BS IS RE BS
Be. 181 Cesar Ruiz was reviewing his company’s activities at the end of the year (2017) and decided to prepare a retained earnings statement. At the beginning of the year his assets were $530,000, liabilities were $140,000, and common stock was $120,000. The net income for the year was $250,000. Dividends of $220,000 were paid during the year. Prepare a retained earnings statement in good form. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
1-40
Solution 181
(5 min.)
CESAR RUIZ.COMPANY Retained Earnings Statement For the Year Ended December 31, 2017 Retained Earnings, Beginning Add: Net Income Less: Dividends Retained Earnings, Ending (Beg. ret. earn + Net inc. – dividends)
$270,000* 250,000 520,000 220,000 $300,000
*(Assets–liab. –com. stock) Be. 182 From the following list of selected accounts taken from the records of Schmidt Clinic, identify those that would appear on the balance sheet. a. b. c. d. e.
Common Stock Service Revenue Land Salaries and Wages Expense Notes Payable
f. g. h. i. j.
Accounts Payable Cash Advertising Expense Supplies Utilities Expense
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Solution 182
(5 min.)
a, c, e, f, g, i Be. 183 Determine the missing items. Assets = Liabilities + Stockholders’ Equity $80,000 (b) $84,000
$56,000 $28,000 (c)
(a) $34,000 $55,000
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 183
(5 min.)
a. $24,000
b. $62,000
c. $29,000
(Assets – Liab.)
(Liab. + Stock. Equity)
(Assets – Stock. Equity)
.
Introduction to Financial Statements
1-41
Be. 184 Determine the missing items. Assets = Liabilities + Stockholders’ Equity $66,000 (b) $54,000
$50,000 $18,000 (c)
(a) $30,000 $40,000
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 184
(5 min.)
a. $16,000
b. $48,000
c. $14,000
(Assets – Liab.)
(Liab. + Stock. Equity)
(Assets – Stock. Equity)
Be. 185 Identify which of the following accounts appear on a balance sheet. (a) Service revenue (b) Cash (c) Common stock (d) Accounts payable (e) Rent expense (f) Supplies (g) Land Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Solution 185 (5 min.) (b), (c), (d), (f), (g)
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
1-42
Be. 186 For the items listed below, fill in the appropriate code letter to indicate whether the item is an asset, liability, or stockholders’ equity item. Code Asset A Liability L Stockholders’ Equity SE _____ 1. Rent Expense
_____
6. Cash
_____ 2. Equipment
_____
7. Accounts Receivable
_____ 3. Accounts Payable
_____
8. Retained Earnings
_____ 4. Common Stock
_____
9. Service Revenue
_____ 5. Insurance Expense
_____ 10. Notes Payable
Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Solution 186 1. 2. 3. 4. 5.
(5 min.)
SE A L SE SE
6. 7. 8. 9. 10.
A A SE SE L
Be. 187 Classify each of these items as an asset (A), liability (L), or stockholders’ equity (SE). _____ 1. _____ 2. _____ 3. _____ 4. _____ 5. _____ 6. _____ 7. _____ 8.
Accounts receivable Accounts payable Common stock Supplies Retained earnings Cash Notes payable Equipment
Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Solution 187 1. 2. 3. 4.
(5 min.)
A L SE A
5. 6. 7. 8.
.
SE A L A
Introduction to Financial Statements
1-43
Be. 188 At the beginning of the year, Gant Company had total assets of $660,000 and total liabilities of $300,000. Answer the following questions viewing each situation as being independent of the others. (1)
If total assets increased $225,000 during the year, and total liabilities decreased $100,000, what is the amount of stockholders’ equity at the end of the year?
(2)
During the year, total liabilities increased $215,000 and stockholders’ equity decreased $130,000. What is the amount of total assets at the end of the year?
(3)
If total assets decreased $60,000 and stockholders’ equity increased $150,000 during the year, what is the amount of total liabilities at the end of the year?
Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 188 Beginning Change Ending
(5 min.) Total Assets $660,000 225,000 $885,000
-
Total Liabilities $300,000 (100,000) $200,000
Stockholders’ Equity
=
$685,000 (1)
(End. Tot. Assets – End. Tot. Liab.)
Beginning Change Ending
Total Assets $660,000 $745,000 (2)
=
Total Liabilities $300,000 215,000 $515,000
Stockholders’ Equity $360,000 (130,000) + $230,000
Total Liabilities $300,000
Stockholders’ Equity $360,000 150,000 + $510,000
(End. Tot. Liab – End. Stock. Equity.)
Beginning Change Ending
Total Assets $660,000 (60,000) $600,000
=
$ 90,000 (3)
(End. Tot. Assets – End. Stock. Equity.)
Be. 189 Reinhardt’s Carpet Cleaning has the following balance sheet items: Buildings Accounts Payable Cash Supplies Accounts Receivable
Notes Payable Common Stock Retained Earnings Equipment
Identify which items are (1) Assets (2) Liabilities (3) Stockholders’ Equity Ans: N/A, LO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
1-44
Solution 189
(5 min.)
(1) Assets—Buildings, Cash, Supplies, Accounts Receivable, Equipment (2) Liabilities—Accounts Payable, Notes Payable (3) Stockholders’ Equity—Common Stock, Retained Earnings Be. 190 On June 1, 2017, Shaw Company prepared a balance sheet that shows the following: Assets (no cash) ...................................................................... $125,000 Liabilities .................................................................................. 75,000 Stockholders’ Equity ................................................................. 50,000 Shortly thereafter, all of the assets were sold for cash. How would the balance sheet appear immediately after the sale of the assets for cash for each of the following cases? Cash Received for the Assets
Assets
Balances Immediately After Sale – Liabilities = Stockholders’ Equity
Cash A
$135,000
$________
$________
$________
Cash B
120,000
________
________
________
Cash C
105,000
________
________
________
Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 190
Cash A Cash B Cash C
(5 min.)
Cash Received for the Assets $135,000 120,000 105,000
Balances Immediately After Sale Assets Liabilities = Stockholders’ Equity $135,000 $75,000 $60,000 (Assets – Liab.) 120,000 75,000 45,000 (Assets – Liab.) 105,000 75,000 30,000 (Assets – Liab.)
Be. 191 Compute the missing amount in each category of the accounting equation.
(a) (b) (c)
Assets $243,000 $183,000 $ ?
Liabilities $ ? $ 75,000 $212,000
Stockholders’ Equity $ 91,000 $ ? $310,000
Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Introduction to Financial Statements Solution 191
1-45
(5 min.)
(a) $152,000: ($243,000 - $91,000 = $152,000). (Assets – Stock. Equity) (b) $108,000: ($183,000 - $75,000 = $108,000). (Assets – Liab.) (c) $522,000: ($212,000 + $310,000 = $522,000). (Liab. + Stock Equity)
EXERCISES Ex. 192 Prepare an income statement and a retained earnings statement, for the month of October, 2017 and a balance sheet at October 31, 2017 for the medical practice of Linda Denny, MD, from the items listed below. Retained earnings (October 1) Common stock Accounts payable Equipment Service revenue Dividends Insurance expense Cash Utilities expense Supplies Salaries and wages expense Accounts receivable Rent expense
$15,000 30,000 6,000 29,000 23,000 6,000 3,500 11,000 700 2,800 9,000 10,000 2,000
LINDA DENNY, MD Income Statement For the Month Ended October 31, 2017 ___________________________________________________________________________ Revenues
$
Expenses
$
Total expenses
Net income
$
.
t
1-46
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 192
(Cont.)
LINDA DENNY, MD Retained Earnings Statement For the Month Ended October 31, 2017 ___________________________________________________________________________ Retained Earnings, October 1 Add:
$
Less:
$
t
LINDA DENNY, MD Balance Sheet October 31, 2017 ___________________________________________________________________________ Assets $
Total assets $
t
Liabilities and Stockholders’ Equity Liabilities $ Stockholders’ Equity $ Total liabilities and stockholders’ equity
$
t
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Introduction to Financial Statements Solution 192
1-47
(15 min.)
LINDA DENNY, MD Income Statement For the Month Ended October 31, 2017 ___________________________________________________________________________ Revenues Service revenue ............................................................................ $23,000 Expenses Salaries and wages expense ......................................................... $9,000 Insurance expense ........................................................................ 3,500 Rent expense ................................................................................ 2,000 Utilities expense ............................................................................ 700 Total expenses ........................................................................ 15,200 Net income ........................................................................................... $ 7,800 (Ser. rev. – Tot. exp.)
LINDA DENNY, MD Retained Earnings Statement For the Month Ended October 31, 2017 ___________________________________________________________________________ Retained Earnings, October 1 ............................................................. $15,000 Add: Net income ................................................................................. 7,800 22,800 Less: Dividends ................................................................................... 6,000 Retained Earnings, October 31 ........................................................... $16,800 (Beg ret. earn. + Net. inc. – dividends)
LINDA DENNY, MD Balance Sheet October 31, 2017 ___________________________________________________________________________ Assets Cash ...................................................................................................... Accounts receivable ............................................................................ Supplies .............................................................................................. Equipment ........................................................................................... Total assets ...................................................................................
$11,000 10,000 2,800 29,000 $52,800
(Cash + Acc. rec. + Sup. + Equip.)
Liabilities and Stockholders’ Equity Liabilities Accounts payable .......................................................................... Stockholders’ Equity Common stock ............................................................................... Retained earnings ........................................................................... Total liabilities and stockholders’ equity .........................................
$ 6,000
$30,000 16,800
46,800 $52,800
(Acct. pay. + Com. stock + End. ret. earn.)
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 193 Use the following accounts and information to prepare, in good form, an income statement and a retained earnings statement, for the month of August and a balance sheet at August 31, 2017 for Pierce Industries. Accounts payable $ 1,100 Accounts receivable 5,400 Buildings 63,000 Cash 18,600 Service revenue 25,700 Common stock 52,000 Retained earnings (beginning) 25,900
Dividends Insurance expense Supplies Notes payable Rent expense Salaries and wages expense
$ 3,000 1,200 1,400 3,300 3,400 12,000
PIERCE INDUSTRIES Income Statement For the Month Ended August 31, 2017 ___________________________________________________________________________ Revenues $ Expenses $
Total expenses Net income
$
t
PIERCE INDUSTRIES Retained Earnings Statement For the Month Ended August 31, 2017 ___________________________________________________________________________ Retained Earnings, August 1 Add:
$
Less:
Retained Earnings, August 31
$
.
t
Introduction to Financial Statements Ex. 193
1-49
(Cont.)
PIERCE INDUSTRIES Balance Sheet August 31, 2017 ___________________________________________________________________________ Assets $
Total assets $
t
Liabilities and Stockholders’ Equity Liabilities $ $ Stockholders’ Equity $ Total liabilities and stockholders’ equity
$
t
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 193
(15 min.)
PIERCE INDUSTRIES Income Statement For the Month Ended August 31, 2017 ___________________________________________________________________________ Revenues Service revenue ............................................................................ $25,700 Expenses Salaries and wages expense ......................................................... $12,000 Rent expense ................................................................................ 3,400 Insurance expense ........................................................................ 1,200 Total expenses ........................................................................ 16,600 Net income .............................................................................. $9,100 (Ser. rev. – Tot. exp.)
.
1-50
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 193
(Cont.)
PIERCE INDUSTRIES Retained Earnings Statement For the Month Ended August 31, 2017 ___________________________________________________________________________ Retained Earnings, August 1 ............................................................... $25,900 Add: Net income .................................................................................. 9,100 35,000 Less: Dividends ................................................................................... 3,000 Retained Earnings, August 31 ............................................................. $32,000 (Beg. ret. earn + Net inc. – dividends)
PIERCE INDUSTRIES Balance Sheet August 31, 2017 ___________________________________________________________________________ Assets Cash … ................................................................................................ Accounts receivable ............................................................................ Supplies .............................................................................................. Buildings .............................................................................................. Total assets ...................................................................................
$18,600 5,400 1,400 63,000 $88,400
(Cash + Acc. rec. + Sup. + Build.)
Liabilities and Stockholders’ Equity Liabilities Accounts payable ................................................................................ $ 1,100 Notes payable ..................................................................................... 3,300 Total liabilities ..................................................................................... Stockholders’ Equity Common stock ............................................................................... $52,000 Retained earnings .......................................................................... 32,000 Total liabilities and stockholders’ equity .........................................
$4,400
84,000 $88,400
(Acct. pay. + Not. pay. + Com. stock + End. ret. earn.)
Ex. 194 At September 1, the balance sheet accounts for Kiner's Restaurant were as follows: Accounts Payable Accounts Receivable Buildings Cash Equipment
$ 3,800 1,600 66,000 5,000 15,700
Land Common Stock Notes Payable Supplies Retained Earnings
$33,000 ? 46,000 3,600 45,200
The following transactions occurred during the next two days: Stockholders invested an additional $20,000 cash in the business. The accounts payable were paid in full. (No payment was made on the notes payable.) Instructions Prepare a balance sheet at September 3, 2017. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Introduction to Financial Statements
Solution 194
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(10 min.) KINER’S RESTAURANT Balance Sheet September 3, 2017 ASSETS
Cash Accounts receivable Supplies Equipment Buildings Land Total assets
$21,200 1,600 3,600 15,700 66,000 33,000 $141,100 (Cash + Acc. rec. + Sup. + Equip. + Build.)
LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities Notes payable
$ 46,000
Stockholders’ Equity Common stock Retained earnings Total liabilities and stockholders’ equity
$49,900 45,200
Cash ($5,000 + $20,000 - $3,800) = $21,200 Accounts Payable ($3,800 - $3,800) = $0 Common Stock Beginning balance ($124,900a - $95,000b) Additional investment Ending balance (a–b) + add. invest.
95,100 $141,100
$29,900 20,000 $49,900
a Acc. rec. + Build + Beg. Cash + Equip. + Land + Supp. b Acc. pay. + Not. pay + Ret. earn.
Ex. 195 This information relates to Connor Co. for the year 2017. Retained earnings, January 1, 2017 Advertising expense Dividends paid during 2017 Rent expense Service revenue Utilities expense Salaries and wages expense
$59,000 1,800 9,000 10,400 52,000 2,400 25,000
Instructions After analyzing the data, prepare an income statement and a retained earnings statement for the year ending December 31, 2017. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 195
(10 min.)
CONNOR CO. Income Statement For the Year Ended December 31, 2017 ___________________________________________________________________________ Revenues Service revenue ............................................................................. $52,000 Expenses Salaries and wages expense ......................................................... $25,000 Rent expense ................................................................................ 10,400 Utilities expense ............................................................................ 2,400 Advertising expense ...................................................................... 1,800 Total expenses ........................................................................ 39,600 Net income .......................................................................................... $12,400 (Ser. rev. – Tot. exp.)
CONNOR CO. Retained Earnings Statement For the Year Ended December 31, 2017 ___________________________________________________________________________ Retained earnings, January 1 .............................................................. $59,000 Add: Net income .................................................................................. 12,400 71,400 Less: Dividends ................................................................................... 9,000 Retained earnings, December 31 ........................................................ $62,400 (Beg. ret. earn. + Net inc. – dividends
Ex. 196 Here are incomplete financial statements for Brandon, Inc. BRANDON, INC. Balance Sheet Assets Cash Inventory Buildings Total assets
$ 5,000 10,000 40,000 $55,000
.
Liabilities and Stockholders' Equity Liabilities Accounts payable $ 5,000 Stockholders' equity Common stock (a) Retained earnings (b) Total liabilities and stockholders' equity $55,000
Introduction to Financial Statements Ex. 196
1-53
(Cont.) Income Statement Revenues Cost of goods sold Administrative expenses Net income
$80,000 (c) 10,000 $ (d)
Retained Earnings Statement Beginning retained earnings Net income Dividends Ending retained earnings
$10,000 (e) 5,000 $24,000
Instructions Calculate the missing amounts. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 196
(10 min.)
First note that the retained earnings statement shows that (b) equals $24,000. Accounts payable + Common stock + Retained earnings = Total liabilities and stockholders' equity $5,000 + a + $24,000 = $55,000 a + $29,000 = $55,000 a = $26,000 Tot liab. & Stock Equity – (Acct. pay. + End. ret. earn) Beginning retained earnings + Net income – Dividends = Ending retained earnings $10,000 + e – $5,000 = $24,000 $5,000 + e = $24,000 e = $19,000 End. ret. earn. + div. – Beg. ret. earn From above, we know that net income (d) equals $19,000. Revenue – Cost of goods sold – Administrative expenses = Net income $80,000 – c – $10,000 = $19,000 $70,000 – c = $19,000 c = $51,000 Rev. – Admin. exp. – Net inc.(e)
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
1-54 Ex. 197
Sleep Cheap is a private camping ground near the Boulder Peak Recreation Area. It has compiled the following financial information as of December 31, 2017. Services revenues (from camping fees) $132,000 Dividends $ 8,000 Sales revenues (from general store) 25,000 Notes payable 50,000 Accounts payable 13,000 Administrative expenses 133,000 Cash 13,500 Supplies 2,500 Equipment 108,000 Common stock 40,000 Retained earnings (1/1/2017) 5,000 Instructions (a) Determine net income from Sleep Cheap for 2017. (b) Prepare a retained earnings statement and a balance sheet for Sleep Cheap as of December 31, 2017. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 197 (10 min.) (a) Service revenue ............................................................................. $132,000 Sales revenue ............................................................................... 25,000 Total revenue ........................................................................... 157,000 Expenses ....................................................................................... 133,000 Net income .................................................................................... $ 24,000 (Tot. reven. – Admin. exp.)
(b)
SLEEP CHEAP Retained Earnings Statement For the Year Ended December 31, 2017 _________________________________________________________________
Retained earnings, January 1 .............................................................. Add: Net income .................................................................................. Less: Dividends .................................................................................... Retained earnings, December 31 .........................................................
$ 5,000 24,000 29,000 8,000 $21,000
(Beg. ret. earn. + Net inc. – dividends)
SLEEP CHEAP Balance Sheet December 31, 2017 _________________________________________________________________ Assets Cash .................................................................................................... $ 13,500 Supplies .............................................................................................. 2,500 Equipment ............................................................................................ 108,000 Total assets ................................................................................... $124,000 (Cash + Supp. + Equip.)
.
Introduction to Financial Statements Solution 197
1-55
(Cont.)
Liabilities and Stockholders’ Equity Liabilities Notes payable ............................................................................... Accounts payable .......................................................................... Total liabilities ........................................................................... Stockholders’ equity Common stock ............................................................................... Retained earnings .......................................................................... Total liabilities and stockholders’ equity ...................................
$50,000 13,000 $ 63,000 40,000 21,000
61,000 $124,000
(Tot. liab. + Com. stock + End. ret. earn.)
Ex. 198 John Tate is the bookkeeper for Gabelli Company. John has been trying to get the balance sheet of Gabelli Company to balance. It finally balanced, but now he's not sure it is correct. GABELLI COMPANY Balance Sheet December 31, 2017 Assets Cash Supplies Equipment Dividends Total assets
$12,500 9,500 50,000 13,000 $85,000
Liabilities and Stockholders' Equity Accounts payable $18,000 Accounts receivable (12,000) Common stock 40,000 Retained earnings 39,000 Total liabilities and stockholders' equity $85,000
Instructions Prepare a correct balance sheet. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 198
(5 min.)
GABELLI COMPANY Balance Sheet December 31, 2017 ___________________________________________________________________________ Assets Cash ................................................................................................... Accounts receivable ............................................................................ Supplies ............................................................................................... Equipment............................................................................................ Total assets ................................................................................... (Cash + Acc. rec. + Supp. + Equip.)
.
$12,500 12,000 9,500 50,000 $84,000
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 198
(Cont.)
Liabilities and Stockholders’ Equity Liabilities Accounts payable .......................................................................... Stockholders’ equity Common stock ............................................................................... Retained earnings .......................................................................... Total liabilities and stockholders’ equity ...................................
$18,000 $40,000 26,000*
66,000 $84,000
(Acc. pay. + Com. stock + Ret. earn. – div.)
*$39,000 – $13,000 Ex. 199 The summaries of data from the balance sheet, income statement, and retained earnings statement for two corporations, Bates Corporation and Wilson Enterprises, are presented below for 2017. Bates Corporation Beginning of year Total assets Total liabilities Total stockholders' equity End of year Total assets Total liabilities Total stockholders' equity Changes during year in retained earnings Dividends Total revenues Total expenses
Wilson Enterprises
$110,000 80,000 (a)
$130,000 (d) 70,000
(b) 120,000 70,000
190,000 65,000 (e)
(c) 225,000 165,000
5,000 (f) 80,000
Instructions Determine the missing amounts. Assume all changes in stockholders' equity are due to changes in retained earnings. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 199
(10 min.)
(a)
Assets $110,000 (a)
= = =
Liabilities $80,000
(b)
Assets (b) (b)
= = =
Liabilities + Stockholders' Equity $120,000 + $70,000 $190,000 (End. liab. + End. stock. equity)
.
+ +
Stockholders' Equity (a) $30,000 (Beg. tot. assets – Beg. tot. liab.)
Introduction to Financial Statements Solution 199
1-57
(Cont.)
(c) Beginning + Stockholders' Equity $30,000(a) +
Revenues
–
Expenses
–
Dividends
=
$225,000 $90,000
– –
$165,000 (c) (c)
–
(c)
= = =
Ending Stockholders' Equity $70,000 $70,000 $20,000
(Beg. stock. equity + Rev. – Exp.–End. stock. equity)
(d)
Assets $130,000 (d)
= = =
Liabilities + Stockholders' Equity (d) + $70,000 $60,000 (Beg. tot. assets – Beg. stock. equity)
(e)
Assets $190,000 (e)
= = =
Liabilities + Stockholders' Equity $65,000 + (e) $125,000 (End. tot. assets – End. tot. liab.)
(f) Beginning + Stockholders' Equity $70,000 + (f) =
Revenues
–
Expenses
–
Dividends
=
(f) $140,000
–
$80,000
–
$5,000
=
Ending Stockholders' Equity $125,000(e)
(End. stock. equity + Div. Exp. – Beg. stock equity)
Ex. 200 This information is for Campo Corporation for the year ended December 31, 2017. Cash received from lenders Cash received from customers Cash paid for new equipment Cash dividends paid Cash paid to suppliers Cash balance 1/1/17
$20,000 65,000 30,000 9,000 28,000 12,000
Instructions Prepare the 2017 statement of cash flows for Campo Corporation. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 200
(10 min.)
CAMPO CORPORATION Statement of Cash Flows For the Year Ended December 31, 2017 ___________________________________________________________________________ Cash flows from operating activities Cash received from customers ...................................................... $65,000 Cash paid to suppliers ................................................................... (28,000) Net cash provided by operating activities ....................................... $37,000 Cash flows from investing activities Cash paid for new equipment ......................................................... (30,000) Net cash used by investing activities .............................................. (30,000) Cash flows from financing activities Cash received from lenders ............................................................ 20,000 Cash dividends paid ....................................................................... (9,000) Net cash provided by financing activities ........................................ 11,000 Net increase in cash (Cash from oper. act. – Cash from inv. act. + Cash from fin.act.) ......................................... 18,000 Cash at beginning of period ................................................................. 12,000 Cash at end of period .......................................................................... $30,000 Ex. 201 One item is omitted in each of the following summaries of balance sheet and income statement data for three different corporations, A, B, and C. Determine the amounts of the missing items, identifying each corporation by letter.
A
Corporation B
C
$410,000 250,000
$150,000 115,000
$199,000 166,000
460,000 280,000
195,000 95,000
205,000 169,000
?
79,000
78,000
Dividends
70,000
83,000
?
Revenue
195,000
?
187,000
Expenses
155,000
113,000
183,000
Beginning of the Year: Assets Liabilities End of the Year: Assets Liabilities During the Year: Additional Investment by stockholders
Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Introduction to Financial Statements Solution 201 (10 min.) Corporation A ($50,000) Beginning stockholders’ equity ($410,000 - $250,000) Additional investments ($180,000 + $70,000 - $160,000 - $40,000) Net income for year ($195,000 - $155,000) Less dividends Ending stockholders’ equity ($460,000 - $280,000) *End. stock. equtiy + Div. + Rev. – Exp.–Beg. stock. equity Corporation B ($182,000) Beginning stockholders’ equity ($150,000 - $115,000) Additional investments Net income for year ($183,000 - $35,000 - $79,000) *[Revenues = $182,000 ($113,000 + $69,000)] Less dividends Ending stockholders’ equity ($195,000 - $95,000) *End. stock. equtiy + Div. – Add. invest. – Beg. stock. equity + Exp. Corporation C ($79,000) Beginning stockholders’ equity ($199,000 - $166,000) Additional investments Net income for year ($187,000 - $183,000) Less dividends ($115,000 - $36,000) Ending stockholders’ equity ($205,000 - $169,000) *Beg. stock. equtiy + Add. inv. + Rev. – Exp.
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$160,000 50,000* 40,000 250,000 70,000 $180,000
$ 35,000 79,000 69,000 183,000 83,000 $100,000
$ 33,000 78,000 4,000 115,000 79,000* $ 36,000
COMPLETION STATEMENTS 202. A business organized as a separate legal entity owned by stockholders is a ___________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
203. _______________ of accounting information are managers who plan, organize, and run a business. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
204. _________________ activities involve collecting the necessary funds to start the business. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
205. The ________________ reports the assets, liabilities, and stockholders’ equity of a business at a specific date. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
206. The claims of owners on the assets of a corporation are known as ________________. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
207. The basic accounting equation is Assets = ____________ + _______________. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
208. The primary purpose of a ________________ is to provide financial information about the cash receipts and cash payments of a business. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
209. The _________________ is prepared by an independent auditor stating the auditor’s opinion as to the fairness of the presentation of the financial statements. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Answers to Completion Statements 202. 203. 204. 205.
corporation Internal users Financing balance sheet
206. 207. 208. 209.
stockholders’ equity Liabilities, Stockholders’ equity statement of cash flows auditor's report
MATCHING 210. Match the items below by entering the appropriate code letter in the space provided. A. Internal users B. Management discussion and analysis C. Annual report D. Sole proprietorship E. Dividends
F. G. H. I. J.
Corporation Assets Liabilities Expenses Investing activities
____
1. Distributions of cash from a corporation to its stock holders.
____
2. Consumed assets or services.
____
3. Ownership is limited to one person.
____
4. Officers and others who manage the business.
____
5. Creditor claims against the assets of the business.
____
6. A separate legal entity under state laws.
____
7. A report prepared by management that presents financial information.
____
8. A section of the annual report that presents management’s views.
____
9. Future economic benefits.
____ 10. Involves acquiring the resources necessary to run the business. Ans: N/A, LO: 1,2,3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
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Introduction to Financial Statements
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Answers to Matching 1. 2. 3. 4. 5.
E I D A H
6. 7. 8. 9. 10.
F C B G J
SHORT-ANSWER ESSAY QUESTIONS S-A E 211 What are the advantages to a business of being formed as a corporation? What are the disadvantages? Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Business Economics
Solution 211 Advantages of a corporation are limited liability (stockholders are not personally liable for corporate debts), easy transferability of ownership, and easier to raise funds. Disadvantages of a corporation are increased taxation and government regulations. S-A E 212 Why would it be safer for a wealthy individual to set up his or her business as a corporation rather than as a proprietorship or partnership? Ans: N/A, LO: 1, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Business Economics
Solution 212 With a proprietorship or partnership, the owner(s) have unlimited liability. That is, they may be required to use personal assets to satisfy business debts. The liability of a corporate shareholder, however, is limited to his or her investment in the business. Therefore, it would be safer for a wealthy individual to set up his/her business as a corporation. S-A E 213 Your friend, James, made this comment: “My major is biology and I plan to research for cures for major illnesses. Therefore, I have no need to study accounting.” What is your response to James? Ans: N/A, LO: 1, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Business Economics
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 213 James, you are entering a dynamic profession and you have the opportunity to make important contributions to society. While science will be your profession and major concern, you will not be able to escape the need to understand accounting. Accounting staff and professionals will always be available to assist you. Here are some areas that will directly affect you: As a manager, you will need to review accounting information (both internal and external) and make decisions. Budgets will be an important part of your research activities. As an employee, you will be concerned about the financial information of your employer. Thus, you will need to be able to read the company’s financial statements. Also, as an investor, you will be interested in the financial statements of other companies. You will probably not be a preparer of the financial statements, but you do need an understanding of how they are prepared. You also need a good understanding of how to interpret the information on the financial statements. S-A E 214 The information needs of a specific user of financial accounting information depends upon the kinds of decisions that user makes. Identify the major users of accounting information and discuss what questions financial accounting information answers for each group of users. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 214 The major users of accounting information are internal users and external users. Internal users are those who manage the business. External users are those outside the business who have either a present or potential financial interest. Financial accounting information may answer the following questions for internal users: 1. Is cash sufficient to pay our debts? 2. Can we afford to give employee pay raises this year? 3. What is the cost of manufacturing each unit of product? 4. Which product line is the most profitable? Questions answered by financial accounting information for external users include: 1. Is the company earning satisfactory income? 2. How does the company compare in size and profitability with competitors? 3. Will the company be able to pay its debts as they come due?
.
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S-A E 215 The statement of cash flows for Nyland Corporation reveals the following information: Net cash used by operating activities ($150,000) Net cash used by investing activities Net cash provided by financing activities Issuance of common stock Issued note payable Net change in cash
($200,000)
$100,000 250,000
$350,000 0
Provide three comments about this information. Make your comments concise yet thorough. Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Business Economics
Solution 215 (1) Operating activities represent the ongoing activities of the company and are a result of its reason for being in business. The fact that this is a negative cash flow is a cause of concern. This may be a new company and future cash flows from operations will be positive. (2) The cash that was used for operating and investing activities came from the stockholders (issuance of common stock) and creditors (borrowing with a notes payable). This is to be expected for a new company, or a company that is expanding, but should not be considered an ongoing way to finance the business. Cash from operating activities should be available to purchase assets and pay dividends to shareholders. (3) There is a concern that all proceeds raised from issuing stock have been used. If operating activities cannot generate positive cash flows, can the corporation issue additional stock to raise cash? (4) The corporation owes on the note payable. Will there be sufficient cash from operating activities to pay the interest and repay the principal? (5) Does the corporation need to acquire additional assets for use in the business? If so, will it be able to get the cash to pay for these future acquisitions. The net of zero may be misleading. The reader may think that there are no potential problems because the cash flows netted to zero. The user of the Statement of Cash Flows needs to consider the activities of each of the sections – operating, investing, and financing. S-A E 216 How are each of the following financial statements interrelated? (a) Retained earnings statement and income statement. (b) Retained earnings statement and balance sheet. (c) Balance sheet and statement of cash flows. Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 216 (a) Net income from the income statement is reported as an increase to retained earnings on the retained earnings statement. (b) The ending amount on the retained earnings statement is reported as the retained earnings amount on the balance sheet. (c) The ending amount on the statement of cash flows is reported as the cash amount on the balance sheet.
.
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S-A E 217 Broadway Corporation’s stockholders’ equity equals one-fourth of the company’s total assets. The company’s liabilities are $270,000. What is the amount of the company’s stockholders’ equity? Ans: N/A, LO: 3, Bloom: AN, Difficulty: Easy, Min: 2, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 217 $90,000: X = 270,000 + ¼X S-A E 218 Which three items affect retained earnings, and how do they affect it? Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Business Economics
Solution 218 Net income increases retained earnings, whereas a net loss and dividends decrease it. S-A E 219 The framework used to record and summarize the economic activities of a business enterprise is referred to as the accounting equation. State the basic accounting equation and define its major components. How are financial statements related to the accounting equation? Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Business Economics
Solution 219 The basic accounting equation is expressed as follows: Assets = Liabilities + Stockholders’ Equity Assets are defined as resources owned by the business. Liabilities are creditors’ claims against the assets of the business; or simply put, liabilities are existing debts and obligations. Stockholders’ equity is the ownership claim on the total assets of the business; it is equal to total assets minus total liabilities. The financial statements report the results and effects of transactions on the business' assets, liabilities, and stockholders’ equity. The balance sheet is a summary expression of the basic accounting equation. S-A E 220 What types of information are presented in the notes to the financial statements? Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 220 Information included in the notes to the financial statements clarifies information presented in the financial statements and includes descriptions of accounting policies, explanations of uncertainties and contingencies, and details too voluminous to be reported in the financial statements.
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S-A E 221 (Ethics) Joe Laramie owns and operates Joe's Burgers, a small fast food store, located at the edge of City College campus in Newton, Ohio. After several very profitable years, Joe's Burgers began to have problems. Most of the problems were related to Joe's expansion of the eating area in the restaurant without corresponding increases in the food preparation area. Joe does not have the cash or financial backing to expand further. He has therefore decided to sell his business. William Sheets is interested in purchasing the business. However, he is located in another city and is unfamiliar with Newton. He has asked Joe why he is selling Joe's Burgers. Joe replies that his elderly mother requires extra care, and that his brother needs help in his manufacturing business. Both are true, but neither is his primary reason for selling. Joe reasons that William should not have asked him anyway, since profitable businesses don't come up for sale. Required: 1. Identify the stakeholders in this situation. 2. Did Joe act ethically in not revealing fully his reasons for selling the business? Why or why not? Ans: N/A, LO: 3, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 221 1. The stakeholders include: Joe Laramie William Sheets Newton, Ohio
Students of City College and other customers City College Persons financing the purchase of Don's Burgers
2. Joe did not act ethically in not revealing fully his reasons for selling the business. Students might be of the opinion that a purchaser should investigate a business before purchasing it, rather than relying entirely on the seller's assertions. However, students should realize that Joe should have said something about his problems. He might ethically be allowed to put these in the best possible light, perhaps, but failure to disclose them at all is certainly unethical. This is especially true, since family concerns might well cause someone to sell a business that is otherwise doing well. Joe has shown an intent to deceive that is unethical, and might be actionable in court as well. S-A E 222 (Communication) Mary Baroni is a friend of yours from high school. She decided to become a beautician after leaving high school, rather than to attend college. She recently opened her own shop, and has contracted her services to a local hospital. She is paid a monthly fee for her services, and receives a small gratuity from each of the patients. She has just received her first set of financial statements from her accountant. She is quite upset. The statements show a cash balance of $3,600 at the end of the month, but a net income of only $500. She has written you a letter, asking you whether such a situation is possible, or whether she should find another accountant. Required: Write a short letter to your friend. Use proper form. Answer her question completely, but briefly. Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Business Economics
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 222 Answers will vary. The instructor's requirements concerning proper form should be followed. The letter may be either business or personal. At a minimum, the letter should be in a recognizable form, and proper grammar and spelling should be used. Neat erasures and corrections might be allowed. A suggested personal letter follows:
1245 Lily Lane Buena Vista, AR 77661 (Date) Dear Mary, Congratulations on opening your business! I am sure you will do well, combining your creative genius with your talent for serving others. You asked about your financial statements. Of course, you realize that I am just an accounting student, but I do know that it is possible to have a large cash balance and little net income. You may have had expenses that were not paid in cash yet. These expenses reduce your income, but not your cash. I think that you should discuss the statements with the accountant who prepared them. He or she will be in the best position to explain the results. Thanks for the question. It really made me think. Sincerely, (signature)
.
Introduction to Financial Statements
1-67
IFRS Questions 1.
Which of the following is not a reason one set of international accounting standards are needed? a. Multinational corporation. b. Financial markets. c. Information technology. d. All of these answer choices are reasons one set of international accounting standards are needed.
Ans: D, LO: 4, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FC: Reporting IMA: Reporting
2.
International standards are referred to as a. IFRS. b. GAAP. c. IASB. d. FASB.
Ans: A, LO: 4, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FC: Reporting IMA: Reporting
3.
U.S. standards are referred to as a. IFRS. b. GAAP. c. IASB. d. FASB.
Ans: B, LO: 4, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FC: Reporting IMA: Reporting
4.
International standards are developed by the a. IFRS. b. GAAP. c. IASB. d. FASB.
Ans: C, LO: 4, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FC: Reporting IMA: Reporting
5.
U.S. standards are developed by the a. IFRS. b. GAAP. c. IASB. d. FASB.
Ans: D, LO: 4, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FC: Reporting IMA: Reporting
6.
The United States and the international standard-setting environment are primarily driven by meeting the needs of a. investors and creditors. b. tax authorities. c. central government planners. d. academic researchers.
Ans: A, LO: 4, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FC: Reporting IMA: Reporting
.
1-68 7.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The internal control standards applicable to Sarbanes-Oxley apply to? a. all U.S.and international companies. b. U.S. and international companies listed on U.S. exchange. c. International companies listed on U.S. exchange. d. U.S. companies listed on U.S. exchange.
Ans: D, LO: 4, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FC: Reporting IMA: Reporting
8.
The concern about international companies adopting SOX-type standards centers on a. cost-benefit analysis. b. ethics issues. c. the governing authorities. d. comparability.
Ans: A, LO: 4, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FC: Reporting IMA: Reporting
9.
Financial accounting ethics violations are a. not a problem in the U.S or internationally. b. much more common in the U.S than internationally. c. much more common internationally than in the U.S. d. a major problem both in the U.S and internationally.
Ans: D, LO: 4, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FC: Reporting IMA: Reporting
10.
IFRS, compared to GAAP, tends to be more a. detailed. b. rules-based. c. principles-based. d. full of disclosure requirements.
Ans: C, LO: 4, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FC: Reporting IMA: Reporting
11.
GAAP, compared to IFRS, tends to be more a. simple in accounting requirements. b. rules-based. c. principles-based. d. simple in disclosure requirements.
Ans: B, LO: 4, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FC: Reporting IMA: Reporting
12.
The conceptual framework that underlines IFRS a. is very similar to that used to develop GAAP. b. does not define assets or liabilities. c. does not define equity. d. does not define income or expenses.
Ans: A, LO: 4, BT: K, Difficulty: Easy TOT: 1.0 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FC: Reporting IMA: Reporting
.
CHAPTER 2 A FURTHER LOOK AT FINANCIAL STATEMENTS SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY Item
LO
BT
Item
LO
BT
Item
LO
BT
Item
LO
BT
Item
LO
BT
3 3 3 3 3 3 3 3 3 3 3
K C K K C K K K K K K
45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55.
3 3 3 3 3 3 3 3 3 3 3
K K K K K K K K K K K
2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
AP AP AN AP AP C K K K K K K K K K K K K K K K K K K K C C C
168. 169. 170. 171. 172. 173. 174. 175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192.
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
K C C C C K C C K K K K C K K K K K C C K K C C C
True-False Statements 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
1 1 1 1 1 1 1 2 2 2 2
K K K K C K C K C K K
12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.
2 2 2 2 2 2 2 2 2 2 2
K K K K C K K K K K K
23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33.
2 2 2 3 3 3 3 3 3 3 3
K K C K K K K K K C K
34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44.
Multiple Choice Questions 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83.
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 1 1 1 2 2 1 1 1 2
K K K K K K K K K K K K K K K K AP K K AP AP AP AP AP AP AP AP AP
84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111.
2 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
AP AP AP AP AP AP AP AP K AP AP K K C K AN AN AP AN K K K C K K K K C .
112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139.
2 2 2 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
C K K AP AP AP AP AP AP AP AP AP AP K K K C C C C AP AP AP AP K K K K
140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
193. 194.
1 2
Brief Exercises AP AP
195. 196.
2 3
AP K
197. 198.
3 3
K C
199. 200.
2 2 2 2
AP AP AP AN
3 3
C C
201.
3
K
214. 215. 216. 217.
2 2 2 2
K AP AP AN
224.
2
K
225.
2
K
236.
2
E
237.
3
E
Exercises 202. 203. 204. 205.
1 1 1. 1, 2
AP K AP AP
206. 207. 208. 209.
1, 2 1 1 2
218. 219.
3 3
K K
220. 221.
3 3
226.
1-3
K
227. 228. 229.
1 2, 1, 2
K K K
AP AP AP AP
210. 211. 212. 213.
Completion Statements K K
222. 223.
2 1
K K
Matching Short Answer Essay 230. 231. 232.
2 3 3
C C C
233. 234. 235.
3 3 3
C K K
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Item 1. 2. 3. 4. 5. 6. 7. 56. 57.
Type TF TF TF TF TF TF TF MC MC
Item 58. 59. 60. 61. 62. 63. 64. 65. 66.
Type MC MC MC MC MC MC MC MC MC
Item 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24.
Type TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF
Item 25. 74. 78. 79. 83. 84. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100.
Type TF MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC
Learning Objective 1 Item Type Item Type 67. MC 77. MC 68. MC 80. MC 69. MC 81. MC 70. MC 82. MC 71. MC 85. MC 72. MC 86. MC 73. MC 87. MC 75. MC 88. MC 76. MC 89. MC Learning Objective 2 Item Type Item Type 101. MC 119. MC 102. MC 120. MC 103. MC 121. MC 104. MC 122. MC 105. MC 123. MC 106. MC 124. MC 107. MC 125. MC 108. MC 126. MC 109. MC 127. MC 110. MC 128. MC 111. MC 129. MC 112. MC 130. MC 113. MC 131. MC 114. MC 132. MC 116. MC 133. MC 117. MC 134. MC 118. MC 135. MC .
Item 115. 193. 202. 203. 204. 205. 206. 207. 208.
Type MC BE Ex Ex Ex Ex Ex Ex Ex
Item 223. 226. 227. 229.
Type CS Ma SA SA
Item 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 194. 195. 205. 206. 209. 210. 211.
Type MC MC MC MC MC MC MC MC MC MC BE BE Ex Ex Ex Ex Ex
Item 212. 213. 214. 215. 216. 217. 222. 224. 225. 228. 229. 230. 236
Type Ex Ex Ex Ex Ex Ex CS CS CS SA SA SA SA
A Further Look at Financial Statements
Item 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42.
Type TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF
Item 43. 44. 44. 45. 47. 48. 49. 50. 51. 52. 53. 54. 55. 146. 147. 148. 149.
Learning Objective 3 Item Type Item Type 150. MC 167. MC 151. MC 168. MC 152. MC 169. MC 153. MC 170. MC 154. MC 171. MC 155. MC 172. MC 156. MC 173. MC 157. MC 174. MC 158. MC 175. MC 159. MC 176. MC 160. MC 177. MC 161. MC 178. MC 162. MC 179. MC 163. MC 180. MC 164. MC 181. MC 165. MC 182. MC 166. MC 183. MC
Type TF TF TF TF TF TF TF TF TF TF TF TF TF MC MC MC MC
Note: TF = True-False MC = Multiple Choice Ma = Matching
Item 184. 185. 186. 187. 188. 189. 190. 191. 192. 196. 197. 198. 199. 200. 201. 218. 219.
C = Completion Ex = Exercise SA = Short Answer Essay
.
Type MC MC MC MC MC MC MC MC MC BE BE BE BE BE BE CS CS
Item 220. 221. 226. 231. 232. 233. 234. 235. 237.
2-3
Type CS CS Ma SA SA SA SA SA SA
2-4
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
CHAPTER LEARNING OBJECTIVES 1. Identify the sections of a classified balance sheet. In a classified balance sheet, companies classify assets as current assets; long-term investments; property, plant, and equipment; and intangibles. They classify liabilities as either current or long-term. A stockholders’ equity section shows common stock and retained earnings. 2. Use ratios to evaluate a company’s profitability, liquidity, and solvency. Ratio analysis expresses the relationship among selected items of financial statements data. Profitability ratios, such as earnings per share (EPS), measure aspects of the operating success of a company for a given period of time. Liquidity ratios, such as the current ratio, measure the short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash. Solvency ratios, such as the debt to assets ratio, measure the ability of a company to survive over a long period. Free cash flow indicates a company’s ability to generate cash from operations that is sufficient to pay debts, acquire assets, and distribute dividends. 3. Discuss financial reporting concepts. Generally accepted accounting principles are a set of rules and practices recognized as a general guide for financial reporting purposes. The basic objective of financial reporting is to provide information that is useful for decision making. To be judged useful, information should have the primary characteristics of relevance and faithful representation. In addition, useful information is comparable, consistency, verifiable, timely, and understandable. The monetary unit assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money. The economic entity assumption states that economic events can be identified with a particular unit of accountability. The periodicity assumption states that the economic life of a business can be divided into artificial time periods and that meaningful accounting reports can be prepared for each period. The going concern assumption states that the company will continue in operation long enough to carry out its existing objectives and commitments. The historical cost principle states that the companies should record assets at their cost. The fair value principle indicates that assets and liabilities should be reported at fair value. The full disclosure principle requires that companies disclose circumstances and events that matter to financial statement users. The cost constraint weighs the cost that companies incur to provide a type of information against its benefit to financial statement users.
.
A Further Look at Financial Statements
2-5
TRUE-FALSE STATEMENTS 1.
Cash and supplies are both classified as current assets.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
2.
Long-term investments appear in the property, plant, and equipment section of the balance sheet.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
3.
A liability is classified as a current liability if it is to be paid within the coming year.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
4.
Stockholders’ equity is divided into two parts: common stock and retained earnings.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
5.
It is possible for an asset to be a current asset even though the expected conversion of that asset into cash is to be longer than one year or the normal operating cycle.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
6.
The investment category on the balance sheet normally includes investments that are intended to be held for a short period of time (less than one year).
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
7.
The main difference between intangible assets and property, plant and equipment is the length of the asset’s life.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
8.
Profitability means having enough funds on hand to pay debts when they fall due.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Management, AICPA PC: None, IMA: Business Economics
9.
Earnings per share is calculated by dividing net income minus preferred stock dividends for the period by the average number of common shares outstanding during the period.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
10.
Earnings per share measures the net income earned on each share of common stock.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
11.
Liquidity ratios measure the short-term ability of a company to pay its maturing obligations and meet unexpected needs for cash.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
12.
Solvency ratios measure the ability of a company to survive over a short period of time.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
2-6 13.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Profitability ratios measure the operating success of a company for a given period of time.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
14.
The current ratio is computed as current liabilities divided by current assets.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
15.
The excess of current assets over current liabilities is called working capital.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
16.
The current ratio takes into account the composition of current assets.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
17.
Solvency ratios measure the short-term ability of the company to pay its maturing obligations.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
18.
The debt to assets ratio measures the percentage of assets financed by creditors.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
19.
Solvency is a company's ability to pay interest as it comes due and to repay the balance of a debt due at its maturity.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Risk Management, AICPA PC: Project Management, IMA: Business Economics
20.
Net cash provided by operating activities takes into account that a company must invest in capital expenditures just to maintain its current level of operations.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
21.
Both investors and creditors have an interest in a company’s ability to generate favorable cash flows.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
22.
Free cash flow is net cash provided by operating activities less capital expenditures.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
23.
In the statement of cash flows, net cash provided by operating activities indicates the cash-generating capability of the company.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
24.
Free cash flow is net cash provided by operating activities less dividends.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
25.
Long-term creditors consider a high free cash flow amount an indication of solvency.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Management, AICPA PC: None, IMA: Business Economics
.
A Further Look at Financial Statements
26.
2-7
The primary accounting standard-setting body in the United States is the Securities and Exchange Commission.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
27.
Generally accepted accounting principles are rules and practices that are recognized as a general guide for financial reporting purposes.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
28.
GAAP stands for generally accepted accounting procedures.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
29.
To be faithfully representative, accounting information should predict future events, confirm prior expectations, and be reported on a timely basis.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
30.
In order for information to be relevant, it must be reported on a monthly basis.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
31.
For information to be useful, it must be both relevant and faithfully representative.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
32.
Consistent use of the same accounting principles and methods is necessary for meaningful analysis of trends within a company.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
33.
A major function of management is to provide the accountant with relevant and useful information.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
34.
The advantage of accounting information is that it provides exact and completely reliable measures.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
35.
Consistency in accounting means that a company uses the same generally accepted accounting principles from one accounting period to the next accounting period.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
36.
The convention of consistency pertains to the use of the same accounting principles by firms in the same industry.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
37.
The periodicity assumption states that the business will remain in operation for the foreseeable future.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Management, AICPA PC: None, IMA: Business Economics
.
2-8 38.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
If a building is offered for sale at $100,000 and the buyer pays $95,000 cash for it, the buyer would record the building at $100,000.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
39.
The most generally accepted value used in accounting is market value.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
40.
For accounting purposes, business transactions should be kept separate from the personal transactions of the stockholders of the business.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
41.
The economic entity assumption states that economic events can be identified with a particular unit of accountability.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
42.
The economic entity assumption states that assets should be recorded at their cost.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
43.
The monetary unit assumption states that transactions that can be measured in terms of money should be recorded in the accounting records.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
44.
The monetary unit assumption has led to an increase in the notes to financial statements.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
45.
The going concern assumption is that the business will continue in operation long enough to carry out its existing objectives and commitments.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Management, AICPA PC: None, IMA: Business Economics
46.
When preparing financial statements, the accountant assumes that the business will stay in business for the foreseeable future.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
47.
Full disclosure of all important facts aids in overcoming the limitations of accounting information.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
48.
The economic entity assumption is that a company will remain in operations for the foreseeable future.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
49.
Materiality is a company-specific aspect of faithful representation.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
A Further Look at Financial Statements
50.
2-9
Relevance and cost are two constraints in accounting.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Management, AICPA PC: None, IMA: Business Economics
51.
Materiality relates to whether an item is large enough to likely influence the decision of an investor or creditor.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
52.
Cost constraint weighs the cost that companies incur to provide a type of information against its benefit to financial statement users.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
53.
In general, the FASB indicates that most assets must follow the fair value principle.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
54.
A material item is one that is likely to influence an investor's decision.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
55.
The periodicity assumption states that every economic entity can be separately identified and accounted for.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Answers to True-False Statements 1. 2. 3. 4. 5. 6. 7. 8.
9. 10. 11. 12.
T F T T F F F F T T T F
13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24.
T F T F F T T F T F T F
25. 26. 27. 28. 29. 30. 31 32. 33. 34. 35. 36.
.
T F T F F F
T T F F T F
37. 38. 39. 40. 41. 42. 43. 44 45. 46. 47. 48.
F F F T T F T F T T T F
49. 50. 51. 52. 53. 54. 55.
F F T T F T F
2-10
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
MULTIPLE CHOICE QUESTIONS 56.
In a classified balance sheet, assets are usually classified as a. current assets; long-term assets; property, plant, and equipment; and intangible assets. b. current assets; long-term investments; property, plant, and equipment; and common stocks. c. current assets; long-term investments; tangible assets; and intangible assets. d. current assets; long-term investments; property, plant, and equipment; and intangible assets.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
57.
On a classified balance sheet, short-term investments are classified as a. an intangible asset. b. property, plant, and equipment. c. a current asset. d. a long-term investment.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
58.
A current asset is a. the last asset purchased by a business. b. an asset which is currently being used to produce a product or service. c. usually found as a separate classification in the income statement. d. expected to be converted to cash or used in the business within a relatively short period of time.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
59.
Which of the following is not classified properly as a current asset? a. Supplies b. Debt investments c. A fund to be used to purchase a building within the next year d. A receivable from the sale of an asset to be collected in two years
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
60.
An intangible asset a. derives its value from the rights and privileges it provides the owner. b. is worthless because it has no physical substance. c. is converted into a tangible asset during the operating cycle. d. cannot be classified on the balance sheet because it lacks physical substance.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
A Further Look at Financial Statements
61.
2-11
Which of the following is not considered an asset? a. Equipment b. Dividends c. Accounts receivable d. Inventory
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
62.
Trademarks would appear in which balance sheet section? a. Intangible assets b. Investments c. Property, plant, and equipment d. Current assets
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
63.
Liabilities are generally classified on a balance sheet as a. small liabilities and large liabilities. b. present liabilities and future liabilities. c. tangible liabilities and intangible liabilities. d. current liabilities and long-term liabilities.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
64.
Which of the following would not be classified as a long-term liability? a. Current maturities of long-term debt b. Bonds payable c. Mortgage payable d. Lease liabilities
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
65.
Which of the following is not a current liability? a. Salaries and Wages Payable b. Accounts Payable c. Taxes Payable d. Bonds Payable
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
66.
Equipment is classified on the balance sheet as a. a current asset. b. property, plant, and equipment. c. an intangible asset. d. a long-term investment.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
67.
It is not true that current assets are resources that are expected to be a. realized in cash within one year. b. sold within one year. c. consumed within one year. d. acquired within one year.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
2-12 68.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The operating cycle of a company is the average time that is required to go from cash to a. sales in producing revenues. b. cash in producing revenues. c. inventory in producing revenues. d. accounts receivable in producing revenues.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
69.
On a classified balance sheet, companies usually list current assets a. in alphabetical order. b. with the largest dollar amounts first. c. in the order in which they are expected to be converted into cash. d. in the order of acquisition.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
70.
Intangible assets are a. listed directly under current assets on the balance sheet. b. not listed on the balance sheet because they do not have physical substance. c. listed after property, plant, and equipment. d. listed as a long-term investment on the balance sheet.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
71.
Which statement about long-term investments is not true? a. They will be held for more than one year. b. They are not currently used in the operation of the business. c. They include investments in stock of other companies and land held for future use. d. They do not include long-term notes receivable.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
72.
These are selected account balances on December 31, 2017. Land $150,000 Land (held for future use) 225,000 Buildings 1,200,000 Inventory 300,000 Equipment 675,000 Furniture 150,000 Accumulated Depreciation 450,000 What is the total amount of property, plant, and equipment that will appear on the balance sheet? a. $2,250,000 b. $1,950,000 c. $2,700,000 d. $1,725,000
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $150,000 + $1,200,000 + $675,000 + $150,000 − $450,000 = $1,725,000 (Land + Build. + Equip + Furn –.Acc. Dep.)
.
A Further Look at Financial Statements
73.
2-13
What is the order in which assets are generally listed on a classified balance sheet? a. Current and long-term b. Current; property, plant and equipment; long-term investments; intangibles c. Current; property, plant and equipment; intangibles; long-term investments d. Current; long-term investments; property, plant and equipment, intangibles
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
74.
Ratios that measure the income or operating success of a company for a given period of time are a. liquidity ratios. b. profitability ratios. c. solvency ratios. d. trending ratios.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
75.
Use the following data to determine the total dollar amount of assets to be classified as current assets. Koonce Office Supplies Balance Sheet December 31, 2017
Cash $ 195,000 Accounts receivable 150,000 Inventory 165,000 Prepaid insurance 90,000 Stock investments 255,000 Land 270,000 Buildings $315,000 Less: Accumulated depreciation (60,000) 255,000 Trademarks 210,000 Total assets $1,590,000 a. b. c. d.
Accounts payable Salaries and wages payable Mortgage payable Total liabilities
$ 210,000 30,000 240,000 $480,000
Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity
$360,000 750,000 $1,110,000 $1,590,000
$855,000 $600,000 $510,000 $435,000
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $195,000 + $150,000 + $165,000 + $90,000 = $600,000 (Cash + Acc. rec. + Inven. + Prep.ins.)
.
2-14 76.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Use the following data to determine the total dollar amount of assets to be classified as property, plant, and equipment. Koonce Office Supplies Balance Sheet December 31, 2017
Cash $ 195,000 Accounts receivable 150,000 Inventory 165,000 Prepaid insurance 90,000 Stock investments 255,000 Land 270,000 Buildings $315,000 Less: Accumulated depreciation (60,000) 255,000 Trademarks 210,000 Total assets $1,590,000 a. b. c. d.
Accounts payable Salaries and wages payable Mortgage payable Total liabilities
$ 210,000 30,000 240,000 480,000
Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity
360,000 750,000 $1,110,000 $1 590,000
$990,000 $525,000 $735,000 $585,000
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $270,000 + $255,000 = $525,000 [Land + (Build. — Acc. dep.)]
77.
Use the following data to determine the total dollar amount of assets to be classified as investments. Koonce Office Supplies Balance Sheet December 31, 2017
Cash $ 195,000 Accounts receivable 150,000 Inventory 165,000 Prepaid insurance 90,000 Stock investments 255,000 Land 270,000 Buildings $315,000 Less: Accumulated depreciation (60,000) 255,000 Trademarks 210,000 Total assets $1,590,000 a. b. c. d.
Accounts payable Salaries and wages payable Mortgage payable Total liabilities
$ 210,000 30,000 240,000 $480,000
Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity
$360,000 750,000 $1,110,000 $1,590,000
$0 $525,000 $255,000 $465,000
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: Stock investments = $255,000
.
A Further Look at Financial Statements
78.
2-15
Use the following data to determine the total amount of working capital. Koonce Office Supplies Balance Sheet December 31, 2017
Cash $ 195,000 Accounts receivable 150,000 Inventory 165,000 Prepaid insurance 90,000 Stock investments 255,000 Land 270,000 Buildings $315,000 Less: Accumulated depreciation (60,000) 275,000 Trademarks 210,000 Total assets $1,590,000 a. b. c. d.
Accounts payable Salaries and wages payable Mortgage payable Total liabilities
$ 210,000 30,000 240,000 $480,000
Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity
$360,000 750,000 $1,110,000 $1,590,000
$360,000 $390,000 $130,000 $180,000
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($195,000 + $150,000 + $165,000 + $90,000) − ($210,000 + $30,000) = $360,000 (Cash + Acc. rec.+ Inv. + Prep. Ins) – (Acct. pay + Sal./wag. pay.)
79.
Use the following data to calculate the current ratio. Koonce Office Supplies Balance Sheet December 31, 2017
Cash $ 195,000 Accounts receivable 150,000 Inventory 165,000 Prepaid insurance 90,000 Stock investments 255,000 Land 270,000 Buildings $315,000 Less: Accumulated depreciation (60,000) 275,000 Trademarks 210,000 Total assets $1,590,000 a. b. c. d.
Accounts payable Salaries and wages payable Mortgage payable Total liabilities
$ 210,000 30,000 240,000 $480,000
Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity
$360,000 750,000 $1,110,000 $1,590,000
2.13 : 1 1.44 : 1 2.86 : 1 2.50 : 1
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($195,000 + $150,000 + $165,000 + $90,000) ($210,000 + $30,000) = 2.50:1 (Cash + Acc. rec. + Inv. + Prep . ins.) ÷ (Acc. pay. + Sal. / wag. pay.)
.
2-16 80.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Use the following data to determine the total dollar amount of assets to be classified as current assets. Carne Auto Supplies Balance Sheet December 31, 2017
Cash $ 70,000 Accounts receivable 100,000 Inventory 140,000 Prepaid insurance 80,000 Stock investments 180,000 Land 190,000 Buildings $230,000 Less: Accumulated depreciation (60,000) 170,000 Trademarks 140,000 Total assets $1,070,000 a. b. c. d.
Accounts payable Salaries and wages payable Mortgage payable Total liabilities
$ 130,000 20,000 180,000 $330,000
Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity
$240,000 500,000 $740,000 $1,070,000
$390,000 $250,000 $570,000 $330,000
Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $70,000 + $100,000 + $140,000 + $80,000 = $390,000 (Cash + Acc. rec + Inv. + Prep. ins.)
81.
Use the following data to determine the total dollar amount of assets to be classified as property, plant, and equipment. Carne Auto Supplies Balance Sheet December 31, 2017
Cash $ 70,000 Accounts receivable 100,000 Inventory 140,000 Prepaid insurance 80,000 Stock investments 180,000 Land 190,000 Buildings $230,000 Less: Accumulated depreciation (60,000) 170,000 Trademarks 140,000 Total assets $1,070,000 a. b. c. d.
Accounts payable Salaries and wages payable Mortgage payable Total liabilities
$ 130,000 20,000 180,000 $330,000
Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity
$240,000 500,000 $740,000 $1,070,000
$540,000 $500,000 $360,000 $420,000
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $95,000 + $85,000 = $180,000 [Land + (Build. – Acc. dep.)]
.
A Further Look at Financial Statements
82.
2-17
Use the following data to determine the total dollar amount of assets to be classified as investments. Carne Auto Supplies Balance Sheet December 31, 2017
Cash $ 70,000 Accounts receivable 100,000 Inventory 140,000 Prepaid insurance 80,000 Stock investments 180,000 Land 190,000 Buildings $230,000 Less: Accumulated depreciation (60,000) 170,000 Trademarks 140,000 Total assets $1,070,000 a. b. c. d.
Accounts payable Salaries and wages payable Mortgage payable Total liabilities
$ 130,000 20,000 180,000 $330,000
Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity
$240,000 500,000 $740,000 $1,070,000
$0 $320,000 $180,000 $280,000
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: Stock investments = $180,000
83.
Use the following data to determine the total amount of working capital. Carne Auto Supplies Balance Sheet December 31, 2017
Cash $ 70,000 Accounts receivable 100,000 Inventory 140,000 Prepaid insurance 80,000 Stock investments 180,000 Land 190,000 Buildings $230,000 Less: Accumulated depreciation (60,000) 170,000 Trademarks 140,000 Total assets $1,070,000 a. b. c. d.
Accounts payable Salaries and wages payable Mortgage payable Total liabilities
$ 130,000 20,000 180,000 $330,000
Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity
$240,000 500,000 $740,000 $1,070,000
$260,000 $240,000 $160,000 $420,000
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($70,000 + $100,000 + $140,000 + $80,000) − ($130,000 + $20,000) = $240,000 (Cash + Acc. rec. + Inv. + Prep. ins.) - (Acc. pay. + Sal./wag. pay.)
.
2-18 84.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Use the following data to calculate the current ratio. Carne Auto Supplies Balance Sheet December 31, 2017
Cash $ 70,000 Accounts receivable 100,000 Inventory 140,000 Prepaid insurance 80,000 Stock investments 180,000 Land 190,000 Buildings $230,000 Less: Accumulated depreciation (60,000) 170,000 Trademarks 140,000 Total assets $1,070,000 a. b. c. d.
Accounts payable Salaries and wages payable Mortgage payable Total liabilities
$ 130,000 20,000 180,000 $330,000
Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity
$240,000 500,000 $740,000 $1,070,000
2.07 : 1 1.67 : 1 3.00 : 1 2.60 : 1
Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($70,000 + $100,000 + $140,000 + $80,000) ($130,000 + $20,000) = $2.60:1 (Cash + Acc. rec. + Inv. + Prep. ins.) ÷ (Acc. pay. + Sal/wag. pay.)
85.
N3 Corporation has assets of $4,200,000, common stock of $1,092,000, and retained earnings of $665,000. What are the creditors’ claims on their assets? a. $3,773,000 b. $1,757,000 c. $2,443,000 d. $4,627,000
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $4,200,000 − $1,092,000 − $665,000 = $2,443,000 (Assets - Com.st.- Ret.earn.)
86.
K2 Corporation has assets of $3,600,000, common stock of $936,000, and retained earnings of $570,000. What are the creditors’ claims on their assets? a. $3,234,000 b. $1,506,000 c. $2,094,000 d. $3,966,000
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $3,600,000 − $936,000 − $570,000 = $2,094,000 (Assets - Com.st.- Ret.earn)
.
A Further Look at Financial Statements
87.
2-19
Use the following data to determine the total dollar amount of assets to be classified as current assets. Eddy Auto Supplies Balance Sheet December 31, 2017
Cash $ 126,000 Accounts receivable 120,000 Inventory 210,000 Prepaid insurance 90,000 Stock investments 255,000 Land 285,000 Buildings $339,000 Less: Accumulated depreciation (60,000) 279,000 Trademarks 210,000 Total assets $1,050,000 a. b. c. d.
Accounts payable Salaries and wages payable Mortgage payable Total liabilities
$ 165,000 30,000 270,000 $465,000
Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity
$360,000 750,000 $1,110,000 $1,575,000
$801,000 $336,000 $546,000 $546,000
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $126,000 + $120,000 + $210,000 + $90,000 = $546,000 (Cash + Acc, rec. + Inv. + Prep. ins.)
88.
Use the following data to determine the total dollar amount of assets to be classified as property, plant, and equipment. Eddy Auto Supplies Balance Sheet December 31, 2017
Cash $ 126,000 Accounts receivable 120,000 Inventory 210,000 Prepaid insurance 90,000 Stock investments 255,000 Land 285,000 Buildings $339,000 Less: Accumulated depreciation (60,000) 279,000 Trademarks 210,000 Total assets $1,050,000 a. b. c. d.
Accounts payable Salaries and wages payable Mortgage payable Total liabilities
$ 165,000 30,000 270,000 $465,000
Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity
$360,000 750,000 $1,110,000 $1,575,000
$1,029,000 $774,000 $834,000 $564,000
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $285,000 + $279,000 = $564,000 [Land + (Build. – Acc. dep.)]
.
2-20 89.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Use the following data to determine the total dollar amount of assets to be classified as investments. Eddy Auto Supplies Balance Sheet December 31, 2017
Cash $ 126,000 Accounts receivable 120,000 Inventory 210,000 Prepaid insurance 90,000 Stock investments 255,000 Land 285,000 Buildings $339,000 Less: Accumulated depreciation (60,000) 279,000 Trademarks 210,000 Total assets $1,050,000 a. b. c. d.
Accounts payable Salaries and wages payable Mortgage payable Total liabilities
$ 165,000 30,000 270,000 $465,000
Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity
$360,000 750,000 $1,110,000 $1,575,000
$0 $465,000 $255,000 $585,000
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: Stock investments = $255,000
90.
Use the following data to determine the total amount of working capital. Eddy Auto Supplies Balance Sheet December 31, 2017
Cash $ 126,000 Accounts receivable 120,000 Inventory 210,000 Prepaid insurance 90,000 Stock investments 255,000 Land 285,000 Buildings $339,000 Less: Accumulated depreciation (60,000) 279,000 Trademarks 210,000 Total assets $1,050,000 a. b. c. d.
Accounts payable Salaries and wages payable Mortgage payable Total liabilities
$ 165,000 30,000 270,000 $465,000
Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity
$360,000 750,000 $1,110,000 $1,575,000
$606,000 $351,000 $381,000 $261,000
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($126,000 + $120,000 + $210,000 + $90,000) − ($165,000 + $30,000) = $351,000 (Cash + Acc. rec. + Inv. + Prep. ins.) – (Acc. pay. + Sal./wag. pay.)
.
A Further Look at Financial Statements
91.
2-21
Use the following data to calculate the current ratio. Eddy Auto Supplies Balance Sheet December 31, 2017
Cash $ 126,000 Accounts receivable 120,000 Inventory 210,000 Prepaid insurance 90,000 Stock investments 255,000 Land 285,000 Buildings $339,000 Less: Accumulated depreciation (60,000) 279,000 Trademarks 210,000 Total assets $1,050,000 a. b. c. d.
Accounts payable Salaries and wages payable Mortgage payable Total liabilities
$ 165,000 30,000 270,000 $465,000
Common stock Retained earnings Total stockholders’ equity Total Liabilities and stockholders’ equity
$360,000 750,000 $1,110,000 $1,575,000
2.34 : 1 2.80 : 1 3.31 : 1 1.26 : 1
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($126,000 + $120,000 + $210,000 + $90,000) ($165,000 + $30,000) = 2.80:1 (Cash + Acc. rec. + Inv. + Prep. ins.) ÷ (Acc. pay. + Sal./wag. pay.)
92.
A measure of profitability is the a. current ratio. b. debt to assets ratio. c. earnings per share. d. working capital.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
93.
For 2017 Kuhlman Corporation reported net income of $36,000; net sales $400,000; and average share outstanding 16,000. There were no preferred dividends. What was the 2017 earnings per share? a. $2.25 b. $0.44 c. $25.00 d. $0.09
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($36,000 − 0) 16,000 = $2.25 [(Net inc. – Pref.div) ÷ Ave.sh.out.
94.
For 2017 Fielder Corporation reported net income of $32,000; net sales $400,000; and average share outstanding 16,000. There were no preferred dividends. What was the 2017 earnings per share? a. $0.08 b. $0.50 c. $25.00 d. $2.00
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
2-22
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution: ($32,000 − 0) 16,000 = $2.00 [(Net inc. – Pref.div) ÷ Ave.sh.out.
95.
Earnings per share are calculated by dividing a. gross profit by average common shares outstanding. b. (net income less preferred dividends) by average common shares outstanding. c. net income by average common shares outstanding. d. net sales by average common shares outstanding.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
96.
Earnings per share is a a. profitability ratio. b. liquidity ratio. c. solvency ratio. d. trending ratio.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
97.
Which of the following statements is true? a. Earnings per share is an internal measure and is not used by stockholders. b. The denominator used in computing earnings per share represents the shares of common stock outstanding on the last day of the accounting period. c. Net income is not adjusted when computing earnings per share. d. By comparing earnings per share of a single corporation over time, a stockholder can evaluate the corporation’s relative earnings performance.
Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
98.
Earnings available to common stockholders is equal to a. total revenues b. net income + preferred dividends. c. preferred dividends – net income. d. net income – preferred dividends.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
99.
The following information is available for Bradshaw Corporation and Newell Corporation: Bradshaw Corporation (in millions) 2017 2016 Preferred dividends 25 10 Net income 500 480 Shares outstanding at the 200 180 end of the year Shares outstanding at the 180 150 beginning of the year
Newell Corporation 2017 2016 0 30 490 520 150 200 200
220
Based on this information, the earnings per share calculations (rounded to two decimals) suggest a. lower performance in 2016 than in 2017 for Bradshaw Corporation. b. higher performance in 2017 than in 2016 for Bradshaw Corporation. c. fewer earnings available to Bradshaw's common stockholders in 2017 than in 2016. d. an increase in the average number of common shares outstanding between 2016 and 2017 for Bradshaw Corporation. Ans: D, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC:
.
A Further Look at Financial Statements Problem Solving, IMA: Reporting
.
2-23
2-24 100.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The following information is available for Bradshaw Corporation and Newell Corporation:
(in millions) Preferred dividends Net income Shares outstanding at the end of the year Shares outstanding at the beginning of the year
Bradshaw Corporation 2017 2016 25 10 500 480 200 180 180
150
Newell Corporation 2017 2016 0 30 490 520 150 200 200
220
Based on this information, which of the following is suggested by the earnings per share calculations (rounded to two decimals) and the information given? a. There is lower performance in 2016 than in 2017 for Newell Corporation. b. There is higher performance in 2016 than in 2017 for Newell Corporation. c. There are fewer earnings available to Newell's common stockholders in 2017 than in 2016. d. There is a decrease in preferred shares of stock in 2017 as compared with 2016. Ans: A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
101.
The following information is available for Bradshaw Corporation and Newell Corporation: Bradshaw Corporation (in millions) 2017 2016 Preferred dividends 25 10 Net income 500 480 Shares outstanding at the 200 180 end of the year Shares outstanding at the 180 150 beginning of the year
Newell Corporation 2017 2016 0 30 490 520 150 200 200
220
Based on this information, what is the amount of Bradshaw's earnings per share (rounded to two decimals) for 2017? a. $2.76 b. $2.50 c. $1.25 d. $1.32 Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($500 − $25) [(200 + 180) 2] = $2.50 (Net inc. – Pref. div) ÷ [End. ch. Out. + beg. .sh. out. ) ÷ 2]
.
A Further Look at Financial Statements
102.
2-25
The following information is available for Bradshaw Corporation and Newell Corporation: Bradshaw Corporation (in millions) 2017 2016 Preferred dividends 25 10 Net income 500 480 Shares outstanding at the 200 180 end of the year Shares outstanding at the 180 150 beginning of the year
Newell Corporation 2017 2016 0 30 490 520 150 200 200
220
Based on the information for both Bradshaw and Newell over the two-year period, the earnings per share calculations (rounded to two decimals) indicate that a. Bradshaw is seeing a greater performance improvement than Newell. b. the earnings available to common stockholders is decreasing for Newell and increasing for Bradshaw. c. the earnings per share calculations for both companies assume that changes in shares between 2016 and 2017 occur in the middle of the year. d. Newell is more financially stable than Bradshaw. Ans: C, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
103.
The relationship between current assets and current liabilities is important in evaluating a company's a. profitability. b. liquidity. c. market value. d. solvency.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
104.
Which of the following is a measure of liquidity? a. Working capital b. Profit margin c. Earnings per share d. Debt to assets ratio
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
105.
Current assets divided by current liabilities is known as the a. working capital. b. current ratio. c. profit margin. d. capital structure.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
106.
The most important information needed to determine if companies can pay their current obligations is the a. net income for this year. b. projected net income for next year. c. relationship between current assets and current liabilities. d. relationship between short-term and long-term liabilities.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
2-26 107.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
A short-term creditor is primarily interested in the __________ of the borrower. a. liquidity b. profitability c. consistency d. solvency
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
108.
The current ratio is a. current assets plus current liabilities. b. current assets minus current liabilities. c. current assets divided by current liabilities. d. current assets times current liabilities.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
109.
Working capital is calculated by taking a. current assets plus current liabilities. b. current assets minus current liabilities. c. current assets divided by current liabilities. d. current assets times current liabilities.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
110.
Working capital is a measure of a. consistency. b. liquidity. c. profitability. d. solvency.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
111.
Long-term creditors are usually most interested in evaluating a. liquidity and profitability. b. consistency and profitability. c. liquidity and solvency. d. consistency and solvency.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
112.
A liquidity ratio measures the a. income or operating success of a company over a period of time. b. ability of a company to survive over a long period of time. c. short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash. d. percentage of total financing provided by creditors.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
113.
Working capital is a. calculated by dividing current assets by current liabilities. b. used to evaluate a company’s liquidity and short-term debt paying ability. c. used to evaluate a company’s solvency and long-term debt paying ability. d. calculated by subtracting current assets from current liabilities.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
.
A Further Look at Financial Statements
2-27
Business Economics
114.
The ability of a business to pay obligations that are expected to become due within the next year or operating cycle is a. leverage. b. liquidity. c. profitability. d. wealth.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
115.
Based on the following data, what is the amount of current assets? Accounts payable……………………………………………………….. $62,000 100,000 Accounts receivable…………………………………………………….. Cash………………………………………………………………………. 70,000 100,000 Intangible assets………………………………………………………… Inventory…………………………………………………………………. 138,000 Long-term investments…………………………………………………. 160,000 Long-term liabilities……………………………………………………… 200,000 Short-term investments…………………………………………………. 80,000 56,000 Notes payable……………………………………………………………. Property, plant, and equipment…………………………………………… 1,340,000 2,000 Prepaid insurance……………………………………………………….. a. b. c. d.
$232,000 $390,000 $252,000 $250,000
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $100,000 + $70,000 + $138,000 + $80,000 + $2,000 = $390,000 (Acc. rec.+ Cash + Inven. +Sh.-term inv + Prep. ins.)
116.
Based on the following data, what is the amount of working capital? Accounts payable……………………………………………………….. $64,000 Accounts receivable…………………………………………………….. 114,000 Cash………………………………………………………………………. 70,000 Intangible assets………………………………………………………… 100,000 Inventory…………………………………………………………………. 138,000 Long-term investments…………………………………………………. 160,000 200,000 Long-term liabilities……………………………… ……………………. Short-term investments…………………………………………………. 80,000 Notes payable (short-term)……………………………………………… 56,000 Property, plant, and equipment…………………………………………… 1,340,000 Prepaid insurance……………………………………………………….. 2,000 a. b. c. d.
$284,000 $332,000 $370,000 $326,000
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
2-28
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution: ($114,000 + $70,000 + $138,000 + $80,000 + $2,000) − ($64,000 + $56,000) = $284,000 (Acc. rec. + Cash. + Inv.+ Sh.-term inv. + Prep. ins.) – (Acc. Pay. + Not. + Pay.)
117.
Using the following balance sheet and income statement data, what is the total amount of working capital? Current assets $ 32,000 Net income $ 42,000 Current liabilities 16,000 Stockholders’ equity 78,000 Average assets 160,000 Total liabilities 42,000 Total assets 120,000 Average common shares outstanding was 15,000. a. b. c. d.
$ 8,000 $ 32,000 $ 10,000 $ 16,000
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $32,000 − $16,000 = $16,000 (Cur. assets – Cur. liab.)
118.
Using the following balance sheet and income statement data, what is the current ratio? Current assets $ 32,000 Net income $ 42,000 Current liabilities 16,000 Stockholders’ equity 78,000 Average assets 160,000 Total liabilities 42,000 Total assets 120,000 Average common shares outstanding was 15,000. a. b. c. d.
2.0 : 1 2.6 : 1 0.5 : 1 2.9 : 1
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $32,000 $16,000 = $2.0:1 (Cur. assets – Cur. liab.)
119.
Using the following balance sheet and income statement data, what is the earnings per share? Current assets $ 32,000 Net income $ 42,000 Current liabilities 16,000 Stockholders’ equity 78,000 Average assets 160,000 Total liabilities 42,000 Total assets 120,000 Average common shares outstanding was 15,000. a. b. c. d.
$5.20 $8.00 $2.80 $0.36
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $42,000 $15,000 = $2.80 (Net + inc. ÷ Ave. sh. out.)
.
A Further Look at Financial Statements
120.
2-29
Using the following balance sheet and income statement data, what is the debt to assets ratio? Current assets $ 32,000 Net income $ 42,000 Current liabilities 16,000 Stockholders’ equity 78,000 Average assets 160,000 Total liabilities 42,000 Total assets 120,000 Average common shares outstanding was 15,000. a. b. c. d.
26 percent 13 percent 65 percent 35 percent
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $42,000 $120,000 = $35% (Tol. Liab. ÷ Tot. assets)
121.
Using the following balance sheet and income statement data, what is the total amount of working capital? Current assets $ 21,000 Net income $ 45,000 Current liabilities 12,000 Stockholders’ equity 63,000 Average assets 132,000 Total liabilities 27,000 Total assets 90,000 Average common shares outstanding was 15,000. a. b. c. d.
$7,000 $5,000 $9,000 $2,000
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $21,000 − $12,000 = $9,000 (Cur. assets – Cur. liab.)
122.
Using the following balance sheet and income statement data, what is the current ratio? Current assets $ 21,000 Net income $ 45,000 Current liabilities 12,000 Stockholders’ equity 63,000 Average assets 132,000 Total liabilities 27,000 Total assets 90,000 Average common shares outstanding was 15,000. a. b. c. d.
0.78 : 1 3.33 : 1 0.57 : 1 1.75: 1
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $21,000 $12,000 = $1.75:1 (Cur. assets ÷ Cur. liab.)
.
2-30 123.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Using the following balance sheet and income statement data, what is the earnings per share? Current assets $ 21,000 Net income $ 45,000 Current liabilities 12,000 Stockholders’ equity 63,000 Average assets 132,000 Total liabilities 27,000 Total assets 90,000 Average common shares outstanding was 15,000. a. b. c. d.
$3.00 $4.20 $0.33 $0.50
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $45,000 $15,000 = $3.00 (Net inc ÷ Ave. sh. out).
124.
Using the following balance sheet and income statement data, what is the debt to assets ratio? Current assets $ 21,000 Net income $ 45,000 Current liabilities 12,000 Stockholders’ equity 63,000 Average assets 132,000 Total liabilities 27,000 Total assets 90,000 Average common shares outstanding was 15,000. a. b. c. d.
20.5 percent 30 percent 33.3 percent 40.9 percent
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $27,000 $90,000 = $30% (Tot. liab. ÷ Tot. assets)
125.
The debt to assets ratio is computed by dividing a. long-term liabilities by total assets. b. long-term liabilities by average assets. c. total liabilities by total assets. d. total liabilities by average assets.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
126.
A useful measure of solvency is the a. current ratio. b. earnings per share. c. return on assets ratio. d. debt to assets ratio.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
127.
Which of the following is not considered a measure of liquidity? a. Current ratio b. Working capital c. Debt to assets ratio d. Each of these answer choices are liquidity measures
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
A Further Look at Financial Statements
128.
2-31
Which measure would a long-term creditor be least interested in reviewing? a. Free cash flow b. Debt to assets ratio c. Current ratio d. Solvency measure
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
129.
Bathlinks Corporation has a debt to assets ratio of 73%. This tells the user of Bathlinks’s financial statements that a. Bathlinks is getting a 27% return on its assets. b. there is a risk that Bathlinks cannot pay its debts as they come due. c. 73% of the assets are financed by the stockholders. d. based on this measure, the user should not invest in Bathlinks.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
130.
Ace Company is a retail store. Due to competition, it is having trouble selling its products. Thus, inventory has been building up. Ace’s current ratio has not changed for the past three years, in spite of the inventory build up. Which of the following statements is true? a. As long as the current ratio remains constant, there is no need for concern. b. The composition of current assets and current liabilities does not matter. c. The management of Ace should consider the effect of slow moving inventory on its liquidity. d. Since inventory is a current asset, any increases should automatically cause the current ratio to rise.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
131.
How can a company improve its current ratio? a. Work with a creditor to reclassify some current debt into long-term debt b. Use cash to reduce current liabilities c. Nothing can ethically be done to improve the current ratio d. Use excess cash to buy new equipment
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
132.
Kingery Corporation has current assets of $1,800,000 and current liabilities of $750,000. If they pay $350,000 of their accounts payable what will their new current ratio be? a. 3.6:1 b. 2.4:1 c. 4.5:1 d. 2.0:1
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($1,800,000 − $350,000) ($750,000 − $350,000) = 3.6:1 [(Cur. assets – A/P Paid) ÷ (Cur. liab. – A/P Paid
.
2-32 133.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Kingery Corporation has current assets of $1,800,000 and current liabilities of $750,000. If they issue $150,000 of new stock what will their new current ratio be? (rounded) a. 2.6:1 b. 2.1:1 c. 2.2:1 d. 2.4:1
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($1,800,000 + $150,000) $750,000 = $2.6:1 (Cur. assets + New stock) ÷ Cur. liab.
134.
Mitchell Corporation has current assets of $1,600,000 million and current liabilities of $750,000. If they pay $350,000 of their accounts payable what will their new current ratio be? a. 3.1:1 b. 4.0:1 c. 1.5:1 d. 2.1:1
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($1,600,000 − $350,000) ($750,000 − $350,000) = $3.1:1 [(Cur. assets – A/p paid) ÷ (Cur. liab.- A/p paid)
135.
Mitchell Corporation has current assets of $1,600,000 and current liabilities of $750,000. If they issue $200,000 of new stock what will their new current ratio be? (rounded) a. 2.4:1 b. 1.9:1 c. 1.7:1 d. 2.13:1
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($1,600,000 + $200,000) $750,000 = $2.4:1 (Cur. assets + New stock ) ÷ Cur. liab.
136.
The debt to assets ratio is a a. liquidity ratio. b. profitability ratio. c. solvency ratio. d. None of the answer choices is correct.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
137.
Free cash flow provides an indication of a company’s ability to a. generate cash to invest in new capital expenditures. b. generate net income. c. generate cash to pay dividends. d. generate cash to invest in new capital expenditures and to pay dividends.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
.
A Further Look at Financial Statements
138.
2-33
Free cash flow represents a. cash provided by operations less adjustments for capital expenditures and dividends. b. a measurement of a company’s cash generating ability. c. a measure of solvency. d. All of these answer choices are correct.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
139.
Free cash flow is net cash provided by operating activities a. less capital expenditures. b. less cash dividends. c. less capital expenditures and cash dividends. d. less capital expenditures and salaries expense.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
140.
In 2017 Grider Corporation had cash receipts of $56,000 and cash disbursements of $32,000. Grider’s ending cash balance at December 31, 2017 was $78,000. What was Grider’s beginning cash balance? a. $54,000 b. $70,000 c. $110,000 d. $102,000
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $78,000 − $56,000 + $32,000 = $54,000 (End. cash.-cash rec. + cash disb.)
141.
In 2017 Grider Corporation had cash receipts of $35,000 and cash disbursements of $20,000. Grider’s ending cash balance at December 31, 2017 was $65,000. What was Grider’s beginning cash balance? a. $50,000 b. $60,000 c. $85,000 d. $80,000
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $65,000 − $35,000 + $20,000 = $50,000 (End. cash – cash rec. + cash disb.)
142.
Suppose that Morgan Corporation produced and sold 4,800 laptop computers during 2017. It reported $130,000 cash provided by operating activities. In order to maintain production at 4,800 laptops, Morgan invested in $8,600 in equipment. Morgan paid $1,400 in dividends. What is Morgan’s free cash flow? a. $120,000 b. $140,000 c. $137,000 d. $130,000
Ans: A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $130,000 − $8,600 − $1,400 = $120,000 (Cash fr. oper. act – equip. inv. – div.)
.
2-34 143.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The following information is available for Cooke Corporation:
Cash receipts from operating activities Cash payments from operating activities Net cash used by investing Net cash provided by financing Net increase in cash and equivalents Cash and equivalents at start of year Cash and equivalents at year-end
(in million) $780 $240 $210 $750 ? $550 ?
What is the net increase in cash and equivalents? a. $1,500 b. $1,080 c. $530 d. $2,050 Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $780,000 − $240,000 − $210,000 + $750,000 = $1,080,000 (Cash rec. – Cash pay. – inv. act.+ fin. act.)
144.
The following information is available for Cooke Corporation: Cash receipts from operating activities Cash payments from operating activities Net cash used by investing Net cash provided by financing Net increase in cash and equivalents Cash and equivalents at start of year Cash and equivalents at year-end
(in million) $780 $240 $210 $750 ? $550 ?
What is the cash and equivalents amount at year-end? a. $1,090 b. $530 c. $1,630 d. $2,530 Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $780 − $240 − $210 + $750 + $550 = $1,630 (Cash rec. – Cash pay. – inv. act. + fin. act. + Beg. cash)
145.
If Morris Corporation has a negative $131 million free cash flow, which of the following statements is most likely true? a. Morris' capital expenditures plus its cash dividends are less than its cash provided by operations. b. This free cash flow indicates that Morris is in good shape to repay its long-term obligations when they come due. c. This free cash flow indicates that Morris presents good cash generating ability to retire stock. d. Morris' cash provided by operations is less than its cash dividends plus capital expenditures.
Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Management, AICPA PC:
.
A Further Look at Financial Statements None, IMA: Business Economics
.
2-35
2-36 146.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Which of the following organizations issues accounting standards for countries outside the United States? a. SEC b. GAAP c. IASB d. FASB
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
147.
Generally accepted accounting principles a. are accounting rules formulated by the Internal Revenue Service. b. are sound in theory but rarely used in real life. c. are accounting rules that are recognized as a general guide for financial reporting. d. have eliminated all errors in accounting.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
148.
The agency of the United States Government that oversees the U.S. financial markets is the a. Internal Revenue Service. b. Security Exchange Commission. c. Financial Accounting Standards Board. d. International Auditing Standards Committee.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
149.
What organization issues U.S. accounting standards? a. Security Exchange Commission b. International Accounting Standards Committee c. International Auditing Standards Committee d. Financial Accounting Standards Board
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
150.
Which one of the following is not an enhancing quality of useful information? a. Timeliness b. Understandability c. Materiality d. Comparability
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
151.
All of the following are qualities of useful information except a. faithful representation. b. materiality. c. relevance. d. flexibility.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
.
A Further Look at Financial Statements
152.
2-37
The two fundamental qualities of useful information are a. relevance and faithful representation. b. verifiability and timeliness. c. comparability and flexibility. d. understandability and consistency.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
153.
The convention of consistency refers to consistent use of accounting principles a. among firms. b. among accounting periods. c. throughout the accounting periods. d. within industries.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
154.
The quality of consistency enhances a. relevance. b. materiality. c. comparability. d. faithful representation.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
155.
Information that is presented in a clear fashion, so that users of that information can interpret it is an example of a. relevance. b. faithful representation. c. understandability. d. comparability.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
155.
In order for accounting information to be relevant, it must a. have very little cost. b. help predict future events or confirm prior expectations. c. not be reported to the public. d. be used by a lot of different firms.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
156.
Accounting information should be verifiable in order to enhance a. comparability. b. faithful representation. c. consistency. d. relevance.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
2-38 158.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Accounting information is relevant to business decisions because it a. has been verified by external audit. b. is prepared on an annual basis. c. confirms prior expectations. d. is neutral in its representations.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
159.
If accounting information has relevance, it is useful in making predictions about a. future IRS audits. b. new accounting principles. c. foreign currency exchange rates. d. the future events of a company.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
160.
Relevant accounting information a. is information that has been audited. b. must be reported within the operating cycle or one year, whichever is longer. c. has been objectively determined. d. is information that is capable of making a difference in a business decision.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
161.
Which of the following is not a quality associated with faithful representation? a. Complete b. Materiality c. Neutral d. All of these answer choices are correct.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
162.
Accounting information should be neutral in order to enhance a. faithful representation. b. consistency. c. comparability. d. relevance.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
163.
Characteristics associated with relevant accounting information are a. comparability and timeliness. b. predictive value and confirmatory value. c. neutral and verifiable. d. consistency and understandability.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
164.
Characteristics associated with faithfully representative accounting information are a. verifiable and timely. b. verifiable and neutral. c. complete and neutral. d. relevance and verifiable.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
2-40 165.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Which of the following statements is not true? a. Comparability means using the same accounting principles from year to year within a company. b. Faithful representation is the quality of information that gives assurance that it is free of error. c. Relevant accounting information must be capable of making a difference in the decision. d. The primary objective of financial reporting is to provide financial information that is useful to investors and creditors for making decisions.
Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
166.
A company can change to a new method of accounting if management can justify that the new method results in a. more meaningful financial information. b. a higher net income. c. a lower net income for tax purposes. d. less likelihood of clerical errors.
Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
167.
An item is considered material if a. it doesn’t costs a lot of money. b. it is of a tangible good. c. its size is likely to influence the decision of an investor or creditor. d. the cost of reporting the item is greater than its benefits.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
168.
Information presented in a clear and concise fashion so that users can comprehend its meaning is an application of a. consistency. b. timeliness. c. verifiability. d. understandability.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
169.
A company using the same accounting principles from year to year is an application of a. timeliness. b. consistency. c. full disclosure. d. materiality.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
170.
Information is _________ if independent measures, using the same methods, obtain similar results. a. Verifiable b. Consistent c. Understandable d. Relevant
Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
A Further Look at Financial Statements
171.
2-41
Different companies using the same accounting principles is an application of a. consistency. b. materiality. c. full disclosure. d. comparability.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
172.
The assumption that requires only those things that can be expressed in money are included in the accounting records is the a. economic entity assumption. b. monetary unit assumption. c. going concern assumption. d. periodicity assumption.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
173.
Which of the following is a constraint in accounting? a. Comparability b. Cost c. Consistency d. Relevance
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
174.
The accounting concept that indicates assets should be reported at the price received to sell an asset is the a. economic entity assumption. b. monetary unit assumption. c. fair value principle. d. historical cost principle.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
175.
For accounting information to have relevance, it must be a. consistent. b. timely. c. verifiable. d. understandable.
Ans: B, LO: .3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
176.
The periodicity assumption states that the economic life of a business can be divided into a. equal time periods. b. cyclical time periods. c. artificial time periods. d. perpetual time periods.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
2-42 177.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Which accounting assumption requires that only those things that can be expressed in dollar values are included in the accounting records? a. monetary unit assumption. b. historical cost principle. c. periodicity assumption. d. full disclosure principle.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
178.
The principle that indicates that assets should be reported at the price received to sell an asset is the a. historical cost principle. b. fair value principle. c. full disclosure principle. d. consistency principle.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Management, AICPA PC: None, IMA: Business Economics
179.
Which accounting assumption assumes that an enterprise will continue in operation long enough to carry out its existing objectives and commitments? a. Monetary unit assumption b. Economic entity assumption c. Periodicity assumption d. Going concern assumption
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
180.
It is assumed that the activities of Ford Motor company can be distinguished from those of General Motors because of the a. going concern assumption. b. economic entity assumption. c. monetary unit assumption. d. periodicity assumption.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
181.
The going concern assumption assumes that the business a. will be liquidated in the near future. b. will be purchased by another business. c. is in a growth industry. d. will remain in operation for the foreseeable future.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
182.
The economic entity assumption states that economic events a. of different entities can be combined if all the entities are corporations. b. must be reported to the Securities and Exchange Commission. c. of a sole proprietorship cannot be distinguished from the personal economic events of its owners. d. of every entity can be separately identified and accounted for.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
A Further Look at Financial Statements
183.
2-43
The concept that a business has a reasonable expectation of remaining in business for the foreseeable future is called the a. economic entity assumption. b. monetary unit assumption. c. periodicity assumption. d. going concern assumption.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
184.
Which of the following is not an accounting assumption? a. Integrity b. Going concern c. Periodicity d. Economic entity
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
185.
The periodicity assumption states a. the business will remain in operation for the foreseeable future. b. the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared. c. every economic entity can be separately identified and accounted for. d. only those things that can be expressed in money are included in the accounting records.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
186.
The TNT Company has five plants nationwide that cost $300 million. The current fair value of the plants is $500 million. The plants will be reported as assets at a. $200 million. b. $800 million. c. $300 million. d. $500 million.
Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
187.
The Mac Company has four plants nationwide that cost $350 million. The current fair value of the plants is $300 million. The plants will be reported as assets at a. $350 million. b. $700 million. c. $300 million. d. $600 million.
Ans: A, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
188.
The historical cost principle requires that when assets are acquired, they be recorded at a. market value. b. the amount paid for them. c. selling price. d. list price.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
2-44 189.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Valuing assets at their fair value rather than at their cost is inconsistent with the a. economic entity assumption. b. historical cost principle. c. periodicity assumption. d. full disclosure principle.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
190.
Jackson Cement Corporation reported $35 million for sales when it only had $20 million of actual sales. Which of the following qualities of useful information has Jackson most likely violated? a. Comparability b. Relevance c. Faithful representation d. Consistency
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
191.
Connor Corporation hired a new accountant. Over the next four years, the accountant used four different accounting methods to depreciation for Connor's equipment. Which of the following qualities of useful information has Connor most likely violated? a. Comparability b. Relevance c. Faithful representation d. Consistency
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
192.
Garrison Company prepares quarterly reports, which it distributes to all stockholders and other entities that rely on its accounting information. Which of the following is the best term for the key assumption in financial reporting that Garrison is following? a. Monetary unit assumption b. Going concern assumption c. Economic entity assumption d. Periodicity assumption.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
A Further Look at Financial Statements
2-45
Answers to Multiple Choice Questions 56. d 57. c 58. d 59. d 60. a 61. b 62. a 63. d 64. a 65. d 66. b 67. d 68. b 69. c 70. c 71 d 72. d 73. d 74. b 75. b 76. b 77. c
78. a 79. d 80. a 81. c 82. c 83. b 84. d 85. c 86. c 87. c 88. d 89. c 90. b 91. b 92. c 93. a 94. d 95. b 96. a 97. d 98. d 99. d
100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121.
a b c b a b c a c b b c c b b b a d a c d c
.
122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143.
d a b c d c c b c a a a a a c d d c a a a b
144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165.
c d c c b d c d a b c c b b c d d b a b c a
166. a 167. c 168. d 169. b 170. a 171. d 172. b 173. b 174. c 175. b 176. c 177. a 178. b 179. d 180. b 181. d 182. d 183. d 184. a 185. b 186. c 187. a
188. b 189. b 190. c 191. d 192. d
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
2-46
BRIEF EXERCISES BE. 193 A list of financial statement items for Maloney Company includes the following: Accounts receivable $19,500 Prepaid insurance $5,400 Cash $22,400 Supplies $1,800 Debt investments $ 6,200 Prepare the current assets section of the balance sheet listing the items in the proper sequence. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 193
(5 min.) MALONEY COMPANY Balance Sheet (PARTIAL)
Assets Current assets Cash. ...................................................................... Debt investments .................................................... Accounts receivable ................................................ Supplies ................................................................... Prepaid insurance .................................................... ` Total current assets .................................................
$ 22,400 6,200 19,500 1,800 5,400 $55,300
BE. 194 The following information (in millions of dollars) is available for Kline Sportswear for 2017: Sales revenue $6,300 Net income $588.7 Stock price per share $18.45 Preferred stock dividend $0 Average shares outstanding
336.4 million
Compute the earnings per share for Kline Sportswear. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 194
(5 min.)
Earnings per share =
$588.7 – 0 336.4
[(Net inc. – Pref. stock div.) ÷ Aver. sh. out.]
.
= $1.75
A Further Look at Financial Statements
2-47
BE. 195 These selected condensed data are taken from a recent balance sheet of Sanson Company (in millions of dollars). Cash $ 7.2 Accounts receivable 14.4 Inventory 18.0 Other current assets 11.1 Total current liabilities 24.8 Additional information: Current liabilities at the beginning of the year were $35.6 million. What are (a) the working capital, and (b) the current ratio? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 195
(5 min.)
a. $25.9 b. 2.04: 1
($50.7 – $24.8) (Cash + Acc. rec. + Inv. + oth. C.A.) – Tot. cur. liab. ($50.7 $24.8) (Cash + Acc. rec. + Inv. + oth. C.A.) ÷ Tot. cur. liab.
BE. 196 Insert the qualitative characteristics listed below that are associated with relevance and faithful representation. Confirmatory value Free from error Neutral
Materiality Complete Predictive value
RELEVANCE
FAITHFUL REPRESENTATION
1.
________________________
1.
_______________________
2.
________________________
2.
_______________________
3.
________________________
3.
_______________________
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Solution 196
(5 min.)
RELEVANCE 1. Confirmatory value 2. Predictive value 3. Materiality
FAITHFUL REPRESENTATION 1. Free from error 2. Complete 3. Neutral
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
2-48
BE. 197 The following terms relate to the fundamental qualities of useful information. Match the key letter of the correct term with the descriptive statement below. a. b. c. d.
Confirmatory value Neutral Predictive value Relevant
e. f. g.
Faithful representation Timely Verifiable
_____ 1. Accounting information that is not biased toward one position or another.
_____ 2. Providing information before it loses its capacity to influence decisions. _____ 3. Providing information that is proven to be free from error. _____ 4. Providing information that would make a difference in a business decision. _____ 5. Provide information that accurately depicts what really happened. _____ 6. Confirms or corrects prior decisions. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Solution 197
(5 min.)
1. b
3. g
5. e
2. f
4. d
6. a
BE. 198 For each of the independent situations described below, list the fundamental or enhancing of quality or useful information that has been violated, if any. List only one term for each case. 1. Carrier Company is in its third year of operation and has yet to issue financial statements. 2. Larsen Corporation has selected the FIFO inventory costing method during the current year. Last year it used the LIFO method and next year it plans to change to the average cost method. 3. Reiser Company expenses some office equipment that is inexpensive even though it has a useful life that exceeds 1 year. Ans: N/A, LO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Solution 198
(5 min.)
1. Relevance (timely) 2. Consistency
3. No violation (materiality)
.
A Further Look at Financial Statements
2-49
BE. 199 Each of the following statements is justified by an accounting concept. Write the letter in the blank next to each statement corresponding to the concept involved. a. b. c. d.
Consistency Materiality Full disclosure Periodicity
1. The life of a business is divided into artificial time periods. 2. This characteristic best enhances comparability of financial statements between years. 3. A merger agreed on just after the balance sheet date nevertheless is reported in the notes to the financial statement. 4. A large company rounds its financial statement figures to the nearest thousand. Ans: N/A, LO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Solution 199 1. d
2. a
(5 min.) 3. c
4. b
BE. 200 Each of the following statements is justified by a fundamental quality or an enhancing of quality accounting. Write the letter in the blank next to each statement corresponding to the quality involved. a. b. c.
Comparability Understandability Verifiable
d. e. f.
Consistency Relevance Faithful representation
_____ 1.
A company uses the same accounting principles from year to year.
_____ 2.
Information that is free from error.
_____ 3.
Information presented in a clear and concise fashion.
_____ 4.
Information that makes a difference in a decision.
_____ 5.
Information accurately depicts what really happened.
Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Solution 200
(5 min.)
1. d
3. b
2. c
4. e.
5. f
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
2-50
Be. 201 Presented below are the basic assumptions and principles underlying financial statements. a. Historical cost principle b. Economic entity assumption c. Full disclosure principle
d. Going concern assumption e. Monetary unit assumption f. Periodicity assumption
Identify the basic assumption or principle that is described below. ____ 1. The economic life of a business can be divided into artificial time periods. ____ 2. The business will continue in operation long enough to carry out its existing objectives. ____ 3. Assets should be recorded at their cost. ____ 4. Economic events can be identified with a particular unit of accountability. ____ 5. Circumstances and events that make a difference to financial statement users should be disclosed. ____ 6. Only transaction data that can be expressed in terms of money should be included in the accounting records. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Solution 201 1. f 2. d 3. a
(5 min.) 4. b 5. c 6. e
.
A Further Look at Financial Statements
2-51
EXERCISES Ex. 202 The following information is available for Mullen Company for the year ended December 31, 2017: Accounts payable Stock investments (long-term) Accumulated depreciation, equipment Retained earnings Common stock Intangible assets Notes payable (due in 5 years) Accounts receivable Cash Debt investments (short-term) Land Equipment
4,700 8,400 4,000 16,000 4,800 2,500 6,000 1,500 2,600 3,000 10,000 7,500
Instructions Use the above information to prepare a classified balance sheet for the year ended December 31, 2017. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 202
(20 min.) MULLEN COMPANY Balance Sheet December 31, 2017
Assets Current assets Cash. ....................................................................... Debt investments .................................................... Accounts receivable ............................................... Total current assets(Cash + Debt inv. + Acc. rec.) .............. Investments Stock investments ................................................... Property, plant, and equipment Land .................................................................... Equipment ............................................................... $7,500 Less Accumulated depreciation-equipment ............. 4,000 Intangible assets ............................................................... Total assets ……. ............................................................... (Tot. cur. assets + Stock inv. + Land + Equip. – Acc. dep. + Int. assets)
.
$ 2,600 3,000 1,500 $7,100 8,400 10,000 3,500
13,500 2,500 $31,500
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
2-52
Solution 202
(Cont.) Liabilities and Stockholders’ Equity
Current liabilities Accounts payable ................................................... Long-term liabilities Notes payable .......................................................... Total liabilities ..................................................................... Stockholders’ equity Common stock ......................................................... Retained earnings.................................................... Total stockholders’ equity .................................................... Total liabilities and stockholders’ equity ............................... (Acc. pay. + Not. pay. + Com. stock + Ret. earn.)
$ 4,700 6,000 $10,700 4,800 16,000 20,800 $31,500
Ex. 203 The following lettered items represent a classification scheme for a balance sheet, and the numbered items represent data found on balance sheets. In the blank next to each account, write the letter indicating to which category it belongs. A. B. C. D. E. F. G. H.
Current assets Investments Property, plant, and equipment Intangible assets Current liabilities Long-term liabilities Stockholders’ equity Not on the balance sheet
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Solution 203 _____ _____ _____ _____ _____
1. 2. 3. 4. 5.
1. C
2. G
(5 min.)
Accumulated depreciation-equip. Common stock Interest expense Salaries and wages payable Retained earnings 3. H
4. E
5. G
.
6. A
_____ 6. _____ 7. _____ 8. _____ 9. _____ 10. 7. D
8. A
Inventory Patents Prepaid insurance Mortgage payable Land (held for investment) 9. F
10. B
A Further Look at Financial Statements
2-53
Ex. 204 These items are taken from the financial statements of Donovan Company. at December 31, 2017. Buildings Accounts receivable Prepaid insurance Cash Equipment Land Insurance expense Depreciation expense Interest expense Common stock Retained earnings (January 1, 2017) Accumulated depreciation—buildings Accounts payable Mortgage payable Accumulated depreciation—equipment Interest payable Service revenue
$95,800 15,600 4,680 18,840 79,400 61,200 780 7,300 2,600 57,000 40,000 45,600 15,500 88,600 18,720 3,600 17,180
Instructions Prepare a classified balance sheet. Assume that $13,600 of the mortgage payable will be paid in 2018. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 204
(20 min.)
DONOVAN COMPANY Balance Sheet December 31, 2017 ___________________________________________________________________________ Assets Current assets Cash ...................................................... Accounts receivable ................................. Prepaid Insurance .................................... Total current assets (Cash + Acc. rec. + Prep. ins.) Property, plant, and equipment Land ....................................................... Buildings ..................................................... $95,800 Less: Accumulated depreciation— buildings .............................................. 45,600 Equipment .................................................. 79,400 Less: Accumulated depreciation— equipment ....................................... 18,720 Total assets ........................................ (Tot. cur. assets + Land + Build. – Acc. depr. + Equip. – Acc. depr.)
.
$18,840 15,600 4,680 $39,120 61,200
50,200
60,680
172,080 $211,200
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 204
(Cont.)
Liabilities and Stockholders' Equity Current liabilities Accounts payable............................................................... Current portion of note payable .......................................... Interest payable ................................................................. Total current liabilities ................................................ Long-term liabilities Mortgage payable ............................................................... Total liabilities ............................................................ Stockholders' equity Common stock .................................................................... Retained earnings ($40,000 + $6,500*)........................................................ Total stockholders' equity.......................................... Total liabilities and Stockholders' equity .............................................
$ 15,500 13,600 3,600 $ 32,700 75,000 107,700 57,000 46,500 103,500 $211,200
(Tot. cur. liab. + Mort. pay. + Com. stock + Beg. ret. earn. + Net. inc.*) *Net income = $17,180 – $780 – $7,300 – $2,600 = $6,500 Ex. 205 The following items are taken from the financial statements of Tracy Company for 2017: Accounts payable Accounts receivable Accumulated depreciation—equipment Advertising expense Cash Common stock Depreciation expense Dividends Equipment Insurance expense Notes payable (due 2020) Prepaid insurance Rent expense Retained earnings (beginning) Salaries and wages expense Salaries and wages payable Service revenue Supplies Supplies expense
.
$ 10,000 11,000 38,000 21,000 14,000 90,000 12,000 15,000 210,000 3,000 70,000 6,000 17,000 12,000 34,000 3,000 130,000 4,000 6,000
A Further Look at Financial Statements
Ex. 205
2-55
(Cont.)
Instructions (a)
Calculate the net income.
(b)
Calculate the retained earnings balance that would appear on a balance sheet at December 31, 2017
(c)
Prepare a classified balance sheet for Tracy Company at December 31, 2017 assuming the note payable is a long-term liability.
(d)
Compute the current ratio, debt to assets ratio, and earnings per share value. The average number of shares outstanding for 2017 was 10,000.
Ans: N/A, LO: 1, 2, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 205
(20 min.)
(a)
Net income = $37,000: ($130,000 – $21,000 – $12,000 – $3,000 – $17,000 – $34,000 – $6,000) (Ser. rev. – Adv. exp. – Dep. exp. – Ins. exp. –Rent exp. – Sal./wag. exp. – Sup. exp.)
(b)
Retained earnings, January 1 Add: Net income
$12,000 37,000 49,000 15,000 $34,000
Less: Dividends Retained earnings, December 31 (Beg. ret. earn. + Net inc. – Div.) (c)
TRACY COMPANY Balance Sheet December 31, 2017 ___________________________________________________________________________ Assets Current assets Cash ................................................................................... $ 14,000 Accounts receivable ............................................................ 11,000 Supplies .............................................................................. 4,000 Prepaid insurance ............................................................... 6,000 Total current assets (Cash + Acc. rec. + Sup. + Prep. ins.) Property, plant, and equipment Equipment ........................................................................... 210,000 Less: Accumulated depreciation—equipment ...................... 38,000 Total assets ................................................................. (Tot. cur. assets + Equip. – Acc. dep.)
.
$35,000
172,000 $207,000
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
2-56
Solution 205
(Cont.)
Liabilities and Stockholders’ Equity Current liabilities Accounts payable ................................................................ $ 10,000 Salaries and wages payable ................................................ 3,000 Total current liabilities ................................................... Long-term liabilities Notes payable ..................................................................... Total liabilities ............................................................... Stockholders’ equity Common stock ..................................................................... 90,000 Retained earnings ............................................................... 34,000 Total liabilities and stockholders’ equity ........................ (Tot. cur. liab. + Not. pay. + Com. stock + End. ret. earn.) (d)
$13,000 70,000 83,000
124,000 $207,000
Current ratio: $35,000 ÷ $13,000 = 2.7:1 ( Cur. assets ÷ Cur. liab.) Debt to assets ratio: $83,000 ÷ $207,000 = 40.1% (Tot. liab. ÷ Tot. assets) Earnings per share: $37,000 ÷ 10,000= $3.70 (Net inc. ÷ Ave. sh. out.)
Ex. 206 The following items are taken from the financial statements of Grove Company for 2017: Accounts payable Accounts receivable Accumulated depreciation-equipment Bonds payable Cash Common stock Cost of goods sold Depreciation expense Dividends Equipment Interest expense Patents Retained earnings, January 1 Salaries and wages expense Sales revenue Supplies
$18,500 8,000 4,800 18,000 24,000 25,000 27,000 4,800 5,300 44,000 2,500 7,500 16,000 5,200 50,500 4,500
Instructions (a) Prepare an income statement and a classified balance sheet for Grove Company. (b) Compute the following ratios and values: 1. Current ratio 2. Debt to assets ratio 3. Working capital 4. Earnings per share (Grove’s average number of shares outstanding during the year was 5,000.) Ans: N/A, LO: 1, 2 Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
A Further Look at Financial Statements
Solution 206 (a)
2-57
(25 min.) GROVE COMPANY Income Statement For the Year Ended December 31, 2017
Sales revenue $50,500 Cost of goods sold 27,000 Gross profit 23,500 Operating expenses Depreciation expense $4,800 Salaries and wages expense 5,200 10,000 Income from operations 13,500 Other expenses and losses Interest expense 2,500 Net income $ 11,000 (Sal. rev. − Cost of goods sold − Dep. exp. − Sal./wag. exp. − Int. exp.) GROVE COMPANY Balance Sheet December 31, 2017 Assets Current assets Cash ........................................................................................... Accounts receivable ................................................................... Supplies ..................................................................................... Total current assets (Cash + Acc. rec. + Sup.) .................... Property, plant, and equipment Equipment .................................................................................. Less: Accumulated depreciation—equipment ............................. Intangible assets Patents ....................................................................................... Total assets ....................................................................... (Tot. cur. assets + Equip. − Acc. dep. + Pat.)
$24,000 8,000 4,500 $36,500 44,000 4,800
Liabilities and Stockholders’ Equity Current liabilities Accounts payable ....................................................................... Long-term liabilities Bonds payable ........................................................................... Total liabilities .................................................................... Stockholders’ equity Common stock ............................................................................ $25,000 Retained earnings ...................................................................... 21,700* Total liabilities and stockholders’ equity ............................. [Acc. pay. + Bonds Pay. + Com. stock + (Beg. ret. earn. + Net inc. − Div.)] *Retained earnings = $21,700 ($16,000 + $11,000 – $5,300). (b) 1. 2. 3. 4.
Current ratio: $36,500 ÷ $18,500 = 1.97:1 (Cur. assets ÷ Cur. liab.) Debt to assets ratio: $36,500 ÷ $83,200 = 43.9% (Tot. liab. ÷ Tot assets) Working capital $36,500 – $18,500 = $18,000 (Cur. assets − Cur. liab.) Earnings per share ( $11,000 ÷ 5,000) = $2.20 (Net inc. ÷ Ave. sh. out.) .
39,200 7,500 $83,200
$18,500 18,000 36,500
46,700 $83,200
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 207 These financial statement items are for Snyder Corporation at year-end, July 31, 2017. Salaries and wages payable Salaries and wages expense Utilities expense Equipment Accounts payable Service revenue Rent revenue Notes payable (due 2019) Common stock Cash Accounts receivable Accumulated depreciation—equipment Dividends Depreciation expense Retained earnings (beginning of the year)
$ 2,580 50,700 22,600 21,000 4,100 62,100 8,500 1,800 16,000 20,200 12,780 6,000 5,000 4,000 35,200
Instructions (a) Prepare an income statement and a retained earnings statement for the year ended July 31, 2017. Snyder Corporation did not issue any new stock during the year. (b) Prepare a classified balance sheet at July 31, 2017. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 207
(25 min.)
(a)
SNYDER CORPORATION Income Statement For the Year Ended July 31, 2017 _____________________________________________________________________________ Revenues Service revenue ........................................... $62,100 Rent revenue................................................ 8,500 $70,600 Total revenues ..................................... Expenses Salaries and wages expense......................... 50,700 Utilities expense ............................................ 22,600 Depreciation expense.................................... 4,000 77,300 Total expense ....................................... Net loss ................................................................... $( 6,700) (Ser. rev. + Rent rev. − Sal./wag. exp. − Util. exp. − Dep. exp.)
SNYDER CORPORATION Retained Earnings Statement For the Year Ended July 31, 2017 _____________________________________________________________________________ Retained earnings, August 1, 2016 ..................... $35,200 Less: Net loss............................................................ $6,700 Dividends .......................................................... 5,000 11,700 Retained earnings, July 31, 2017 ......................... $23,500 (Beg. ret. earn. − Net loss − Div.)
.
A Further Look at Financial Statements
Solution 207
2-59
(25 min.)
(b)
SNYDER CORPORATION Balance Sheet July 31, 2017 _____________________________________________________________________________ Assets Current assets Cash $20,200 Accounts receivable 12,780 Total current assets $32,980 Property, plant, and equipment Equipment 21,000 Less: Accumulated depreciation—equipment 6,000 15,000 Total assets $47,980 (Cash + Acc. rec. + Equip. − Acc. depr.) Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 4,100 Salaries and wages payable 2,580 Total current liabilities Notes payable (due 2019) Total liabilities Stockholders' equity Common stock 16,000 Retained earnings 23,500 Total stockholders' equity Total liabilities and stockholders' equity (Acc. pay. + Sal./wag. pay. + Not. pay. + Com. stock + End. ret. earn.)
.
$6,680 1,800 8,480
39,500 $47,980
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
2-60 Ex. 208
These items are taken from the financial statements of Drew Corporation for 2017. Retained earnings (beginning of year) Utilities expense Equipment Accounts payable Cash Salaries and wages payable Common stock Dividends Service revenue Prepaid insurance Maintenance and repairs expense Depreciation expense Accounts receivable Insurance expense Salaries and wages expense Accumulated depreciation—equipment
$33,000 2,000 56,000 15,300 15,900 3,000 13,000 14,000 78,000 3,500 1,800 3,300 14,200 2,200 47,000 17,600
Instructions Prepare an income statement and a retained earnings statement for the year ended December 31, 2017 and a classified balance sheet as of December 31, 2017. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 208
(25 min.)
DREW CORPORATION Income Statement For the Year Ended December 31, 2017 _____________________________________________________________________________ Revenues Service revenue ...................................... Expense Salaries and wages expense.................. Depreciation expense............................. Insurance expense................................. Utilities expense ..................................... Maintenance and repairs expense.......... Total expenses ................................. Net income .......................................................
$78,000 $47,000 3,300 2,200 2,000 1,800 56,300 $21,700
(Ser. rev. − Sal./wag. exp. − Dep. exp. − Ins. exp. −Util. exp. − Main./rep. exp.)
DREW CORPORATION Retained Earnings Statement For the Year Ended December 31, 2017 _____________________________________________________________________________ Retained earnings, January 1, 2016.................... Add: Net income................................................. Less: Dividends .................................................. Retained earnings, December 31, 2017 .............. .
$33,000 21,700 54,700 14,000 $40,700
A Further Look at Financial Statements
2-61
(Beg. ret. earn. + Net inc. − Div.)
Solution 208
(Cont.)
DREW CORPORATION Balance Sheet December 31, 2017 _____________________________________________________________________________ Assets Current assets Cash .......................................................................... $15,900 Accounts receivable ................................................... 14,200 Prepaid insurance ...................................................... 3,500 Total current assets............................................... $33,600 (Cash + Acc. rec. + Prep. ins.) Property, plant, and equipment Equipment.................................................................. $56,000 Less: Accumulated depreciation—equipment ........... 17,600 38,400 Total assets........................................................... $72,000 (Tot. cur. assets + Equip. − Acc. dep.) Liabilities and Stockholders' Equity Current liabilities Accounts payable....................................................... Salaries and wages payable ...................................... Total current liabilities ............................................ Stockholders' equity Common stock ........................................................... Retained earnings ...................................................... Total stockholders' equity ...................................... Total liabilities and stockholders' equity ................. (Acc. pay. + Sal./wag. pay. + Com. stock + End. ret. earn.)
$15,300 3,000 $18,300 13,000 40,700 53,700 $72,000
Ex. 209 The Dobson Company gathered the following condensed data for the year ended December 31, 2017: Cost of goods sold $ 720,000 Net sales 1,249,000 Administrative expenses 289,000 Interest expense 68,000 Dividends paid 38,000 Selling expenses 45,000 Instructions Prepare an income statement for the year ended December 31, 2017. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
2-62
Solution 209
(10 min.) DOBSON COMPANY Income Statement For the Year Ended December 31, 2017
Revenues Net sales .......................................................................................
$1,249,000
Expenses Cost of goods sold ......................................................................... Administrative expenses ................................................................ Selling expenses ........................................................................... Interest expense ............................................................................ Total expenses .....................................................................
$720,000 289,000 45,000 68,000
Net income ................................................................................... (Net sal. − Cost of goods sold − Admin. exp. − Sell. exp. − Int. exp.)
1,122,000 $ 127,000
Ex. 210 The following data are taken from the financial statements of Rosen, Inc. as of the end of the year 2017. The data are in alphabetical order. Accounts payable $ 28,000 Accounts receivable 66,000 Cash 24,000 Gross profit 160,000 Income before income taxes 54,000
Net income Other current liabilities Salaries and wages payable Total assets Total liabilities
$ 48,000 17,000 5,000 250,000 175,000
Additional information: The average common shares outstanding during the year was 40,000.
Instructions Compute the following: (a) Current ratio. (b) Working capital.
(c) Earnings per share. (d) Debts to assets ratio.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 210
(5 min.)
(a)
Current ratio = Current assets* ÷ Current liabilities** = $90,000 ÷ $50,000 = 1.8 : 1
(b)
Working capital = Current assets* – Current liabilities** = $90,000 – $50,000 = $40,000
(c)
Earnings per share = (Net income–Preferred dividends) ÷ Average common shares outstanding = $48,000 ÷ 40,000 = $1.20
(d) Debt to assets ratio = Total debt ÷ Total assets = $175,000 ÷ $250,000 = 70% *(Acc. rec. + Cash) **(Acc. pay. + Oth. cur. liab. + Sal./wag. pay.)
.
A Further Look at Financial Statements
2-63
Ex. 211 Use the following data to calculate the liquidity and profitability ratios listed below. Average common shares outstanding Capital expenditures Cash provided by operating activities Dividends paid Current assets Instructions Compute the following: (a) Current ratio. (b) Working capital. (c) Earnings per share.
10,000 $20,000 32,000 5,000 190,000
Current liabilities Net income Net sales Total liabilities Total assets
$100,000 21,000 150,000 126,000 210,000
(d) Debt to assets ratio. (e) Free cash flow.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 211
(15 min.)
(a)
Current ratio = Current assets ÷ Current liabilities = $190,000 ÷ $100,000 = 1.9 : 1
(b)
Working capital = Current assets – Current liabilities = $190,000 – $100,000 = $90,000
(c)
Earnings per share ratio = (Net income – Preferred stock dividends) ÷ Average common share outstanding = $21,000 ÷ 10,000 = $2.10
(d)
Debt to assets ratio = Total debt ÷ Total assets = $126,000 ÷ $210,000 = 60%
(e)
Free cash flow = Cash provided by operating activities – Capital expenditures – Dividends paid = $32,000 – $20,000 – $5,000 = $7,000.
Ex. 212 The following data are taken from the financial statements of Edington Company. The data are in alphabetical order. Accounts payable $ 28,000 Net sales 500,000 Accounts receivable 65,000 Other current liabilities 20,000 Average common shares out. 20,000 Salaries and wages payable 7,000 Cash 56,000 Stockholders’ equity 135,000 Gross profit 190,000 Total assets 300,000 Net income 50,000 Instructions Compute the following: (a) Current ratio. (b) Working capital.
(c) Earnings per share. (d) Debt to assets ratio.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 212
(10 min.)
(a)
Current ratio = Current assets* ÷ Current liabilities** = $121,000 ÷ $55,000 = 2.2 : 1
(b)
Working capital = Current assets* – Current liabilities** = $121,000 – $55,000 = $66,000
(c)
Earnings per share = Net income ÷ Average common shares outstanding = $50,000 ÷ 20,000 = $2.50
(d)
Debt to assets ratio
= Total debt ÷ Total assets = $165,000 ÷ $300,000 = 55% (Total debt = Total assets – Stockholders’ equity = $300,000 – $135,000) *(Acc. rec. + Cash) **(Acc. pay. + Oth. cur. liab. + Sal./wag. pay.) Ex. 213 Comparative financial statement data for Arthur Corporation and Lancelot Corporation, two competitors, appear below. All balance sheet data are as of December 31, 2017.
Net sales Cost of goods sold Operating expenses Interest expense Income tax expense
Arthur Corporation 2017 $1,850,000 1,225,000 303,000 9,000 85,000
Lancelot Corporation 2017 $620,000 365,000 98,000 3,800 36,800
Current assets Plant assets (net) Current liabilities Long-term liabilities
427,200 532,000 66,325 148,500
130,336 139,728 35,348 29,620
Additional Information: Cash from operating activities $153,000 Capital expenditures $90,000 Dividends paid $36,000 Average number of shares outstanding 100,000
$44,000 $20,000 $15,000 50,000
Instructions (a) Comment on the relative profitability of the companies by computing the net income and earnings per share for each company for 2017. (b) Comment on the relative solvency of the companies by computing the debt to assets ratio and the free cash flow for each company for 2017. Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
.
A Further Look at Financial Statements
Solution 213
2-65
(15 min.)
(a)
Arthur Company appears to be more profitable. Its net income for 2017 is $228,000 ($1,850,000 – $1,225,000 – $303,000 – $9,000 – $85,000). Its earnings per share is $2.28 ($228,000 100,000 shares outstanding). Lancelot's net income for 2017 is $116,400 ($620,000 – $365,000 – $98,000 – $3,800 – $36,800). Its earnings per share is $2.33 ($116,400 50,000 shares outstanding).
(b)
Arthur appears to be slightly more solvent. Arthur's 2017 debt to assets ratio of 22.4% ($214,825 $959,200)a is lower than Lancelot's ratio of 24.1% ($64,968 $270,064)b. The lower the percentage of debt to assets, the lower the risk that a company may be unable to pay its debts as they income due. Another measure of solvency, free cash flow, also indicates that Arthur is more solvent. Arthur had $27,000 ($153,000 – $90,000 – $36,000) of free cash flow while Lancelot had only $9,000 ($44,000 – $20,000 – $15,000). a
$214,825 ($66,325 + $148,500) is Arthur's 2017 total liabilities $959,200 ($427,200 + $532,000) is Arthur's 2017 total assets. b
$64,968 ($35,348 + $29,620) is Lancelot's 2017 total liabilities $270,064 ($130,336 + $139,728) is Lancelot's 2017 total assets. Ex. 214 For each of the ratios listed below, indicate by the appropriate code letter, whether it is a liquidity ratio, a profitability ratio, or a solvency ratio. Code: L = P = S =
Liquidity ratio Profitability ratio Solvency ratio
____
1. Price-earnings ratio
____
2. Free cash flow
____
3. Debt to assets ratio
____
4. Earnings per share
____
5. Current ratio
Ans: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 214 P S S P L
1. 2. 3. 4. 5.
(5 min.)
Price-earnings ratio Free cash flow Debt to assets ratio Earnings per share Current ratio .
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 215 The following information is available from the annual reports of Marin Company and Nance Company. (amounts in millions) Marin Nance Sales $26,510 $34,512 Gross profit 6,610 8,887 Net income 565 1,221 Current assets 13,712 28,447 Beginning total assets 17,102 33,130 Ending total assets 22,088 36,167 Current liabilities 7,966 13,950 Total liabilities 16,136 29,222 Average common shares outstanding 250 480 Preferred stock dividends paid -0-0Instructions (a) For each company, compute the following ratios: 1. Current ratio 2. Debt to assets ratio 3. Earnings per share (b) Based on your calculations, discuss the relative liquidity, solvency, and profitability of the two companies. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 215
(12 min.)
(a) 1. Current ratio (Cur. assets/Cur. liab.) 2. Debt to assets ratio (Tot. liab. ÷ Tot. assets) 3. Earnings per share (Net. inc. ÷ Ave. sh. out.)
Marin 1.72:1 ( $13,712 ÷ $7,966)
Nance 2.04:1 ($28,447 ÷ $13,950)
73% ($16,136 ÷ 22,088)
81% ($29,222 ÷ $36,167)
$2.26 ($565 ÷ 250)
$2.54 ($1,221 ÷ 480)
(b) Based on the current ratio, Nance is more liquid than Marin since its current ratio (2.04:1) is 19% higher than Marin’s ratio (1.72:1). However, Marin would be considered more solvent than Nance since its debt to assets ratio (73%) is 10% lower than Nance’s debt ratio (81%). A lower debt to assets ratio indicates a company is more solvent and better able to survive over a long period of time. Nance is more profitable than Marin since its earnings per share and is higher than Marin’s respective vaules. Nance’s earnings per share ($2.54) is 12.4% higher than Marin’s value.
.
A Further Look at Financial Statements
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Ex. 216 You are provide with the following information for Trent Company, effective as of its April 30, 2017, year-end. Accounts payable Accounts receivable Buildings, net of accumulated depreciation Cash Common stock Cost of goods sold Current portion of long-term debt Depreciation expense Dividends paid during the year Equipment, net of accumulated depreciation Income tax expense Income taxes payable Interest expense Inventory Land Long-term debt Prepaid expenses Retained earnings, beginning Service revenue Selling expenses Debt investments Salaries and wages expense Salaries and wages payable
$
834 810 3,537 770 900 2,500 450 335 475 1,220 265 265 400 967 1,600 3,500 12 1,600 9,600 310 1,200 700 222
Instructions Prepare an income statement for Trent Company for the year ended April 30, 2017. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 216
(15 min.)
TRENT COMPANY Income Statement For the Year Ended April 30, 2017 _____________________________________________________________________________ Service revenue ...................................................
$9,600
Expense Cost of goods sold ....................................... $2,500 Salaries and wages expense ....................... 700 Interest expense .......................................... 400 Depreciation expense .................................. 335 Selling expenses.......................................... 310 Income tax expense..................................... 265 4,510 Total expenses..................................... Net income........................................................... $5,090 (Ser. rev. − Cost of goods sold − Sal./wag. exp. − Int. exp. − Dep. exp. − Sell. exp. − Inc. tax exp.) .
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
2-68 Ex. 217
The chief financial officer (CFO) of SuperClean Corporation requested that the accounting department prepare a preliminary balance sheet on December 30, 2017, so that the CFO could get an idea of how the company stood. He knows that certain debt agreements with its creditors require the company to maintain a current ratio of at least 2:1. The preliminary balance sheet is as follows. SUPERCLEAN CORPORATION Balance Sheet December 30, 2017 Current assets Cash
Current liabilities Accounts payable
$25,000
Accounts receivable
20,000
Salaries and wages
$ 20,000 10,000
$ 40,000
payable Prepaid insurance
15,000
$ 60,000
Long-term liabilities Notes payable
90,000
Total liabilities Property, plant, and equipment (net)
210,000
Total assets
130,000
Stockholders' equity
$270,000
Common stock Retained earnings Total liabilities and stockholders equity
100,000 40,000
140,000 $270,000
Instructions (a) Calculate the current ratio and working capital based on the preliminary balance sheet. (b) Based in the results in (a), the CFO requested that $20,000 of cash be used to pay off the balance of the accounts payable account on December 31, 2017. Calculate the new current ratio and working capital after the company takes these actions. Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 217
(10 min.)
$60,000 = 1.50:1 (Cash + Acc. rec. + Prep. ins. ÷ Cur. liab.) $40,000 Working capital = $60,000 – $40,000 = $20,000 (Cash + Acc. rec. – Cur. liab.)
(a)
Current ratio =
(b)
Current ratio =
$40,000* $20,000**
= 2.0:1
Working capital = $40,000 – $20,000 = $20,000 *$60,000 – $20,000 **$40,000 – $20,000
.
A Further Look at Financial Statements
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COMPLETION STATEMENTS 218. The rules and practices that are recognized as general guides for financial reporting are called ______________ _____________ _______________. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: FSA
219. In accounting, ____________ results when different companies use the same accounting principles. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
220. _______________ is a company-specific aspect of relevance where size is likely to influence the decision of an investor or creditor. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
221. The _______________ constraint relates to the fact that providing information is costly. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
222. The earnings per share value is calculated by dividing net income – preferred stock dividends by _______________ ______________ ______________. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
223. Assets that are expected to be converted to cash or used in the business within a relatively short period of time are called ______________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
224. The ________________ is current assets divided by current liabilities. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
225. A measurement to provide additional insight regarding a company’s cash-generating ability is _____________. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
Answers to Completion Statements 218. generally accepted accounting principles 219. comparability 220. materiality 221. cost 222. average common shares outstanding 223. current assets 224. current ratio 225. free cash flow
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
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MATCHING 226. Match the items below by entering the appropriate code letter in the space provided. A. Relevance B. Liquidity ratios C. Comparability D. Consistency E. Intangible assets F. Free cash flow
G. H. I. J. K. L.
Working capital Current ratio Earnings per share Solvency ratios Economic entity assumption Materiality
____
1. Measures of the ability of the company to survive over a long period of time.
____
2. Current assets divided by current liabilities.
____
3. Information that has a bearing on a decision.
____
4. Economic events can be identified with a particular unit of accountability.
____
5. An item important enough to influence the decision of an investor or creditor.
____
6. Same accounting principles and methods used from year to year within a company.
____
7. Cash from operating activities less capital expenditures and cash dividends.
____
8. Noncurrent assets that do not have physical substance.
____
9. (Net income – preferred stock dividends) divided by average common shares outstanding.
____ 10. Different companies using the same accounting principles. ____ 11. Measures of the short-term ability of the enterprise to pay its maturing obligations. ____ 12. The excess of current assets over current liabilities. Ans: N/A, LO: 1-3, Bloom: K, Difficulty: Easy, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
Answers to Matching 1. 5. 9.
J L I
2. 6. 10.
H D C
.
3. 7. 11.
A F B
4. 8. 12.
K E G
A Further Look at Financial Statements
2-71
SHORT-ANSWER ESSAY QUESTIONS S-A E 227 Identify the two parts of stockholders' equity in a corporation and indicate the purpose of each. Ans: N/A, LO: 1, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 227 The two parts of stockholders' equity and the purpose of each are: (1) Common stock is used to record investments of assets in the business by the owners (stockholders). (2) Retained earnings is used to record net income retained in the business. S-A E 228 What do these classes of ratios measure? (a) Liquidity ratios. (b) Profitability ratios. (c) Solvency ratios. Ans: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communication, IMA: Business Economics
Solution 228 (a) Liquidity ratios measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash. (b) Profitability ratios measure the income or operating success of a company for a given period of time. (c) Solvency ratios measure the company's ability to survive over a long period of time. S-A E 229 Give the definition of current assets, current liabilities and the current ratio. Ans: N/A, LO: 1, 2, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communication, IMA: Business Economics
Solution 229 Current assets are cash or other resources that are reasonably expected to be realized in cash or sold or consumed in the business within one year or the operating cycle, whichever is longer. Current liabilities are obligations reasonably expected to be paid from the existing current assets or through the creation of other current liabilities within the next year or operating cycle, whichever is longer. The current ratio is a measure used to evaluate a company’s liquidity and short-term debt paying ability, computed by dividing current assets by current liabilities.
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
S-A E 230 Are short-term creditors, long-term creditors, and stockholders primarily interested in the same characteristics of a company? Explain. Ans: N/A, LO: 2, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communication, IMA: Business Economics
Solution 230 The three parties are not primarily interested in the same characteristics of a company. Shortterm creditors are primarily interested in the liquidity of the enterprise. In contrast, long-term creditors and stockholders are primarily interested in the profitability and solvency of the company. S-A E 231 Relevance and faithful representation are the fundamental qualities of useful information. (a) Briefly define each term. (b) Why are these characteristics important to users of financial statements? Ans: N/A, LO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 231 (a) Relevance is the quality of information that makes a difference in a business decision. Information is considered relevant if it provides information that provides accurate expectations about future, and confirms or corrects prior expectations. Faithful representation means that information accurately depicts what really happened. Information must be complete, neutral and free from error to provide a faithful representation. (b) Relevance and faithful representation are important to the users of financial statements because these users do not have first-hand knowledge of the operations of the business. In order for these users to make decisions, they must have assurances that the information provided by the company is relevant – makes a difference and faithfully representative – means what the company says. Without these assurances, the users cannot have confidence in the information provided to them.
.
A Further Look at Financial Statements
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S-A E 232 You and the CEO of your company are waiting on an elevator. You are going to the 25th floor and the CEO is going to the 35th floor. The CEO says “What is the difference between consistency and comparability?” You have two minutes to respond. What will you say? Ans: N/A, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 232 You have asked an excellent question and I am glad to respond. Consistency means that a company uses the same accounting principles and methods each year. Decision-makers can work with accounting information, knowing that the company is consistently applying with the principles and methods it has chosen. This is why it is so important that we carefully make these choices. There are procedures for making changes and communicating those changes to financial statement users. Comparability allows users to compare accounting information of different companies. The financial statement footnotes identify many of the principles and procedures that companies use. Comparisons can be made for companies within certain industries or other groupings. S-A E 233 Comparability and consistency are enhancing qualities that make accounting information useful for decision-making purposes. Briefly explain the difference between these two qualities and explain how they are related to each other. Ans: N/A, LO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 233 Comparability results when different companies use the same accounting principles and methods, while consistency results when one company uses the same principles and methods from year to year. The two qualities are related because information must possess relevance, faithful representation, comparability, and consistency to achieve the highest level of decision usefulness. In addition, accounting information for two entities cannot be comparable unless both companies practice consistency in their choice of principles and methods. S-A E 234 Identify and briefly explain the two fundamental qualities of useful information. Ans: N/A, LO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 234 Relevance and faithful representation are the two fundamental qualities of useful information. Relevance is the quality of information that indicates the information makes a difference in a decision. Faithful representation is information that is complete, neutral, and free from error.
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
S-A E 235 What are three of the five enhancing qualities of useful information. Ans: N/A, LO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 235 The FASB and IASB describe the following enhancing qualities of useful information: comparability, consistency, verifiability, timeliness, and understandability. S-A E 236
(Ethics)
Many bonus plans are based upon the attainment of some specified short-term goal. For example, sales personnel at Metal Crafters are given a bonus of 5% of the amount by which their sales exceed $100,000. Sometimes the attainment of these goals is achieved by methods detrimental to the long-term needs of the company. Sales representative Sara Crown, for example, finds herself tempted to court certain customers that place large orders, even though she knows they may not be able to pay. She complains that the bonus system itself is unethical. Required: Is a bonus system like the one at Metal Crafters unethical? Explain. Ans: N/A, LO: 2, Bloom: E, Difficulty: Medium, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Decision Modeling, AICPA PC: Communication, IMA: Performance Measurement
Solution 236 The bonus system described is not necessarily unethical, but it may be short-sighted. When employees are able to identify and address larger concerns (such as Sara's identification of the problem regarding the ability of a customer to pay) then such issues should probably become part of the system of bonuses. It is very difficult to set a bonus plan that allows for all contingencies, however. Since sales representatives are hired to generate sales, they most often are rewarded based on generating sales. Some of the future events, such as customers defaulting on payments, may not be the fault of the sales representative. For Sara Crown to create sales by soliciting customers with a poor payment record would be unethical on her part. She is required to use integrity, even when the possibility exists of her not using it, and even when she might gain by not using it.
.
A Further Look at Financial Statements
S-A E 237
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(Communication)
Sunshine Sugar grows sugar cane in Florida, California, and Hawaii. Its investment in land to grow sugar exceeds $2 million. Currently, land whose original cost was more than $300,000 in Florida is threatened by plans to flood the Everglades to reclaim the wetlands. Sunshine plans to fight vigorously to keep its land in production, particularly because most of the rest of its land is in California, which is threatened by water shortages. The land in Florida is also significantly more productive than that in California, and the wages paid to workers to process the sugar cane are substantially less. Current plans include litigation to prevent government seizure of the land, an extensive public education campaign, and intense lobbying efforts. Required: Sunshine has determined that a footnote disclosure should be made in the financial statements to alert the investors of the threat to the land. Carefully consider how much of the above information is appropriate for inclusion in the footnote. Write the footnote. Ans: N/A, LO: 3, Bloom: E, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 237 NOTE: A portion of the most valuable land owned by the company is the subject of plans by the Environmental Protection Agency to flood the Florida Everglades to "reclaim" the so-called wetlands. The company is working with the United States Department of Agriculture and other agencies to prevent this result. The company will be spending money to educate the public about this issue. Currently, land costing around $300,000 is at risk. Usually the details of exactly why the land is so valuable to the company are not appropriate for inclusion. Footnotes need not be emotional or dramatic, either. There should be a systematic listing of at least the minimum amount the public has a right to know—how much land is at risk, and the nature of the risk.
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
IFRS Questions 1.
The classified balance sheet is a. required under GAAP but not under IFRS. b. required under IFRS in the same format as under GAAP. c. required under IFRS but not under GAAP. d. required under IFRS with certain variations in format as compared to GAAP.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
2.
IFRS requires the use of a. the term balance sheet. b. the term statement of financial position. c. neither balance sheet nor statement of financial position, but recommends use of the term balance sheet. d. neither balance sheet nor statement of financial position, but recommends use of the term statement of financial position.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
3.
IFRS a. requires a specific format for the balance sheet (statement of financial position) that is identical to U.S. GAAP. b. requires a specific format for the balance sheet (statement of financial position) that is different from U.S. GAAP. c. requires no specific format for the balance sheet (statement of financial position) but most companies that follow IFRS prepare the statement identical to U.S. GAAP . d. requires no specific format for the balance sheet (statement of financial position) but most companies that follow IFRS prepare the statement in a different format from U.S. GAAP.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
4.
Most companies that follow IFRS present balance sheet (statement of financial position) information in this order. a. current assets; investments; property; plant and equipment; intangible assets; current liabilities; long term liabilities; owners' equity. b. intangible assets; property; plant and equipment; investments; current assets; current liabilities; owners' equity; long term liabilities. c. current assets; noncurrent assets; current liabilities; noncurrent liabilities; equity. d. noncurrent assets; current assets; equity; noncurrent liabilities; current liabilities.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
5.
Under IFRS and under GAAP, current assets are listed in IFRS GAAP a. order of liquidity order of liquidity b. reverse order of liquidity order of liquidity c. order of liquidity reverse order of liquidity d. reverse order of liquidity reverse order of liquidity
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
A Further Look at Financial Statements
6.
2-77
The subtotal net assets is used in a. both GAAP and IFRS. b. GAAP but not IFRS. c. IFRS but not GAAP. d. neither IFRS nor GAAP.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
7.
Both IFRS and GAAP require disclosure about a. accounting policies followed. b. judgements that management has made in the process of applying the entity's accounting policies. c. the key assumptions and estimation uncertainty. d. all of the above.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
8.
Under IFRS a. comparative prior-period information must be presented, but financial statements need not be provided annually. b. comparative prior-period information must be presented, and financial statements must be provided annually. c. comparative prior-period information is not required, but financial statements need not be provided annually. d. comparative prior-period information is not required, but financial statements must be provided annually.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
9.
The use of fair value to report assets a. is not allowed under GAAP or IFRS. b. is required by GAAP and IFRS. c. is increasing under GAAP and IFRS, but GAAP has adopted it more broadly. d. is increasing under GAAP and IFRS, but IFRS has adopted it more broadly.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
10
Under IFRS a. companies can apply fair value to property, plant, and equipment and natural resources. b. companies can apply fair value to property, plant, and equipment but not to natural resources. c. companies can apply fair value to neither property, plant, and equipment nor natural resources. d. companies can apply fair value to natural resources but not to property, plant, and equipment.
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
CHAPTER 3 THE ACCOUNTING INFORMATION SYSTEM SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY Item
LO
BT
Item
LO
BT
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
1 1 1 1 1 2 2 2 2 2 2
K C C C C K K K K K K
12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.
2 2 2 2 2 2 2 2 2 2 2
K K K K K K K K K K K
55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88.
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 1 2 2
C C C C C C C C C C C C C C C C C C C C C C C C C C C C C AP AP C K K
89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122.
2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
Item
LO
BT
Item
LO
BT
Item
LO
BT
3 3 3 3 3 3 4 4 4 4 4
K K K K K K K K K K K
45. 46. 47. 48. 49. 50. 51. 52. 53. 54.
4 4 4 4 5 5 5 5 5 5
K K K K K C K C K K
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 5 4 4 4 4 4 4 4
K K K K K K K K K K C C K K K K K K K C AP AP AP C AP AP K K K K K K K K
191. 192. 193. 194. 195. 196. 197. 198. 199. 200. 201. 202. 203. 204. 205. 206. 207. 208. 209. 210. 211. 212. 213. 214. 215. 216. 217. 218.
4 3 4 4 4 4 4 4 4 4 4 4 4 5 4 4 5 5 5 5 5 5 5 5 5 5 5 5
K K K K K C K K K K K K K K AP AP K C C K K C K K C AN K K
True-False Statements 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33.
2 2 2 2 2 2 2 3 3 3 3
K K K K K K K K K K K
34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44.
Multiple Choice Questions K K K K K K K K K K K K K K K K K K K K C K C C C K K C C K K K K C
.
123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156.
2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
C C C K C C K C K K K K C C C K K C AP AP AP AP AP C C C C K K C C C C C
157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187. 188. 189. 190.
3-2
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Brief Exercises 219. 220.
1 2
C C
221. 222.
2 2
K K
223. 224.
3 5
AP AP
225. 226.
3 1
C C
227. 228.
4 5
AP AP
247. 248. 249. 250. 251. 252.
3 3 3,4 3,5 4,5 4,5
AP AP AP AP AP AP
253. 254. 255. 256. 257 258.
5 5 5 5 5 5
AP AN AN AN AP AP
265. 266.
3 4
K K
267. 268.
4 5
K K
276. 277.
3 5
C C
278. 279.
2 5
E AN
Exercises 229. 230. 231. 232. 233. 234.
1 2 1 1 1 1
C K C AP AP AP
235. 236. 237. 238. 239. 240.
1 1 1,3,4 2 2 2
AP AP AP K K C
259. 260.
2 2
K K
261. 262.
2 2
K K
269.
1-5
K
270. 271.
1,3 2
K K
241. 242. 243. 244. 245. 246.
2 2 2 2 2 3
K K K C K AP
Completion Statements 263. 264.
3 3
K K
Matching Short Answer Essay 272. 273.
3 2
C C
274. 275.
2 2
C K
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Item
Type
Item
Type
Learning Objective 1 Item Type Item Type
Item
Type
Item
Type
1. 2. 3. 4. 5. 55. 56. 57. 58.
TF TF TF TF TF MC MC MC MC
59. 60. 61. 62. 63. 64. 65. 66. 67.
MC MC MC MC MC MC MC MC MC
68. 69. 70. 71. 72. 73. 74. 75. 76.
MC MC MC MC MC MC MC MC MC
86. 219. 226. 229. 231. 232. 233. 234. 235.
MC BE BE Ex Ex Ex Ex Ex Ex
236. 237. 269. 270.
Ex Ex Ma SA
Item
Type
Item
Type
141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 220. 221.
MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC BE BE
238. 239. 240. 241. 242. 243. 244. 245. 259. 260. 261. 262. 269. 271. 273. 274. 275. 278.
Ex Ex Ex Ex Ex Ex Ex Ex CS CS CS CS Ma SA SA SA SA SA
MC MC MC MC MC MC MC MC MC
77. 78. 79. 80. 81. 82. 83. 84. 85.
Item
Type
Item
Type
Learning Objective 2 Item Type Item Type
6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23.
TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF
26. 27. 28. 29. 84. 85. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98.
TF TF TF TF MC MC MC MC MC MC MC MC MC MC MC MC MC MC
101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. .
MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC
121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138.
MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC
The Accounting Information System 24. 25.
TF TF
99. 100.
MC MC
119. 120.
Item Type Item
Type
Item
30. 31. 32. 33. 34. 35. 36. 37. 38.
TF MC MC MC MC MC MC MC MC
165. 166. 167. 168. 168. 169. 170. 171. 172.
TF TF TF TF TF TF TF TF TF
39. 157. 158. 159. 160. 161. 162. 163. 164.
MC MC
MC MC
222. 230.
BE Ex
Learning Objective 3 Type Item Type
Item
Type
Item
Type
182. 192. 223. 225. 237. 246. 247. 248. 249.
MC MC BE BE Ex Ex Ex Ex Ex
250. 263. 264. 265. 269. 270. 272. 276.
Ex CS CS CS Ma SA SA SA
MC MC MC MC MC MC MC MC MC
139. 140.
3-3
173. 174. 175. 176. 177. 178. 179. 180. 181.
MC MC MC MC MC MC MC MC MC
Item
Type
Item
Type
Learning Objective 4 Item Type Item Type
Item
Type
Item
Type
40. 41. 42. 43. 44. 43. 46.
TF TF TF TF TF TF TF
47. 48. 184. 185. 186. 187. 188.
TF TF MC MC MC MC MC
189. 190. 191. 193. 194. 195. 196.
MC MC MC MC MC MC MC
205. 206. 227. 237. 249. 251. 252.
MC MC BE BE Ex Ex Ex
266. 267. 269.
CS CS Ma
Item
Type
Item
Type
252. 253. 254. 255. 256. 257.
Ex Ex Ex Ex Ex Ex
258. 268. 269. 277. 279.
Ex CS Ma SA SA
MC MC MC MC MC MC MC
197. 198. 199. 200. 201. 202. 203.
Item
Type
Item
Type
Learning Objective 5 Item Type Item Type
49. 50. 51. 52. 53. 54.
TF TF TF TF TF TF
183. 204. 207. 208. 209. 210.
MC MC MC MC MC MC
211. 212. 213. 214. 215. 216.
Note: TF = True-False MC = Multiple Choice Ma = Matching
MC MC MC MC MC MC
217. 218. 224. 228. 250. 251.
MC MC BE BE Ex Ex
C = Completion Ex = Exercise SA = Short Answer Essay
CHAPTER LEARNING OBJECTIVES 1. Analyze the effect of business transactions on the basic accounting equation. Each business transaction must have a dual effect on the accounting equation. For example, if an individual asset is increased, there must be a corresponding (a) decrease in another asset, or (b) increase in a specific liability, or (c) increase in stockholders’ equity. 2. Explain how accounts, debits, and credits are used to record business transactions. An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders’ equity items. The terms debit and credit are synonymous with left and right. Assets, dividends, and expenses are increased by debits and decreased by credits. Liabilities, common stock, .
3-4
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
retained earnings, and revenues are increased by credits and decreased by debits.
.
The Accounting Information System
3-5
3. Indicate how a journal is used in the recording process. The basic steps in the recording process are (a) analyze each transaction in terms of its effect on the accounts, (b) enter the transaction information in a journal, and (c) transfer the journal information to the appropriate accounts in the ledger. The initial accounting record of a transaction is entered in a journal before the data are entered in the accounts. A journal (a) discloses in one place the complete effect of a transaction, (b) provides a chronological record of transactions, and (c) prevents or locates errors because the debit and credit amounts for each entry can be readily compared. 4. Explain how a ledger and posting help in the recording process. The entire group of accounts maintained by a company is referred to collectively as a ledger. The ledger provides the balance in each of the accounts as well as keeps track of changes in these balances. Posting is the procedure of transferring journal entries to the ledger accounts. This phase of the recording process accumulates the effects of journalized transactions in the individual accounts. 5. Prepare a trial balance. A trial balance is a list of accounts and their balances at a given time. The primary purpose of the trial balance is to prove the mathematical equality of debits and credits after posting. A trial balance also uncovers errors in journalizing and posting and is useful in preparing financial statements.
TRUE-FALSE STATEMENTS 1.
Economic events that require recording in the financial statements are called accounting transactions.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
2.
Revenue increases stockholders’ equity and should be recorded whenever cash is received from customers.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
3.
Collection on an account receivable will increase both cash and accounts receivable.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
4.
The payment of a liability decreases both cash and accounts payable.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
5.
If total assets are increased, there must be a corresponding increase in liabilities or a decrease in stockholders’ equity.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
6.
A new account is opened for each transaction entered into by a business firm.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
3-6 7.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The recording process becomes more efficient and informative if all transactions are recorded in one account.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
8.
An account consists of two parts: (1) a left or debit side and (2) a right or credit side.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
9.
For a T account, an account balance is the difference in total dollars between total debit amounts and total credit amounts.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
10.
An account is often referred to as a T-account because of the way it is constructed.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
11.
A debit to an account always indicates an increase in that account.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
12.
If a revenue account is credited, the revenue account is increased.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
13.
The normal balance of all accounts is a debit.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
14.
Debit and credit can be interpreted to mean “bad” and “good”, respectively.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
15.
A credit means that an account has been increased.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
16.
A decrease in a liability account is recorded by a debit.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
17.
An increase in an asset is recorded by a debit.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
18.
The double-entry system of accounting refers to the placement of a double line at the end of a column of figures.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
19.
A credit balance in a liability account indicates that an error in recording has occurred.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
20.
The normal balance of an asset is a credit.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
The Accounting Information System
21.
3-7
The normal balance of the dividend account is a credit.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
22.
Assets are decreased with a credit.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
23.
A debit means that an account has been decreased.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
24.
A decrease in a liability is recorded by a debit.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
25.
An increase in an asset is recorded by a debit.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
26.
Liabilities are increased with debits and decreased with credits.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
27.
The dividends account is a subdivision of the retained earnings account and appears as an expense on the income statement.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
28.
Revenues are a subdivision of stockholders’ equity.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
29.
Under the double-entry system, revenues must always equal expenses.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
30.
Transactions are entered in the ledger first and then they are analyzed in terms of their effect on the accounts.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
31.
Source documents can provide evidence that a transaction has occurred.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
32.
Each transaction must be analyzed in terms of its effect on the accounts before it can be recorded in a journal.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
33.
Transactions are entered in the ledger accounts and then transferred to journals.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
34.
All business transactions must be entered first in the general ledger.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None,
.
3-8
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition IMA: FSA
.
The Accounting Information System
35.
3-9
Transactions are recorded in alphabetical order in a journal.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
36.
The journal is a chronological record of all transactions.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
37.
A journal is an accounting record in which transactions are initially recorded.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
38.
The complete effect of a transaction on the accounts is disclosed in the journal.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
39.
The account titles used in journalizing transactions need not be identical to the account titles in the ledger.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
40.
The chart of accounts is a special ledger used in accounting systems.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
41.
A general ledger should be arranged in financial statement order beginning with the balance sheet accounts.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
42.
The entire group of accounts maintained by a company is referred to collectively as the journal.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
43.
Prepaid expenses are assets.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
44.
Salaries and wages payable is a type of expense.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
45.
Dividends are classified as an expense.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
46.
Unearned Service Revenue is classified as a liability on the balance sheet.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
47.
Posting is the process of proving the equality of debits and credits in the trial balance.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
48.
Entering transactions into the journal is called posting.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
3-10 49.
A trial balance is prepared at the beginning of an accounting period.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
50.
A trial balance does not prove that all transactions have been recorded or that the ledger is correct.
Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
51.
In a trial balance, all debits are listed before all credits.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
52.
When the columns of the trial balance equal each other, it means that no errors have occurred in the recording and posting the transactions.
Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
53.
Operating activities are the types of activities the company performs to generate profits.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
54.
Financing activities include the purchase or sale of long-lived assets or the purchase or sale of investment securities.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
Answers to True-False Statements 1. 2. 3. 4. 5. 6. 7. 8. 9.
T F F T F F F F T
10. 11. 12. 13. 14. 15. 16. 17. 18.
T F T F F F T T F
19. 20. 21. 22. 23. 24. 25. 26. 27.
F F F T F T T F F
28. 29. 30. 31. 32. 33. 34. 35. 36.
T F F T T F F F T
37. 38. 39. 40. 41. 42. 43. 44. 45.
T T F F T F T F F
46. 47. 48. 49. 50. 51. 52. 53. 54.
T F F F T F F T F
MULTIPLE CHOICE QUESTIONS 55.
If total liabilities decreased by $4,000, then a. stockholders’ equity must have decreased by $4,000. b. assets must have decreased by $4,000, or stockholders’ equity must have increased by $4,000. c. assets and stockholders’ equity each increased by $2,000. d. assets must have increased by $4,000.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
The Accounting Information System
56.
3-11
Collection of a $600 Accounts Receivable a. increases an asset $600; decreases an asset $600. b. increases an asset $600; decreases a liability $600. c. decreases a liability $600; increases stockholders’ equity $600. d. decreases an asset $600; decreases a liability $600.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
57.
If an individual asset is increased, then a. there could be an equal decrease in a specific liability. b. there could be an equal decrease in stockholders’ equity. c. there could be an equal decrease in another asset. d. None of these answer choices are correct.
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
58.
If services are rendered on account, then a. assets will decrease. b. liabilities will increase. c. stockholders’ equity will increase. d. liabilities will decrease.
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
59.
If services are rendered for cash, then a. assets will increase. b. liabilities will increase. c. stockholders’ equity will decrease. d. liabilities will decrease.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
60.
If expenses are paid in cash, then a. assets will increase. b. liabilities will decrease. c. stockholders’ equity will increase. d. assets will decrease.
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
61.
An investment by the stockholders in a business increases a. assets and stockholders’ equity. b. assets and liabilities. c. liabilities and stockholders’ equity. d. assets only.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
62.
The purchase of an asset for cash a. increases assets and stockholders’ equity. b. increases assets and liabilities. c. decreases assets and increases liabilities. d. leaves total assets unchanged.
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
3-12 63.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The purchase of an asset on credit a. increases assets and stockholders’ equity. b. increases assets and liabilities. c. decreases assets and increases liabilities. d. leaves total assets unchanged.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
64.
The payment of a liability a. decreases assets and stockholders’ equity. b. increases assets and decreases liabilities. c. decreases assets and increases liabilities. d. decreases assets and liabilities.
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
65.
The sale of an asset on credit for what it cost a. increases assets and liabilities. b. decreases assets and liabilities. c. leaves total assets unchanged. d. decreases assets and increases liabilities.
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
66.
When collection is made on Accounts Receivable, a. total assets will remain the same. b. stockholders equity will increase. c. total assets will increase. d. total assets will decrease.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
67.
A revenue generally a. increases assets and liabilities. b. increases assets and stockholders’ equity. c. increases assets and decreases stockholders’ equity. d. leaves total assets unchanged.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
68.
A paid dividend a. decreases assets and stockholders’ equity. b. increases assets and stockholders’ equity. c. increases assets and decreases stockholders’ equity. d. decreases assets and increases stockholders’ equity.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
69.
Receiving payment of a portion of an accounts receivable will a. not affect total assets. b. increase liabilities. c. increase stockholders’ equity. d. decrease net income.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
The Accounting Information System
70.
3-13
An expense a. decreases assets and liabilities. b. decreases stockholders’ equity. c. leaves stockholders’ equity unchanged. d. is basically the same as a liability.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
71.
Which of the following items has no effect on retained earnings? a. Expense b. Dividends c. Land purchase d. Revenue
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
72.
If a company buys a $700 machine on credit, this transaction will affect the a. income statement and retained earnings statement only. b. income statement only. c. income statement, retained earnings statement, and balance sheet. d. balance sheet only.
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
73.
A payment of a portion of an accounts payable will a. not affect total assets. b. increase liabilities. c. not affect stockholders’ equity. d. decrease net income.
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
74.
Powers Corporation received a cash advance of $500 from a customer. As a result of this event, a. assets increased by $500. b. equity increased by $500. c. liabilities decreased by $500. d. Both assets and equity increased by $500.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
75.
Courtney Company purchased equipment for $1,800 cash. As a result of this event, a. equity decreased by $1,800. b. assets increased by $1,800. c. total assets remained unchanged. d. Both assets and equity decreased by $1,800.
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
3-14 76.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Comstock Company provided consulting services and billed the client $2,500. As a result of this event a. assets remained unchanged. b. assets increased by $2,500. c. equity increased by $2,500 d. Both assets and equity increased by $2,500.
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
77.
Budke Corporation paid dividends of $5,000. As a result of this event, the a. Dividends account was increased by $5,000. b. Dividends account was decreased by $5,000. c. Cash account was increased by $5,000. d. Cash was increased and the Dividends account was decreased by $5,000.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
78.
If a company pays dividends of $10,000, a. stockholders' equity will be reduced by $10,000. b. net income will be reduced by $10,000. c. retained earnings will be reduced by $10,000. d. Both retained earnings and stockholders' equity will be reduced by $10,000.
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
79.
If a company issues common stock for $40,000 and uses $30,000 of the cash to purchase a truck, a. assets will be increased by $10,000. b. equity will be reduced by $40,000. c. assets will be increased by $40,000. d. assets will be unchanged.
Ans: C, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
80.
Are advanced receipts from customers treated as revenue at the time of receipt? Why or why not? a. Yes, they are treated as revenue at the time of receipt because the company has access to the cash. b. No, the amount of revenue cannot be adequately determined until the company completes the work. c. Yes, The intent of the company is to perform the work and the customer is confident that the services will be completed. d. No, revenue cannot be recognized until the work is performed.
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
81.
The receipt of cash in advance from a customer a. increases assets and stockholders' equity. b. increases assets and decreases stockholders' equity. c. increases assets and liabilities. d. none of these answer choices are correct.
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
The Accounting Information System
82.
3-15
On March 1, 2017, Freeze Company hires a new employee who will start to work on March 6. The employee will be paid on the last day of each month. Should a journal entry be made on March 6? Why or why not? a. Yes, the company is now obligated to pay the employee, thus that event must be recorded. b. No, hiring an employee is an important event; however it is not an economic event that should be recorded. c. Yes, failure to record the event would cause the financial statements to be misleading. d. No, the financial position of the company has been changed, however, the dollar amount of the transaction is not yet known.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
83.
Howard Company had a transaction that caused a $5,000 increase in both assets and total liabilities. This transaction could have been a(n) a. purchase of office equipment for $12,000, paying $7,000 cash and issuing a note payable for the balance. b. investment of $5,000 cash in the business by the stockholders. c. purchase of office equipment for $5,000 cash. d. repayment of a $5,000 bank loan.
Ans: A, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
84.
Jamal Company began the year with $126,000 in its Common Stock account and a debit balance in Retained Earnings of $54,000. During the year, the company earned net income of $27,000 and declared and paid $9,000 of dividends. In addition, the company sold additional common stock amounting to $33,000. Based on this information, what should the transaction analysis show for the ending total of all stockholders' equity accounts? a. $231,000 b. $249,000 c. $123,000 d. $165,000
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $126,000 + $54,000 + $27,000 − $9,000 + $33,000 = $123,000 (Beg. Com. St. − Beg. Ret. Earn. + Net inc. − Div. + com. st. sold)
85.
Crawford Company started the year with $60,000 in its Common Stock account and a credit balance in Retained Earnings of $44,000. During the year, the company earned net income of $48,000 and declared and paid $20,000 of dividends. In addition, the company sold additional common stock amounting to $28,000. As a result, the amount of its retained earnings at the end of the year would be a. $160,000. b. $72,000. c. $132,000. d. $100,000.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $44,000 + $48,000 − $20,000 = $72,000 (Beg. Ret. Earn. + Net inc. − Div.)
.
3-16 86.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
All of the following are characteristics of every accounting information system except it is a system a. that collects transaction data. b. that processes transaction data. c. that communicates financial information to decision makers. d. of data storage hardware for the chart of accounts.
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Leverage Technology, AICPA FC: Leverage Technology, AICPA PC: None, IMA: Business Applications
87.
The left side of an account is a. blank. b. a description of the account. c. the debit side. d. the balance of the account.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
88.
Which one of the following is not a part of an account? a. Credit side b. Trial balance c. Debit side d. Title
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
89.
An account is a part of the financial information system and is described by each one of the following except a. an account has a debit and credit side. b. an account is a source document. c. an account consists of three parts. d. an account has a title.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
90.
The right side of an account a. is the correct side. b. reflects all transactions for the accounting period. c. shows all the balances of the accounts in the system. d. is the credit side.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
91.
An account consists of a. a title, a debit balance, and a credit balance. b. a title, a left side, and a debit balance. c. a title, a debit side, and a credit side. d. a title, a right side, and a debit balance.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
The Accounting Information System
92.
3-17
A T-account is a. a way of depicting the basic form of an account. b. a special account used instead of a journal. c. a special account used instead of a trial balance. d. used for accounts that have both a debit and credit balance.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
93.
Which statement about an account is true? a. In its simplest form, an account consists of two parts. b. An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders’ equity items. c. There are separate account for specific assets and liabilities but only one account for stockholders’ equity items. d. The left side of an account is the credit or decrease side.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
94.
In its simplest form, an account consists of all of the following except a. right (credit) side. b. account title. c. left side. d. explanation column.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
95.
A debit to an asset account indicates a(n) a. error. b. credit was made to a liability account. c. decrease in the asset. d. increase in the asset.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
96.
Debits a. increase both assets and liabilities. b. decrease both assets and liabilities. c. increase assets and decrease liabilities. d. decrease assets and increase liabilities.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
97.
The normal balance of any account is the a. left side. b. right side. c. side which increases that account. d. side which decreases that account.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
3-18 98.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The double-entry system requires that each transaction must be recorded a. in at least two different accounts. b. in two sets of books. c. in a journal and in a ledger. d. first as a revenue and then as an expense.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
99.
A credit is not the normal balance for which account listed below? a. Common Stock account b. Revenue account c. Liability account d. Dividends account
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
100.
The classification and normal balance of the Dividends account is a. revenue with a credit balance. b. an expense with a debit balance. c. a liability with a credit balance. d. stockholders’ equity with a debit balance.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
101.
Which of the following describes the classification and normal balance of the Retained Earnings account? a. Asset, debit b. Stockholders’ equity, credit c. Revenues, credit d. Expense, debit
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
102.
Which of the following describes the classification and normal balance of the Unearned Rent Revenue account? a. Asset, debit b. Liability, credit c. Revenues, credit d. Expense, debit
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
103.
A revenue account a. is increased by debits. b. is decreased by credits. c. has a normal balance of a debit. d. is increased by credits.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
The Accounting Information System
104.
3-19
Which one of the following represents the expanded basic accounting equation? a. Assets = Liabilities + Common Stock + Dividends – Revenue – Expenses b. Assets + Dividends + Expenses = Liabilities + Common Stock + Revenues c. Assets – Liabilities – Dividends = Common Stock + Revenues – Expenses d. Assets = Revenues + Expenses – Liabilities
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
105.
Which of the following correctly identifies normal balances of accounts? a. Assets Debit Liabilities Credit Common Stock Credit Revenues Debit Expenses Credit b. Assets Liabilities Common Stock Revenues Expenses
Debit Credit Credit Credit Credit
c. Assets Liabilities Common Stock Revenues Expenses
Credit Debit Debit Credit Debit
d. Assets Liabilities Common Stock Revenues Expenses
Debit Credit Credit Credit Debit
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
106.
Which accounts normally have debit balances? a. Assets, expenses, and revenues b. Assets, expense, and retained earnings c. Assets, liabilities, and dividends d. Assets, expenses, and dividends
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
107.
Which accounts normally have credit balances? a. Revenues, liabilities, and dividends b. Revenues, liabilities, and assets c. Revenues, liabilities, and retained earnings d. Revenues, liabilities, and expenses
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
3-20 108.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The best interpretation of the word “credit” is the a. offset side of an account. b. increase side of an account. c. right side of an account. d. decrease side of an account.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
109.
In recording an accounting transaction in a double-entry system a. the number of debit accounts must equal the number of credit accounts. b. there must always be entries made on both sides of the accounting equation. c. the amount of the debits must equal the amount of the credits. d. there must only be two accounts affected by any transaction.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
110.
A debit is not the normal balance for which account listed below? a. Dividends b. Cash c. Accounts Receivable d. Service Revenue
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
111.
An accountant has debited an asset account for $1,000 and credited a liability account for $500. What can be done to complete the recording of the transaction? a. Nothing further must be done. b. Debit a stockholders’ equity account for $500. c. Debit another asset account for $500. d. Credit a different asset account for $500.
Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
112.
An accountant has debited an asset account for $800 and credited a liability account for $700. Which of the following would be an incorrect way to complete the recording of the transaction? a. Credit an asset account for $100. b. Credit another liability account for $100. c. Credit a stockholders’ equity account for $100. d. Debit a stockholders’ equity account for $100.
Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
113.
An accountant has debited an asset account for $900 and credited a liability account for $600. What can be done to complete the recording of the transaction? a Debit a stockholders’ equity account for $300. b. Debit another asset account for $300. c. Credit a different asset account for $300. d. Nothing further must be done.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
The Accounting Information System
114.
3-21
Which of the following accounts is increased with a debit? a. Dividends b. Service Revenue c. Interest Payable d. Common Stock
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
115.
Which of the following accounts is increased with a credit? a. Supplies Expense b. Supplies c. Sales Revenue d. Dividends
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
116.
Which pair of accounts follows the rules of debit and credit in relation to increases and decreases in the same manner? a. Dividends Payable and Rent Expense b. Utilities Expense and Notes Payable c. Prepaid Insurance and Advertising Expense d. Service Revenue and Equipment
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
117.
Which of the following accounts follows the rules of debit and credit in relation to increases and decreases in the opposite manner? a. Prepaid Insurance and Dividends b. Dividends and Interest Revenue c. Interest Payable and Common Stock d. Advertising Expense and Land
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
118.
Which of the following is not true of the terms debit and credit? a. They can be abbreviated as Dr. and Cr. b. They can be interpreted to mean increase and decrease. c. They can be used to describe the balance of an account. d. They can be interpreted to mean left and right.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
119.
An account will have a credit balance if the a. credits exceed the debits. b. first transaction entered was a credit. c. debits exceed the credits. d. last transaction entered was a credit.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
3-22
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
120.
For the basic accounting equation to stay in balance, each transaction recorded must a. affect two or less accounts. b. affect two or more accounts. c. always affect exactly two accounts. d. affect the same number of asset and liability accounts.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
121.
Which of the following statements is true? a. Debits increase assets and increase liabilities. b. Credits decrease assets and decrease liabilities. c. Credits decrease assets and increase liabilities. d. Debits increase liabilities and decrease assets.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
122.
Which pair of the listed accounts follows the rules of debits and credits in relation to increases and decreases in the same manner? a. Salaries and Wages Expense and Notes Payable b. Common Stock and Rent Expense c. Prepaid Rent and Advertising Expense d. Service Revenue and Equipment
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
123.
Which pair of the listed accounts follows the rules of debits and credits in relation to increases and decreases in the opposite manner? a. Salaries and Wages Expense and Notes Payable b. Common Stock and Unearned Rent Revenue c. Prepaid Rent and Advertising Expense d. Service Revenue and Notes Payable
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
124.
A company that receives money in advance of performing a service a. debits Cash and credits Unearned Service Revenue. b. debits Unearned Service Revenue and credits Accounts Payable c. debits Cash and credits Prepaid Insurance. d. debits Cash and credits Accounts Receivable.
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
125.
When a company performs a service but has not yet received payment, it a. debits Service Revenue and credits Accounts Receivable. b. debits Accounts Receivable and credits Service Revenue. c. debits Service Revenue and credits Accounts Payable. d. makes no entry until cash is received.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
The Accounting Information System
126.
3-23
Assets normally show a. credit balances. b. debit balances. c. debit and credit balances. d. debit or credit balances.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
127.
An awareness of the normal balances of accounts would help you spot which of the following as an error in recording? a. A debit balance in the Dividends account b. A credit balance in an expense account c. A credit balance in a liabilities account d. A credit balance in a revenue account
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
128.
If a company has overdrawn its bank balance, then a. its Cash account will show a debit balance. b. its Cash account will show a credit balance. c. the Cash account debits will exceed the cash account credits. d. it cannot be detected by observing the balance of the Cash account.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
129.
Which account below is not a subdivision of stockholders’ equity? a. Dividends b. Revenues c. Expenses d. Liabilities
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
130.
When a corporation distributes a dividend the a. most common form of distribution is a cash dividend. b. Dividends account will be increased with a credit. c. Retained Earnings account will be directly increased with a debit. d. Dividends account will be decreased with a debit.
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
131.
The Dividends account a. appears on the income statement along with the expenses of the business. b. must show transactions every accounting period. c. is increased with debits and decreased with credits. d. is not a proper subdivision of stockholders’ equity.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
3-24 132.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
A revenue account a. is increased with a debit. b. is decreased with a credit. c. is increased with a credit. d. has a normal balance of a debit.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
133.
Which of the following statements is not true? a. Expenses increase stockholders’ equity. b. Expenses have normal debit balances. c. Expenses decrease stockholders’ equity. d. Expenses are a negative factor in the computation of net income.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
134.
A credit to a liability account a. indicates an increase in the amount owed to creditors. b. indicates a decrease in the amount owed to creditors. c. is an error. d. must be accompanied by a debit to an asset account.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
135.
In the first month of operations, the total of the debit entries to the Cash account amounted to $7,000 and the total of the credit entries to the Cash account amounted to $4,000. The Cash account has a a. $4,000 credit balance. b. $7,000 debit balance. c. $3,000 debit balance. d. $3,000 credit balance.
Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $7,000 dr. − $4,000 cr. = $3,000 dr. (Cash debits − Cash credits)
136.
In the first month of operations, the total of the debit entries to the Cash account amounted to $2,000 and the total of the credit entries to the Cash account amounted to $1,500. The Cash account has a a. $1,500 credit balance. b. $500 debit balance. c. $2,000 debit balance. d. $500 credit balance.
Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $2,000 dr. − $1,500 cr. = $500 dr. (Cash debits − Cash credits)
.
The Accounting Information System
137.
3-25
In the first month of operations, the total of the debit entries to the Cash account amounted to $3,000 and the total of the credit entries to the Cash account amounted to $1,800. The Cash account has a a. $1,800 credit balance. b. $3,000 debit balance. c. $1,200 debit balance. d. $1,800 credit balance.
Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $3,000 dr. − $1,800 cr. = $1,200 dr. (Cash debits − Cash credits)
138.
The Cash account has a credit balance. Which statement is true? a. This is the normal balance for cash. b. An error has occurred and must be corrected before financial statements can be prepared. c. The account needs to be analyzed to determine the reason for the credit balance. d. Debit postings exceed the credit postings for the accounting period.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
139.
Which statement is incorrect? a. Dividends represent a distribution by a corporation to its stockholders. b. Dividends are shown on the income statement. c. Dividends reduce stockholders’ equity, thus the Dividends account increases on the left side. d. The Dividends account has a normal debit balance.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
140.
Why are expenses increased with a debit? a. They are always paid by cash, which is credited. Thus expenses are debited. b. They decrease stockholders’ equity thus they are increased with a debit. c. They have the same rules of debits and credits as the retained earnings account. d. None of the statements are correct.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
141.
Barnes Company showed the following balances at the end of its first year: Cash $14,000 Prepaid insurance 700 Accounts receivable 3,500 Accounts payable 2,800 Notes payable 4,200 Common stock 5,400 Dividends 700 Revenues 29,000 Expenses 17,500
.
3-26
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
MC. 141 (cont.) What amount did Barnes Company show as total credits? a. $42,100 b. $41,400 c. $40,700 d. $42,800 Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $2,800 + $4,200 + $5,400 + $29,000 = $41,400 (Acc. pay. + Not. pay. + Com. st. + Rev.)
142.
Winrow Company showed the following balances at the end of its first year: Cash $11,000 Prepaid insurance 500 Accounts receivable 2,500 Accounts payable 2,000 Notes payable 3,000 Common stock 5,000 Dividends 500 Revenues 22,000 Expenses 12,500 What amount did Winrow Company show as total credits? a. $32,500 b. $32,000 c. $31,500 d. $33,000
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $2,000 + $3,000 + $5,000 + $22,000 = $32,000 (Acc. pay. + Not. pay. + Com. st. + Rev.)
143.
During January 2017, its first month of operation, Osborn Enterprises earned net income of $6,800 and paid dividends to the owners of $2,000. At January 31, the balance in Retained Earnings will be a. $0. b. $6,800 credit. c. $4,800 credit. d. $2,000 debit.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $6,800 − $2,000 = $4,800 (Net Inc − div.)
144.
On June 1, 2017, England Inc. reported a cash balance of $42,000. During June, England made deposits of $16,000 and made disbursements totaling $48,000. What is the cash balance at the end of June? a. $10,000 credit balance b. $58,000 debit balance c. $10,000 debit balance d. $6,000 credit balance
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $42,000 + $16,000 − $48,000 = $10,000 debit (Beg. cash + dep. − disb.)
.
The Accounting Information System
145.
3-27
At January 1, 2017, Troyer Industries reported Retained Earnings of $350,000. During 2017, Troyer had a net loss of $75,000 and paid dividends to the stockholders of $50,000. At December 31, 2017, the balance in Retained Earnings is a. $350,000 debit. b. $300,000 credit. c. $275,000 debit. d. $225,000 credit.
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $350,000 − $75,000 − $50,000 = $225,000 (Beg. Ret. Earn. − Net loss − div.)
146.
During January 2017, Carey Services Inc. paid a cash dividends of $2,000. This transaction a. reduces stockholders' equity by $2,000. b. increases stockholders' equity by $2,000. c. reduces net income by $2,000. d. increases expenses by $2,000.
Ans: A, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
147.
During February 2017, its first month of operations, the owner of Schwenn Enterprises invested cash of $100,000. Schwenn had cash sales of $20,000 and paid expenses of $35,000. Assuming no other transactions impacted the cash account, what is the balance in Cash at February 28? a. $15,000 credit b. $85,000 debit c. $120,000 debit d. $65,000 credit
Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $100,000 + $20,000 − $35,000 = $85,000 (Beg. cash + sales − exp.)
148.
At September 1, 2017, Kern Enterprises reported a cash balance of $140,000. During the month, Kern collected cash of $60,000 and made disbursements of $100,000. At September 30, 2017, the cash balance is a. $40,000 credit. b. $100,000 credit. c. $200,000 debit. d. $100,000 debit.
Ans: D, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $140,000 + $60,000 − $100,000 = $100,000 debit (Beg. cash.+ collect − disb.)
149.
All of the following statements regarding the double-entry system are true except a. a two-sided effect of each transaction is recorded in appropriate accounts when using the double-entry system. b. the double-entry system provides a logical method for recording transactions. c. both sides of the accounting equation must be affected when recording a transaction using the double-entry system. d. when using the double-entry system, the sum of all debits to the accounts must equal the sum of all credits.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None,
.
3-28
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition IMA: Business Applications
150.
Which of the following accounts has a normal debit balance? a. Accounts Payable b. Prepaid Rent c. Retained Earnings d. Common Stock
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
151.
Which of the following accounts has a normal credit balance? a. Prepaid Rent b. Notes Receivable c. Rent Revenue d. Rent Expense
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
152.
During 2017, its first year of operations, Jane's Bakery had revenues of $130,000 and expenses of $66,000. The business paid cash dividends of $36,000. What is the balance in Retained Earnings at December 31, 2017? a. $0 b. $36,000 debit c. $28,000 credit d. $64,000 credit
Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($130,000 – $66,000) − $36,000 = $28,000 (Rev. − exp. − div.)
153.
At February 1, 2017, the balance in Goebel Inc.'s supplies account was $3,500. During February. Goebel purchased supplies of $3,000 and used supplies of $4,000. At the end of February, the balance in the Supplies account should be a. $3,500 debit. b. $4,500 credit. c. $10,500 debit. d. $2,500 debit.
Ans: D, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $3,500 + $3,000 − $4,000 = $2,500 (Beg. sup. + purch − sup. used)
154.
At December 1, 2017, Orear Company's Accounts Receivable balance was $16,800. During December, Orear had credit sales of $45,000 and collected accounts receivable of $36,000. At December 31, 2017, the Accounts Receivable balance is a. $16,800 debit b. $25,800 debit c. $61,800 debit d. $25,800 credit
Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $16,800 + $45,000 − $36,000 = $25,800 debit (Beg. Acc. Rec. + sales − collect.)
.
The Accounting Information System
155.
3-29
At October 1, 2017, Metz Industries had an Accounts Payable balance of $140,000. During the month, the company made purchases on account of $100,000 and made payments on account of $160,000. At October 31, 2017, the Accounts Payable balance is a. $140,000 debit b. $20,000 credit c. $80,000 credit d. $160,000 credit
Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $140,000 + $100,000 − $160,000 = $80,000 (Beg. Acc. Pay. + purch. − pay.)
156.
At September 1, 2017, Baxter Inc. reported Retained Earnings of $423,000. During the month, Baxter generated revenues of $60,000, incurred expenses of $36,000, purchased equipment for $15,000 and paid dividends of $6,000. What is the balance in Retained Earnings at September 30, 2017? a. $423,000 debit b. $24,000 credit c. $426,000 credit d. $441,000 credit
Ans: D, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $423,000 + ($60,000 − $36,000) − $6,000 = $441,000 [Beg. Ret. Earn. + (rev. − exp.)− div.]
157.
The usual sequence of steps in the transaction recording process is a. journalize, analyze, post to the ledger. b. analyze, journalize, post to the ledger. c. journalize, post to the ledger, analyze. d. post to the ledger, journalize, analyze.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Applications
158.
In recording accounting transactions, evidence that a transaction has taken place is obtained from a. source documents. b. the Internal Revenue Service. c. the public relations department. d. the Securities and Exchange Commission.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
159.
After a business transaction has been analyzed and entered in the journal, the next step in the recording process is to transfer the information to a. the company's bank. b. stockholders’ equity. c. ledger accounts. d. financial statements.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Applications
.
3-30 160.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The first step in the recording process is to a. prepare financial statements. b. analyze the transaction in terms of its effect on the accounts. c. post to a journal. d. prepare a trial balance.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Applications
161.
Which of the following is not part of the recording process? a. Analyzing transactions b. Preparing a trial balance c. Entering transactions in a journal d. Posting journal entries
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Applications
162.
Evidence that would not help with determining the effects of a transaction on the accounts would be a(n) a. cash register sales tape. b. bill. c. advertising brochure. d. check.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Applications
163.
After transaction information has been recorded in the journal, it is transferred to the a. trial balance. b. income statement. c. general journal. d. ledger.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Applications
164.
The usual sequence of steps in the recording process is to a. analyze each transaction, enter the transaction in the journal, and transfer the information to the ledger accounts. b. analyze each transaction, enter the transaction in the ledger, and transfer the information to the journal. c. analyze each transaction, enter the transaction in the book of accounts, and transfer the information to the journal. d. analyze each transaction, enter the transaction in the book of original entry, and transfer the information to the journal.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
165.
The final step in the recording process is to transfer the journal information to the a. trial balance. b. financial statements. c. ledger. d. file cabinets.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
The Accounting Information System
166.
3-31
The recording process occurs a. once a year. b. once a month. c. repeatedly during the accounting period. d. infrequently in a manual accounting system.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
167.
Which of the following is not an example of a source document that provides evidence of a transaction? a. A cancelled check b. A sales slip c. A trial balance d. A cash register tape
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
168.
All of the following are significant contributions that the journal makes to the recording process except the journal a. discloses the complete effect of a transaction in one place. b. helps prevent or locate errors because debits and credits can be readily compared. c. keeps complete information about changes in a specific account balance in one place. d. provides a chronological record of transactions.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
169.
A journal provides a. the balances for each account. b. information about a transaction in several different places. c. a list of all accounts used in the business. d. a chronological record of transactions.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
170.
The basic format of a journal would not include a(n) a. brief explanation. b. account title column. c. T-account. d. date column.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
171.
Transactions in a journal are initially recorded in a. account number order. b. dollar amount order. c. alphabetical order. d. chronological order.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
3-32 172.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
A journal is not useful for a. disclosing in one place the complete effect of a transaction. b. preparing financial statements. c. providing a record of transactions. d. locating and preventing errors.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
173.
A complete journal entry does not show a. the date of the transaction. b. the new balance in the accounts affected by the transaction. c. a brief explanation of the transaction. d. the accounts and amounts to be debited and credited.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
174.
The name given to entering transaction data in the journal is a. chronicling. b. listing. c. posting. d. journalizing.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
175.
The basic form of a journal entry has the a. debit account entered first and indented. b. credit account entered first and indented. c. debit account entered first at the extreme left margin. d. credit account entered first at the extreme left margin.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
176.
Which of the following journal entries is recorded correctly and in the basic format? a. Salaries and Wages Expense 550 Cash 1,500 Advertising Expense 950 b. Salaries and Wages Expense Advertising Expense Cash c. Cash
550 950 1,600 1,500
Salaries and Wages Expense Advertising Expense d. Salaries and Wages Expense Advertising Expense Cash
550 950 550 950 1,500
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
The Accounting Information System
177.
3-33
When a company has performed a service but has not yet received payment, it a. debits accounts receivable and credits service revenue. b. debits revenue from services and credits accounts receivable. c. debits revenue from services and credits accounts payable. d. makes no entry until the cash is received.
Ans: A, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
178.
A company that receives money in advance of performing a service a. debits cash and credits prepaid services. b. debits unearned fees and credits accounts payable. c. debits cash and credits unearned service revenue. d. debits cash and credits accounts receivable.
Ans: C, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
179.
When a company receives a utility bill but will not pay it right away, it should a. debit Utilities Expense and credit Accounts Receivable. b. debit Utilities Expense and credit Accounts Payable. c. debit Accounts Payable and credit Utilities Expense. d. make no entry until the bill is paid.
Ans: B, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
180.
When a service has been performed, but no cash has been received, which of the following statements is true? a. No journal entry is made. b. The entry includes a debit to accounts payable. c. The entry includes a credit to unearned revenue. d. The entry includes a debit to accounts receivable.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
181.
Equipment costing $20,000 is purchased by paying $5,000 cash and signing a note payable for the remainder. The journal entry should include a a. credit to Notes Payable. b. debit to Cash. c. credit to Notes Receivable. d. credit to Equipment.
Ans: A, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
182.
Equipment costing $20,000 is purchased by paying $5,000 cash and signing a note payable for the remainder. The journal entry should include a a. debit to Notes Payable. b. credit to Cash. c. credit to Notes Receivable. d. credit to Equipment.
Ans: B, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
3-34 183.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
An accounting record that includes a list of accounts and their balances at a given time is called a a. trial balance. b. general journal. c. general ledger. d. chart of accounts.
Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
184.
Typically the chart of accounts begins with a. asset accounts. b. liability accounts. c. revenue accounts. d. expense accounts.
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
185.
The purpose of the ledger is to a. record chronologically the day’s transactions. b. keep a record of documentation to support each transaction. c. keep in one place all information about changes in specific account balances. d. make sure that all assets, liabilities, etc., have normal balances at all times.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
186.
Which of the following accounts probably would be listed before the others in a chart of accounts? a. Accumulated Depreciation—Buildings b. Insurance Expense c. Dividends d. Notes Payable
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
187.
Which of the following accounts probably would be listed after the others in a chart of accounts? a. Accumulated Depreciation—Buildings b. Insurance Expense c. Dividends d. Notes Payable
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
188.
The Unearned Service Revenue account is classified as a(n) a. asset. b. revenue. c. expense. d. liability.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
The Accounting Information System
189.
3-35
A ledger a. contains only asset and liability accounts. b. is a collection of the entire group of accounts maintained by a company. c. provides a chronological record of transactions. d. should show accounts in alphabetical order.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
190.
Which of the following is an asset? a. Service Revenue b. Notes Payable c. Supplies Expense d. Prepaid Rent
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
191.
A person who wants to determine the balance of a particular account should refer to the a. ledger. b. source document. c. chart of accounts. d. journal.
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
192.
A journal a. contains only asset and liability accounts. b. is a collection of the entire group of accounts maintained by a company. c. provides a chronological record of transactions. d. should show accounts in alphabetical order.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
193.
The usual ordering of accounts in the general ledger is a. assets, liabilities, stockholders’ equity, revenues, and expenses. b. assets, liabilities, stockholders’ equity, expenses, and revenues. c. liabilities, assets, stockholders’ equity, revenues, and expenses. d. stockholders’ equity, assets, liabilities, expenses, and revenues.
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
194.
Management could determine the amounts due from customers by examining which ledger account? a. Service Revenue b. Accounts Payable c. Accounts Receivable d. Supplies
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
3-36 195.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The ledger accounts are typically arranged in a. chronological order. b. alphabetical order. c. financial statement order. d. order of appearance in the journal.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
196.
Which statement is incorrect? a. A chart of accounts is a listing of accounts used by a business. b. New accounts can be added to the chart of accounts. c. Stockholders’ Equity is an account that is included in the chart of accounts. d. Account titles for the chart of accounts are used in general journal entries.
Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
197.
The procedure of transferring journal entries to the ledger accounts is called a. journalizing. b. analyzing. c. reporting. d. posting.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
198.
A chart of accounts for a business firm a. is a graph. b. indicates the amount of profit or loss for the period. c. lists the accounts in the ledger. d. shows the balance of each account in the general ledger.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
199.
Posting a. should be performed in account number order. b. accumulates the effects of journalized transactions in the individual accounts. c. involves transferring all debits and credits on a journal page to the trial balance. d. is accomplished by examining ledger accounts and seeing which ones need updating.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
200.
The principal purpose of posting is to a. help identify errors made in the journal. b. accumulate the effects of journalized transactions in the individual accounts. c. enter transactions directly into the ledger. d. help determine if the financial statements are ready to be prepared.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
201.
Posting is performed by transferring information from the a. source documents to the journal. b. ledger to the journal. c. source documents to the ledger. d. journal to the ledger.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
The Accounting Information System
202.
3-37
Posting a. transfers journal entries to ledger accounts. b. transfers ledger transaction data to the journal. c. involves transferring all debits and credits on a journal page to the trial balance. d. provides a chronological record of transactions.
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
203.
Posting a. transfers ledger transaction data to the journal. b. normally occurs before journalizing. c. accumulates the effects of journalized transactions in the individual accounts. d. enters transaction data in the journal.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
204.
A list of accounts and their balances at a given time is called a(n) a. journal. b. posting. c. trial balance. d. income statement.
Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
205.
On January 14, Decker industries purchased supplies of $500 on account. The entry to record the purchase will include a. a debit to Supplies and a credit to Accounts Payable. b. a debit to Supplies Expense and a credit to Accounts Receivable. c. a debit to Supplies and a credit to Cash. d. a debit to Accounts Receivable and a credit to Supplies.
Ans: A, LO: 4, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
206.
On July 7, 2017, Shireman Enterprises received cash $1,400 for services rendered. The entry to record this transaction will include a. a debit to Service Revenue of $1,400. b. a credit to Accounts Receivable of $1,400. c. a debit to Cash of $1,400. d. a credit to Accounts Payable of $1,400.
Ans: C, LO: 4, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
207.
The primary purpose of the trial balance is to a. disclose the complete effect of a transaction in one place. b. make sure a journal entry is not posted twice. c. transfer journal entries to the ledger accounts. d. prove the equality of the debit and credit amounts after posting.
Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
3-38 208.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The accountant for Mega Stores, Inc. should have recorded the following correct entry: Jan. 15 Notes Receivable 243 Equipment 243 Instead, he misunderstood the transaction and recorded an incorrect entry. Which of the following wrong entries pertaining to this transaction could have been detected as erroneous when using a trial balance? a. Jan 15 Notes Payable 243 Cash 243 b. Jan 15 Notes Receivable 234 Equipment 234 c. Jan 15 Equipment 243 Notes Receivable 243 d. Jan 15 Notes Receivable 243 Equipment 234
Ans: D, LO: 5, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
209.
If the sum of the debit column equals the sum of the credit column in a trial balance, it indicates a. no errors have been made. b. no errors can be discovered. c. that all accounts reflect correct balances. d. the mathematical equality of the accounting equation.
Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
210.
A trial balance is a listing of a. transactions in a journal. b. the chart of accounts. c. general ledger accounts and balances. d. the totals from the journal pages.
Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
211.
Customarily, a trial balance is prepared a. at the end of each day. b. after each journal entry is posted. c. at the end of an accounting period. d. only at the inception of the business.
Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
212.
A trial balance would only help in detecting which one of the following errors? a. A transaction that is not journalized b. A journal entry that is posted twice c. Offsetting errors made in recording the transaction d. A transposition error when transferring the debit side of journal entry to the ledger
Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
The Accounting Information System
213.
3-39
A trial balance proves a. the mathematical equality of debits and credits after the posting process. b. the ledger is posted correctly. c. that all transactions have been recorded correctly. d. that all transactions have been posted.
Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
214.
A trial balance a. is a list of accounts with their balances at a given point in time. b. will not balance if a correct journal entry is posted twice. c. will tell you if a transaction is not posted at all. d. proves the factual accuracy of journalized transactions.
Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
215.
A trial balance will not balance if a. a correcting journal entry is posted twice. b. a $50 cash dividend is debited to dividends for $500 and credited to cash for $50. c. a $300 payment on accounts payable is debited to accounts payable for $30 and credited to cash for $30. d. a transaction is not posted at all.
Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
216.
Which of the following errors, each considered individually, would cause the trial balance to be out of balance? a. A payment of $148 to a creditor was posted as a debit to Accounts Payable and a debit of $148 to Cash. b. Cash of $530 received from a customer on account was posted as a debit of $350 to Cash and as a credit of $350 to Accounts Payable. c. A payment of $59 for supplies was posted as a debit of $95 to Supplies and a credit of $95 to Cash. d. A transaction was not posted.
Ans: A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
217.
Borrowing money and issuing shares of stock are a. operating activities. b. investing activities. c. financing activities. d. None of these answer choices are correct.
Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
218.
The purchase or sale of long-lived assets used in operating the business is a. an operating activity. b. an investing activity. c. a financing activity. d. None of these answer choices are correct.
Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
3-40
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Answers to Multiple Choice Questions 55. b 56. a 57. c 58. c 59. a 60. d 61. a 62. d 63. b 64. d 65. c 66. a 67. b 68. a 69. a 70. b 71. c 72. d 73. c 74. a 75. c 76. d 77. a 78. d
79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102.
c d c b a c b d c b b d c a b d d c c a d d b b
103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126.
d b d d c c c d d d c a c c b b a b c c a a b b
127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150.
b b d a c c a a c b c c b b b b c c d a b d c b
151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174.
c c d b c d b a c b b c d a c c c c d c d b b d
175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. 194. 195. 196. 197. 198.
c d a c b d a b a a c a b d b d a c a c c c d c
199. 200. 201. 202. 203. 204. 205. 206. 207. 208. 209. 210. 211. 212. 213. 214. 215. 216. 217. 218.
b b d a c c a c d d d c c d a a b a c b
BRIEF EXERCISES Be. 219 Presented here are five economic events. For each item, indicate whether the event increased (+), decreased (–), or had no effect (NE) on assets, liabilities, and stockholders’ equity.
=
Liabilities ______
+
Stockholders’ Equity _______
1. Received cash for services rendered.
Assets ______
2. Purchased supplies on account.
______
______
_______
3. Paid employees' salaries.
______
______
_______
4. Dividends paid in cash. 5. Expenses paid in cash.
______ ______
______ ______
_______ _______
Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
The Accounting Information System
Solution 219
3-41
(5 min.)
1. Received cash for services rendered. 2. Purchased supplies on account. 3. Paid employees' salaries. 4. Dividends paid in cash. 5. Expenses paid in cash.
Assets + + – – –
=
Liabilities NE + NE NE NE
+
Stockholders’ Equity + NE – – –
Be. 220 At June 1, 2017, Massoth Industries had an Accounts Receivable balance of $18,000. During the month, the company had credit sales of $25,000 and collected Accounts Receivable of $27,000. What is the balance in Accounts Receivable at June 30, 2017? Ans: N/A, LO: 2, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 220 (5 min.) The balance at the end of the month is $16,000, calculated as follows: Beginning Accounts Receivable Add: Credit Sales Less: Collections Ending Accounts Receivable
$18,000 25,000 27,000 $16,000
Be. 221 For each item below, indicate whether a debit or credit applies. 1. Increase in Accounts Payable 2. Increase in Accounts Receivable 3. Increase in Retained Earnings 4. Decrease in Unearned Service Revenue 5. Decrease in Interest Payable
____ ____ ____ ____ ____
__ __ __ __ __
Ans: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 221 (5 min.) 1. Increase in Accounts Payable 2. Increase in Accounts Receivable 3. Increase in Retained Earnings 4. Decrease in Unearned Service Revenue 5. Decrease in Interest Payable
.
____Cr.__ ____Dr.__ ____Cr.__ ____Dr.__ ____Dr.__
3-42
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Be. 222 For each of the following accounts indicate the effect of a debit or a credit on the account and the normal balance. Increase (+), Decrease (–).
1. Salaries and Wages Expense.
Debit ______
_Credit_ ______
Normal Balance _______
2. Accounts Receivable.
______
______
_______
3. Service Revenue. 4. Dividends
______ ______
______ ______
_______ _______
5. Retained Earnings.
______
______
_______
Ans: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 222
(5 min.)
1. Salaries and Wages Expense.
Debit __+_ _
_Credit_ ___–__ _
Normal Balance __Dr___
2. Accounts Receivable
__+__
___–__
__Dr___
3. Service Revenue.
__–__
___+__
__Cr___
4. Dividends 5. Retained Earnings
__+__ __–_ _
___–__ ___+__
__Dr___ __Cr___
Be. 223 Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transaction. 1. 2. 3. 4. 5.
Owner invested $60,000 in exchange for common stock of the corporation. Hired an employee to be paid $400 per week, starting tomorrow. Paid two years’ rent in advance, $7,200. Paid the worker’s weekly wage. Recorded service revenue earned and received for the week, $1,500.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 223 (5 min.) 1. Cash ......................................................................................... Common Stock ................................................................
60,000 60,000
2.
No entry
3.
Prepaid Rent ............................................................................ Cash ................................................................................
7,200
Salaries and Wages Expense ................................................... Cash ................................................................................
400
Cash ......................................................................................... Service Revenue ..............................................................
1,500
4.
5.
.
7,200
400
1,500
The Accounting Information System
3-43
Be 224 Prepare a corrected trial balance for Shafer Company. All accounts should have a normal balance Shafer Company Trial Balance For the Quarter Ended March 31, 2017 Cash Accounts Receivable Prepaid Insurance Equipment Accounts Payable Unearned Service Revenue Notes Payable Common Stock Retained Earnings Dividends Service Revenue Salaries and Wages Expense Utilities Expense Rent Expense
Debit $28,000
Credit $32,000
2,500 60,000 15,000 10,000 20,000 30,000 27,000 1,500 52,000 15,000 5,000 10,000 $157,500
$150,500
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 224 (5 min.) Shafer Company Trial Balance For the Quarter Ended March 31, 2017 Debit Credit Cash $28,000 Accounts Receivable 32,000 Prepaid Insurance 2,500 Equipment 60,000 Accounts Payable $15,000 Unearned Service Revenue 10,000 Notes Payable 20,000 Common Stock 30,000 Retained Earnings 27,000 Dividends 1,500 Service Revenue 52,000 Salaries and Wages Expense 15,000 Utilities Expense 5,000 Rent Expense 10,000 $154,000 $154,000 (Acc. Rec. & Div. are debits; Un. Ser. Rev. & Ret. Earn. are credits) .
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Be. 225 For each of the following transactions of Woods Inc., identify the account to be debited and the account to be credited. 1. 2. 3. 4.
Purchased 18-month insurance policy for cash. Paid weekly payroll. Purchased supplies on account. Received utility bill to be paid at later date.
Ans: N/A, LO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 225 Transaction 1 2 3 4
(5 min.) Debit Prepaid Insurance Salaries and Wages Expense Supplies Utilities Expense
Credit Cash Cash Accounts Payable Accounts Payable
Be. 226 Identify the impact on the accounting equation of the following transactions. 1. 2. 3. 4.
Purchased 24-month insurance policy for cash. Purchased supplies on account. Received utility bill to be paid at later date. Paid utility bill previously accrued.
Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 226 (5 min.) 1. Net effect is no change: Increases assets and decreases assets. 2. Increases assets and increases liabilities. 3. Increases liabilities and decreases stockholders' equity. 4. Decreases assets and decreases liabilities. Be. 227 The transactions of the Stormont Store are recorded in the general journal below. You are to post the journal entries to T-accounts and compute the August 31, 2017 balances. General Journal ____________________________________________________________________________ Date Account Titles and Explanation Debit Credit ____________________________________________________________________________ 2017 Aug. 5 Accounts Receivable 2,500 Service Revenue 2,500 10 Cash 3,000 Service Revenue 3,000 19 Rent Expense 1,000 Cash 1,000 25 Cash 1,400 Accounts Receivable 1,400 .
The Accounting Information System
Be. 227
3-45
(Cont.) General Ledger Cash
Accounts Receivable
Service Revenue
Rent Expense
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 227
(5 min.) General Ledger Cash
8/10 8/25
3,000 1,400
8/31 Bal.
3,400
Accounts Receivable 8/19
1,000
8/5
2,500
8/31 Bal.
1,100
Service Revenue
8/25
1,400
Rent Expense
8/5 8/10 8/31 Bal.
2,500 3,000 5,500
8/19
1,000
8/31 Bal.
1,000
Be. 228 Prepare a trial balance from the ledger accounts of Swisher Company as of January 31, 2017. Accounts Payable Accounts Receivable Cash Common Stock Dividends
1,500 2,500 1,600 2,200 1,400
Rent Expense Service Revenue Supplies Salaries and Wages Expense
$ 500 3,500 200 1,000
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
3-46
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 228
(5 min.) Swisher Company Trial Balance January 31, 2017 Debit Cash Accounts Receivable Supplies Accounts Payable Common Stock Dividends Service Revenue Rent Expense Salaries and Wages Expense
Credit
$1,600 2,500 200 $1,500 2,200 1,400 3,500 500 1,000 $7,200
$7,200
(All accounts are debits except Acc. Pay., Com. St., & Ser. Rev.)
Exercises Ex. 229 Selected transactions for the Sleezer Company are listed below. List the number of the transaction and then describe the effect of each transaction on assets, liabilities, and stockholders’ equity. Sample: Made initial cash investment in the business. The answer would be—Increase in assets and increase in stockholders’ equity. 1. 2. 3. 4. 5. 6. 7. 8. 9.
Paid monthly utility bill. Purchased new display case for cash. Paid cash for repair work on security system. Billed customers for services performed. Received cash from customers billed in transaction 4. Dividends paid to owners. Incurred advertising expenses on account. Paid monthly rent. Received cash from customers when service was rendered.
Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 229 (10 min.) 1. Decrease in assets and decrease in stockholders’ equity. 2. No net change in assets. 3. Decrease in assets and decrease in stockholders’ equity. 4. Increase in assets and increase in stockholders’ equity. 5. No net change in assets. 6. Decrease in assets and decrease in stockholders’ equity. 7. Increase in liabilities and decrease in stockholders’ equity. 8. Decrease in assets and decrease in stockholders’ equity. 9. Increase in assets and increase in stockholders’ equity. .
The Accounting Information System
3-47
Ex. 230 Selected accounts from the ledger of McDaniel Corporation appear below. For each account, indicate the following: (a) In the first column at the right, indicate the nature of each account, using the following abbreviations: Asset - A Expense - E
Liability - L Revenues - R
None of the above - N
(b) In the second column, indicate the normal balance by inserting Dr. or Cr. Type of Account
Normal Balance
1. Supplies ……………………………….. 2. Notes Payable …………………………. 3. Service Revenue………………………. 4. Dividends………………………………. 5. Accounts Payable…………………….. 6. Salaries and Wages Expense………… 7. Common Stock………………………… 8. Accounts Receivable………………….. 9. Equipment…………………………….. 10. Notes Receivable……………………… Ans: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Solution 230
(5 min.)
1. Supplies ………………………………. 2. Note Payable …………………………. 3. Service Revenue………………………. 4. Dividends………………………………. 5. Accounts Payable…………………….. 6. Salaries and Wages Expense………… 7. Common Stock………………………… 8. Accounts Receivable………………….. 9. Equipment…………………………….. 10. Notes Receivable………………………
.
Type of Account A L R N L E N A A A
Normal Balance Dr. Cr. Cr. Dr. Cr. Dr. Cr. Dr. Dr. Dr.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 231 Analyze the transactions of a business organized as a corporation described below and indicate their effect on the basic accounting equation. Use a plus sign (+) to indicate an increase and a minus sign (–) to indicate a decrease. Stockholders’ Assets = Liabilities + Equity 1. Received cash for services rendered. ______ ______ _______ 2. Purchased office equipment on credit. ______ ______ _______ 3. Paid employees' salaries. 4. Received cash from customer in payment on account.
______
______
_______
______
______
_______
5. Paid telephone bill for the month.
______
______
_______
6. Paid for office equipment purchased in transaction 2.
______
______
_______
7. Purchased office supplies on credit.
______
______
_______
8. Dividends were paid. 9. Obtained a loan from the bank.
______ ______
______ ______
_______ _______
10. Billed customers for services rendered.
______
______
_______
Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 231
(10 min.)
1. Received cash for services rendered. 2. Purchased office equipment on credit. 3. Paid employees' salaries. 4. Received cash from customer in payment on account. 5. Paid telephone bill for the month. 6. Paid for office equipment purchased in transaction 2. 7. Purchased office supplies on credit. 8. Dividends were paid. 9. Obtained a loan from the bank. 10. Billed customers for services rendered.
.
Assets + + –
=
Liabilities
Stockholders’ Equity +
+ –
+,– – – + – + +
+
– – + – + +
The Accounting Information System
3-49
Ex. 232 Sara Obermeyer decides to open a pizza parlor near the local college campus that will operate as a corporation. Analyze the following transactions for the month of June in terms of their effect on the basic accounting equation. Record each transaction by increasing (+) or decreasing (–) the dollar amount of each item affected. Indicate the new balance of each item after a transaction is recorded. It is not necessary to identify the cause of changes in stockholders’ equity. Transactions (1) Sara Obermeyer invests $25,000 cash in exchange for common stock to start a pizza parlor business on June 1. (2) Purchased equipment for $4,000 paying $2,000 in cash and the remainder due in 30 days. (3) Purchased supplies for $1,200 cash. (4) Received a bill from Campus News for $200 for advertising in the campus newspaper. (5) Cash receipts from customers for pizza sales amounted to $1,500. (6) Paid salaries of $200 to student workers. (7) Billed the Tiger Football Team $300 for pizzas ordered. (8) Paid $200 to Campus News for advertising that was previously billed in Transaction 4. (9) Sara Obermeyer was paid dividends of $1,200. (10) Incurred utility expenses for month on account, $100. TransAccounts Accounts Common Retained action Cash + Receivable + Supplies + Equipment = Payable + Stock + Earnings (1) ___________________________________________________________________________________ Balance (2) ___________________________________________________________________________________ Balance (3) ___________________________________________________________________________________ Balance (4) ___________________________________________________________________________________ Balance (5) ___________________________________________________________________________________ Balance (6) ___________________________________________________________________________________ Balance (7) ___________________________________________________________________________________ Balance (8) ___________________________________________________________________________________ Balance (9) ___________________________________________________________________________________ Balance (10) ___________________________________________________________________________________ Totals Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
3-50
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 232 (20 min.) Transaction
Accounts Accounts Common Cash + Receivable + Supplies + Equipment = Payable + Stock +
Retained Earnings
(1) +$25,000 +$25,000 ___________________________________________________________________________________ Balance $25,000 $25,000 (2) – 2,000 +$4,000 +$2,000 ___________________________________________________________________________________ Balance $23,000 $4,000 $2,000 $25,000 (3) – 1,200 +$1,200 ___________________________________________________________________________________ Balance $21,800 $1,200 $4,000 $2,000 $25,000 (4) + 200 -$ 200 ___________________________________________________________________________________ Balance $21,800 $1,200 $4,000 $2,200 $25,000 -$ 200 (5) + 1,500 +1,500 ___________________________________________________________________________________ Balance $23,300 $1,200 $4,000 $2,200 $25,000 $1,300 (6) – 200 – 200 ___________________________________________________________________________________ Balance $23,100 $1,200 $4,000 $2,200 $25,000 $1,100 (7) +$300 + 300 ___________________________________________________________________________________ Balance $23,100 $300 $1,200 $4,000 $2,200 $25,000 $1,400 (8) – 200 – 200 ___________________________________________________________________________________ Balance $22,900 $300 $1,200 $4,000 $2,000 $25,000 $1,400 (9) – 1,200 – 1,200 ___________________________________________________________________________________ Balance $21,700 $300 $1,200 $4,000 $2,000 $25,000 $ 200 (10) + 100 – 100 ___________________________________________________________________________________ Totals
$21,700
$300
$1,200
[Cash total = (1) – (2) – (3) + (5) – (6) – (8) – (9)]
.
$4,000
$2,100
$25,000
$ 100
The Accounting Information System
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Ex. 233 Analyze the following transactions in terms of their effect on the basic accounting equation. Record each transaction by increasing (+) or decreasing (–) the dollar amount of each item affected. Indicate the new balance of each item after a transaction is recorded. (1) Issued stock to investors for $20,000 in cash. (2) Purchased supplies on credit for $700. (3) Billed customers $1,000 for services provided. (4) Paid for supplies purchased in transaction 2. (5) Paid dividends of $300 cash to stockholders. (6) Received half from customers billed in transaction 3. (7) Received and paid utility bill for $100. TransAccounts Accounts Common Retained action Cash + Receivable + Supplies = Payable + Stock + Earnings (1) ________________________________________________________________________ Balance (2) ________________________________________________________________________ Balance (3) ________________________________________________________________________ Balance (4) ________________________________________________________________________ Balance (5) ________________________________________________________________________ Balance (6) ________________________________________________________________________ Balance (7) ________________________________________________________________________ Totals Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
3-52
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 233
(15 minutes)
TransAccounts Accounts Common Retained action Cash + Receivable + Supplies = Payable + Stock + Earnings (1) +$20,000 +$20,000 ___________________________________________________________________________________ Balance $20,000 $20,000 (2) +$700 +$700 ___________________________________________________________________________________ Balance $20,000 $700 $700 $20,000 (3) +$1,000 +$1,000 ___________________________________________________________________________________ Balance $20,000 $1,000 $700 $700 $20,000 $1,000 (4) –700 –700 ___________________________________________________________________________________ Balance $19,300 $1,000 $700 0 $20,000 $1,000 (5) –300 –300 ___________________________________________________________________________________ Balance $19,000 $1,000 $700 $20,000 $700 (6) +500 –500 ___________________________________________________________________________________ Balance $19,500 $500 $700 $20,000 $700 (7) –100 –100 ___________________________________________________________________________________ Totals $19,400 $500 $700 $20,000 $ 600
Cash total = (1) – (4) – (5) + (6) – (7) Ex. 234 A tabular analysis of the transactions made during August 2017 by Baxter Company during its first month of operations is shown below. Each increase and decrease in stockholders' equity is explained. Assets Cash 1. +$30,000 2. 3. 4. 5. 6. 7. 8. 9. 10.
–1,000 –750 +2,400 –1,500 –1,000 –800 +450 –4,000
+ A/R
+ Supp.
= + Equip
+$5,000
= Accts Pay
Liab.+ Com. Stock +$30,000
+ Rev.
Stockholders' Equity Retained Earnings - Exp. - Div. Com. Stock
+$4,000
+$750 +$5,900
+8,300
Serv. Rev.
– 1,500 –1,000 –800
Div. Rent Exp.
–4,000 –500
Sal. Exp. Util. Exp.
–450 +500
Instructions (a) Determine how much stockholders' equity increased for the month. (b) Compute the net income for the month. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
The Accounting Information System
Solution 234 (10 min.) (a) Issued common stock ................................................................. Service revenue ......................................................................... Dividends ................................................................................... Rent expense ............................................................................. Salaries expense ........................................................................ Utilities expense ......................................................................... Increase in stockholders' equity .................................................. (Increase = 1.+ 4. –6. –7. –9. –10.) (b)
Service revenue ......................................................................... Rent expense ............................................................................. Salaries expense ........................................................................ Utilities expense ......................................................................... Net income ................................................................................. (Net inc. = 4. –7. –9. –10.)
3-53
$30,000 8,300 (1,000) (800) (4,000) (500) $32,000
8,300 (800) (4,000) (500) $ 3,000
Ex. 235 The tabular analysis of transactions for Baxter Company is presented below. Assets
Cash + A/R 1. +$30,000 2. –1,000 3. –950 4. +2,400 +$5,900 5. –1,500 6. –1,000 7. –800 8. +450 –450 9. –4,000 10.
=
+ Supp.
Liab. +
+ Equip.
Accts = Payable
+$11,000
+$10,000
+ C/S +$30,000
Stockholders' Equity Retained Earnings + Rev.
- Exp.
- Div. Com. Stock
+$950 +8,300
Serv. Rev.
–1,500 –1,000
+500
–800
Div. Rent Exp.
–4,000 –500
Sal. Exp. Util. Exp.
Instructions Prepare a retained earnings statement for August and a classified balance sheet at August 31, 2017. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 235
(10 min.)
BAXTER COMPANY Retained Earnings Statement For the Month Ended August 31, 2017 ___________________________________________________________________________ Retained earnings, August 1 ............................................................... $ 0 Add: Net income ................................................................................. 3,000* 3,000 Less: Dividends ................................................................................... 1,000 Retained earnings, August 31 ............................................................. $2,000 *$8,300 – $800 – $4,000 – $500 (Net. inc. = 4. –7. –9. –10.)
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 235
(Cont.)
BAXTER COMPANY Balance Sheet August 31, 2017 ___________________________________________________________________________ Assets Current Assets: Cash..................................................................................................... Accounts receivable ............................................................................ Supplies .............................................................................................. Total current assets ........................................................................ Equipment ........................................................................................... Total assets ................................................................................... (Cash + Acc. rec. + Sup. + Equip.) Liabilities and Stockholders’ Equity Current Liabilities Accounts payable .......................................................................... Stockholders’ equity Common stock ............................................................................... Retained earnings .......................................................................... Total liabilities and stockholders’ equity ................................... (Acct. Pay. + Com. St. + Ret. earn.)
$23,600 5,450 950 $30,000 11,000 $41,000
$ 9,000 $30,000 2,000
32,000 $41,000
Ex. 236 The accounts in the ledger of Dependable Delivery Service contain the following balances on July 31, 2017. Accounts Receivable Accounts Payable Cash Equipment Utilities Expense Insurance Expense Notes Payable, due 2020
$11,400 7,400 15,940 59,360 950 600 31,450
Prepaid Insurance Maintenance and Repairs Expense Service Revenue Dividends Common Stock Salaries and Wages Expense Salaries and Wages Payable Retained Earnings (July 1, 2017)
$ 1,800 1,200 15,500 800 40,000 8,400 900 5,200
Instructions Prepare an income statement and a retained earnings statement for the month of July 2017, and a classified balance sheet for July 31. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
The Accounting Information System
Solution 236
3-55
(10 min.)
DEPENDABLE DELIVERY SERVICE Income Statement For the Month Ended July 31, 2017 ___________________________________________________________________________ Revenues Service revenue ............................................................................ $15,500 Expenses Salaries and wages expense ......................................................... $8,400 Maintenance and repairs expense ................................................. 1,200 Gasoline expense ......................................................................... 950 Insurance expense ........................................................................ 600 Total expenses ........................................................................ 11,150 Net income .......................................................................................... $ 4,350 (Ser. rev. − Sal./wag. exp – Main./rep. exp.– Gas. exp. – Ins. exp.) DEPENDABLE DELIVERY SERVICE Retained Earnings Statement For the Month Ended July 31, 2017 ___________________________________________________________________________ Retained earnings, July 1 .................................................................... $5,200 Add: Net income ................................................................................. 4,350 9,550 Less: Dividends ................................................................................... 800 Retained earnings, July 31 .................................................................. $8,750 (Beg. Ret. earn. + Net inc. – Div.) DEPENDABLE DELIVERY SERVICE Balance Sheet July 31, 2017 ___________________________________________________________________________ Assets Current Assets: Cash ............................................................................................. Accounts receivable ...................................................................... Prepaid insurance .......................................................................... Total current assets .................................................................. Equipment ........................................................................................... Total assets ................................................................................... (Cash + Acc. rec. + Prep. ins. + Equip.)
.
$15,940 11,400 1,800 $29,140 59,360 $88,500
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Liabilities and Stockholders’ Equity Current Liabilities Accounts payable .......................................................................... $ 7,400 Salaries and wages payable .......................................................... 900 Total current liabilities .............................................................. Notes payable ..................................................................................... Total liabilities .......................................................................... Stockholders’ equity Common stock ............................................................................... 40,000 Retained earnings .......................................................................... 8,750 Total stockholders' equity ............................................................... Total liabilities and stockholders’ equity ................................... (Acc. Pay + Sal./wag. Pay. + Not. Pay. + Com. St. + End. Ret. earn.)
$ 8,300 31,450 39,750
48,750 $88,500
Ex. 237 Selected transactions for Stockton Corporation during its first month in business are presented below: Sept. 1 5 25 30
Issued common stock in exchange for $30,000 cash received from investors. Purchased equipment for $20,000, paying $2,000 in cash and the balance on account. Paid $6,000 cash on balance owed for equipment. Paid $1,000 cash dividend.
Stockton's chart of accounts shows: Cash, Equipment, Accounts Payable, Common Stock, and Dividends. Instructions (a) Prepare a tabular analysis of the September transactions. The column headings should be: Cash + Equipment = Accounts Payable + Stockholders' Equity. For transactions affecting stockholders' equity, provide explanations in the right margin. (b) Journalize the transactions. Do not provide explanations. (c) Post the transactions to T-accounts. Ans: N/A, LO: 1, 3, 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 237 (a)
(10min.)
Assets
Sept.
= Liabilities Accounts = Payable
Cash + Equipment 1 +$30,000 5 –2,000 +$20,000 +$18,000 25 –6,000 –6,000 30 –1,000 $21,000 $20,000 $ 12,000 (Cash tot. = 9/1 – 9/5 – 9/25 – 9/30)
.
+
Stockholders' Equity Stockholders' + Equity +$30,000 Issued stock
+
–1,000 $29,000
Dividends
The Accounting Information System
Solution 237
3-57
(Cont.)
(b)
Date Sept. 1
5
25
30
General Journal Account Titles Debit Cash ................................................................................... 30,000 Common Stock .............................................................
J1 Credit 30,000
Equipment........................................................................... 20,000 Cash ............................................................................. Accounts Payable .........................................................
2,000 18,000
Accounts Payable ............................................................... 6,000 Cash .............................................................................
6,000
Dividends ............................................................................ 1,000 Cash .............................................................................
1,000
(c)
9/1
Bal.
9/5 Bal.
9/25
Cash 30,000 9/5 9/25 9/30 21,000
Common Stock 9/1 Bal.
2,000 6,000 1,000
9/30 Bal.
Equipment 20,000 20,000
30,000 30,000
Dividends 1,000 1,000
Accounts Payable 6,000 9/5 18,000 Bal. 12,000
Ex. 238 For each item below, indicate whether a debit or credit applies. 1. Decrease in Notes Payable 2. Increase in Dividends 3. Increase in Common Stock 4. Increase in Unearned Rent Revenue 5. Decrease in Interest Payable 6. Increase in Prepaid Insurance 7. Decrease in Salaries and Wages Expense 8. Decrease in Supplies 9. Increase in Revenues 10. Decrease in Accounts Receivable
____ ____ ____ ____ ____ ____ ____ ____ ____ ____
__ __ __ __ __ __ __ __ __ __
Ans: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
3-58
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 238 (5 min.) 1. Decrease in Notes Payable 2. Increase in Dividends 3. Increase in Common Stock 4. Increase in Unearned Rent Revenue 5. Decrease in Interest Payable 6. Increase in Prepaid Insurance 7. Decrease in Salaries and Wages Expense 8. Decrease in Supplies 9. Increase in Revenues 10. Decrease in Accounts Receivable
____Dr.__ ____Dr.__ ____Cr.__ ____Cr.__ ____Dr.__ ____Dr.__ ____Cr.__ ____Cr.__ ____Cr.__ ____Cr.__
Ex. 239 For each item below, indicate whether a debit or credit applies. 1. Decrease in Prepaid Rent 2. Increase in Service Revenue 3. Decrease in Unearned Rent Revenue 4. Increase in Dividends 5. Decrease in Interest Receivable 6. Increase in Depreciation Expense 7. Decrease in Accounts Payable 8. Increase in Supplies 9. Increase in Salaries and Wages Expense 10. Decrease in Accounts Receivable
____ ____ ____ ____ ____ ____ ____ ____ ____ ____
__ __ __ __ __ __ __ __ __ __
Ans: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 239 (5 min.) 1. Decrease in Prepaid Rent 2. Increase in Service Revenue 3. Decrease in Unearned Rent Revenue 4. Increase in Dividends 5. Decrease in Interest Receivable 6. Increase in Depreciation Expense 7. Decrease in Accounts Payable 8. Increase in Supplies 9. Increase in Salaries and Wages Expense 10. Decrease in Accounts Receivable
.
____Cr.__ ____Cr.__ ____Dr.__ ____Dr.__ ____Cr.__ ____Dr.__ ____Dr.__ ____Dr.__ ____Dr.__ ____Cr.__
The Accounting Information System
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Ex. 240 The chart of accounts used by Norton Printing Company is listed below. You are to indicate the proper accounts to be debited and credited for the following transactions by writing the account number(s) in the appropriate boxes. CHART OF ACCOUNTS 1 Cash 8 Common Stock 2 Accounts Receivable 9 Retained Earnings 3 Supplies 10 Dividends 4 Equipment 11 Service Revenue 5 Accounts Payable 12 Advertising Expense 6 Notes Payable 13 Rent Expense 7 Unearned Service Revenue ___________________________________________________________________________ Number(s) of account(s) debited 1.
Number(s) of account(s) credited
Stockholders invest $90,000 cash to start the business.
_______________________________________________________________________________________________________
2.
Purchased three digital copy machines for $400,000, paying $100,000 cash and signing a 5-year, 6% note for the remainder.
_______________________________________________________________________________________________________
3.
Purchased $5,000 paper supplies on credit.
_______________________________________________________________________________________________________
4.
Cash received for photocopy services amounted to $7,000.
_______________________________________________________________________________________________________
5.
Paid $500 cash for radio advertising.
_______________________________________________________________________________________________________
6.
Paid $800 on account for paper supplies purchased in transaction 3.
_______________________________________________________________________________________________________
7.
Dividends of $1,500 were paid to stockholders.
_______________________________________________________________________________________________________
8.
Paid $1,200 cash for rent for the current month.
_______________________________________________________________________________________________________
9.
Received $2,000 cash advance from a customer for future copying.
_______________________________________________________________________________________________________
10.
Billed a customer for $450 for photocopy services completed.
_______________________________________________________________________________________________________ Ans: N/A, LO: 2, Bloom: C, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 240 (15 min.) __________________________________________________________________________
1.
Stockholders invest $90,000 cash to start the business.
Number(s) of account(s) debited
Number(s) of account(s) credited
1
8
_______________________________________________________________________________________________________
2.
Purchased three digital copy machines for $400,000, paying $100,000 cash and signing a 5-year, 10% note for the remainder.
4
1, 6
_______________________________________________________________________________________________________
3.
Purchased $5,000 paper supplies on credit.
3
5
_______________________________________________________________________________________________________
4.
Cash received for photocopy services amounted to $7,000.
1
11
_______________________________________________________________________________________________________
5.
Paid $500 cash for radio advertising.
12
1
_______________________________________________________________________________________________________
6.
Paid $800 on account for paper supplies purchased in transaction 3.
5
1
_______________________________________________________________________________________________________
7.
Dividends of $1,500 were paid to stockholders.
10
1
_______________________________________________________________________________________________________
8.
Paid $1,200 cash for rent for the current month.
13
1
_______________________________________________________________________________________________________
9.
Received $2,000 cash advance from a customer for future copying.
1
7
_______________________________________________________________________________________________________
10.
Billed a customer for $450 for photocopy services completed.
2
11
_______________________________________________________________________________________________________
.
The Accounting Information System
3-61
Ex. 241 Under a double-entry system, show how the entry in each statement is entered in the ledger by using debit or credit to indicate the increase or decrease in the affected account. Debit or Credit 1.
An increase in Salaries and Wages Expense.
__________________
2.
An increase in Accounts Payable.
__________________
3.
An increase in Prepaid Insurance.
__________________
4.
An increase in Common Stock.
__________________
5.
A increase in Supplies.
__________________
6.
An increase in Dividends.
__________________
7.
An increase in Service Revenue.
__________________
8.
A decrease in Accounts Receivable.
__________________
9.
An increase in Rent Expense.
__________________
10.
A decrease in Equipment.
__________________
Ans: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 241 (5 min.) 1. An increase in Salaries and Wages Expense.
Debit _______
2.
An increase in Accounts Payable.
Credit ______
3.
An increase in Prepaid Insurance.
Debit _______
4.
An increase in Common Stock.
Credit ______
5.
An increase in Supplies.
Debit _______
6.
An increase in Dividends.
Debit _______
7.
An increase in Service Revenue.
Credit ______
8.
A decrease in Accounts Receivable.
Credit ______
9.
An increase in Rent Expense.
Debit _______
10.
A decrease in Equipment.
Credit ______
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 242 For the accounts listed below, indicate if the normal balance of the account is a debit or credit. Normal Balance Debit or Credit
Accounts 1.
Service Revenue
_________________
2.
Rent Expense
_________________
3.
Accounts Receivable
_________________
4.
Accounts Payable
_________________
5.
Common Stock
_________________
6.
Supplies
_________________
7.
Insurance Expense
_________________
8.
Dividends
_________________
9.
Buildings
_________________
10.
Notes Payable
_________________
Ans: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 242
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
(5 min.) Normal Balance Debit or Credit Credit Debit Debit Credit Credit Debit Debit Debit Debit Credit
Accounts Service Revenue Rent Expense Accounts Receivable Accounts Payable Common Stock Supplies Insurance Expense Dividends Buildings Notes Payable
Ex. 243 During an accounting period, a business has numerous transactions affecting each of the following accounts. State for each account whether it is likely to have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries. (1) (2) (3) (4) (5)
Advertising Expense Service Revenue Accounts Payable Accounts Receivable Common Stock
(6) (7) (8) (9) (10)
Dividends Cash Salaries and Wages Expense Notes Payable Insurance Expense
Ans: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
The Accounting Information System
Solution 243 (5 min.) (1) (a) (2) (b) (3) (c) (4) (c) (5) (b)
(6) (7) (8) (9) (10)
3-63
(a) (c) (a) (c) (a)
Ex. 244 Eight transactions are recorded in the following T-accounts:
(1) (7)
Cash 35,000 (2) 22,500 (3) (4) (6) (8)
(5)
Supplies 1,950
(3)
Common Stock (1)
(6)
3,500 1,950 2,225 8,000 4,500
(2)
Accounts Receivable 27,500 (7) 22,500
Equipment 13,500 Service Revenue (5)
35,000
Accounts Payable 8,000 (2) 10,000
(8)
27,500
Dividends 4,500
Salaries and Wages Expense (4) 2,225
Indicate for each debit and each credit: (a) whether an asset, liability, common stock, dividends, revenue, or expense account was affected and (b) whether the account was increased (+) or (–) decreased. Answers should be presented in the following chart form: Transaction No.
Account Debited Type Effect
Account Credited Type Effect
___________________________________________________________________________ (1)
(Example)
Asset
+
Common Stock
+
___________________________________________________________________________ (2)
___________________________________________________________________________ (3)
___________________________________________________________________________ (4)
___________________________________________________________________________ (5)
___________________________________________________________________________ (6)
___________________________________________________________________________ (7)
___________________________________________________________________________ (8) Ans: N/A, LO: 2, Bloom: C, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
3-64
Solution 244 (15 min.) Transaction Account Debited Account Credited No. Type Effect Type Effect __________________________________________________________________________ (1) (Example) Asset + Common Stock + __________________________________________________________________________ (2) Asset + Asset – Liability + __________________________________________________________________________ (3) Asset + Asset – __________________________________________________________________________ (4) Expense + Asset – __________________________________________________________________________ (5) Asset + Revenue + __________________________________________________________________________ (6) Liability – Asset – __________________________________________________________________________ (7) Asset + Asset – __________________________________________________________________________ (8) Dividends + Asset – Ex. 245 For each of the following accounts indicate (a) the type of account (Asset, Liability, Stockholders’ Equity, Revenue, and Expense), (b) the debit and credit effects, and (c) the normal account balance. Example 0. Cash
1. 2. 3. 4.
a. Asset account b. Debit increases, credit decreases c. Normal balance - debit Accounts Payable Accounts Receivable Common Stock Dividends
Accounts 5. Service Revenue 6. Insurance Expense 7. Notes Payable 8. Equipment
Ans: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 245 (15 min.) 1. a. Liability Account. b. Debit decreases, credit increases. c. Normal balance – credit. 2. a. Asset Account. b. Debit increases, credit decreases. c. Normal balance – debit. 3. a. Stockholders’ Equity Account. b. Debit decreases, credit increases. c. Normal balance – credit. 4. a. Stockholders’ Equity Account. b. Debit increases, credit decreases. c. Normal balance – debit.
.
5. a. b. c. 6. a. b. c. 7. a. b. c. 8. a. b. c.
Revenue Account. Debit decreases, credit increases. Normal balance – credit. Expense Account. Debit increases, credit decreases. Normal balance – debit. Liability Account. Debit decreases, credit increases. Normal balance – credit. Asset Account. Debit increases, credit decreases. Normal balance – debit.
The Accounting Information System
3-65
Ex. 246 Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transactions. 1. Stockholders invest $40,000 in cash in starting a real estate office operating as a corporation. 2. Purchased $500 of supplies on credit. 3. Purchased equipment for $25,000, paying $3,500 in cash and signed a 30-day, $21,500, note payable. 4. Real estate commissions billed to clients amount to $4,000. 5. Paid $700 in cash for the current month's rent. 6. Paid $250 cash on account for office supplies purchased in transaction 2. 7. Received a bill for $800 for advertising for the current month. 8. Paid $2,500 cash for office salaries. 9. Paid $1,200 cash dividends to stockholders. 10. Received a check for $2,000 from a client in payment on account for commissions billed in transaction 4. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 246 (15 min.) 1. Cash ........................................................................................ Common Stock ............................................................... 2.
3.
4.
5.
6.
7.
8.
9.
10.
40,000 40,000
Supplies .................................................................................. Accounts Payable ...........................................................
500
Equipment ............................................................................... Cash ............................................................................... Notes Payable ................................................................
25,000
Accounts Receivable ............................................................... Service Revenue ............................................................
4,000
Rent Expense .......................................................................... Cash ...............................................................................
700
Accounts Payable .................................................................... Cash ...............................................................................
250
Advertising Expense ................................................................ Accounts Payable ...........................................................
800
Salaries and Wages Expense .................................................. Cash ...............................................................................
2,500
Dividends ................................................................................ Cash ...............................................................................
1,200
Cash ........................................................................................ Accounts Receivable ......................................................
2,000
.
500
3,500 21,500
4,000
700
250
800
2,500
1,200
2,000
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 247 Journalize the following business transactions in general journal form. Identify each transaction by number. You may omit explanations of the transactions. 1. 2. 3. 4. 5. 6. 7.
Received $50,000 from stockholders. Purchased equipment for $75,000, paying $15,000 in cash and giving a note payable for the remainder. Paid $3,000 rent for the month. Recorded $12,500 of services provided on account. Paid wages of $9,500. Received $7,000 in cash for services provided. Collected $2,000 from customers on account.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 247 (15 min.) 1. Cash ......................................................................................... Common Stock ................................................................ 2.
3.
4.
5.
6.
7.
50,000 50,000
Equipment ................................................................................ Cash ................................................................................ Notes Payable..................................................................
75,000
Rent Expense ........................................................................... Cash ................................................................................
3,000
Accounts Receivable ................................................................ Service Revenue ..............................................................
12,500
Salaries and Wages Expense ................................................... Cash ................................................................................
9,500
Cash ......................................................................................... Service Revenue ..............................................................
7,000
Cash ......................................................................................... Accounts Receivable........................................................
2,000
.
15,000 60,000
3,000
12,500
9,500
7,000
2,000
The Accounting Information System
3-67
Ex. 248 Transactions for the Hartman Company for the month of November are presented below. Journalize each transaction and identify each transaction by number. You may omit journal explanations. 1. Stockholders invested an additional $40,000 cash in the business. 2. Purchased land costing $18,000 for cash. 3. Purchased equipment costing $45,000 for $4,500 cash and the remainder on credit. 4. Purchased supplies on account for $800. 5. Paid $3,000 for a one-year insurance policy. 6. Received $2,000 cash for services performed. 7. Received $5,000 for services previously performed on account. 8. Paid wages to employees for $2,500. 9. Paid dividends to stockholders of $400. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 248 (10 min.) 1. Cash ........................................................................................ Common Stock ............................................................... 2.
3.
4.
5.
6.
7.
8.
9.
40,000 40,000
Land ........................................................................................ Cash ...............................................................................
18,000
Equipment ............................................................................... Cash ............................................................................... Accounts Payable ...........................................................
45,000
Supplies .................................................................................. Accounts Payable ...........................................................
800
Prepaid Insurance ................................................................... Cash ...............................................................................
3,000
Cash ........................................................................................ Service Revenue ............................................................
2,000
Cash ........................................................................................ Accounts Receivable ......................................................
5,000
Salaries and Wages Expense .................................................. Cash ...............................................................................
2,500
Dividends ................................................................................ Cash ...............................................................................
400
.
18,000
4,500 40,500
800
3,000
2,000
5,000
2,500
400
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
3-68
Ex. 249 This information relates to Hanshew Real Estate Agency. Oct.
1 Stockholders invested $35,000 in exchange for common stock of the corporation. 2 Hires an administrative assistant at an annual salary of $36,000. 3 Buys equipment for $3,500 on account. 6 Sells a house and lot for M Springer; commissions due from Springer, $10,000 (not paid by Springer at this time). 10 Receives cash of $140 as commission for acting as rental agent renting an apartment. 27 Pays $700 on account for the equipment purchased on October 3. 30 Pays the administrative assistant $3,000 in salary for October.
Instructions (a) Journalize the transactions. Do not provide explanations. (b) Post the transactions to T accounts. Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 249
(15 min.)
(a)
General Journal
Date
Account Titles
Debit
Oct. 1
Cash ..................................................................... Common Stock..................................................
35,000 35,000
2
No entry.
3
Equipment ............................................................. Accounts Payable .............................................
3,500
Accounts Receivable ............................................. Service Revenue ...............................................
10,000
Cash ..................................................................... Service Revenue ...............................................
140
Accounts Payable ................................................. Cash .................................................................
700
Salaries and Wages Expense ............................... Cash .................................................................
3,000
6 10 27 30
.
Credit
3,500 10,000 140 700 3,000
The Accounting Information System
Solution 249
3-69
(Cont.)
(b) Cash Oct.
1 10
Bal.
Accounts Payable
35,000 Oct. 27 140
700
30
Oct.
27
700
31,440
6
Bal.
3
Bal.
3,500
Bal.
2,800
Common Stock
10,000
Oct.
10,000
Bal.
Equipment Oct.
3
3,000
Accounts Receivable Oct.
Oct.
1
35,000 35,000
Service Revenue
3,500
Oct.
3,500
6
10,000
10
140
Bal.
10,140
Salaries and Wages Expense Oct.
30
3,000
Bal.
3,000
Ex. 250 These T accounts summarize the ledger of Garner Gardening Company Inc. at the end of the first month of operations, April 2017. Cash Apr.
1
20,000
12
700
29
800
30
900
Apr.
Unearned Service Revenue 15
1,200
25
3,500
Apr.
Accounts Receivable Apr.
7
3,400
Apr.
29
4
800
Apr.
25
5,700
3,500
1
20,000
Service Revenue Apr.
Account Payable Apr.
900
Common Stock
Supplies Apr.
30
Apr.
3,400
12
700
Salaries and Wages Expense 4
.
7
5,700
Apr.
15
1,200
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
3-70 Ex. 250
(Cont.)
Instructions (a) Prepare in the order they occurred the journal entries (including explanations) that resulted in the amounts posted to the accounts. (b) Prepare a trial balance at April 30, 2017. Ans: N/A, LO: 3, 5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 250 (15 min.) (a) General Journal Date
Account Titles and Explanation
Debit
Apr. 1
Cash ..................................................................... Common Stock.................................................. (Issued stock for cash)
20,000
Supplies ................................................................ Accounts Payable ............................................. (Purchased supplies on account)
5,700
Accounts Receivable ............................................. Service Revenue ............................................... (Billed clients for services rendered)
3,400
Cash ..................................................................... Service Revenue ............................................... (Received cash for revenue earned)
700
Salaries and Wages Expense ............................... Cash ................................................................. (Paid salaries)
1,200
Accounts Payable ................................................. Cash ................................................................. (Paid creditors on account)
3,500
Cash ..................................................................... Accounts Receivable ......................................... (Received cash in payment of account)
800
Cash ..................................................................... Unearned Service Revenue .............................. (Received cash for future services)
900
4
7
12
15
25
29
30
.
Credit
20,000
5,700
3,400
700
1,200
3,500
800
900
The Accounting Information System
Solution 250
3-71
(Cont.)
(b) GARNER GARDENING COMPANY INC. Trial Balance April 30, 2017 Debit Cash ............................................................................... Accounts Receivable....................................................... Supplies .......................................................................... Accounts Payable ........................................................... Unearned Service Revenue ............................................ Common Stock ............................................................... Service Revenue............................................................. Salaries and Wages Expense .........................................
Credit
$17,700* 2,600 5,700 $ 2,200 900 20,000 4,100 1,200 $27,200
$27,200
*(4/1 + 4/12 – 4/15 – 4/25 + 4/29 + 4/30) Ex. 251 The transactions of the Speedy Delivery Service are recorded in the general journal below. You are to post the journal entries to the accounts in the general ledger. After all entries have been posted, you are to prepare a trial balance on the form provided. General Journal ____________________________________________________________________________ Date Account Titles and Explanation Debit Credit ____________________________________________________________________________ 2017 Sept. 1 Cash 25,000 Common Stock 25,000 (Stockholders invested cash in business) 4
8
15
18
Equipment Cash Notes Payable (Paid cash and issued 2-year, 6%, note for delivery trucks)
60,000
Rent Expense Cash (Paid September rent)
1,000
Prepaid Insurance Cash (Paid one-year liability insurance)
1,400
Cash
4,500 Service Revenue (Received cash for delivery services) .
10,000 50,000
1,000
1,400
4,500
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
3-72 Ex. 251
20
25
30
30
(Cont.) Salaries and Wages Expense Cash (Paid salaries for current period)
500
Utilities Expense Accounts Payable (Received a bill for September utilities)
100
Dividends Cash (Paid dividends)
750
500
100
750
Accounts Receivable Service Revenue (Billed customer for delivery service)
1,000 1,000
General Ledger Cash
Accounts Receivable
Prepaid Insurance
Equipment
Accounts Payable
Notes Payable
.
The Accounting Information System
Ex. 251
3-73
(Cont.) Common Stock
Dividends
Service Revenue
Rent Expense
Salaries and Wages Expense
Utilities Expense
SPEEDY DELIVERY SERVICE Trial Balance September 30, 2017 Accounts
Credit
Debit
Ans: N/A, LO: 4,5, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
3-74
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 251
(25 min.) Cash
Accounts Receivable
9/1
25,000
9/4
10,000
9/30
1,000
9/18
4,500
9/8
1,000
9/30
Bal. 1,000
9/15
1,400
9/20
500
9/30
750
9/30
Bal 15,850 Prepaid Insurance
Equipment
9/15
1,400
9/4
60,000
9/30
Bal. 1,400
9/30
Bal. 60,000
Accounts Payable
Notes Payable
9/25
100
9/4
50,000
9/30
Bal. 100
9/30
Bal. 50,000
Common Stock
Dividends
9/1
25,000
9/30
750
9/30
Bal. 25,000
9/30
Bal. 750
Service Revenue
Rent Expense
9/18
4,500
9/8
1,000
9/30
1,000
9/30
Bal. 1,000
9/30
Bal. 5,500
.
The Accounting Information System
Salaries and Wages Expense
3-75
Utilities Expense
9/20
500
9/25
100
9/30
Bal. 500
9/30
Bal. 100
SPEEDY DELIVERY SERVICE Trial Balance September 30, 2017 Accounts
Credit $ 15,850 1,000 1,400 60,000
Debit
Cash Accounts Receivable Prepaid Insurance Equipment Accounts Payable $ 100 Notes Payable 50,000 Common Stock 25,000 Dividends 750 Service Revenue 5,500 Rent Expense 1,000 Salaries and Wages Expense 500 Utilities Expense 100 Totals $80,600 $80,600 (All accounts are debits except Acc. Pay., Not. Pay. Com. St. & Ser. Rev.) ____________________________________________________________________________ Ex. 252 Selected transactions from the journal of Giambi Inc. during its first month of operations are presented here. Date Account Titles Aug. 1 Cash Common Stock 10 Cash Service Revenue 12 Equipment Cash Notes Payable 25 Accounts Receivable Service Revenue 31 Cash Accounts Receivable
.
Debit 10,000
Credit 10,000
1,700 1,700 12,200 1,200 11,000 2,500 2,500 600 600
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 252
(Cont.)
Instructions (a) Post the transactions to T-accounts. (b) Prepare a trial balance at August 31, 2017. Ans: N/A, LO: 4, 5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 252
(15 min.)
(a) Aug. 1 10 31 Bal.
Aug. 25 Bal.
Aug. 12 Bal.
Cash 10,000 Aug. 12 1,700 600 11,100
Accounts Receivable 2,500 Aug. 31 1,900
Equipment 12,200 12,200
1,200
Notes Payable Aug. 12 Bal.
11,000 11,000
Common Stock Aug. 1 Bal.
10,000 10,000
Service Revenue Aug. 10 25 Bal.
1,700 2,500 4,200
600
(b) GIAMBI INC. Trial Balance August 31, 2017 ___________________________________________________________________________ Debit Credit Cash ................................................................................................... $11,100 Accounts Receivable ........................................................................... 1,900 Equipment ............................................................................................ 12,200 Notes Payable ..................................................................................... $ 11,000 Common Stock..................................................................................... 10,000 Service Revenue ................................................................................. 4,200 $25,200 $25,200 (All accounts are debits except Not. Pay., Com. St., & Ser. Rev.)
.
The Accounting Information System
3-77
Ex. 253 The accounts in the ledger of Dependable Delivery Service contain the following balances on July 31, 2017. Accounts Receivable Accounts Payable Cash Equipment Gasoline Expense Insurance Expense Notes Payable, due 2020
$16,400 12,400 ? 59,360 950 600 28,450
Prepaid Insurance Maintenance and Repairs Expense Service Revenue Dividends Common Stock Salaries and Wages Expense Salaries and Wages Payable Retained Earnings (July 1, 2017)
$ 1,800 1,200 13,500 800 50,000 6,400 900 5,200
Instructions Prepare a trial balance with the accounts arranged as illustrated in the chapter, and fill in the missing amount for Cash. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 253
(8 min.)
DEPENDABLE DELIVERY SERVICE Trial Balance July 31, 2017 ___________________________________________________________________________ Debit Credit Cash ($110,450 – Debit total without Cash $87,510) .......................... $22,940 Accounts Receivable ........................................................................... 16,400 Prepaid Insurance ................................................................................ 1,800 Equipment ........................................................................................... 59,360 Accounts Payable ............................................................................... $ 12,400 Salaries and Wages Payable .............................................................. 900 Notes Payable (due 2020) .................................................................. 28,450 Common Stock .................................................................................... 50,000 Retained Earnings ............................................................................... 5,200 Dividends ............................................................................................ 800 Service Revenue ................................................................................. 13,500 Salaries and Wages Expense .............................................................. 6,400 Gasoline Expense ................................................................................ 950 Maintenance and Repairs Expense...................................................... 1,200 Insurance Expense .............................................................................. 600 $110,450$110,450 (All accounts are debits except Acc. Pay., Sal./Wag. Pay., Not. Pay., Com. St., Ret. Earn., & Ser. Rev.)
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 254 The trial balance of the Gavin Company shown below does not balance. GAVIN COMPANY Trial Balance June 30, 2017 ____________________________________________________________________________ Debit Credit Cash .............................................................................................. $ 5,600 Accounts Receivable ..................................................................... 7,600 Supplies ........................................................................................ 600 Equipment ..................................................................................... 8,300 Accounts Payable .......................................................................... $ 12,766 Common Stock .............................................................................. 1,941 Dividends ...................................................................................... 1,500 Service Revenue ........................................................................... 15,200 Salaries and Wages Expense ........................................................ 3,800 Maintenance and Repairs Expense ............................................... 1,600 Totals .................................................................................... $29,000 $29,907 An examination of the ledger and journal reveals the following errors: 1. Each of the above listed accounts has a normal balance per the general ledger. 2. Cash of $350 received from a customer on account was debited to Cash $530 and credited to Accounts Receivable $530. 3. Dividends of $300 paid to stockholders were posted as a credit to Dividends, $300, and a credit to Cash $300. 4. Salaries and Wages Expense of $300 was omitted from the trial balance. 5. The purchase of equipment on account for $700 was recorded as a debit to Maintenance and Repairs Expense and a credit to Accounts Payable for $700. 6. Services were performed on account for a customer, $510, for which Accounts Receivable was debited $510 and Service Revenue was credited $51. 7. A payment on account for $215 was credited to Cash for $215 and credited to Accounts Payable for $251. Instructions Prepare a correct trial balance. Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: FSA
.
The Accounting Information System
Solution 254
3-79
(25 min.)
GAVIN COMPANY Trial Balance June 30, 2017 ____________________________________________________________________________ Debit Credit Cash [5,600 – 180 (2)] ................................................................... $ 5,420 Accounts Receivable [7,600 + 180 (2)]........................................... 7,780 Supplies ......................................................................................... 600 Equipment [8,300 + 700 (5)]........................................................... 9,000 Accounts Payable [12,766 – 251–215 (7)]...................................... $12,300 Common Stock .............................................................................. 1,941 Dividends [1,500 + 300 + 300 (3)] .................................................. 2,100 Service Revenue [15,200 + 459 (6)] ............................................... 15,659 Salaries and Wages Expense [3,800 + 300 (4)] ............................. 4,100 Maintenance and Repairs Expense [1,600 – 700 (5)] ..................... 900 Totals...................................................................................... $29,900 $29,900 Ex. 255 Some of the following errors would cause the debit and credit columns of the trial balance to have unequal totals. For each of the four cases, state whether the error would cause unequal totals in the trial balance. If the error causes unequal totals, indicate the amount of difference between the columns and state whether the debit or credit is larger. Each case is to be considered independently of the others. 1. A payment of $700 to a creditor was recorded by a debit to Accounts Payable of $70 and a credit to Cash of $700. 2. A $340 payment for a printer was recorded by a debit to Equipment of $34 and a credit to Cash for $34. 3. An account receivable in the amount of $2,000 was collected in full. The collection was recorded by a debit to Cash for $2,000 and a debit to Accounts Payable for $2,000. 4. An account payable was paid by issuing a check for $800. The payment was recorded by debiting Accounts Payable $800 and crediting Accounts Receivable $800. Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 255 (5 min.) 1. The trial balance totals will be unequal. The credit column will be $630 larger than the debit column. 2. The trial balance totals will be misstated but not unequal. 3. The trial balance totals will be unequal. The debit column will be $4,000 larger than the credit column. 4. The trial balance totals will be misstated but not unequal.
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 256 Some of the following errors would cause the debit and credit columns of the trial balance to have unequal totals. For each of the four cases, state whether the error would cause unequal totals in the trial balance. If the error causes unequal totals, indicate the amount of difference between the columns and state whether the debit or credit is larger. Each case is to be considered independently of the others. 1. A collection on account of $400 was journalized and posted as a debit to Cash $400 and a credit to Service Revenue $400. 2. A $950 purchase of supplies on account was recorded as a debit of $950 to Equipment and a credit of $950 to Accounts Payable. 3. A purchase of equipment for $3,500 on account was not recorded. 4. A $270 receipt on account was recorded as a $720 debit to Cash and a $270 credit to Accounts Receivable. Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 256 (5 min.) 1. The trial balance totals will be misstated but not unequal. 2. The trial balance totals will be misstated but not unequal. 3. The trial balance totals will be misstated but not unequal. 4. The trial balance totals will be unequal. The debit column will be $450 larger than the credit column. Ex. 257 Sue Sloan and Associates is a financial planning service. The account balances at December 31, 2017 are shown by the following alphabetical list: Accounts Payable Accounts Receivable Buildings Cash Common Stock Equipment Land Notes Payable Notes Receivable Supplies
$34,000 16,000 120,000 24,500 167,700 79,300 47,000 95,000 9,100 800
Instructions Prepare a trial balance with the accounts arranged in financial statement order. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
The Accounting Information System
Solution 257
3-81
(10 min.) SUE SLOAN AND ASSOCIATES Trial Balance December 31, 2017
Debit Cash ............................................................................................. $ 24,500 Notes Receivable .......................................................................... 9,100 Accounts Receivable ..................................................................... 16,000 Supplies ........................................................................................ 800 Equipment ..................................................................................... 79,300 Buildings ....................................................................................... 120,000 Land .............................................................................................. 47,000 Accounts Payable ......................................................................... Notes Payable ............................................................................... Common Stock ............................................................................. Totals .................................................................................... $296,700 (All accounts are debits except Acc. Pay., Not. Pay. & Com. St.)
Credit
$ 34,000 95,000 167,700 $296,700
Ex. 258 The ledger accounts of the Get Fit Gym at July 31, 2017 are shown below: Accounts Payable Accounts Receivable Buildings Common Stock Cash Equipment Notes Payable Supplies Dividends
$ 12,100 1,050 55,400 65,100 9,000 45,900 45,000 350 10,500
Instructions Prepare a trial balance with the ledger accounts arranged in the proper financial statement order. Include the appropriate heading. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 258
(10 min.) GET FIT GYM Trial Balance July 31, 2017
Cash .............................................................................................. Accounts Receivable ..................................................................... Supplies ........................................................................................ Equipment ..................................................................................... Buildings ....................................................................................... Accounts Payable .......................................................................... Notes Payable ............................................................................... Common Stock .............................................................................. Dividends ...................................................................................... Totals .................................................................................... (All accounts are debits except Acct. Pay., Not. Pay., & Com. St.)
Debit $ 9,000 1,050 350 45,900 55,400
Credit
$ 12,100 45,000 65,100 10,500 $122,200
$122,200
COMPLETION STATEMENTS 259.
An _______________ is an individual accounting record of increases and decreases in specific assets, liabilities, and stockholders’ equity items.
Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
260.
The act of entering an amount on the left side of an account is called _______________ the account, and making an entry on the right side is called _________________ the account.
Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
261.
_____________, ______________, and _______________ have debit normal account balances whereas _______________, ______________, ______________, and ________________ have credit normal account balances.
Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
262.
The five subdivisions of stockholders’ equity are ______________, _______________, _________________, __________________, and _________________.
Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
263.
The basic steps in the recording process are: _______________ each transaction, enter the transaction in a ______________, and transfer the _______________ information to appropriate accounts in the ________________.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
The Accounting Information System
264.
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A sales slip, a check, and a cash register tape are examples of ________________ used as evidence that a transaction has taken place.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
265.
An accounting record where transactions are initially recorded in chronological order is called a ________________.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
266.
Posting is the procedure of transferring journal entries to ________________.
Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
267.
The entire group of accounts and their balances maintained by a company is called the ________________.
Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
268.
A two column list of all accounts and their balances at a given time is a ______________.
Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Answers to Completion Statements 259. account 260. debiting, crediting 261. assets, expenses, dividends, common stock, liabilities, revenues, retained earnings 262. common stock, retained earnings, dividends, revenues, expenses
.
263. 264. 265. 266. 267. 268.
analyze, journal, journal, ledger source documents journal ledger accounts general ledger trial balance
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
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MATCHING 269. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Account Normal account balance Debit Revenue account Ledger
F. G. H. I. J.
Journal Posting Chart of accounts Trial balance Source document
____
1. The entire group of accounts maintained by a company.
____
2. Transferring journal entries to ledger accounts.
____
3. The side which increases an account.
____
4. A list of all the accounts used by a company.
____
5. An accounting record of increases and decreases in specific assets, liabilities, and stockholders’ equity items.
____
6. Left side of an account.
____
7. Evidence that a transaction has taken place.
____
8. Shows the debit and credit effects of specific transactions.
____
9. A list of accounts and their balances at a given time.
____ 10. Has a credit normal balance Ans: N/A, LO: 1-5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Answers to Matching 1. 2. 3. 4. 5.
E G B H A
6. 7. 8. 9. 10.
.
C J F I D
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SHORT-ANSWER ESSAY QUESTIONS
S-A E 270 Describe the accounting information system and the steps in the recording process. Ans: N/A, LO: 1, 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Communications, IMA: Business Applications
Solution 270 The system of collecting and processing transaction data and communicating financial information to decision makers is known as the accounting information system. The basic steps in the recording process are: (1) Analyze each transaction in terms of its effect on the accounts (2) Enter the transaction information in a journal (3) Transfer the information to the appropriate accounts in the ledger. S-A E 271 A student is considering dropping his accounting class because he cannot understand the rules of debits and credits. Can the student be successful in the course without an understanding of the rules of debits and credits? Explain the rules of debits and credits in a way that will help him understand them. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Communications, IMA: Business Applications
Solution 271 Accounting is based on the double-entry system. This system records the dual effect of each transaction in the appropriate accounts, thus keeping the accounting equation in balance. Each transaction is analyzed and recorded using this dual effect system. If you do not have this basic understanding, the remaining chapters will become increasingly more difficult. You will not have the ability to make journal entries for the many new topics in these upcoming chapters. You may be trying to memorize the rules of debits and credits, only to discover that this does not work. Here are some other ways to master this very important topic: Make sure that you understand the accounting equation. Assets equal the total of liabilities and stockholders’ equity. Stockholders’ equity is not an account but rather a group of accounts that includes common stock, retained earnings, revenues, expenses, and dividends. Common stock, retained earnings, and revenues cause stockholders’ equity to increase while expenses and dividends cause stockholders’ equity to decrease. Next, make sure that you understand the accounting meaning of the terms debits and credits. For accounting, debit means left and credit means right. Don’t try to add any more to these definitions.
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Solution 271
(Cont.)
Then, work with the rules of debits and credits. These rules determine whether a debit or credit increases or decreases an account. Start with assets. Assets increase with a debit and thus decrease with a credit. Think about the cash account – when cash is received, the account is increased with a debit. When cash is paid, the account is decreased with a credit. The remaining accounts are on the right side of the equal sign in the accounting equation. All of the other rules of debits and credits keep the equation in balance. Liabilities, common stock, retained earnings, and revenues are all increased with credits. Expenses and dividends are the two accounts that cause stockholders’ equity to decrease, thus they must be increased with a debit. Finally, you must work examples, exercises and problems to apply these rules of debits and credits. The more you work with these rules, the quicker they will become as natural as the multiplication tables. S-A E 272 During a study session, a classmate states that it is not necessary to make journal entries and then post them to the ledger. She states that it is sufficient to analyze the transaction and simply record the information in T-accounts. What is your response to this statement? Be brief, yet concise. Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Communications, IMA: Business Applications
Solution 272 You have a very good point regarding the steps of the accounting cycle. If a company only has a few transactions, it might be possible to simply analyze them and then record each in T accounts. However, nearly all businesses have many transactions each day. There must be a systematic way to process these transactions. The steps of the accounting cycle represent this process. After analyzing each transaction, a journal entry needs to be prepared. The journal represents a chronological listing of every transaction for a business. This allows users to review past transactions. Your approach does not leave a trail that can be reviewed at a later date. Once the journal entries are made, posting allows each line of the journal to be transferred into the ledger. This process increases and decreases individual accounts in the ledger. At the end of the accounting period, the balance of each account is determined and the trial balance is prepared. Based on your approach, if someone saw a credit to cash for $10,000 and wondered what the debit was, that person would have to go through every ledger account to locate the corresponding debit. By having a general journal, the person can view the entire transaction, thus easily seeing the account that was debited. Your approach may work for a very simple business, but it would result in problems for the majority of businesses and accountants. S-A E 273 An account is an important accounting record where financial information is stored until needed. Briefly explain (1) the nature of an account, (2) the different types of accounts, and (3) the manner in which an account is increased and decreased and its normal balance. Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Communications, IMA: FSA
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Solution 273 An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders’ equity accounts. In its simplest form, an account consists of three parts: (1) the title of the account, (2) a left or debit side, and (3) a right or credit side (it resembles the letter T). Accounts are classified as asset, liability, stockholders’ equity, revenue, and expense. Accounts with a normal debit balance, such as assets and expenses, are increased when debited and decreased when credited. Accounts with a normal credit balance, such as liabilities and revenues, are increased when credited and decreased when debited. S-A E 274 Why is the Dividends account increased by a debit? stockholders’ equity.
Explain in terms of its relationship to
Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Communications, IMA: Business Applications
Solution 274 Dividends represent a decrease in stockholders’ equity. According to the rules of debit and credit, a decrease in stockholders’ equity is recorded as a debit. S-A E 275 Steve Rondelli, a fellow student, contends that the double-entry system means each transaction must be recorded twice. Is Steve correct? Explain. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Communications, IMA: FSA
Solution 275 Steve is incorrect, the double-entry system merely records the dual (two-sided) effect of a transaction on the accounting equation. A transaction is not recorded twice; it is recorded once, with a dual effect. In other words, for each transaction, debits must equal credits. S-A E 276 (a) Can accounting transaction debits and credits be recorded directly in the ledger accounts? (b) What are the advantages of first recording transactions in the journal and then posting to the ledger? Ans: N/A, LO: 3, 4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Communications, IMA: FSA
Solution 276 (a) Yes, debits and credits could be recorded directly in the ledger. (b) The advantages of using the journal are: (1) It discloses in one place the complete effect of a transaction. (2) It provides a chronological record of all transactions. (3) It helps to prevent or locate errors because the debit and credit amounts for each entry can be readily compared. S-A E 277 Describe the process of preparing a trial balance. What is the purpose of preparing a trial balance? If a trial balance does not balance, identify what might be the reasons why it does not balance. If the trial balance does balance, does that insure that the ledger accounts are correct? Explain. Ans: N/A, LO: 5, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
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Solution 277 The process of preparing a trial balance consists of (1) listing the account titles and their debit or credit balances in the order in which they appear in the general ledger, (2) totaling the debit and credit columns, and (3) proving the equality of the total debits and total credits. The primary purpose of the trial balance is to prove the equality of the debits and credits after posting. A trial balance also uncovers errors in journalizing and posting because errors in journalizing and posting cause a trial balance not to balance. A trial balance does not prove that all transactions have been recorded or that the ledger is correct. The trial balance may balance even when (1) an entire transaction is not journalized, (2) a correct journal entry is not posted, (3) a journal entry is posted twice, (4) incorrect accounts are used in journalizing or posting, or (5) offsetting errors are made in recording the amount of a transaction or posting to the ledger. S-A E 278 (Ethics) Robert Harder, Jr. was appointed the manager of Westbrook Properties, a recently formed company that manages residential rental properties. Maria Valdez is the accountant. She prepared a chart of accounts based on an analysis of the expenditures of the company. One of the largest expense categories is Travel and Entertainment. Mr. Harder believes that it is important to maintain a presence in the social life of the city. In this, he sharply differs from his father, Robert Harder, Sr. the elder Mr. Harder has set up Westbrook Properties in order to test his son's management skills before allowing him to manage a more lucrative commercial property business. Mr. Harder, Sr. provided the capital for Westbrook, and maintains close contact with the company. He allowed his son, however, to hire his own employees. Mr. Harder has asked Ms. Valdez to name the Travel and Entertainment account Property Development. He hopes to deflect his father's attention away from the amount he has spent on travel and entertainment until he has proven that his methods work. When Ms. Valdez resisted, he reminded her that he, not his father, hired her. He also reminded her that she had been enthusiastic about his business plans when she was hired. Required: 1. Who are the stakeholders in this situation? 2. Should Ms. Valdez agree to the change in the Travel and Entertainment account to Property Development? Explain. Ans: N/A, LO: 2, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Professional Demeanor, IMA: FSA
Solution 278 1. The stakeholders in this situation include Mr. Harder, Jr. Maria Valdez Mr. Harder, Sr. Bankers and others who might rely on the financial statements. 2. Ms. Valdez definitely should not agree to the name change. The intention of the person making the change is to deceive someone who has a right to know the affairs of the business, fully and completely. Though Ms. Valdez was hired by Mr. Harder, Jr., and though she may agree with his business methods, she cannot be a party to such deceit.
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S-A E 279 (Communication) The following trial balance was obtained from Gentry Company's computer system. RPT DPT PRIORITY RUN BY SEQUENCE
TR BAL ACC MGR 2 R.HAMES 997411
ACCOUNT BAL CASH 18700 SUPPLIES 5600 ACC PAY 7500NOTE PAY 1200COMMON STOCK 10000DIVIDENDS 500 SERVICE REVENUE 11000SAL AND WAG EXP 3500 RENT EXP 900 OTHER EXP 500 BAL 0 ***TRIAL BALANCE IS IN BALANCE***
Required: 1. What features make this trial balance difficult to read? 2. Prepare an improved trial balance. Ans: N/A, LO: 5, Bloom: AN, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 279 1. The trial balance is difficult to read because a. The title is not explanatory b. Account abbreviations are used c. The numbers are not shown in standard currency format d. Debits and credits are not separately shown, but are indicated by a "-" for credits e. Extraneous information is provided. 2.
GENTRY COMPANY Trial Balance
Cash Supplies Accounts Payable Note Payable Common Stock Dividends Service Revenue Salaries and Wages Expense Rent Expense Other Expenses
Debit $18,700 5,600
Credit
$ 7,500 1,200 10,000 500
11,000 3,500 900 500 $29,700 $29,700 (All accounts are debits except Acc. Pay., Not. Pay., Com. St., & Ser. Rev.)
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IFRS QUESTIONS 1.
Which of the following are the same under both GAAP and IFRS? a. The account. b. Debit and credit rules. c. Steps in the recording process. d. All of these answer choices are correct.
Ans: D LO6 BT: K Difficulty: Easy TOT: 1min. AACSB: RT AICPA BB: CT AICPA FC: Reporting IMA: Reporting
2.
Which of the following are the same under both GAAP and IFRS? a. The journal. b. The ledger. c. The chart of accounts. d. All of these answer choices are correct.
Ans: D LO6 BT: K Difficulty: Easy TOT: 1min. AACSB: RT AICPA BB: CT AICPA FC: Reporting IMA: Reporting
3.
Which of the following is true? a. Transaction analysis is completely different under IFRS and GAAP. b. Most transaction are recorded differently under IFRS and GAAP. c. Transaction analysis is the same under IFRS and GAAP, but some transactions are recorded differently. d. All transaction are recorded the same under IFRS and GAAP.
Ans: C LO6 BT: K Difficulty: Easy TOT: 1min. AACSB: RT AICPA BB: CT AICPA FC: Reporting IMA: Reporting
4.
European companies rely a. less on historical cost and more on fair values than U.S companies. b. less on fair values and more on historical cost than U.S companies. c. completely on fair values for financial reporting. d. completely on historical cost for financial reporting.
Ans: A LO6 BT: K Difficulty: Easy TOT: 1min. AACSB: RT AICPA BB: CT AICPA FC: Reporting IMA: Reporting
5.
The double-entry accounting system is the basis of accounting systems a. worldwide. b. worldwide, except for the U.S. c. in the U.S. only d. neither internationally nor in the U.S.
Ans: A LO6 BT: K Difficulty: Easy TOT: 1min. AACSB: RT AICPA BB: CT AICPA FC: Reporting IMA: Reporting
6.
Under IFRS, the trial balance a. follows the same format as under GAAP. b. shows credits on the left and debits on the right. c. include less accounts than under GAAP. d. include more accounts than under GAAP.
Ans: A LO6 BT: K Difficulty: Easy TOT: 1min. AACSB: RT AICPA BB: CT AICPA FC: Reporting IMA: Reporting
.
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7.
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Which of the following statements is true regarding the recording process? a. Because IFRS (International Financial Reporting Standards) rely more on fair value and less on historical cost than U.S. GAAP, the double-entry accounting system is not widely used by companies who use IFRS. b. Both IFRS (International Financial Reporting Standards) and U.S. GAAP use the same general rules of debits and credits and the steps in the recording process. c. A trial balance using IFRS (International Financial Reporting Standards) is organized by first showing the accounts from the statement of financial position followed by accounts from the income statement; a trial balance using U.S. GAAP is organized using the opposite order. d. All of these answer choices are correct.
Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
8.
Under U.S. GAAP a. currency signs are generally used in the journal, ledger, trial balance, and financial statements. b. Share Capital – Ordinary is referred to as Retained Earnings. c. the statement of financial position is often called the statement of changes in financial position. d. the rules of debits and credits, and the steps in the recording process are the same as under IFRS (International Financial Reporting Standards).
Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
CHAPTER 4 ACCRUAL ACCOUNTING CONCEPTS SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY Item
LO
BT
Item
LO
BT Item LO BT Item True-False Statements
LO
BT
Item
LO
BT
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
1 1 1 1 1 1 1 1 1 1 1
K K K K K K K K C K K
12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.
1 1 1 1 1 1 1 1 1 1 1
3 3 3 4 4 4 4 4 4 4 4
K K K K K K K K K K K
45. 46. 47. 48. 49. 50. 51. 52. *53.
4 4 4 4 4 4 4 4 5
K K K K K K K K K
54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86.
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
K K K K K K K K K K K K K K K C C C C C C K K C AP AP AP AP AP AP AP AP AP
87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119.
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2
K 23. 1 K 34. K 24. 2 K 35. K 25. 2 C 36. K 26. 2 K 37. K 27. 2 K 38. K 28. 2 K 39. K 29. 2 K 40. K 30. 2 K 41. K 31. 2 K 42. K 32. 2 K 43. C 33. 3 K 44. Multiple Choice Questions AP 120. 2 AP 153. C 121. 2 AP 154. K 122. 2 AP 155. K 123. 2 K 156. C 124. 2 AP 157. K 125. 2 AP 158. K 126. 2 AP 159. K 127. 2 K 160. K 128. 2 K 161. K 129. 2 K 162. C 130. 2 C 163. K 131. 2 AP 164. K 132. 2 C 165. C 133. 2 C 166. K 134. 2 K 167. K 135. 2 C 168. K 136. 2 C 169. C 137. 2 K 170. K 138. 2 C 171. K 139. 2 C 172. K 140. 2 C 173. C 141. 2 C 174. C 142. 2 K 175. K 143. 2 AP 176. K 144. 2 AP 177. K 145. 2 AN 178. K 146. 2 AP 179. K 147. 2 AP 180. K 148. 2 K 181. K 149. 3 AP 182. K 150. 3 AP 183. K 151. 2 K 184. K 152. 2 K 185.
2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3
C K K K K K AP C C C AN AN AP AP AP AP AP AP AN AN AP AP AP AP AP AP AP AP AP AP AP AN AN
186. 187. 188. 189. 190. 191. 192. 193. 194. 195. 196. 197. 198. 199. 200. 201. 202. 203. 204. 205. 206. 207. 208. 209. 210. 211. 212. 213. 214. 215. 216. 217. 218.
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4 4 4 4 4 4 4
AP AP C C C C AP AP AP AP AN AP AP AP AP AP AP AN AP AP AP AP K K K K K K K K AP AP AP
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
219. 220. 221. 222. 223. 224.
4 4 4 4 4 4
AP AP K K C K
225. 226. 227. 228. 229. 230.
4 4 4 4 4 4
248. 249. 250. 251.
1 1 1 2, 3
K AP AP K
252 253. 254. 255.
1, 2 2, 3 2 2
264. 265. 266. 267. 268. 269.
1 1 1 1 1 2, 3
AN AN AP C AP AN
270. 271. 272. 273. 274. 275.
2, 3 2, 3 2, 3 2, 3 2, 3 2
292. 293. 294.
1 1 1
K K K
295. 296. 297.
1 1 2
303.
1-4
K
304. 305.
1 1
C C
306. 307.
1 1, 2, 3
K K K K K K
231. 4 K 237. 232. 4 AP 238. 233. 4 AP 239. 234. 4 AP 240. 235. 4 AP 241. 236. 4 AP 242. Brief Exercises K 256. 2 AP 260. AN 257. 3 AP 261. AP 258. 2, 3 K 262. AP 259. 2 AP 263. Exercises AN 276. 2 AP 282. K 277. 2, 3 AP 283. K 278. 2, 3 AP 284. AP 279. 2, 3 AP 285. AP 280. 2, 3 AP 286. C 281. 2, 3 AP 287. Completion Statements K 298. 2 K 301. K 299. 3 K 302. K 300. 4 K Matching
C C
Short Answer Essay 308. 1 K 310. 309. 1 C 311.
*This topic is dealt with in an Appendix to the chapter.
.
4 4 4 4 4 4
K K K K K C
3 4 4 4
AP AP AP K
2, 3 2, 3 2, 3 2, 3 3 3
AP AN K AP AP AP
4 4
K K
1 4
K C
*243. *244. *245. *246. *247.
5 5 5 5 5
K K K K K
288. 289. 290. 291.
2, 3 2 4 4
AP AP AP AP
312. 313.
1 1
E C
Accrual Accounting Concepts
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE L.O. 1 Item 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 22. 23. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76.
Type TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC
L.O. 1 (cont.)
L.O. 1 (cont.)
Item 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 248. 249. 250. 252. 264. 265.
Item 266. 267. 268. 292. 293. 294. 295. 296.
Type MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC Be Be Be Be Ex Ex .
Type Ex Ex Ex C C C C C
L.O. 2 Item 24. 25. 26. 27. 28. 29. 30. 31. 32. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143 144. 145. 146. 147. 148. 151. 152.
Type TF TF TF TF TF TF TF TF TF MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC
L.O. 2 (cont.) Item 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 176. 177. 251. 252. 253. 254. 255. 256. 258. 259. 269. 270. 271. 272. 273. 274. 275. 276. 277. 278. 279. 280.
Type MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC Be Be Be Be Be Be Be Be Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex
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L.O. 2 (cont.)
L.O. 3 (cont.)
Item 281. 282. 283. 284. 285. 288. 289. 297. 298.
Item 197. 198. 199. 200. 201. 202. 203. 204. 205. 206. 207. 251. 253. 257. 258. 260. 269. 270. 271. 272. 273. 274. 277. 278. 279. 280. 281.
Type MC MC MC MC MC MC MC MC MC MC MC Be Be Be Be Be Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex Ex
282.
Ex
283. 284. 285. 286. 287. 288. 299.
Ex Ex Ex Ex Ex Ex C
Type Ex Ex Ex Ex Ex Ex Ex C C
L.O. 3 33. 34. 35. 36. 149. 150. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. 194. 195. 196.
TF TF TF TF MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC
Note:
TF = True-False MC = Multiple Choice
L.O. 4 Item 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 208. 209. 210. 211. 212. 213. 214. 215. 216. 217. 218. 219. 220. 221. 222. 223. 224. 225. 226. 227. 228. 229. 230. 231. 232. 233. 234.
Type TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC
L.O. 4 (cont.) Item 235. 236. 237. 238. 239. 240. 241. 242. 261. 262. 263. 290. 291. 300. 301. 302.
Type MC MC MC MC MC MC MC MC Be Be Be Ex Ex C C C
L.O.*5 Item 53. 243. 244. 245. 246. 247.
Type TF MC MC MC MC MC
C = Completion Ex = Exercise
The chapter also contains one set of ten Matching questions and ten Short-Answer Essay questions. .
Accrual Accounting Concepts
4-5
CHAPTER LEARNING OBJECTIVES 1. Explain the accrual basis of accounting and the reasons for adjusting entries. The revenue recognition principle dictates that companies recognize revenue when a performance obligation has been satisfied. The expense recognition principle dictates that companies recognize expenses in the period when the company makes efforts to generate those revenues. Under the cash basis, companies record events only in the periods in which the company receives or pays cash. Accrual-based accounting means that companies record in the periods in which the events occur, events that change a company's financial statements even if cash has not been exchanged. Companies make adjusting entries at the end of an accounting period. These entries ensure that companies record revenues in the period in which the performance obligation is satisfied and that companies recognize expenses in the period in which they are incurred. The major types of adjusting entries are prepaid expenses, unearned revenues, accrued revenues, and accrued expenses. 2. Prepare adjusting entries for deferrals. Deferrals are either prepaid expenses or unearned revenues. Companies make adjusting entries for deferrals at the statement date to record the portion of the deferred item that represents the expense incurred or the revenue for services performed in the current accounting period. 3. Prepare adjusting entries for accruals. Accruals are either accrued revenues or accrued expenses. Adjusting entries for accruals record revenues earned and expenses incurred in the current accounting period that have not been recognized through daily entries. 4. Prepare an adjusted trial balance and closing entries. An adjusted trial balance is a trial balance that shows the balances of all accounts, including those that have been adjusted, at the end of an accounting period. The purpose of an adjusted trial balance is to show the effects of all financial events that have occurred during the accounting period. One purpose of closing entries is to transfer net income or net loss for the period to Retained Earnings. A second purpose is to “zero-out” all temporary accounts (revenue accounts, expense accounts, and Dividends) so that they start each new period with a zero balance. To accomplish this, companies “close” all temporary accounts at the end of an accounting period. They make separate entries to close revenues and expenses to Income Summary, Income Summary to Retained Earnings, and Dividends to Retained Earnings. Only temporary accounts are closed. The required steps in the accounting cycle are (a) analyze business transactions, (b) journalize the transactions, (c) post to ledger accounts, (d) prepare a trial balance, (e) journalize and post adjusting entries, (f) prepare an adjusted trial balance, (g) prepare financial statements, (h) journalize and post-closing entries, and (i) prepare a post-closing trial balance.
.
4-6
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
*5.Describe the purpose and the basic form of a worksheet. The worksheet is a device to make it easier to prepare adjusting entries and the financial statements. Companies often prepare a worksheet using a computer spreadsheet. The sets of columns of the worksheet are, from left to right, the unadjusted trial balance, adjustments, adjusted trial balance, income statement, and balance sheet.
.
Accrual Accounting Concepts
4-7
TRUE-FALSE STATEMENTS 1.
The periodicity assumption states that the economic life of a business entity can be divided into artificial time periods.
Ans: T, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Reporting
2.
The periodicity assumption is often referred to as the expense recognition principle.
Ans: F, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Reporting
3.
The revenue recognition principle dictates that revenue be recognized in the accounting period in which the performance obligation is satisfied.
Ans: T, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Reporting
4.
Expense recognition is tied to revenue recognition.
Ans: T, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Reporting
5.
The revenue recognition principle and the expense recognition principle are helpful guides used in determining net income or net loss for a period.
Ans: T, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Reporting
6.
The expense recognition principle requires that efforts be related to accomplishments.
Ans: T, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Reporting
7.
Recognizing when an expense contributes to the production of revenue is critical.
Ans: T, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Reporting
8.
The expense recognition principle is frequently referred to as the matching principle.
Ans: T, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Reporting
9.
Income will always be greater under the cash basis of accounting than under the accrual basis of accounting.
Ans: F, LO 1, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Reporting
10.
The cash basis of accounting is not in accordance with generally accepted accounting principles.
Ans: T, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
11.
Adjusting entries are often made because some business events are not recorded as they occur.
Ans: T, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Reporting
12.
Adjusting entries are recorded in the general journal but are not posted to the accounts in the general ledger.
Ans: F, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Reporting
13.
Adjusting entries are not necessary if the trial balance debit and credit columns balances are equal.
Ans: F, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Reporting
.
4-8 14.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
An adjusting entry would be made to the revenue account only when cash is received.
Ans: F, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
15.
An adjusting entry to a prepaid expense is required to recognize expired expenses.
Ans: T, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Reporting
16.
An adjusting entry always involves two balance sheet accounts.
Ans: F, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Reporting
17.
An adjusting entry always involves a balance sheet account and an income statement account.
Ans: T, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Reporting
18.
Revenue received before it is recognized and expenses paid before being used or consumed are both initially recorded as liabilities.
Ans: F, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
19.
Revenue received before it is recognized and expenses used or consumed before being paid are both initially recorded as liabilities.
Ans: T, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
20.
Accrued revenues are revenues that have been received but not yet recognized.
Ans: F, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
21.
Accrued revenues are revenues that have been recognized but not yet recorded.
Ans: T, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
22.
The difference between unearned revenue and accrued revenue is that accrued revenue has been recorded and needs adjusting and unearned revenue has never been recorded.
Ans: F, LO 1, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
23.
If prepaid costs are initially recorded as an asset, no adjusting entries will be required in the future.
Ans: F, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
24.
The cost of a depreciable asset less accumulated depreciation reflects the book value of the asset.
Ans: T, LO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving
25.
The book value of a depreciable asset is always equal to its market value because depreciation is a valuation technique.
Ans: F, LO 2, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics
26.
Accumulated Depreciation is a liability account and has a credit normal account balance.
Ans: F, LO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
27.
A liability—revenue account relationship exists with an unearned rent revenue adjusting entry.
Ans: T, LO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
Accrual Accounting Concepts
28.
4-9
The balances of the Depreciation Expense and the Accumulated Depreciation accounts should always be the same.
Ans: F, LO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
29.
Unearned revenue is a prepayment that requires an adjusting entry when services are performed.
Ans: T, LO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
30.
The adjusting entry for unearned revenue results in an increase (a debit) to an asset account and an increase (a credit) to a revenue account.
Ans: F, LO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
31.
Asset prepayments become expenses when they expire.
Ans: T, LO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
32.
A contra asset account is subtracted from a related account in the balance sheet.
Ans: T, LO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
33.
Accrued revenues are revenues that have been recognized but cash has not been received before financial statements have been prepared.
Ans: F, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
34.
The adjusting entry for accrued salaries requires a debit to Salaries and Wages Payable.
Ans: F, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
35.
The accrued interest for a three month note payable of $10,000 dated December 1, 2017 at an interest rate of 6% is $150 on December 31, 2017.
Ans: F, LO 3, BT: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
36.
Without an adjusting entry for accrued interest expense, liabilities and interest expense are understated, and net income and stockholders’ equity are overstated.
Ans: T, LO 3, BT: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
37.
Financial statements can be prepared from the information provided by an adjusted trial balance.
Ans: T, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
38.
An adjusted trial balance must be prepared before the adjusting entries can be recorded.
Ans: F, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
4-10 39.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Closing entries deal primarily with the balances of permanent accounts.
Ans: F, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
40.
The only accounts that are closed are temporary accounts.
Ans: T, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
41.
When closing entries are prepared, each income statement account is closed directly to retained earnings.
Ans: F, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
42.
Cash is a temporary account.
Ans: F, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
43.
The post-closing trial balance will contain only permanent—balance sheet—accounts.
Ans: T, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
44.
Accounts receivable is a permanent account.
Ans: T, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
45.
The Dividends account is closed to the Income Summary account at the end of each year.
Ans: F, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
46.
A revenue account is closed with a credit to the revenue account and a debit to Income Summary.
Ans: F, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving
47.
An expense account is closed with a credit to the expense account and a debit to the Income Summary account.
Ans: T, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
48.
Financial statements must be prepared before the closing entries are made.
Ans: T, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
49.
In the accounting cycle, closing entries are prepared before adjusting entries.
Ans: F, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
50.
Closing entries result in the transfer of net income or net loss into the Retained Earnings account.
Ans: T, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
51.
The post closing trial balance will have fewer accounts than the adjusted trial balance.
Ans: T, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
Accrual Accounting Concepts
52.
4-11
The accounting cycle begins with the journalizing of the transactions.
Ans: F, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
*53.
A 10-column worksheet is a permanent accounting record.
Ans: F, LO 5, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Answers to True-False Statements 1. 2. 3. 4. 5. 6. 7. 8. 9.
T F T T T T T T F
10. 11. 12. 13. 14. 15. 16. 17. 18.
T T F F F T F T F
19. 20. 21. 22. 23. 24. 25. 26. 27.
T F T F F T F F T
28. 29. 30. 31. 32. 33. 34. 35. 36.
.
F T F T T F F F T
37. 38. 39. 40. 41. 42. 43. 44. 45.
T F F T F F T T F
46. 47. 48. 49. 50. 51. 52. 53.
F T T F T T F F
4-12
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
MULTIPLE CHOICE QUESTIONS 54.
The periodicity assumption states that: a. a transaction can only affect one period of time. b. estimates should not be made if a transaction affects more than one time period. c. adjustments to the enterprise's accounts can only be made in the time period when the business terminates its operations. d. the economic life of a business can be divided into artificial time periods.
Ans: D, LO 1, BT: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
55.
One of the accounting concepts upon which adjustments for prepayments and accruals are based is: a. expense recognition. b. cost. c. monetary unit. d. economic entity.
Ans: A, LO 1, BT: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
56.
An accounting time period that is one year in length is called: a. a fiscal year. b. an interim period. c. the time period assumption. d. a reporting period.
Ans: A, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
57.
Adjustments would not be necessary if financial statements were prepared to reflect net income from: a. monthly operations. b. fiscal year operations. c. interim operations. d. lifetime operations.
Ans: D, LO 1, BT: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
58.
Management usually wants ________ financial statements and the IRS requires all businesses to file _________ tax returns. a. annual, annual b. monthly, annual c. quarterly, monthly d. monthly, monthly
Ans: B, LO 1, BT: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting
.
Accrual Accounting Concepts
59.
4-13
Expenses are recognized when: a. they contribute to the production of revenue. b. they are paid. c. they are billed by the supplier. d. the invoice is received.
Ans: A, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
60.
Which of the following is not generally an accounting time period? a. A week. b. A month. c. A quarter. d. A year.
Ans: A, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting
61.
The revenue recognition principle dictates that revenue should be recognized in the accounting records: a. when cash is received. b. when the performance obligation is satisfied. c. at the end of the month. d. in the period that income taxes are paid.
Ans: B, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting
62.
In a service-type business, revenue is recognized: a. at the end of the month. b. at the end of the year. c. when the service is performed. d. when cash is received.
Ans: C, LO 1, BT: K, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
63.
The expense recognition principle matches: a. customers with businesses. b. expenses with revenues. c. assets with liabilities. d. creditors with businesses.
Ans: B, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
64.
Otto’s Tune-Up Shop follows the revenue recognition principle. Otto services a car on August 31. The customer picks up the vehicle on September 1 and mails the payment to Otto on September 5. Otto receives the check in the mail on September 6. When should Otto show that the revenue was recognized? a. August 31 b. August 1 c. September 5 d. September 6
Ans: A, LO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting
.
4-14 65.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
A company spends $20 million dollars for an office building. Over what period should the cost be written off? a. When the $20 million is expended in cash. b. All in the first year. c. After $20 million in revenue is earned. d. None of these answer choices are correct.
Ans: D, LO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Decision Modeling, AICPA PC: Communication, IMA: Business Economics
66.
The expense recognition principle states that expenses should be matched with revenues. Another way of stating the principle is to say that: a. assets should be matched with liabilities. b. efforts should be matched with accomplishments. c. dividends should be matched with stockholder investments. d. cash payments should be matched with cash receipts.
Ans: B, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting
67.
Which principle dictates that efforts (expenses) be recorded with accomplishments (revenues)? a. Historical cost principle. b. Periodicity principle. c. Revenue recognition principle. d. Expense recognition principle.
Ans: D, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
68.
A flower shop makes a large sale for $1,000 on November 30. The customer is sent a statement on December 5 and a check is received on December 10. The flower shop follows GAAP and applies the revenue recognition principle. When is the $1,000 considered to be recognized? a. December 5 b. December 10 c. November 30 d. December 1
Ans: C, LO 1, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting
69.
A furniture factory's employees work overtime to finish an order that is sold on January 31. The office sends a statement to the customer in early February and payment is received by mid-February. The overtime wages should be expensed in: a. January. b. February. c. the period when the workers receive their checks. d. either January or February depending on when the pay period ends.
Ans: A, LO 1, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
Accrual Accounting Concepts
70.
4-15
Which is not an application of revenue recognition? a. Recording revenue as an adjusting entry on the last day of the accounting period. b. Accepting cash from an established customer for services to be performed over the next three months. c. Billing customers on June 30 for services completed during June. d. Receiving cash for services performed.
Ans: B, LO 1, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
71.
Why do generally accepted accounting principles require the application of the revenue recognition principle? a. Failure to apply the revenue recognition principle could lead to a misstatement of revenue. b. It is easy to apply the revenue recognition principle because revenue issues are always easy to identify and resolve. c. Recording revenue when cash is received is an objective application of the revenue recognition principle. d. Accounting software has made the revenue recognition easy to apply.
Ans: A, LO 1, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Risk Analysis, AICPA PC: Communication, IMA: Business Economics
72.
On April 1, 2017, nPropel Corporation paid $48,000 cash for equipment that will be used in business operations. The equipment will be used for four years. nPropel records depreciation expense of $48,000 for the calendar year ending December 31, 2017. Which accounting principle has been violated? a. Depreciation principle. b. No principle has been violated. c. Cash principle. d. Expense recognition principle.
Ans: D, LO 1, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Ethics, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
73.
Under the cash basis of accounting: a. revenue is recognized when services are performed. b. expenses are matched with the revenue that is produced. c. cash must be received before revenue is recognized. d. a promise to pay is sufficient to recognize revenue.
Ans: C, LO 1, BT: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
74.
Under the accrual basis of accounting: a. cash must be received before revenue is recognized. b. net income is calculated by matching cash outflows against cash inflows. c. events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received. d. the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under generally accepted accounting principles.
Ans: C, LO 1, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting
.
4-16 75.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Using accrual accounting, expenses are recorded and reported only: a. when they are incurred whether or not cash is paid. b. when they are incurred and paid at the same time. c. if they are paid before they are incurred. d. if they are paid after they are incurred.
Ans: A, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting
76.
A small company may be able to justify using a cash basis of accounting if they have: a. sales under $1,000,000. b. no accountants on staff. c. few receivables and payables. d. all sales and purchases on account.
Ans: C, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
77.
Which statement is correct? a. As long as a company consistently uses the cash basis of accounting, generally accepted accounting principles allow its use. b. The use of the cash basis of accounting violates both the revenue recognition and expense recognition principles. c. The cash basis of accounting is objective because no one can be certain of the amount of revenue until the cash is received. d. As long as management is ethical, there are no problems with using the cash basis of accounting.
Ans: B, LO 1, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
78.
The following is selected information from L Corporation for the fiscal year ending October 31, 2017. Cash received from customers Revenue recognized Cash paid for expenses Cash paid for computers on November 1, 2016 that will be used for 3 years Expenses incurred including any depreciation Proceeds from a bank loan, part of which was used to pay for the computers
$300,000 440,000 170,000 48,000 216,000 100,000
Based on the accrual basis of accounting, what is L Corporation’s net income for the year ending October 31, 2017? a. $254,000 b. $224,000 c. $208,000 d. $270,000 Ans: B, LO 1, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $440,000 − $216,000 = $224,000 (Rev. recog. − exp. incur.)
.
Accrual Accounting Concepts
79.
4-17
The following is selected information from C Corporation for the fiscal year ending October 31, 2017. Cash received from customers Revenue recognized Cash paid for expenses Cash paid for computers on November 1, 2016 that will be used for 3 years Expenses incurred including any depreciation Proceeds from a bank loan, part of which was used to pay for the computers
$150,000 225,000 85,000 24,000 119,000 50,000
Based on the accrual basis of accounting, what is C Corporation’s net income for the year ending October 31, 2017? a. $132,000 b. $116,000 c. $106,000 d. $140,000 Ans: C, LO 1, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting , AICPA PC: Problem Solving, IMA: Reporting Solution: $225,000 − $119,000 = $106,000 (Rev. recog. − exp. incur.)
80.
La More Company had the following transactions during 2016: • Sales of $9,000 on account • Collected $4,000 for services to be performed in 2017 • Paid $3,750 cash in salaries for 2016 • Purchased airline tickets for $500 in December for a trip to take place in 2017 What is La More’s 2016 net income using accrual accounting? a. $5,750 b. $9,750 c. $9,250 d. $5,250
Ans: D, LO 1, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $9,000 − $3,750 = $5,250 (Sales − Salaries)
.
4-18
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
81.
La More Company had the following transactions during 2016. • Sales of $9,000 on account • Collected $4,000 for services to be performed in 2017 • Paid $2,650 cash in salaries • Purchased airline tickets for $500 in December for a trip to take place in 2017 What is La More’s 2016 net income using cash basis accounting? a. $10,350 b. $1,350 c. $9,850 d. $850
Ans: D, LO 1, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $4,000 − $2,650 − $500 = $850 (Collect. − salaries − air. tick.)
82.
Wang Company had the following transactions during 2016: • Sales of $10,800 on account • Collected $4,800 for services to be performed in 2017 • Paid $2,600 cash in salaries for 2016 • Purchased airline tickets for $600 in December for a trip to take place in 2017 What is Wang’s 2016 net income using accrual accounting? a. $8,800 b. $13,600 c. $13,000 d. $8,200
Ans: D, LO 1, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $10,800 − $2,600 = $8,200 (Sales − Salaries)
83.
Wang Company had the following transactions during 2016: • Sales of $10,800 on account • Collected $4,800 for services to be performed in 2017 • Paid $2,600 cash in salaries • Purchased airline tickets for $600 in December for a trip to take place in 2017 What is Wang’s 2016 net income using cash basis accounting? a. $1,600 b. $2,800 c. $13,000 d. $2,200
Ans: A, LO 1, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $4,800 − $2,600 − $600 = $1,600 (Collect. − Salaries − air. tick.)
.
Accrual Accounting Concepts
84.
4-19
Given the data below for a firm in its first year of operation, determine net income under the cash basis of accounting. Revenue recognized $19,000 Accounts receivable 3,000 Expenses incurred 7,250 Accounts payable (related to expenses) 750 Supplies purchased with cash 1,800 a. $9,500 b. $14,000 c. $7,700 d. $9,950
Ans: C, LO 1, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($19,000 − $3,000) − ($7,250 − $750) − $1,800 = $7,700 [(Rev. recog. − acc. rec.) - (exp. incur. − acc. pay.) − sup.]
85.
Given the data below for a firm in its first year of operation, determine net income under the accrual basis of accounting. Revenue recognized $19,000 Accounts receivable 3,000 Expenses incurred 7,250 Accounts payable (related to expenses) 750 Supplies purchased with cash 1,800 a. $11,750 b. $14,000 c. $9,500 d. $12,200
Ans: A, LO 1, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $19,000 − $7,250 = $11,750 (Rev. recog. − exp. incur.)
86.
Given the data below for a firm in its first year of operation, determine net income under the cash basis of accounting. Cash received from customers $45,000 Accounts receivable 12,000 Cash paid for expenses 26,000 Accounts payable (related to expenses) 3,000 Prepaid rent for next period 7,000 a. $19,000 b. $28,000 c. $21,000 d. $12,000
Ans: D, LO 1, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $45,000 − $26,000 − $7,000 = $12,000 (Cash rec. − Cash paid − Prep. rent)
.
4-20 87.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Given the data below for a firm in its first year of operation, determine net income under the accrual basis of accounting. Cash received from customers $45,000 Accounts receivable 12,000 Cash paid for expenses 26,000 Accounts payable (related to expenses) 3,000 Prepaid rent for next period 7,000 a. $19,000 b. $28,000 c. $21,000 d. $12,000
Ans: B, LO 1, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $45,000 + $12,000 − $26,000 − $3,000 = $28,000 (Cash rec. + acc. rec. − cash paid − acc. pay.)
88.
Under the cash basis of accounting, an amount received from a customer in advance of providing the services would be reported as a(n): a. revenue. b. liability. c. expense. d. prepaid expense.
Ans: A, LO 1, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting
89.
Which of the following would not be an application of the revenue recognition or expense recognition principle? a. Recording accrued salaries and wages expense. b. Recording accrued interest revenue. c. Recording the collection of an advance customer payment as revenue. d. Recording prepaid expense adjustments.
Ans: C, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA BB: None, AICPA FC: Risk Analysis, AICPA PC: Professional Demeanor
90.
Why was Apple required to spread their iPhone revenues over a two year period? a. Because of its newness, their returns might exceed the normal level of returns. b. Because they were required to provide software updates over that two year period. c. Because that was the estimated life of the iPhone. d. Because they needed to defer revenue recognition since they had a swap program available for future models.
Ans: B, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
91.
Which of the following is an example of a deferral adjusting entry? a. Accrued expense b. Accrued revenue c. Prepaid expense d. All of these choices are correct.
Ans: C, LO 1, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Accrual Accounting Concepts
92.
4-21
The primary difference between prepaid and accrued expenses is that prepaid expenses have: a. been incurred and accrued expenses have not. b. not been paid and accrued expenses have. c. been recorded and accrued expenses have not. d. not been recorded and accrued expenses have.
Ans: C, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
93.
The primary difference between accrued revenues and unearned revenues is that accrued revenues have: a. not been recognized and accrued revenues have been. b. been paid and unearned revenues have not. c. been recorded and unearned revenues have not. d. not been recorded and unearned revenues have.
Ans: D, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
94.
The general term employed to indicate an expense that has not been paid or revenue that has not been received and has not yet been recognized in the accounts is: a. contra asset. b. prepayment. c. asset. d. accrued.
Ans: D, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
95.
Accounts often need to be adjusted because: a. there are never enough accounts to record all the transactions. b. many transactions affect more than one time period. c. there are always errors made in recording transactions. d. management can't decide what they want to report.
Ans: B, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
96.
Adjusting entries are made to ensure that: a. expense are recognized in the period in which they are incurred. b. revenues are recorded in the period in which the performance obligation is satisfied. c. balance sheet and income statement accounts have correct balances at the end of an accounting period. d. All of these answer choices are correct.
Ans: D, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
97.
Adjusting entries are: a. not necessary if the accounting system is operating properly. b. usually required before financial statements are prepared. c. made whenever management desires to change an account balance. d. made to balance sheet accounts only.
Ans: B, LO 1, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
4-22 98.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Each of the following is a major type (or category) of adjusting entry except: a. earned expenses. b. prepaid expenses. c. accrued expenses. d. accrued revenues.
Ans: A, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving
99.
Adjusting entries are required: a. because some costs expire with the passage of time and have not yet been journalized. b. when the company's profits are below the budget. c. when expenses are recorded in the period in which they are earned. d. None of these answer choices are correct.
Ans: A, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
100.
Which one of the following is not a justification for adjusting entries? a. Adjusting entries are necessary to ensure that the revenue recognition principle is followed. b. Adjusting entries are necessary to ensure that the expense recognition principle is followed. c. Adjusting entries are necessary to enable financial statements to be in conformity with GAAP. d. Adjusting entries are necessary to bring the general ledger accounts in line with the budget.
Ans: D, LO 1, BT: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
101.
An adjusting entry: a. affects two balance sheet accounts. b. affects two income statement accounts. c. affects a balance sheet account and an income statement account. d. is always a compound entry.
Ans: C, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
102.
Adjusting entries are: a. the same as correcting entries. b. needed to ensure that the expense recognition principle is followed. c. optional. d. rarely needed.
Ans: B, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
103.
The preparation of adjusting entries is: a. straightforward because the accounts that need adjustment will be out of balance. b. needed to ensure that the expense recognition principle is followed. c. only required for accounts that do not have a normal balance. d. optional when financial statements are prepared.
Ans: B, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
Accrual Accounting Concepts
104.
4-23
If a resource has been consumed but a bill has not been received at the end of the accounting period, then: a. an expense should be recorded when the bill is received. b. an expense should be recorded when the cash is paid out. c. an adjusting entry should be made recognizing the expense. d. it is optional whether to record the expense before the bill is received.
Ans: C, LO 1, BT: C, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
105.
An asset–expense relationship exists with: a. liability accounts. b. revenue accounts. c. prepaid expense adjusting entries. d. accrued expense adjusting entries.
Ans: C, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
106.
A liability–revenue relationship exists with: a. asset accounts. b. revenue accounts. c. unearned revenue adjusting entries. d. accrued expense adjusting entries.
Ans: C, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
107.
Adjusting entries can be classified as: a. postponements and advances. b. accruals and deferrals. c. deferrals and postponements. d. accruals and advances.
Ans: B, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
108.
Which of the following items describe the two classifications of adjusting entries? a. Postponements and advances. b. Accruals and advances. c. Deferrals and postponements. d. Accruals and deferrals.
Ans: D, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
109.
Which of the following describes an accrued expense? a. Incurred but not yet paid or recorded. b. Paid and recorded in an asset account after they are used or consumed. c. Paid and recorded in an asset account before they are used or consumed. d. Incurred and already paid or recorded.
Ans: A, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
4-24 110.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Accrued revenues are: a. received and recorded as liabilities before they are recognized. b. recognized and recorded as liabilities before they are received. c. recognized but not yet received or recorded. d. recognized and already received and recorded.
Ans: C, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
111.
Prepaid expenses are: a. paid and recorded in an asset account before they are used or consumed. b. paid and recorded in an asset account after they are used or consumed. c. incurred but not yet paid or recorded. d. incurred and already paid or recorded.
Ans: A, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
112.
Goods purchased for future use in the business, such as supplies, are called: a. prepaid expenses. b. revenues. c. stockholders’ equity. d. liabilities.
Ans: A, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
113.
Accrued expenses are: a. paid and recorded in an asset account before they are used or consumed. b. paid and recorded in an asset account after they are used or consumed. c. incurred but not yet paid or recorded. d. incurred and already paid or recorded.
Ans: C, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
114.
Unearned revenues are: a. received and recorded as liabilities before they are recognized. b. recognized and recorded as liabilities before they are received. c. recognized but not yet received or recorded. d. recognized and already received and recorded.
Ans: A, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
115.
Adjusting entries affect at least: a. one revenue and one expense account. b. one asset and one liability account. c. one revenue and one balance sheet account. d. one income statement account and one balance sheet account.
Ans: D, LO 1, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
Accrual Accounting Concepts
116.
4-25
An architecture firm earned $2,000 for architecture services provided with the fee to be paid in the future. No entry was made at the time the service was provided. If the fee has not been paid by the end of the accounting period and no adjusting entry is made, this would cause: a. revenues to be overstated. b. net income to be overstated. c. liabilities to be understated. d. revenues to be understated.
Ans: D, LO 2, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
117.
An adjusting entry can include a: a. debit to an asset and a credit to a liability. b. debit to a revenue and a credit to an asset. c. debit to a liability and a credit to a revenue. d. debit to an expense and a credit to a revenue.
Ans: C, LO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
118.
A law firm received $2,000 cash for legal services to be rendered in the future. The full amount was credited to the liability account Unearned Service Revenue. If the legal services have been rendered at the end of the accounting period and no adjusting entry is made, this would cause: a. expenses to be overstated. b. net income to be overstated. c. liabilities to be understated. d. revenues to be understated.
Ans: D, LO 2, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
119.
On January 1, 2017, M. Johanson Company purchased equipment for $54,000. The company is depreciating the equipment at the rate of $750 per month. The book value of the equipment at December 31, 2017 is: a. $0. b. $9,000. c. $45,000. d. $54,000.
Ans: C, LO 2, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $54,000 − ($750 12) = $45,000 [Cost of equip. − (dep./mon 12)]
.
4-26 120.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The Vintage Laundry Company purchased $8,500 worth of laundry supplies on June 2 and recorded the purchase as an asset. On June 30, an inventory of the laundry supplies indicated only $1,500 on hand. The adjusting entry that should be made by the company on June 30 is: a. debit Supplies Expense, $1,500; credit Supplies, $1,500. b. debit Supplies, $7,000; credit Supplies Expense, $7,000. c. debit Supplies, $1,500; credit Supplies Expense, $1,500. d. debit Supplies Expense, $7,000; credit Supplies, $7,000.
Ans: D, LO 2, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $8,500 − $1,500 = $7,000 (Sup. purch. − Sup. on hand)
121.
Greese Company purchased office supplies costing $7,000 and debited Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $2,500 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be: a. debit Supplies Expense, $2,500; credit Supplies, $2,500. b. debit Supplies, $4,500; credit Supplies Expense, $4,500. c. debit Supplies Expense, $4,500; credit Supplies, $4,500. d. debit Supplies, $2,500; credit Supplies Expense, $2,500.
Ans: C, LO 2, BT: AP, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $7,000 − $2,500 = $4,500 (Sup. purch. − Sup. on hand)
122.
A company purchased office supplies costing $5,000 and debited Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $900 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be: a. debit Supplies Expense, $5,900; credit Supplies, $5,900. b. debit Supplies, $900; credit Supplies Expense, $900. c. debit Supplies Expense, $4,100; credit Supplies, $4,100. d. debit Supplies, $4,100; credit Supplies Expense, $4,100.
Ans: C, LO 2, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $5,000 − $900 = $4,100 (Sup. purch. − Sup. on hand)
123.
Unearned revenue is classified as a(n): a. asset account. b. revenue account. c. contra revenue account. d. liability.
Ans: D, LO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Accrual Accounting Concepts
124.
4-27
Boyce Company purchased office supplies costing $7,000 and debited Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $1,800 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be: a. debit Supplies Expense, $5,200; credit Supplies, $5,200. b. debit Supplies, $1,800; credit Supplies Expense, $1,800. c. debit Supplies Expense, $1,800; credit Supplies, $1,800. d. debit Supplies, $5,200; credit Supplies Expense, $5,200.
Ans: A, LO 2, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $7,000 − $1,800 = $5,200 (Sup. purch. − Sup. on hand)
125.
On July 1 the Fisher Shoe Store paid $24,000 to Acme Realty for 6 months rent beginning July 1. Prepaid Rent was debited for the full amount. If financial statements are prepared on July 31, the adjusting entry to be made by the Fisher Shoe Store is: a. debit Rent Expense, $24,000; credit Prepaid Rent, $4,000. b. debit Prepaid Rent, $4,000; credit Rent Expense, $4,000. c. debit Rent Expense, $4,000; credit Prepaid Rent, $4,000. d. debit Rent Expense, $24,000; credit Prepaid Rent, $20,000.
Ans: C, LO 2, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $24,000 1/6 = $4,000 (Rent paid 1/6)
126.
The balance in the prepaid rent account before adjustment at the end of the year is $12,000 and represents three months rent paid on December 1. The adjusting entry required on December 31 is: a. debit Prepaid Rent, $4,000; credit Rent Expense $4,000. b. debit Prepaid Rent, $8,000; credit Rent Expense, $8,000. c. debit Rent Expense, $12,000; credit Prepaid Rent, $12,000. d. debit Rent Expense, $4,000; credit Prepaid Rent, $4,000.
Ans: D, LO 2, BT: AP, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $12,000 1/3 = $4,000 (Prep. rent bal. 1/3)
127.
If a business has received cash in advance of services performed and credits a liability account, the adjusting entry needed after the services are performed will be: a. debit Unearned Service Revenue and credit Cash. b. debit Unearned Service Revenue and credit Service Revenue. c. debit Unearned Service Revenue and credit Prepaid Expense. d. debit Unearned Service Revenue and credit Accounts Receivable.
Ans: B, LO 2, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
4-28 128.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Accumulated Depreciation is a(n): a. expense account. b. stockholders’ equity account. c. liability account. d. contra asset account.
Ans: D, LO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
129.
The Harris Company purchased equipment for $15,000 on December 1. It is estimated that annual depreciation on the computer will be $3,000. If financial statements are to be prepared on December 31, the company should make the following adjusting entry: a. debit Depreciation Expense, $3,000; credit Accumulated Depreciation, $3,000. b. debit Depreciation Expense, $250; credit Accumulated Depreciation, $250. c. debit Depreciation Expense, $12,000; credit Accumulated Depreciation, $12,000. d. debit Equipment, $15,000; credit Accumulated Depreciation, $15,000.
Ans: B, LO 2, BT: K, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $3,000 12 = $250 (Ann. depr. 12)
130.
Adjustments for unearned revenue: a. decrease liabilities and increase revenues. b. increase liabilities and increase revenues. c. increase assets and increase revenues. d. decrease revenues and decrease assets.
Ans: A, LO 2, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
131.
Leyland Realty Company received a check for $18,000 on July 1, which represents a 6month advance payment of rent on a building it rents to a client. Unearned Rent Revenue was credited for the full $18,000. Financial statements will be prepared on July 31. Leyland Realty should make the following adjusting entry on July 31: a. debit Unearned Rent Revenue, $3,000; credit Rent Revenue, $3,000. b. debit Rent Revenue, $3,000; credit Unearned Rent Revenue, $3,000. c. debit Unearned Rent Revenue, $18,000; credit Rent Revenue, $18,000. d. debit Cash, $18,000; credit Rent Revenue, $18,000.
Ans: A, LO 2, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Reporting Solution: $18,000 6 = $3,000 (Rent pay 6)
132.
As prepaid expenses expire with the passage of time, the correct adjusting entry will be a: a. debit to an asset account and a credit to an expense account. b. debit to an expense account and a credit to an asset account. c. debit to an asset account and a credit to an asset account. d. debit to an expense account and a credit to an expense account.
Ans: B, LO 2, BT: C, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
Accrual Accounting Concepts
133.
4-29
The adjusting entry to an unearned revenue account will a. decrease liabilities and increase revenues. b. increase liabilities and increase revenues. c. increase assets and increase revenues. d. decrease revenues and decrease assets.
Ans: A, LO 2, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
134.
Payments of expenses that will benefit more than one accounting period are identified as: a. expenses. b. revenues. c. prepaid expenses. d. liabilities.
Ans: C, LO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
135.
A company usually determines the amount of supplies used during a period by: a. adding the supplies on hand to the balance of the Supplies account. b. summing the amount of supplies purchased during the period. c. taking the difference between the supplies purchased and the supplies paid for during the period. d. taking the difference between the balance of the Supplies account and the cost of supplies on hand.
Ans: D, LO 2, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
136.
If a company fails to make an adjusting entry to record supplies expense, then: a. stockholders’ equity will be understated. b. expense will be understated. c. assets will be understated. d. net income will be understated.
Ans: B, LO 2, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
137.
Supplies are recorded as assets when purchased. Therefore, the credit to supplies in the adjusting entry is for the amount of supplies: a. remaining. b. purchased. c. used. d. either used or remaining.
Ans: C, LO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
138.
If a company fails to adjust for accrued revenues: a. liabilities will be understated and revenues will be understated. b. liabilities will be overstated and revenues will be understated. c. assets will be overstated and revenues will be understated. d. assets will be understated and revenues will be understated.
Ans: D, LO 2, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
4-30 139.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
If a company fails to adjust a Prepaid Rent account for rent that has expired, what effect will this have on that month's financial statements? a. Failure to make an adjustment does not affect the financial statements. b. Expenses will be overstated and net income and stockholders’ equity will be under- stated. c. Assets will be overstated and net income and stockholders’ equity will be understated. d. Assets will be overstated and net income and stockholders’ equity will be overstated.
Ans: D, LO 2, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
140.
If a company fails to adjust an Unearned Rent Revenue account for rent that has been recognized, what effect will this have on that month’s financial statements? a. Assets will be understated and revenues will be understated. b. Liabilities will be understated and revenues will be understated. c. Liabilities will be overstated and revenues will be understated. d. Assets will be overstated and revenues will be understated.
Ans: C, LO 2, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
141.
If a company fails to adjust for accrued expenses, what effect will this have on that month's financial statements? a. Failure to make an adjustment does not affect the financial statements. b. Expenses will be understated and net income and stockholders’ equity will be overstated. c. Assets will be overstated and net income and stockholders’ equity will be under-stated. d. Assets will be overstated and net income and stockholders’ equity will be overstated.
Ans: B, LO 2, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
142.
On January 1, 2016, Leardon Inc. purchased equipment for $25,000. The company is depreciating the equipment at the rate of $1,000 per month. At January 31, 2017, the balance in Accumulated Depreciation is: a. $1,000 debit. b. $12,000 credit. c. $13,000 credit. d. $62,000 debit.
Ans: C, LO 2, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,000 13 mon. = $13,000 (Depr./mon. 13)
143.
At December 31, 2017, before any year-end adjustments, Dallis Company's Prepaid Insurance account had a balance of $5,800. It was determined that $2,600 of the Prepaid Insurance had expired. The adjusted balance for Insurance Expense for the year would be: a. $2,600. b. $3,200. c. $5,800. d. $2,800.
Ans: A, LO 2, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
Accrual Accounting Concepts
144.
4-31
At December 31, 2017, before any year-end adjustments, Janus Company's Prepaid Insurance account had a balance of $4,200. It was determined that $1,800 of the Prepaid Insurance had expired. The adjusted balance for Prepaid Insurance for the year would be: a. $1,800. b. $2,400. c. $5,700. d. $4,200.
Ans: B, LO 2, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $4,200 − $1,800 = $2,400 (Prep. Ins. bal. − ins. expir.)
145.
At the end of the fiscal year, the usual adjusting entry for depreciation on equipment was omitted. Which of the following statements is true? a. Net income will be overstated for the current year. b. Total assets will be understated at the end of the current year. c. The balance sheet and income statement will be misstated but the Retained Earnings statement will be correct for the current year. d. Total expenses will be overstated at the end of the current year.
Ans: A, LO 2, BT: AN, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
146.
The trial balance for Greenway Corporation appears as follows: Greenway Corporation Trial Balance December 31, 2017 Cash Accounts Receivable Prepaid Insurance Supplies Equipment Accumulated Depreciation, Equipment Accounts Payable Common Stock Retained Earnings Service Revenue Salaries and Wages Expense Rent Expense
$ 300 522 82 180 4,000 $ 600 384 1,200 1,400 3,000 1,000 500 $6,584
$6,584
If, on December 31, 2017, supplies on hand were $40, the adjusting entry would contain a: a. debit to Supplies for $40. b. credit to Supplies for $40. c. debit to Supplies Expense for $140. d. credit to Supplies Expense for $140. Ans: C, LO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $180 − $40 = $140
.
4-32
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition (Sup. bal. − Sup. on hand)
.
Accrual Accounting Concepts
147.
4-33
The trial balance for Greenway Corporation appears as follows: Greenway Corporation Trial Balance December 31, 2017 Cash Accounts Receivable Prepaid Insurance Supplies Equipment Accumulated Depreciation, Equipment Accounts Payable Common Stock Retained Earnings Service Revenue Salaries and Wages Expense Rent Expense
$ 300 522 82 180 4,000 $ 600 384 1,200 1,400 3,000 1,000 500 $6,584
$6,584
If, on December 31, 2017, the insurance still unexpired amounted to $20, the adjusting entry would contain a: a. debit to Prepaid Insurance for $62. b. credit to Prepaid Insurance for $20. c. debit to Insurance Expense for $62. d. debit to Prepaid Insurance for $20. Ans: C, LO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $82 − $20 = $62 (Prep. ins. bal. − unexp. ins.)
.
4-34 148.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The trial balance for Greenway Corporation appears as follows: Greenway Corporation Trial Balance December 31, 2017 Cash Accounts Receivable Prepaid Insurance Supplies Equipment Accumulated Depreciation, Equipment Accounts Payable Common Stock Retained Earnings Service Revenue Salaries and Wages Expense Rent Expense
$ 300 522 82 180 4,000 $ 600 384 1,200 1,400 3,000 1,000 500 $6,584
$6,584
If the estimated depreciation for equipment were $600, the adjusting entry would contain a: a. credit to Accumulated Depreciation, Equipment for $600. b. credit to Depreciation Expense, Equipment for $600. c. debit to Accumulated Depreciation, Equipment for $600. d. credit to Equipment for $600. Ans: A, LO 2, BT: K, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
Accrual Accounting Concepts
149.
4-35
The trial balance for Greenway Corporation appears as follows: Greenway Corporation Trial Balance December 31, 2017 Cash Accounts Receivable Prepaid Insurance Supplies Equipment Accumulated Depreciation, Equipment Accounts Payable Common Stock Retained Earnings Service Revenue Salaries and Wages Expense Rent Expense
$ 300 522 82 180 4,000 $ 600 384 1,200 1,400 3,000 1,000 500 $6,584
$6,584
If as of December 31, 2017, rent of $150 for December had not been recorded or paid, the adjusting entry would include a: a. credit to Accumulated Rent for $150. b. credit to Cash for $150. c. debit to Rent Payable for $150 d. debit to Rent Expense for $150 Ans: D, LO 3, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
4-36 150.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The trial balance for Greenway Corporation appears as follows: Greenway Corporation Trial Balance December 31, 2017 Cash Accounts Receivable Prepaid Insurance Supplies Equipment Accumulated Depreciation, Equipment Accounts Payable Common Stock Retained Earnings Service Revenue Salaries and Wages Expense Rent Expense
$ 300 522 82 180 4,000 $ 600 384 1,200 1,400 3,000 1,000 500 $6,584
$6,584
If service for $175 had been performed but not billed, the adjusting entry to record this would include a: a. debit to Service Revenue for $175. b. credit to Unearned Service Revenue for $175. c. credit to Service Revenue for $175. d. debit to Unearned Revenue for $175. Ans: C, LO 3, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving
151.
Depreciation is the process of: a. valuing an asset at its fair value. b. increasing the value of an asset over the periods in which it is used. c. allocating the cost of an asset to the periods in which it is used. d. writing down an asset to its real value each accounting period.
Ans: C, LO 2, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
152.
The difference between the balance of a plant asset account and the related accumulated depreciation account is termed: a. market value. b. contra asset. c. book value. d. liability.
Ans: C, LO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Accrual Accounting Concepts
153.
4-37
A new accountant working for Metcalf Company records $800 Depreciation Expense on store equipment as follows: Dr. Cr. Depreciation Expense …………………….. .............. 822 822 Cash ................................................................. The effect of this entry is to: a. adjust the accounts to their proper amounts on December 31. b. understate total assets on the balance sheet as of December 31. c. overstate the book value of the depreciable assets at December 31. d. understate the book value of the depreciable assets as of December 31.
Ans: C, LO 2, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving
154.
From an accounting standpoint, the acquisition of long-lived assets is essentially a(n): a. accrual of expense. b. accrual of revenue. c. accrual of unearned revenue. d. prepaid expense.
Ans: D, LO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
155.
If a business pays rent in advance and debits a Prepaid Rent account, the company receiving the rent payment will credit: a. cash. b. prepaid rent. c. unearned rent revenue. d. accrued rent revenue.
Ans: C, LO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
156.
An accumulated depreciation account: a. is a contra liability account. b. increases on the debit side. c. is offset against total assets on the balance sheet. d. has a normal credit balance.
Ans: D, LO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
157.
The difference between the cost of a depreciable asset and its related accumulated depreciation is referred to as the: a. market value of the asset. b. blue book value of the asset. c. book value of the asset. d. depreciated difference of the asset.
Ans: C, LO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
158.
Which of the following would not result in unearned revenue? a. Rent collected in advance from tenants. b. Services performed on account. c. Sale of season tickets to football games. d. Sale of two-year magazine subscriptions.
Ans: B, LO 2, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
4-38 159.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The policy at Adler Corporation is to expense all office supplies at the time of purchase. On the last day of the accounting period, there are $1,100 of unused office supplies on hand and the balance of supplies expense is $3,500. What should the accountant do? a. Debit Supplies and credit Supplies Expense for $1,100. b. Nothing, company policy says to expense supplies when purchased. c. Convince management to change its policy to avoid problems in the future. d. Debit Supplies Expense for $2,400 and credit Supplies for $2,400.
Ans: A, LO 2, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
160.
Which statement is correct? a. Accumulated Depreciation should always have a debit balance in the adjusted trial balance. b. Accumulated Depreciation is added to the long-term liabilities on the balance sheet. c. Accumulated Depreciation, Equipment represents the total cost of equipment that has expired up to the date of the balance sheet. d. Accumulated Depreciation is used to reveal the value of the related asset on the date of the balance sheet.
Ans: C, LO 2, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
161.
Walton Company collected $14,400 in May of 2016 for 4 months of service which would take place from October of 2016 through January of 2017. The revenue reported from this transaction during 2016 would be: a. $0. b. $10,800. c. $14,400. d. $3,600.
Ans: B, LO 2, BT: C, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $14,400 3/4 = $10,800 (Collect. 3/4)
162.
Skypress Company collected $11,200 in May of 2016 for 4 months of service which would take place from October of 2016 through January of 2017. The revenue reported from this transaction during 2016 would be: a. $0. b. $8,400. c. $11,200. d. $2,800.
Ans: B, LO 2, BT: C, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $11,200 3/4 = $8,400 (Collect. 3/4)
.
Accrual Accounting Concepts
163.
4-39
Masterfalls Corporation purchased a one-year insurance policy in January 2016 for $36,000. The insurance policy is in effect from March 2016 through February 2017. If the company neglects to make the proper year-end adjustment for the expired insurance: a. net income and assets will be understated by $30,000. b. net income and assets will be overstated by $30,000. c. net income and assets will be understated by $6,000. d. net income and assets will be overstated by $6,000.
Ans: B, LO 2, BT: AN, Difficulty: Hard, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $36,000 10/12 = $30,000 (Insur. pol. cost 10/12)
164.
James & Younger Corporation purchased a one-year insurance policy in January 2016 for $42,000. The insurance policy is in effect from March 2016 through February 2017. If the company neglects to make the proper year-end adjustment for the expired insurance: a. net income and assets will be understated by $35,000. b. net income and assets will be overstated by $35,000. c. net income and assets will be understated by $7,000. d. net income and assets will be overstated by $7,000.
Ans: B, LO 2, BT: AN, Difficulty: Hard, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $42,000 10/12 = $35,000 (Insur. pol. cost 10/12)
165.
At March 1, 2017, Candy Inc. had supplies on hand of $2,000. During the month, Candy purchased supplies of $2,900 and used supplies of $2,800. The March 31 balance sheet should report what balance in the supplies account? a. $2,000 b. $2,100 c. $2,800 d. $2,900
Ans: B, LO 2, BT: AP, Difficulty: Hard, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $2,000 + $2,900 − $2,800 = $2,100 (Beg. sup. + sup. purch. − sup. used)
166.
Darting Company purchased equipment for $9,000 on January 1, 2017. The company expects to use the equipment for 3 years. It has no salvage value. Monthly depreciation expense on the asset is: a. $0. b. $250. c. $3,000. d. $9,000.
Ans: B, LO 2, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($9,000 3) 12 = $250 (Equip. cost 3) 12
.
4-40
167.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Fleet Services Company purchased equipment for $12,000 on January 1, 2017. The company expects to use the equipment for 5 years. It has no salvage value. What balance would be reported on the December 31, 2017 balance sheet for Accumulated Depreciation? a. $0 because Accumulated Depreciation is reported on the Income Statement. b. $2,400 c. $9,600 d. $12,000
Ans: B, LO 2, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $12,000 5 = $2,400 (Equip. cost 5)
168.
Green Realty Company received a check for $24,000 on July 1 which represents a 6 month advance payment of rent on a building it rents to a client. Unearned Rent Revenue was credited for the full $24,000. Financial statements will be prepared on July 31. Green Realty should make the following adjusting entry on July 31: a. debit Unearned Rent Revenue, $4,000; credit Rent Revenue, $4,000. b. debit Rent Revenue, $4,000; credit Unearned Rent Revenue, $4,000. c. debit Unearned Rent Revenue, $24,000; credit Rent Revenue, $24,000. d. debit Cash, $24,000; credit Rent Revenue, $24,000.
Ans: A, LO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $24,000 6 = $4,000 (Rent rec. 6)
169.
Oakville Inc. purchased a 12-month insurance policy on March 1, 2017 for $2,400. At March 31, 2017, the adjusting journal entry to record expiration of this asset will include: a. a debit to Prepaid Insurance and a credit to Cash for $2,400. b. a debit to Prepaid Insurance and a credit to Insurance Expense for $240. c. a debit to Insurance Expense and a credit to Prepaid Insurance for $200. d. a debit to Insurance Expense and a credit to Cash for $200.
Ans: C, LO 2, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $2,400 12 = $200 (Insur. pol. cost. 12)
170.
Hoosher Enterprises purchased an 18-month insurance policy on May 31, 2017 for $10,800. The December 31, 2017 balance sheet would report Prepaid Insurance of: a. $0 because Prepaid Insurance is reported on the Income Statement. b. $4,200. c. $6,600. d. $10,800.
Ans: C, LO 2, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $10,800 11/18 = $6,600 (Insur. pol. cost. 11/18)
.
Accrual Accounting Concepts
171.
4-41
At March 1, I. Repo Inc. reported a balance in Supplies of $200. During March, the company purchased supplies for $950 and consumed supplies of $800. If no adjusting entry is made for supplies: a. stockholders' equity will be overstated by $800. b. expenses will be understated by $950. c. assets will be understated by $350. d. net income will be understated by $800.
Ans: A, LO 2, BT: AN, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
172.
Regions Inc. pays its rent of $60,000 annually on January 1 and makes monthly adjusting entries. If the February 28 monthly adjusting entry for prepaid rent is omitted, which of the following are true? a. Failure to make the adjustment does not affect the February financial statements. b. Expenses will be overstated by $5,000 and net income and stockholders' equity will be understated by $5,000. c. Assets will be overstated by $10,000 and net income and stockholders' equity will be understated by $10,000. d. Assets will be overstated by $5,000 and net income and stockholders' equity will be overstated by $5,000.
Ans: D, LO 2, BT: AN, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $60,000 12 = $5,000 (Rent pay 12)
173.
Muldoon Advertising has an opening balance in its supplies account of $2,400 and purchases $3,000 of supplies during the year. A year-end physical count shows $2,800 in supplies inventory. Which is the appropriate journal entry at year end? a. Dr Supplies Expense $2,600 Cr Supplies $2,600 b. Dr Supplies Expense $2,800 Cr Supplies $2,800 c. Dr Supplies $2,600 Cr Supplies Expense $2,600 d. Dr Supplies $3,000 Cr Cash $3,000
Ans: A, LO 2, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $2,400 + $3,000 – $2,800 = $2,600 (Beg. sup. + sup. purch. – end. sup.)
174.
The fiscal year opened for Noland Manufacturing with a $2,700 balance in its prepaid insurance account. They purchased $9,600 in insurance policies during the year. If $1,725 of insurance has expired during the year, what is the year-end balance in the prepaid insurance account? a. $10,575 b. $12,300 c. $7,875 d. $5,175
Ans: A, LO 2, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
4-42
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution: $2,700 + $9,600 – $1,725 = $10,575 (Beg. prep. ins. + ins. purch. – expir. ins.)
.
Accrual Accounting Concepts
175.
4-43
Equipment was purchased by Noland Manufacturing on January 1, 2017, for $125,000. Noland’s policy is to adjust its accounts at year-end. Which is the appropriate journal entry to record depreciation at year-end if the company expects to use equipment consistently for five years? In the choices below, as per convention, debits are listed first followed by credits. a. Depreciation Expense – Equipment $25,000 Accumulated Depreciation – Equipment $25,000 b. Accumulated Depreciation – Equipment $25,000 Depreciation Expense – Equipment $25,000 c. Depreciation Expense – Equipment $25,000 Equipment $25,000 d. Accumulated Depreciation – Equipment $25,000 Equipment $25,000
Ans: A, LO 2, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $125,000 ÷ 5 = $25,000 (Equip. cost/5 years.)
176.
Foley Marketing received $60,000 from a customer on January 2nd, 2017 to be on retainer for the next two years. The appropriate journal entry to recognize revenue at Foley's fiscal yearend on December 31st, 2017 would be ____________. a. Unearned Revenue $30,000 Service Revenue $30,000 b. Service Revenue $30,000 Unearned Revenue $30,000 c. Service Revenue $30,000 Cash $30,000 d. Unearned Revenue $30,000 Cash $30,000
Ans: A, LO 2, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $60,000 ÷ 2 yrs. = $30,000 (Cash rec. /2 yrs.)
177.
A customer paid $60,000 to Foley Marketing on December 30, 2015, to perform services from January 1, 2016 through December 31, 2019. If Foley fails to record the revenue recognized, ________ would be understated by ________ each year. a. net income, $15,000 b. net income, $12,000 c. liabilities, $15,000 d. assets, $12,000
Ans: A, LO 2, BT: AN, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $60,000 ÷ 4 yrs. = $15,000 (Cash paid/4 yrs.)
.
4-44 178.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Merando Industries employs a five-day workweek and a September 30 year-end. Normal weekly wages amount to $36,000. If September 30 ends on a Wednesday, what is the appropriate journal entry at fiscal year-end? a. Salaries and Wages Expense $21,600 Salaries and Wages Payable $21,600 b. Salaries and Wages Expense $36,000 Salaries and Wages Payable $36,000 c. Salaries and Wages Expense $7,200 Salaries and Wages Payable $7,200 d. Salaries and Wages Expense $21,600 Cash $21,600
Ans: A, LO 3, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $36,000 3/5 = $21,600 (Week. wag. x 3/5)
179.
Merando Industries employs a five-day workweek and a September 30 year-end. Normal weekly wages amount to $35,000. If September 30 ends on a Wednesday, what is the appropriate journal entry on October 2, the next payday for Merando? a. Salaries and Wages Expense $14,000 Salaries and Wages Payable $21,000 Cash $35,000 b. Salaries and Wages Expense $21,000 Salaries and Wages Payable $14,000 Cash $35,000 c. Salaries and Wages Expense $21,000 Cash $21,000 d. Salaries and Wages Payable $14,000 Cash $14,000
Ans: A, LO 3, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($35,000 ÷ 5) 2 = $14,000 expense (Week. wag./5) x 2
180.
LR Corporation is a cash-basis business. LR signed a six-month, 12% note payable of $10,000 on October 1st, 2017. By recording the interest expense related to the note only when it is paid on April 1st, 2018, LR will understate expenses by ________ on its year-end financial statements on December 31st, 2017. a. $300 b. $600 c. $0 d. $11,200
Ans: A, LO 3, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $10,000 .12 3/12 = $300
(Note amount x int. rate x 3/12)
.
Accrual Accounting Concepts
181.
4-45
Baden Industries borrows $20,000 at 7% annual interest for six months on October 1st, 2017. Which is the appropriate entry to accrue interest if Baden employs a December 31st, 2017, fiscal year? a. Interest Expense $350 Interest Payable $350 b. Interest Expense $1,400 Interest Payable $1,400 c. Interest Expense $350 Notes Payable $350 d. Notes Payable $1,400 Interest Payable $1,400
Ans: A, LO 3, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $20,000 .07 3/12 = $350 (Amount bor. x int. rate x 3/12
182.
Kingman Consulting uses the cash basis of accounting and a fiscal year ending December 31. Beginning on September 1, 2016, Kingman performs services for Renfro International at a rate of $5,000 per month. On February 12, 2017, Renfro pays Kingman $25,000 in full for all services rendered from September 1, 2016 to January 31, 2017. Kingman understated revenues by ________ on its year-end financial statement. a. $20,000 b. $5,000 c. $25,000 d. $15,000
Ans: A, LO 3, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($25,000 ÷ 5) 4 = $20,000 (Cash rec./5 mon.) x 4 mon.
183.
Brokaw Industries signs a $40,000, 9%, 6-month note payable on September 1, 2016. How much interest expense will Brokaw report in its 2017 financial statements? a. $600 b. $1,200 c. $1,800 d. $0
Ans: A, LO 3, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $40,000 .09 2/12 = $600 (Note amount x int. rate x 2/12)
184.
On August 15th, 2017, Kinney Industries signs a $200,000, 8%, twelve-month note payable. Which of the following entries correctly records the accrued interest on December 31st, 2017? a. Interest Expense $6,000 Interest Payable $6,000 b. Interest Expense $5,333.33 Interest Payable $5,333.33 c. Interest Expense $16,000 Interest Payable $16,000 d. Interest Expense $10,000 .
4-46
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Interest Payable $10,000 Ans: A, LO 3, BT: AN, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $200,000 .08 4.5/12 = $6,000 (Note amount x int. rate x 4.5/12)
.
Accrual Accounting Concepts
185.
4-47
On November 1, 2016, Weller Industries, which uses a calendar year as its fiscal year, signs a $30,000, 7%, six-month note payable. Which of the following entries correctly records the payment of the note and entire interest on May 1, 2017? a. Notes Payable $30,000 Interest Expense 700 Interest Payable 350 Cash $31,050 b. Notes Payable $32,100 Cash $32,100 c. Notes Payable $31,050 Cash $31,050 d. Notes Payable $30,000 Interest Expense 1,050 Cash $31,050
Ans: A, LO 3, BT: AN, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $30,000 × .07 × 4/12 = $700 (Note amount x int. rate x 4/12)
186.
An adjusting entry can include a: a. debit to an asset and a credit to a revenue. b. debit to a revenue and a credit to an asset. c. credit to an expense and a debit to a revenue. d. debit to an expense and a credit to a revenue.
Ans: A, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
187.
A revenue–asset relationship exists with: a. prepaid expense adjusting entries. b. accrued expense adjusting entries. c. unearned revenue adjusting entries. d. accrued revenue adjusting entries.
Ans: D, LO 3, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
188.
The accounts of a business, before an adjusting entry is made to record accrued revenue, reflect an: a. understated liability and an overstated revenue. b. overstated asset and an understated revenue. c. understated expense and an overstated revenue. d. understated asset and an understated revenue.
Ans: D, LO 3, BT: C, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
189.
Adjustments for accrued revenues: a. increase assets and increase revenues. b. increase assets and increase liabilities. c. decrease assets and increase revenues. d. decrease liabilities and increase revenues.
Ans: A, LO 3, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
4-48 190.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Failure to prepare an adjusting entry at the end of the period to record an accrued expense would cause: a. net income to be understated. b. an overstatement of assets and an overstatement of liabilities. c. an understatement of expenses and an understatement of liabilities. d. an overstatement of expenses and an overstatement of liabilities.
Ans: C, LO 3, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
191.
Failure to prepare an adjusting entry at the end of a period to record an accrued revenue would cause: a. net income to be overstated. b. an understatement of assets and an understatement of revenues. c. an understatement of revenues and an understatement of liabilities. d. an understatement of revenues and an overstatement of liabilities.
Ans: B, LO 3, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
192.
An adjusting entry made to record accrued interest on a note receivable due next year consists of a: a. debit to Interest Expense and a credit to Interest Payable. b. debit to Interest Receivable and a credit to Interest Revenue. c. debit to Interest Expense and a credit to Notes Payable. d. debit to Interest Expense and a credit to Cash.
Ans: B, LO 3, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
193.
Raxon Company borrowed $50,000 from the bank signing a 6%, 3-month note on September 1. Principal and interest are payable to the bank on December 1. If the company prepares monthly financial statements, the adjusting entry that the company should make for interest on September 30, would be: a. debit Interest Expense, $3,000; credit Interest Payable, $3,000. b. debit Interest Expense, $250; credit Interest Payable, $250. c. debit Note Payable, $3,000; credit Cash, $3,000. d. debit Cash, $750; credit Interest Payable, $750.
Ans: B, LO 3, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $50,000 .06 1/12 = $250 (Amount borrowed .06 1/12)
194.
Nacron Company borrowed $15,000 from the bank signing a 6%, 3-month note on September 1. Principal and interest are payable to the bank on December 1. If the company prepares monthly financial statements, the adjusting entry that the company should make for interest on September 30, would be: a. debit Interest Expense, $75; credit Interest Payable, $75. b. debit Interest Expense, $900; credit Interest Payable, $900. c. debit Note Payable, $900; credit Cash, $900. d. debit Cash, $75; credit Interest Payable, $75.
Ans: A, LO 3, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $15,000 .06 1/12 = $75 (Amount borrowed .06 1/12)
.
Accrual Accounting Concepts
195.
4-49
Mary Richardo has performed $500 of CPA services for a client but has not billed the client as of the end of the accounting period. What adjusting entry must Mary make? a. Debit Cash and credit Unearned Service Revenue b. Debit Accounts Receivable and credit Unearned Service Revenue c. Debit Accounts Receivable and credit Service Revenue d. Debit Unearned Service Revenue and credit Service Revenue
Ans: C, LO 3, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
196.
Mary Richardo, CPA, has billed her clients for services performed. She subsequently receives payments from her clients. What entry will she make upon receipt of the payments? a. Debit Unearned Service Revenue and credit Service Revenue b. Debit Cash and credit Accounts Receivable c. Debit Accounts Receivable and credit Service Revenue d. Debit Cash and credit Service Revenue
Ans: B, LO 3, BT: AN, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
197.
Amos Real Estate signed a four-month note payable in the amount of $20,000 on September 1. The note requires interest at an annual rate of 9%. The amount of interest to be accrued at the end of September is: a. $600. b. $150. c. $1,800. d. $200.
Ans: B, LO 3, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $20,000 .09 1/12 = $150 (Note pay. .09 1/12)
198.
DeNova Real Estate signed a four-month note payable in the amount of $40,000 on September 1. The note requires interest at an annual rate of 6%. The amount of interest to be accrued at the end of September is: a. $2,400. b. $600. c. $200. d. $450.
Ans: C, LO 3, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $40,000 .06 1/12 = $200 (Note pay. .06 1/12)
.
4-50 199.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
A gift shop signs a three-month note payable to help finance increases in inventory for the Christmas shopping season. The note is signed on November 1 in the amount of $50,000 with annual interest of 6%. What is the adjusting entry to be made on December 31 for the interest expense accrued to that date, if no entries have been made previously for the interest? a. Interest Expense 500 Interest Payable 500 b. Interest Expense 750 Interest Payable 750 c. Interest Expense 500 Cash 500 d. Interest Expense 750 Note Payable 750
Ans: A, LO 3, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $50,000 .06 2/12 = $500 (Note pay. .06 2/12)
200.
Ye Olde Christmas shop signs a three-month note payable to help finance increases in inventory for the Christmas shopping season. The note is signed on October 1 in the amount of $30,000 with annual interest of 6%. What is the adjusting entry to be made on December 31 for the interest expense accrued to that date, if no entries have been made previously for the interest? a. Interest Expense 150 Interest Payable 150 b. Interest Expense 300 Interest Payable 300 c. Interest Expense 450 Interest Payable 450 d. Interest Expense 1,800 Note Payable 1,800
Ans: C, LO 3, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $30,000 .06 3/12 = $450 (Note pay. .06 3/12)
201.
Snelling Tables paid employee wages on and through Friday, January 26, and the next payroll will be paid in February. There are three more working days in January (29–31). Employees work 5 days a week and the company pays $1,200 a day in wages. What will be the adjusting entry to accrue wages expense at the end of January? a. Salaries and Wages Expense 1,200 Salaries and Wages Payable 1,200 b. Salaries and Wages Expense 6,000 Salaries and Wages Payable 6,000 c. Salaries and Wages Expense 3,600 Salaries and Wages Payable 3,600 d. No adjusting entry is required.
Ans: C, LO 5, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $1,200 3 = $3,600 (Wages/day 3)
.
Accrual Accounting Concepts
202.
4-51
Jill Clown earned a salary of $500 for the last week of October. She will be paid on November 1. The adjusting entry for Jill’s employer October 31 is: a. No entry is required. b. Salaries and Wages Expense 500 Salaries and Wages Payable 500 c. Salaries and Wages Expense 500 Cash 500 d. Salaries and Wages Payable 500 Cash 500
Ans: B, LO 3, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
203.
At the end of the fiscal year, the usual adjusting entry for accrued salaries owed to employees was omitted. Which of the following statements is true? a. Salaries and Wages Expense for the year is overstated. b. Liabilities at the end of the year are understated. c. Assets at the end of the year are understated. d. Stockholders’ equity at the end of the year is understated.
Ans: B, LO 3, BT: AN, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
204.
A company shows a balance in Salaries and Wages Payable of $50,000 at the end of the month. The next payroll amounting to $75,000 is to be paid in the following month. What will be the journal entry to record the payment of salaries? a. Salaries and Wages Expense 75,000 Salaries and Wages Payable 75,000 b. Salaries and Wages Expense 75,000 Cash 75,000 c. Salaries and Wages Expense 25,000 Cash 25,000 d. Salaries and Wages Payable 50,000 Salaries and Wages Expense 25,000 Cash 75,000
Ans: D, LO 3, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
205.
De Meaning Corporation issued a one-year 6% $400,000 note on April 30, 2017. Interest expense for the year ended December 31, 2017 was: a. $24,000. b. $18,000. c. $16,000. d. $14,000.
Ans: C, LO 3, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $400,000 .06 8/12 = $16,000 (Note pay. .06 8/12)
.
4-52 206.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Bluing Corporation issued a one-year 9% $400,000 note on April 30, 2017. Interest expense for the year ended December 31, 2017 was: a. $36,000. b. $27,000. c. $24,000. d. $21,000.
Ans: C, LO 3, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $400,000 .09 8/12 = $24,000 (Note pay. .09 8/12)
207.
Employees at Biquell Corporation are paid $15,000 cash every Friday for working Monday through Friday. The calendar year accounting period ends on Wednesday, December 31. How much salaries and wages expense should be recorded two days later on January 2? a. $15,000 b. $9,000 c. None, expense recognition requires the weekly salary to be accrued on December 31. d. $6,000
Ans: D, LO 3, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $15,000 2/5 = $6,000 (Salar./week 2/5)
208.
An adjusted trial balance: a. is prepared after the financial statements are completed. b. proves the equality of the total debit balances and total credit balances of ledger accounts after all adjustments have been made. c. is a required financial statement under generally accepted accounting principles. d. cannot be used to prepare financial statements.
Ans: B, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
209.
Which of the statements below is not true? a. An adjusted trial balance should show ledger account balances. b. An adjusted trial balance can be used to prepare financial statements. c. An adjusted trial balance proves the mathematical equality of debits and credits in the ledger. d. An adjusted trial balance is prepared before all transactions have been journalized.
Ans: D, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
210.
Which statement is incorrect concerning the adjusted trial balance? a. An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made. b. The adjusted trial balance provides the primary basis for the preparation of financial statements. c. The adjusted trial balance lists the account balances in order of their magnitude. d. The adjusted trial balance is prepared after the adjusting entries have been journalized and posted.
Ans: C, LO 4, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Accrual Accounting Concepts
211.
4-53
Can financial statements be prepared directly from the adjusted trial balance? a. They cannot. The general ledger must be used. b. Yes, adjusting entries have been recorded in the general journal and posted to the ledger accounts. c. No, the adjusted trial balance merely proves the equality of the total debit and total credit balances in the ledger after adjustments are posted. It has no other purpose. d. They can because that is the only reason that an adjusted trial balance is prepared.
Ans: B, LO 4, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
212.
The primary source used in the preparation of the financial statements is the: a. trial balance. b. post-closing trial balance. c. general trial balance. d. adjusted trial balance.
Ans: D, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
213.
Which of the following accounts will reflect the account’s beginning balance on the adjusted trial balance? a. Prepaid rent b. Retained earnings c. Prepaid insurance d. Unearned revenue
Ans: B, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
214.
The following accounts show balances on the adjusted trial balance. Which of these account balances will not appear the same on the balance sheet? a. Retained earnings b. Accounts receivable c. Common stock d. Notes payable
Ans: A, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
215.
Which trial balance will consist of the greatest number of accounts? a. Post-closing trial balance b. Trial balance c. Adjusted trial balance d. All of the above will contain the same number of accounts.
Ans: C, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
4-54 216.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Based on the account balances below, what is the total of the debit and credit columns of the adjusted trial balance? Service revenue $5,300 Equipment $7,400 Cash 2,525 Prepaid insurance 1,225 Unearned service rev. 5,320 Depreciation expense 640 Salaries and wages expense 1,050 Accum. depreciation 1,280 Common stock 390 Retained earnings 550 a. $11,150 b. $12,840 c. $11,560 d. $12,430
Ans: B, LO 6, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $5,300 + $5,320 + $390 + $1,280 + $550 = $12,840 (Ser. rev. + Un. ser. rev. + com. st. + acc. dep. + ret. earn.)
217.
Given the following adjusted trial balance: Cash Accounts receivable Inventory Prepaid rent Equipment Accumulated depreciation-equipment Accounts payable Unearned service revenue Common stock Retained earnings Service revenue Interest revenue Salaries and wages expense Travel expense Total Net income for the year is: a. $198. b. $370. c. $424. d. $596.
Debit $1,662 2,098 3,124 86 300
Credit
52 82 122 206 6,610 368 56 160 66 $7,496
$7,496
Ans: A, LO 4, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $368 + $56 − $160 − $66 = $198 (Ser. rev. + int. rev. − sal. exp. − trav. exp.)
.
Accrual Accounting Concepts 218.
4-55
Given the following adjusted trial balance:
Debit Credit Cash $1,662 Accounts receivable 2,098 Inventory 3,124 Prepaid rent 86 Equipment 300 Accumulated depreciation-equipment 52 Accounts payable 82 Unearned service revenue 122 Common stock 206 Retained earnings 6,610 Service revenue 368 Interest revenue 56 Salaries and wages expense 160 Travel expense 66 Total $7,496 $7,496 After closing entries have been posted, the balance in retained earnings will be: a. $6,440. b. $6,612. c. $6,980. d. $6,808. Ans: D, LO 4, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $6,610 + $368 + $56 − $160 − $66 = $6,808 (Beg. ret. earn. + Ser. rev. + int. rev. − sal. exp. − trav. exp.)
219.
Given the following adjusted trial balance: Cash Accounts receivable Inventory Prepaid rent Equipment Accumulated depreciation-equipment Accounts payable Unearned service revenue Common stock Retained earnings Service revenue Interest revenue Salaries and wages expense Travel expense Total Net income for the year is: a. $99. b. $184. c. $212. d. $298.
Debit $ 831 1,049 1,562 43 150
Credit
26 41 61 103 3,305 184 28 80 33 $3,748
$3,748
Ans: A, LO 4, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution: $184 + $28 − $80 − $33 = $99 (Ser. rev. + int. rev. − sal. exp. − trav. exp.)
220.
Given the following adjusted trial balance: Debit Credit Cash $ 831 Accounts receivable 1,049 Inventory 1,562 Prepaid rent 43 Equipment 150 Accumulated depreciation-equipment 26 Accounts payable 41 Unearned service revenue 61 Common stock 103 Retained earnings 3,305 Service revenue 184 Interest revenue 28 Salaries and wages expense 80 Travel expense 33 Total $3,748 $3,748 After closing entries have been posted, the balance in retained earnings will be: a. $3,306. b. $3,220. c. $3,490. d. $3,404.
Ans: D, LO 4, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $3,305 + $184 + $28 − $80 − $33 = $3,404 (Beg. ret. earn. + Ser. rev. + int. rev. − sal. exp. − trav. exp.)
221.
Which statement is correct concerning the adjusted trial balance? a. An adjusted trail balance eliminates the need for the preparation of financial statements. b. The purpose of an adjusted trial balance is to prove the equality of the total debit balances and the total credit balances in the ledger. c. An adjusted trial balance will contain only permanent—balance sheet—accounts. d. The adjusted trial balance is prepared after the adjusting entries have been journalized but before they have been posted.
Ans: B, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
222.
Which of the following is a true statement about closing the books of a corporation? a. Expenses are closed to the Expense Summary account. b. Only revenues are closed to the Income Summary account. c. Revenues and expenses are closed to the Income Summary account. d. Revenues, expenses, and the Dividends account are closed to the Income Summary account.
Ans: C, LO 4, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
223.
The closing entry process consists of closing: a. all asset and liability accounts. b. out the Retained Earnings account. c. all permanent accounts. d. all temporary accounts. .
Accrual Accounting Concepts
4-57
Ans: D, LO 4, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
224.
Which account will have a zero balance after closing entries have been journalized and posted? a. Service revenue. b. Supplies. c. Prepaid Insurance. d. Accumulated Depreciation.
Ans: A, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
225.
A post-closing trial balance will show: a. zero balances for all accounts. b. zero balances for balance sheet accounts. c. only balance sheet accounts. d. only income statement accounts.
Ans: C, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
226.
Which types of accounts will appear in the post-closing trial balance? a. Permanent accounts. b. Temporary accounts. c. Accounts shown in the income statement columns of a work sheet. d. None of these answer choices are correct.
Ans: A, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
227.
The purpose of the post-closing trial balance is to: a. prove that no mistakes were made. b. prove the equality of the permanent account balances that are carried forward into the next accounting period. c. prove the equality of the temporary account balances that are carried forward into the next accounting period. d. list all the balance sheet accounts in alphabetical order for easy reference.
Ans: B, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
228.
Closing entries: a. are prepared before the financial statements. b. reduce the number of permanent accounts. c. cause the revenue and expense accounts to have zero balances. d. summarize the activity in every account.
Ans: C, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
229.
Which of the following account’s balance will change between the adjusted trial balance and the post-closing trial balance? a. Common stock b. Prepaid rent c. Unearned service revenue d. Retained earnings
Ans: D, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Which type of accounts will not appear in the post-closing trial balance? a. Asset accounts b. Permanent accounts c. Liability accounts d. Temporary accounts
Ans: D, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
231.
There are usually how many closing journal entries? a. 5 b. 4 c. 3 d. 2
Ans: B, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
232.
Given the following adjusted trial balance, what will be the totals for the debit and credit columns of the post-closing trial balance?
Cash Accounts receivable Inventory Prepaid rent Equipment Accumulated depreciation-equipment Accounts payable Unearned service revenue Common stock Retained earnings Service revenue Interest revenue Salaries and wages expense Travel expense Totals a. b. c. d.
Debit $1,662 2,098 3,124 86 300
Credit
$
160 66 $7,496
52 82 172 206 6,610 318 56
$7,496
$7,496 $7,218 $7,444 $7,270
Ans: D, LO 4, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,662 + $2,098 + $3,124 + $86 + $300 = $7,270 (Cash + acc. rec. + inven. + prep. rent. + equip.)
.
Accrual Accounting Concepts
233.
4-59
Given the following adjusted trial balance, what will be the totals for the debit and credit columns of the post-closing trial balance?
Cash Accounts receivable Inventory Prepaid rent Equipment Accumulated depreciation-equipment Accounts payable Unearned service revenue Common stock Retained earnings Service revenue Interest revenue Salaries and wages expense Travel expense Totals a. b. c. d.
Debit $ 831 1,049 1,562 43 150
Credit
$
26 41 86 103 3,305 159 28
80 33 $3,748
$3,748
$3,635 $3,609 $3,748 $3,722
Ans: A, LO 4, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $831 + $1,049 + $1,562 + $43 + $150 = $3,635 (Cash + acc. rec. + inven. + prep. rent. + equip.)
234.
The following information is from the Income Statement of the Dirt Poor Laundry Service: Revenues Service Revenue Expenses Salaries and wages expense $ 2,450 Advertising expense 500 Rent expense 300 Supplies expense 200 Insurance expense 100 Total expenses Net Income The entry to close the Service Revenue account includes a: a. debit to Service Revenue for $6,500. b. credit to Service Revenue for $6,500. c. debit to Income Summary for $6,500. d. debit to Retained Earnings for $6,500.
$6,500
3,550 $2,950
Ans: A, LO 4, BT: AP, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
4-60 235.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The following information is from the Income Statement of the Dirt Poor Laundry Service: Revenues Service Revenue Expenses Salaries and Wages expense Advertising expense Rent expense Supplies expense Insurance expense Total expenses Net Income The entry to close the expense accounts includes a: a. credit to Income Summary for $3,550. b. debit to Income Summary for $3,550. c. debit to Salaries and Wages Expense for $2,450. d. credit to Retained Earnings for $3,550.
$6,500 $ 2,450 500 300 200 100 3,550 $2,950
Ans: B, LO 4, BT: AP, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
236.
The following information is from the Income Statement of the Dirt Poor Laundry Service: Revenues Service Revenue Expenses Salaries and Wages expense Advertising expense Rent expense Supplies expense Insurance expense Total expenses Net Income The entry to close the Income Summary includes a: a. credit to Income Summary for $2,950. b. debit to Income Summary for $2,950. c. debit to Retained Earnings for $2,950. d. credit to Common Stock for $2,950.
$6,500 $ 2,450 500 300 200 100 3,550 $2,950
Ans: B, LO 4, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
237.
The final step in the accounting cycle is to prepare: a. closing entries. b. financial statements. c. a post-closing trial balance. d. adjusting entries.
Ans: C, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
Accrual Accounting Concepts
238.
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All of the following are required steps in the accounting cycle except: a. journalizing and posting closing entries. b. preparing an adjusted trial balance. c. preparing a post-closing trial balance. d. preparing a work sheet.
Ans: D, LO 4, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
239.
The first required step in the accounting cycle is: a. adjusting entries. b. journalizing transactions. c. analyzing transactions. d. posting transactions.
Ans: C, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
240.
How many required steps are there in the accounting cycle? a. 11 b. 9 c. 7 d. 5
Ans: B, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
241.
Which of the following steps in the accounting cycle usually occurs only at the end of a company’s annual accounting period? a. Step 3: Post to the ledger accounts. b. Step 7: Prepare financial statements. c. Step 6: Prepare adjusting trial balance. d. Step 9: Prepare a post-closing trial balance.
Ans: D, LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
242.
The Accounts Receivable account has a beginning balance of $52,000 and an ending balance of $74,000. If $42,000 was sold on account during the year, what were the total collections on account? a. $20,000 b. $64,000 c. $74,000 d. $84,000
Ans: A, LO 4, BT: C, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($52,000 + $42,000) − $74,000] = $20,000 (Beg. acc. rec. + Sales − end. acc. rec.)
*243. The worksheet is: a. part of the journal. b. a financial statement. c. part of the ledger. d. none of these answer choices are correct. Ans: D, LO 5, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
*244. The worksheet starts with two columns for the: a. adjustments. b. financial statements. c. trial balance. d. adjusted trial balance. Ans: C, LO 5, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
*245. The worksheet does not contain columns for the: a. income statement. b. statement of retained earnings. c. balance sheet. d. adjusted trial balance. Ans: B, LO 5, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
*246. The worksheet contains columns for the: a. statement of retained earnings. b. statement of cash flows. c. post-closing trial balance. d. balance sheet. Ans: D, LO 5, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
*247. Net income is recorded on the worksheet under the: a. debit column of the adjusted trial balance and the credit column of retained earnings. b. debit column of the income statement and the credit column of the balance sheet. c. credit column of the adjusted trial balance and the debit column of retained earnings. d. credit column of the income statement and the debit column of the balance sheet. Ans: B, LO 5, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
Accrual Accounting Concepts
Answers to Multiple Choice Questions 54. d 55. a 56. a 57. d 58. b 59. a 60. a 61. b 62. c 63. b 64. a 65. d 66. b 67. d 68. c 69. a 70. b 71. a 72. d 73. c 74. c 75. a 76. c 77. b 78. b 79. c 80. d 81. d
82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109.
d a c a d b a c b c c d d b d b a a d c b b c c c b d a
110. 111. 112. 113. 114. 115. 116. 117 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137.
c a a c a d d c d c d c c d a c d b d b a a b a c d b c
138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165.
.
d d c b c a b a c c a d c c c c d c d c b a c b b b b b
166. 167 168. 169. 170. 171. 172. 173. 174. 175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193.
b b a c c a d a a a a a a a a a a a a a a d d a c b b b
194. 195. 196. 197. 198. 199. 200. 201. 202. 203. 204. 205. 206. 207. 208. 209. 210. 211. 212. 213. 214. 215. 216. 217. 218. 219. 220. 221.
a c b b c a c c b b d c c d b d c b d b a c b a d a d b
222. 223. 224. 225. 226. 227. 228. 229. 230. 231. 232. 233. 234. 235. 236. 237. 238. 239. 240. 241. 242. 243. 244. 245. 246. 247.
c d a c a b c d d b d a a b b c d c b d a d c b d b
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
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BRIEF EXERCISES Be. 248 Identify the effect, if any, that each of the following transactions would have upon cash and retained earnings. Show the dollar amount and the effect (+, –, N). Retained _Cash__ Earnings 1. 2. 3. 4. 5.
Purchases equipment for $3,000 Purchased $200 of supplies for cash Recorded an adjusting entry to record use of $110 of the above supplies. Received $600 from customers in payment of their accounts Recorded depreciation of equipment for period used, $900.
Solution 248
1. 2. 3. 4. 5.
_______ _______
_______ _______
_______
_______
_______
_______
_______
_______
_Cash__
Retained Earnings
$-3,000_ $ -_200
__ N__ __ N _
___N__
$ -110_
$ + 600
__N__
_N _
$ - 900_
(5 min.)
Purchases equipment for $3,000 Purchased $200 of supplies for cash Recorded an adjusting entry to record use of $110 of the above supplies. Received $600 from customers in payment of their accounts Recorded depreciation of equipment for period used, $900.
Ans: N/A, LO 1, BT: K, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
Accrual Accounting Concepts
4-65
Be. 249 Before month-end adjustments are made, the February 28 trial balance of Cole’s Enterprise contains revenue of $11,000 and expenses of $8,900. Adjustments are necessary for the following items: • • • • •
Depreciation for February is $1,200. Revenue recognized but not yet billed is $2,800. Accrued interest expense is $900. Revenue collected in advance that is now recognized is $2,500. Portion of prepaid insurance expired during February is $500.
Instructions: Calculate the correct net income for Cole's Enterprise for February 3. Solution 249
(5 min.)
Net Income before Adjustments ($11,000 – 8,900)
$ 2,100
Add: Unearned Revenues Accrued Revenues
$2,500 2,800
Subtract: Depreciation Expense Interest Expense Insurance Expense
1,200 900 500
Net Income after Adjustments
5,300 7,400
2,600 $ 4,800
(Rev. − exp.) + (unearn. and acc. rev. ) − (dep. exp. + int. exp. + ins. exp.) Ans: N/A, LO 1, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Be. 250 Before month-end adjustments are made, the September 30 trial balance of Horton Enterprise contains revenue of $9,200 and expenses of $6,500. Adjustments are necessary for the following items: • • • • •
Depreciation for September is $300. Revenue recognized but not yet billed is $2,100. Accrued interest expense is $800. Revenue collected in advance that is now recognized is $3,400. Portion of prepaid insurance expired during September is $300.
Instructions: Calculate the correct net income for Horton’s Enterprise for September.
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
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Solution 250
(5 min.)
Net Income before Adjustments ($9,200 – 6,500) Add:
$ 2,700
Unearned Revenues Accrued Revenues
$3,400 2,100
Subtract: Depreciation Expense Interest Expense Insurance Expense
300 800 300
Net Income after Adjustments
5,500 8,200
1,400 $ 6,800
(Rev. − exp.) + (unearn. and acc. rev. ) − (dep. exp. + int. exp. + ins. exp.) Ans: N/A, LO 1, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Be. 251 For each of the following oversights, state whether total assets will be understated (U), overstated (O), or no affect (NA). _____
1.
Failure to record revenue recognized but not yet received.
_____
2.
Failure to record expired prepaid rent.
_____
3.
Failure to record accrued interest on the bank savings account.
_____
4.
Failure to record depreciation.
_____
5.
Failure to record accrued wages.
_____
6.
Failure to record the recognized portion of unearned revenues.
Solution 251 1. 2. 3. 4. 5. 6.
(5 min.)
U O U O NA NA
Ans: N/A, LO 2 & 3, BT: K, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
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Accrual Accounting Concepts
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Be. 252 State whether each situation is a prepaid expense (PE), unearned revenue (UR), accrued revenue (AR) or an accrued expense (AE). 1. 2. 3. 4. 5.
Unrecorded interest on savings bonds is $245. Property taxes that have been incurred but that have not yet been paid or recorded amount to $300. Legal fees of $1,000 were collected in advance. By year end 60 percent were still unearned. Prepaid insurance had a $500 balance prior to adjustment. By year end, 40 percent was still unexpired. Unpaid salaries earned by year end but not yet paid or recorded amounted to $1,200.
Solution 252 1. 2. 3. 4. 5.
(5 min.)
AR AE UR PE AE
Ans: N/A, LO 1, BT: K, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Be. 253 Identify the impact on the balance sheet for that month if the following information is not used to adjust the accounts. 1. 2. 3. 4.
Supplies consumed during the month totalled $3,000. Interest accrues on notes payable at the rate of $200 per month. Insurance of $450 expired during the month. Plant and equipment are depreciated at the rate of $1,200 per month.
Solution 253 1. 2. 3. 4.
Assets overstated and Stockholders' Equity overstated by $3,000. Liabilities understated and Stockholders' Equity overstated by $200. Assets overstated and Stockholders' Equity overstated by $450. Assets overstated and Stockholders' Equity overstated by $1,200.
Ans: N/A, LO 2 & 3, BT: AN, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Be. 254 On January 1, the Biddle & Biddle, CPAs received a $7,500 cash retainer for accounting services to be provided rateably over the next 3 months. The full amount was credited to the liability account Unearned Service Revenue. Assuming that the revenue is recognized rateably over the 3 month period, what adjusting journal entry should be made at January 31? .
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
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Solution 254 Unearned Service Revenue Service Revenue
2,500 2,500
Ans: N/A, LO 2, BT: AP, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving , IMA: Business Economics
Be. 255 On February 1, the Acts Tax Service received a $3,600 cash retainer for tax preparation services to be provided rateably over the next 4 months. The full amount was credited to the liability account Unearned Service Revenue. Assuming that the revenue is recognized rateably over the 4 month period, what balance would be reported on the February 28 balance sheet for Unearned Service Revenue? Solution 255 Revenue recognized monthly = $3,600/ 4 months = $900 per month (Cash rec. ÷ 4)
Feb 28 balance in Unearned Service Revenue = $3,600 – $900 revenue recognized in February = $2,700 [Cash rec. – (Cash rec. ÷ 4)] Ans: N/A, LO 2, BT: AP, Difficulty: Easy, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Be. 256 Better Publications, sold annual subscriptions to their magazine for $42,000 in December, 2016. The magazine is published monthly. The new subscribers received their first magazine in January, 2017. 1. 2.
What adjusting entry should be made in January if the subscriptions were originally recorded as a liability? What amount will be reported on the January 2017 balance sheet for Unearned Subscription Revenue?
Solution 256 1.
2.
Unearned Subscription Revenue Subscription Revenue
3,500 3,500
Unearned Subscription Revenue at January 31: $42,000 – $3,500 = $38,500 [Ann. sub. – (ann. sub. ÷ 12)]
Ans: N/A, LO 2, BT: AP, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
Accrual Accounting Concepts
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Be. 257 River Ridge Music School borrowed $30,000 from the bank signing a 6%, 6-month note on November 1. Principal and interest are payable to the bank on May 1. If the company prepares monthly financial statements, what adjusting entry should the company make at November 30 with regard to the note (round answer to the nearest dollar)? Solution 257 Interest Expense ($30,000 6% 1/12) Interest Payable (Borrowing 6% 1/12)
150 150
Ans: N/A, LO 3, BT: AP, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Be. 258 Match the statements below with the appropriate terms by entering the appropriate letter code in the spaces provided. TERMS: A. Prepaid Expenses B. Unearned Revenues C. Accrued Revenues D. Accrued Expenses STATEMENTS: ____ 1. A revenue not yet recognized; collected in advance. ____ 2. An expense incurred; not yet paid or recorded. ____ 3. A revenue recognized; not yet collected or recorded. ____ 4. An expense not yet incurred; paid in advance. Solution 258 1. 2. 3. 4.
(5 min.)
B D C A
Ans: N/A, LO 2, BT: K, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
4-70 Be. 259
Prepare adjusting entries for the following transactions. Omit explanations. 1. 2. 3.
Depreciation on equipment is $800 for the accounting period. There was no beginning balance of supplies and $600 of supplies were purchased during the period. At the end of the period $120 of supplies were on hand. Prepaid rent had a $1,000 normal balance prior to adjustment. By year end $300 was unexpired.
Solution 259
(5 min.)
1. Depreciation Expense ................................................................... Accumulated Depreciation—Equipment ...............................
800
2. Supplies Expense ......................................................................... Supplies ............................................................................... ($600 – $120)
480
800
480
(Sup. pur. – Sup. on hand)
3. Rent Expense ............................................................................... Prepaid Rent ........................................................................ ($1,000 – $300)
700 700
(Prep. rent. bal. – Unexp. rent) Ans: N/A, LO 2, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Be. 260 Prepare adjusting entries for the following transactions. Omit explanations. 1. 2. 3.
Unrecorded interest accrued on savings bonds is $200. Property taxes incurred but not paid or recorded amount to $900. Salaries incurred by year end but not yet paid or recorded amounted to $600.
Solution 260
(5 min.)
1. Interest Receivable ........................................................................ Interest Revenue ...................................................................
200
2. Property Tax Expense ................................................................... Property Taxes Payable .......................................................
900
3. Salaries and Wages Expense ....................................................... Salaries and Wages Payable ................................................
600
200
900
600
Ans: N/A, LO 3, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
Accrual Accounting Concepts
4-71
Be. 261 The adjusted trial balance of Warbocks Corporation at December 31, 2017 includes the following accounts: Retained Earnings $12,600; Dividends $5,000; Service Revenue $30,000; Salaries and Wages Expense $15,000; Insurance Expense $2,000; Rent Expense $4,500; Supplies Expense $500; and Depreciation Expense $1,000. Prepare an income statement for the year ended December 31, 2017. Solution 261
(5 min.)
WARBOCKS CORPORATION Income Statement For the Year Ended December 31, 2017 ___________________________________________________________________________ Revenues Service Revenue Expenses Salaries and Wages Expense Rent Expense Insurance Expense Depreciation Expense Supplies Expense Total Expenses Net Income
$ 30,000 $15,000 4,500 2,000 1,000 500 23,000 $ 7,000
(Ser. rev. – sal. exp. – rent exp. – ins. exp. – dep. exp. – sup. exp.) Ans: N/A, LO 4, BT: AP, Difficulty: Hard, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Be. 262 The adjusted trial balance of Warbocks Corporation at December 31, 2017 includes the following accounts: Retained Earnings $12,600; Dividends $5,000; Service Revenue $30,000; Salaries and Wages Expense $15,000; Insurance Expense $2,000; Rent Expense $4,500; Supplies Expense $500; and Depreciation Expense $1,000. Prepare a retained earnings statement for the year. Solution 262
(5 min.)
WARBOCKS CORPORATION Retained Earnings Statement For the Year Ended December 31, 2017 ___________________________________________________________________________ Retained Earnings, January 1 Plus: Net Income Less: Dividends Retained Earnings, December 31
$12,600 7,000 19,600 5,000 $14,600
(Beg. ret. earn. + net inc. – div.) Ans: N/A, LO 4, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
4-72 Be. 263
The following selected accounts appear in the adjusted trial balance for Blender Company. Identify the accounts that would be included in the post-closing trial balance. 1. 2. 3. 4.
Accumulated Depreciation Depreciation Expense Retained Earnings Dividends
Solution 263
5. 6. 7.
Supplies Accounts Payable Service Revenue
(5 min.)
The following are accounts that would be included in the post-closing trial balance. 1. 3. 5. 6.
Accumulated Depreciation Retained Earnings Supplies Accounts Payable
Ans: N/A, LO 4, BT: K, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
EXERCISES Ex. 264 The balance sheets of Palle’ Company include the following: 12/31/17 $4,300 5,000 3,700 -0-
Interest Receivable Supplies Salaries and Wages Payable Unearned Service Revenue The income statement for 2017 shows the following: Interest Revenue Service Revenue Supplies Expense Salaries and Wages Expense Instructions: Calculate the following for 2017: 1. Cash received for interest. 2. Cash paid for supplies. 3. Cash paid for salaries and wages. 4. Cash received for service revenue.
.
$17,500 78,700 10,700 48,000
12/31/16 $ -03,900 3,800 4,000
Accrual Accounting Concepts
Solution 264
4-73
(15 min.)
1. Cash received for interest = Interest Revenue Less: Interest Receivable Cash Received
$13,200 $17,500 4,300 $13,200
(Int. rev. – end. int. rec.)
2. Cash paid for supplies = Supplies Expense Less: Supplies (2016)
$11,800 $10,700 3,900 6,800 5,000 $11,800
Add: Supplies (2017) Cash Paid (Sup. exp. – beg. sup. + end. sup.)
3. Cash paid for salaries and wages = Salaries and Wages Expense Add: Salaries and Wages Payable (2016) Less: Salaries and Wages Payable (2017) Cash Paid
$48,100 $48,000 3,800 51,800 3,700 $48,100
(Sal./Wag. exp. + beg. sal./wag. pay. – end. sal./wag. pay.)
4. Cash received for service revenue = Service Revenue Less: Unearned Service Revenue (2016) Cash Received
$74,700 $78,700 4,000 $74,700
(Ser. rev. – beg. unear. ser. rev.) Ans: N/A, LO 1, BT: AN, Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Ex. 265 The 2017 income statement for Moring Company showed rent expense of $9,500 and wages expense of $8,600. The related balance sheet account balance at year-end last year and this year were as follows: 2017 2016 Prepaid Rent $900 $300 Salaries and Wages Payable 500 400 Calculate the following for 2017: 1. Cash paid for rent. 2. Cash paid for wages.
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
4-74
Solution 265
(10 min.)
1. Cash paid for rent = Rent Expense Less: Prepaid rent (2016)
$10,100 $9,500 300 9,200 900 $10,100
Add: Prepaid rent (2017) Cash Paid (Rent exp. – beg. prep. rent + end. prep. rent)
2. Cash paid for wages = Salaries and Wages Expense Add: Salaries and Wages Payable (2016)
$8,500 $8,600 400 9,000 500 $8,500
Less: Salaries and Wages Payable (2017) Cash Paid (Sal. exp. + beg. sal. pay. – end. sal. pay.)
Ans: N/A, LO 1, BT: AN, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Ex. 266 A company using the cash basis of accounting reports net income for 2017 of $45,460. If the company had used the accrual basis of accounting it would have reported the following year-end balances: 2017 Accounts receivable $3,850 Supplies 1,740 Salaries and wages payable 3,600 Other unpaid amounts 2,400
2016 $5,100 1,950 2,250 2,100
Instructions: Determine the company’s net income under the accrual basis of accounting. Show your calculations. Use the column headings shown below. Explanation
Amount
.
Accrual Accounting Concepts
Solution 266
4-75
(10 min.)
Explanation Cash basis net income The decrease in accounts receivable would be included in cash basis net income, but not accrual basis net income The decrease in supplies would not be included in cash basis net income The increase in salaries payable would be deducted in accrual basis net income The increase in other unpaid amounts would be deducted in accrual basis net income Accrual basis net income
Amount $45,460
(1,250) ( 210) (1,350) ( 300) $42,350
(Cash bas. NI – dec. in acc. rec. and sup. – inc. sal. pay. and oth. unpaid amounts) Ans: N/A, LO 1, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Ex. 267 Double-entry Accounting Services begin operations on July 1. It allows its clients 90 days to pay for services received. On the other hand, the company’s suppliers require payment for their goods and services within 30 days. Double-entry prepaid its office rent for 12 months on July 1. At the end of the year, December 31, the company had yet to pay its last month’s utility bill. Instructions: Explain how cash and accrual basis accounting would handle each of the events described above. Use the column headings shown below. Event Cash Basis Accrual Basis
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
4-76
Solution 267
(10 min.)
Event Cash Basis 90 days for customers Revenue would be to pay recorded when the cash was received.
Accrual Basis Revenue would be recorded when the service was performed.
30 days to pay suppliers
Expenses would be recorded when the cash was paid.
Until the item purchased was used it would be recorded as an asset. When used, it would then be expensed.
Prepaid rent of 12 months
It would expensed when paid.
It would be recorded as an asset when paid and then expensed as time passes.
Unpaid utilities
It would not be expensed until paid.
It would be expensed in the month incurred.
Ans: N/A, LO 1, BT: C, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Ex. 268 Hooper Company prepared the following income statement using the cash basis of accounting: HOOPER COMPANY Income Statement, Cash Basis For the Year Ended December 31, 2016 Service revenue (does not include $40,000 of services rendered on account because the collection will not be until 2017).................................................... Expenses (does not include $20,000 of expenses on account because payment will not be made until 2017) .............................................................. Net income ............................................................................................................
$380,000 220,000 $160,000
Additional data: 1. Depreciation on a company automobile for the year amounted to $7,000. This amount is not included in the expenses above. 2. On January 1, 2016, paid for a two-year insurance policy on the automobile amounting to $1,600. This amount is included in the expenses above. Instructions: (a) Recast the above income statement on the accrual basis in conformity with generally accepted accounting principles. Show computations and explain each change. (b)
Explain which basis (cash or accrual) provides a better measure of income.
.
Accrual Accounting Concepts
Solution 268 (a)
4-77
(15 min.)
HOOPER COMPANY Income Statement For the Year Ended December 31, 2016 Service revenue ............................................................................................. Expenses ....................................................................................................... Net income ....................................................................................................
$420,000 246,200 $173,800
(ser. rev. + acc. rev.) – [Exp. + acc. exp. – (ins. pay. ÷ 2) + depr.]
Service revenue should include the $40,000 for services performed on account. The accrual basis states that revenue is reflected in the period when the service is performed. ($380,000 + $40,000 = $420,000). Expenses should include the $20,000 for expenses incurred but not yet paid. The accrual basis states that expenses should be reflected in the period when incurred. Expenses also should only include half of the $1,600 insurance premium since $800 applies to 2016. The other $800 is an asset and should be reflected on the balance sheet as prepaid insurance. The $7,000 of depreciation for the automobile is included as an expense in 2016. ($220,000 + $20,000 – $800 + $7,000 = $246,200). (b) The accrual basis of accounting provides a better measure of income than the cash basis. The accrual basis is required under generally accepted accounting principles and recognizes revenues when the performance obligation is satisfied and expenses when incurred. Revenues and expenses recognized under the accrual basis are related to the economic environment in which they occur and thus allow trends to be more meaningfully interpreted. The cash basis often fails to recognize revenue in the period when the performance obligation is satisfied and expenses when incurred. Additionally, expenses are not matched with revenues when recognized; therefore, the expense recognition principle is violated. Ans: N/A, LO 1, BT: AP, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
4-78
Ex. 269 On December 31, 2017, Çolski Company prepared an income statement and balance sheet and failed to take into account three adjusting entries. The incorrect income statement showed net income of $40,000. The balance sheet showed total assets, $130,000; total liabilities, $60,000; and stockholders’ equity, $70,000. The data for the three adjusting entries were: (1)
Depreciation of $9,000 was not recorded on equipment.
(2)
Salaries and Wages amounting to $10,000 for the last two days in December were not paid and not recorded. The next payroll will be in January.
(3)
Rent of $8,000 was paid for two months in advance on December 1. The entire amount was debited to Prepaid Rent when paid.
Instructions: Complete the following tabulation to correct the financial statement amounts shown (indicate deductions with parentheses): Item Incorrect balances Effects of: Depreciation
Net Income $ 40,000
Total Assets $130,000
Total Liabilities Stockholders’ Equity $ 60,000 $ 70,000
Total Assets $130,000
Total Liabilities Stockholders’ Equity $60,000 $70,000
Salaries and Wages Rent Correct Balances Solution 269
(10 min.)
Item Net Income Incorrect balances $40,000 Effects of: Depreciation (9,000) Salaries and Wages (10,000) Rent (4,000) Correct Balances $17,000
(9,000) 10,000 (4,000) $117,000
[Net inc. – depr. – sal./wag. – (rent pay ÷ 2)]
$70,000
(9,000) (10,000) (4,000) $47,000
[St. equity – depr. – sal./wag. – (rent pay ÷ 2)]
Ans: N/A, LO 2 & 3, BT: AN, Difficulty: Hard, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
Accrual Accounting Concepts
4-79
Ex. 270 The Downtown Company accumulates the following adjustment data at December 31. 1. Revenue of $1,100 collected in advance has been recognized. 2. Salaries of $600 are unpaid. 3. Prepaid rent totaling $400 has expired. 4. Supplies of $550 have been used. 5. Revenue recognized but unbilled totals $750. 6. Utility expenses of $300 are unpaid. 7. Interest of $250 has accrued on a note payable. Instructions: (a) For each of the above items indicate: 1. The type of adjustment (prepaid expense, unearned revenue, accrued revenue, or accrued expense). 2. The account relationship (asset/liability, liability/revenue, etc.). 3. The status of account balances before adjustment (understatement or overstatement). 4. The adjusting entry. (b) Assume net income before the adjustments listed above was $22,500. What is the adjusted net income? Prepare your answer in the tabular form presented below.
Type of Adjustment
Account Balances Before Adjustment (Understatement or Overstatement)
Account Relationship
.
Adjusting Entry
Income Effect Increase (Decrease)
4-80
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 270
(20 min.)
(a)
Account Balances Before Adjustment (Understatement or Overstatement) Adjusting Entry Liab. O Unearned Ser Rev. Rev. U Service Revenue
Type of Account Adjustment Relationship 1. Unearned revenue L/R 2. Accrued expense 3. Prepaid expense 4. Prepaid expense 5. Accrued revenue 6. Accrued expense 7. Accrued expense Codes: A = L = E = (b)
E/L E/A E/A A/R E/L E/L
Asset Liability Expense
R = O = U =
Income Effect Increase (Decrease) 1,100
Exp. U Liab. U
Salaries and Wages Expense Salaries and Wages Payable
(600)
Exp. U Asset O
Rent Expense Prepaid Rent
(400)
Exp. U Asset O
Supplies Expense Supplies
(550)
Asset U Rev. U
Accounts Receivable Service Revenue
750
Exp. U Liab. U
Utilities Expense Accounts Payable
(300)
Exp. U Liab. U
Interest Expense Interest Payable
(250)
Revenue Overstatement Understatement
Net income before adjustments .................................................. Add: Unearned service revenue (1) ......................................... Accrued revenue (5) ........................................................ Less: Accrued salaries (2) ........................................................ Prepaid rent expired (3) .................................................. Supplies used (4) ............................................................ Accrued utilities (6) ......................................................... Accrued interest (7) ........................................................ Adjusted net income ...................................................................
$22,500 $1,100 750 600 400 550 300 250
1,850 24,350
2,100 $22,250
[Net inc. + Unear. and acc. rev. – (acc. sal. + prep. rent exp. + sup. used + acc. util and int.)] Ans: N/A, LO 2 & 3, BT: AN, Difficulty: Hard, TOT: 20 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Accrual Accounting Concepts
4-81
Ex. 271 The adjusted trial balance of Masters Company includes the following balance sheet accounts that frequently require adjustment. For each account, indicate (a) the type of adjusting entry (prepaid expenses, unearned revenues, accrued revenues, or accrued expenses) and (b) the related account in the adjusting entry. (a) (b) Balance Sheet Account Type of Adjusting Entry Related Account 1. Supplies 2. Accounts Receivable 3. Prepaid Insurance 4. Accumulated Depreciation— Equipment 5. Interest Payable 6. Salaries and Wages Payable 7. Unearned Service Revenue Solution 271
(10 min)(cont.)
Balance Sheet Account
(a) Type of Adjusting Entry
(b) Related Account
1. Supplies
Prepaid Expense
Supplies Expense
2. Accounts Receivable
Accrued Revenue
Service Revenue
3. Prepaid Insurance
Prepaid Expense
Insurance Expense
4. Accumulated Depreciation— Equipment
Prepaid Expense
Depreciation Expense
5. Interest Payable
Accrued Expense
Interest Expense
6. Salaries and Wages Payable
Accrued Expense
Salaries and Wages Exp.
7. Unearned Service Revenue
Unearned Revenue
Service Revenue
Ans: N/A, LO 2 & 3, BT: K, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
4-82
Ex. 272 Match the statements below with the appropriate terms by entering the appropriate letter code in the spaces provided. TERMS: A. Prepaid Expenses B. Unearned Revenues C. Accrued Revenues D. Accrued Expenses STATEMENTS: ___
1. A revenue not yet recognized; collected in advance.
___
2. Office supplies on hand that will be used in the next period.
___
3. Subscription revenue collected; not yet recognized.
___
4. Rent not yet collected; already recognized.
___
5. An expense incurred; not yet paid or recorded.
___
6. A revenue recognized; not yet collected or recorded.
___
7. An expense not yet incurred; paid in advance.
___
8. Interest expense incurred; not yet paid.
Solution 272 1. 2. 3. 4. 5. 6. 7. 8.
(5 min.)
B A B C D C A D
Ans: N/A, LO 2 & 3, BT: K, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
Accrual Accounting Concepts
4-83
Ex. 273 A review of the ledger of Wilde Co. at December 31, 2017, produces the following data pertaining to the preparation of annual adjusting entries: (a) Salaries and Wages Payable $0: Salaries are paid every Friday for the current week. Five employees receive a weekly salary of $800, and three employees earn a weekly salary of $700. December 31 is a Tuesday. Employees do not work weekends. All employees worked the last 2 days of December. (b) Unearned Rent Revenue $60,000: The company had several lease contracts during the year as shown below: Rent Term per Number of Date (in months) lease leases Oct. 1 12 $ 8,000 3 Dec. 1 12 18,000 2 (c) Notes Receivable $90,000: This is a 6-month note, dated November 1, 2017, with a 6% interest rate. Instructions: Prepare the adjusting entries at December 31, 2017. Show all computations. Solution 273 (a)
Dec. 31 Salaries and Wages Expense Salaries and Wages Payable (5 X $800 X 2/5 = $1,600) (3 X $700 X 2/5 = $ 840)
2,440 2,440
[(1st sal./wk. × 5 × 2/5) + (2nd sal./wk. × 3 × 2/5)]
(b)
31 Unearned Rent Revenue Rent Revenue (3/12 X $8,000 X 3 = $6,000) (1/12 X $18,000 X 2 = $3,000)
9,000 9,000
[(1st rent/lease × 3 × 3/12) + (2nd rent/lease × 2 × 1/12)]
(c)
31 Interest Receivable Interest Revenue ($90,000 X .06 X 2/12 = $900)
900 900
(Note amount × .06 × 2/12) Ans: N/A, LO 2 & 3, BT: AP, Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
4-84
Ex. 274 A review of the ledger of Weakly Service Co. at December 31, 2017, produces the following data pertaining to the preparation of annual adjusting entries: (a) Notes Payable $80,000: This is a 9-month note, dated September 1, 2017, with a 9% interest rate. (b) Prepaid Rent $648,000. The company rents offices throughout the Midwest. During 2017 it signed 10 leases as shown below:
Date Sept. 1 Nov. 1
Term (in months) 8 12
Monthly Rent $ 4,500 7,000
Number of Leases 4 6
(c) Unearned Service Revenue $175,800. During 2017 the company entered into 13 monthly service contracts with clients. The clients prepaid for the services to be provided over the contract period in an even manner. Date Aug. 1 Oct. 1
Service Period (in months) 9 6
Amount Per Contract $12,600 15,000
Number of Contracts 8 5
Instructions: Prepare the adjusting entries at December 31, 2017. Show all computations. Solution 274 (a)
Dec. 31 Interest Expense 2,400 Interest Payable ($80,000 X .09 X 4/12 = $2,400)
2,400
(Note amount × .09 × 4/12)
(b)
31 Rent Expense Prepaid Rent (4 X $4,500 X 4 = $72,000) (2 X $7,000 X 6 = $84,000)
156,000 156,000
(1st mon. rent × 4 × 4 mon.) + (2nd mon. rent × 6 × 2 mon.)
(c)
31 Unearned Service Revenue Service Revenue (5/9 X $12,600 X 8 = $56,000) (3/6 X $15,000 X 5 = $37,500)
93,500 93,500
(1st cont. amount × 8 × 5/9) + (2nd cont. amount × 5 × 3/6) Ans: N/A, LO 2 & 3, BT: AP, Difficulty: Medium, TOT: 20 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
Accrual Accounting Concepts
4-85
Ex. 275 The Scarlet Pages, a semi-professional hockey team, prepare financial statements on a monthly basis. Their season begins in October, but in September the team engaged in the following transactions: (a)
Paid $150,000 to Oklahoma City as advance rent for use of Oklahoma City Arena for the sixmonth period October 1 through March 31.
(b)
Collected $450,000 cash from sales of season tickets for the team's 30 home games. This amount was credited to Unearned Ticket Revenue.
(c)
During the month of October, the Scarlet Pages played five home games.
Instructions: Prepare the adjusting entries required at October 31 for the transactions above. Solution 275
(5 min.)
(a) Rent Expense .............................................................................. Prepaid Rent ...................................................................... ($150,000 6 = $25,000) (b) & (c) Unearned Ticket Revenue ........................................................... Ticket Revenue .................................................................. ($450,000 30 = $15,000; $15,000 5 = $75,000)
25,000 25,000
75,000 75,000
[(Cash coll. ÷ 30) × 5] Ans: N/A, LO 2, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving
Ex. 276 The Jacquers, a semi-professional baseball team, prepare financial statements on a monthly basis. Their season begins in April, but in March the team engaged in the following transactions: (a)
Paid $120,000 to Lawrence City as advance rent for use of Lawrence City Stadium for the sixmonth period April 1 through September 30.
(b)
Collected $600,000 cash from sales of season tickets for the team's 20 home games. This amount was credited to Unearned Ticket Revenue.
(c)
During the month of April, the Jacquers played four home games and five road games.
Instructions: Prepare the adjusting entries required at April 30 for the transactions above. .
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
4-86
Solution 276
(5 min.)
(a) Rent Expense .............................................................................. Prepaid Rent ..................................................................... ($120,000 6 = $20,000)
20,000 20,000
(Rent paid 6)
(b) & (c) Unearned Ticket Revenue ........................................................... Ticket Revenue .................................................................. ($600,000 20 = $30,000; $30,000 4 = $120,000)
120,000 120,000
[(Cash collect. ÷ 20) × 4] Ans: N/A, LO 2, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Ex. 277 Prepare adjusting entries for the following transactions. Omit explanations. 1. 2. 3. 4. 5.
Depreciation on equipment is $1,340 for the accounting period. Interest owed on a loan but not paid or recorded is $275. There was no beginning balance of supplies and $550 of office supplies were purchased during the period. At the end of the period $100 of supplies were on hand. Prepaid rent had a $1,000 normal balance prior to adjustment. By year end $700 had expired. Accrued salaries at the end of the period amounted to $900.
Solution 277
(10 min.)
1. Depreciation Expense ................................................................... Accumulated Depreciation—Equipment ...............................
1,340
2. Interest Expense ........................................................................... Interest Payable ...................................................................
275
3. Supplies Expense ......................................................................... Supplies ............................................................................... ($550 – $100)
450
1,340
275
450
(Beg. sup. – sup. on hand)
4. Rent Expense ............................................................................... Prepaid Rent ........................................................................
700
5.
900
Salaries and Wages Expense .................................................... Salaries and Wages Payable .................................................
700
900
Ans: N/A, LO 2 & 3, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
Accrual Accounting Concepts
4-87
Ex. 278 Prepare adjusting entries for the following transactions. Omit explanations. 1. 2. 3. 4. 5.
Unrecorded interest accrued on savings bonds is $410. Property taxes incurred but not paid or recorded amount to $800. Unearned service revenue of $4,000 was collected in advance. By year end $700 was still unearned. Prepaid insurance had a $750 debit balance prior to adjustment. By year end, 60 percent was still unexpired. Salaries incurred by year end but not yet paid or recorded amounted to $650.
Solution 278
(10 min.)
1. Interest Receivable ........................................................................ Interest Revenue ...................................................................
410
2. Property Tax Expense ................................................................... Property Taxes Payable .......................................................
800
3. Unearned Service Revenue ........................................................... Service Revenue .................................................................. ($4,000 – $700)
3,300
410
800
3,300
(Amount coll. in adv. – unear. amount)
4. Insurance Expense ........................................................................ Prepaid Insurance ................................................................. ($750 x .40)
300 300
[Prep. ins. bal. x (1 – .60)]
5. Salaries and Wages Expense ....................................................... Salaries and Wages Payable .................................................
650 650
Ans: N/A, LO 2 & 3, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Ex. 279 Prepare year-end adjustments for the following transactions. Omit explanations. 1. 2. 3. 4. 5. 6. 7.
Accrued interest on notes receivable is $30. $1,000 of unearned service revenue has been recognized. Three years’ rent, totaling $45,000, was paid in advance at the beginning of the year. Services totaling $2,900 had been performed but not yet billed at the end of the year. Depreciation on equipment totaled $6,500 for the year. Supplies purchased totaled $850. By year end, only $250 of supplies remained. Salaries owed to employees at the end of the year total $960
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
4-88
Solution 279
(10 min.)
1. Interest Receivable ........................................................................ Interest Revenue ...................................................................
30
2. Unearned Service Revenue ........................................................... Service Revenue ..................................................................
1,000
3.
15,000
Rent Expense .............................................................................. Prepaid Rent ........................................................................ ($45,000 3 = $15,000)
30
1,000
15,000
(Rent paid 3)
4.
Accounts Receivable ................................................................... Service Revenue.....................................................................
2,900
Depreciation Expense ................................................................ Accumulated Depreciation—Equipment ...............................
6,500
6. Supplies Expense ......................................................................... Supplies ............................................................................... ($850 – $250)
600
5.
2,900 6,500
600
(sup. purch. – end. sup.)
7. Salaries and Wages Expense ....................................................... Salaries and Wages Payable ..............................................
960 960
Ans: N/A, LO 2 & 3, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Ex. 280 Janus Coat Company purchased a delivery truck on June 1 for $30,000, paying $10,000 cash and signing a 6%, 2-month note for the remaining balance. The truck is expected to depreciate $6,000 each year. Janus Coat Company prepares monthly financial statements. Instructions: (a)
Prepare the general journal entry to record the acquisition of the delivery truck on June 1st.
(b)
Prepare any adjusting journal entries that should be made on June 30th.
(c)
Show how the delivery truck will be reflected on Janus Coat Company's balance sheet on June 30th.
.
Accrual Accounting Concepts
Solution 280
4-89
(10 min.)
(a) June 1 Equipment .................................................................... Notes Payable ..................................................... Cash .................................................................... (To record acquisition of delivery truck and signing of a 2-month, 6% note)
30,000
(b) June 30 Depreciation Expense ................................................... Accumulated Depreciation—Equipment ............... (To record monthly depreciation) ($6,000 12 = $500/month)
500
20,000 10,000
500
(Depr./yr. 12)
30 Interest Expense .......................................................... Interest Payable .................................................. (To accrue interest on notes payable) ($20,000 6% 1/12 = $100)
100 100
(Note pay. amount 6% 1/12)
(c) Assets Equipment Less: Accumulated Depreciation—Equipment
$30,000 500
$29,500
Ans: N/A, LO 2 & 3, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
4-90
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 281 Sunkan Company prepares monthly financial statements. Below are listed some selected accounts and their balances on the September 30 trial balance before any adjustments have been made for the month of September. SUNKAN COMPANY Trial Balance (Selected Accounts) September 30, 2017 __________________________________________________________________________ Supplies .............................................................................................. Prepaid Insurance ............................................................................... Equipment ........................................................................................... Accumulated Depreciation—Equipment .............................................. Unearned Rent Revenue ....................................................................
Debit $ 2,700 4,800 16,200
Credit
$ 1,000 1,200
(Note: Debit column does not equal credit column because this is a partial listing of selected account balances.) An analysis of the account balances by the company's accountant provided the following additional information: 1. A physical count of office supplies revealed $1,000 on hand on September 30. 2. A two-year life insurance policy was purchased on September 1 for $4,800. 3. Office equipment depreciates $3,000 per year. 4. The amount of rent received in advance that remains unearned at September 30 is $300. Instructions: Using the information given, prepare the adjusting entries that should be made by Sunkan Company on September 30.
.
Accrual Accounting Concepts
Solution 281
4-91
(10 min.)
1. Supplies Expense ......................................................................... 1,700 Supplies ................................................................................ (To record the amount of office supplies used $2,700 – 1,000)
1,700
(Sup. bal. – end. sup.)
2. Insurance Expense ........................................................................ Prepaid Insurance ................................................................ (To record insurance expired $4,800 24)
200 200
(Prep. ins. bal. 24)
3. Depreciation Expense ................................................................... Accumulated Depreciation—Equipment ................................ (To record monthly depreciation $3,000 12)
250 250
(Depr./yr. 12)
4. Unearned Rent Revenue ............................................................... Rent Revenue ...................................................................... (To record rent revenue recognized $1,200 – $300)
900 900
(Unear. rent rev. bal. – end. unear. rent) Ans: N/A, LO 2 & 3, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving
Ex. 282 Prepare the required end-of-period adjusting entries for each independent case listed below. Case 1 The Thoma Company began the year with a $3,000 balance in the Supplies account. During the year, $8,500 of additional supplies were purchased. A physical count of supplies on hand at the end of the year revealed that $8,300 worth of supplies had been used during the year. No adjusting entry has been made until year end. Case 2 The Leno Company has a calendar year-end accounting period. On July 1, the company purchased office equipment for $30,000. It is estimated that the office equipment will depreciate $200 each month. No adjusting entry has been made until year end. Case 3 Yeats Realty is in the business of renting several apartment buildings and prepares monthly financial statements. It has been determined that 2 tenants in $900 per month apartments and one tenant in the $1,000 per month apartment had not paid their December rent as of December 31st.
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 282
(10 min.)
Case 1—December 31 Supplies Expense ............................................................ Supplies ................................................................ (To record supplies used during the year) Case 2—December 31 Depreciation Expense ....................................................... Accumulated Depreciation—Equipment................. (To record depreciation expense for six months) $200 6 months = $1,200 Depreciation
8,300 8,300
1,200 1,200
(Depr./mon. 6)
Case 3—December 31 Accounts Receivable ........................................................ Rent Revenue ....................................................... (To accrue rent recognized but not yet received) [(2 x $900) + $1,000)]
2,800 2,800
[(2 x 1st rent/mon.) + 2nd rent/mon.] Ans: N/A, LO 2 & 3, BT: AP, Difficulty: Hard, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Accrual Accounting Concepts
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Ex. 283 Greenstream Insurance Agency prepares monthly financial statements. Presented below is an income statement for the month of June that is correct on the basis of information considered. GREENSTREAM INSURANCE AGENCY Income Statement For the Month Ended June 30 ___________________________________________________________________________ Revenues Service Revenue ........................................................................ $40,000 Expenses Salaries and Wages Expense ..................................................... $12,000 Advertising Expense ................................................................... 800 Rent Expense ............................................................................. 4,200 Depreciation Expense ................................................................ 2,800 Total Expenses ........................................................................... 19,800 Net Income ......................................................................................... $20,200 Additional Data: When the income statement was prepared, the company accountant neglected to take into consideration the following information: 1. A utility bill for $1,200 was received on the last day of the month for electric and gas service for the month of June. 2. A company insurance salesman sold a life insurance policy to a client for a premium of $10,000. The agency billed the client for the policy and is entitled to a commission of 20%. 3. Supplies on hand at the beginning of the month were $2,500. The agency purchased additional supplies during the month for $1,500 in cash and $1,200 of supplies were on hand at June 30. 4. The agency purchased a new car at the beginning of the month for $24,000 cash. The car will depreciate $6,000 per year. 5. Salaries owed to employees at the end of the month total $5,300. The salaries will be paid on July 5. Instructions: Prepare a corrected income statement.
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 283
(15 min.)
GREENSTREAM INSURANCE AGENCY Income Statement For the Month Ended June 30 __________________________________________________________________________ Revenues Service Revenue ($40,000 + $2,000) .......................................... $42,000 Expenses Salaries and Wages Expense ($12,000 + $5,300) ...................... $17,300 Rent Expense ............................................................................. 4,200 Depreciation Expense ($2,800 + $500) ...................................... 3,300 Supplies Expense ($0 + $2,800) ................................................ 2,800 Utilities Expense ($0 + $1,200) ................................................... 1,200 Advertising Expense ................................................................... 800 Total expenses .................................................................. 29,600 Net Income ......................................................................................... $12,400 [Ser. rev. + (ins. prem. × 20%)] – (sal. exp. + acc. sal.) – rent exp. – [(dep./yr. ÷ 12) + dep. exp.] – (beg. sup. + sup. pur. – end. sup.) – util. bill exp – adver. exp Ans: N/A, LO 2 & 3, BT: AN, Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Ex. 284 One part of an adjusting entry is given below. Instructions: Indicate the account title for the other part of the entry. 1. Unearned Service Revenue is debited. 2. Prepaid Rent is credited. 3. Accounts Receivable is debited. 4. Depreciation Expense on equipment is debited. 5. Utilities Expense is debited. 6. Interest Payable is credited. 7. Service Revenue is credited (give two possible debit accounts). 8. Interest Receivable is debited. Solution 284 1. 2. 3. 4.
(5 min.)
Service Revenue 5. Rent Expense 6. Service Revenue 7. Accumulated Depreciation—Equipment 8.
Utilities Payable Interest Expense Accounts Receivable or Unearned Service Revenue Interest Revenue
Ans: N/A, LO 2 & 3, BT: K, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
Accrual Accounting Concepts
4-95
Ex. 285 The following ledger accounts are used by the Heartland Race Track: Accounts Receivable Prepaid Advertising Prepaid Rent Unearned Sales Revenue Sales Revenue Advertising Expense Rent Expense Instructions: For each of the following transactions below, prepare the journal entry (if one is required) to record the initial transaction and then prepare the adjusting entry, if any, required on November 30, the end of the fiscal year. (a)
On November 1, paid rent on the track facility for three months, $150,000.
(b)
On November 1, sold season tickets for admission to the racetrack. The racing season is yearround with 25 racing days each month. Season ticket sales totaled $960,000.
(c)
On November 1, borrowed $250,000 from First National Bank by issuing a 6% note payable due in three months.
(d)
On November 5, programs for 20 racing days in November, 25 racing days in December and 15 racing days in January were printed for $3,000.
(e)
The accountant for the concessions company reported that gross receipts for November were $140,000. Ten percent is due to Heartland and will be remitted by December 10.
Solution 285
(15 min.)
(a) Journal Entry Prepaid Rent ........................................................................ Cash ............................................................................ Adjusting Entry Rent Expense ....................................................................... Prepaid Rent ................................................................ ($150,000 3 = $50,000)
150,000 150,000
50,000 50,000
(Rent paid 3)
(b) Journal Entry Cash ..................................................................................... Unearned Sales Revenue ............................................. Adjusting Entry Unearned Sales Revenue ..................................................... Sales Revenue ............................................................ ($960,000 12 = $80,000) (Ticket sales amount 12)
.
960,000 960,000
80,000 80,000
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
4-96
Solution 285 (cont.) (c) Journal Entry Cash ..................................................................................... Notes Payable ............................................................. Adjusting Entry Interest Expense ................................................................... Interest Payable ........................................................... ([$250,000 6%] 1/12 = $1,250)
250,000 250,000
1,250 1,250
(Amount borrow. 6% 1/12)
(d) Journal Entry Prepaid Advertising .............................................................. Cash ............................................................................ Adjusting Entry Advertising Expense ............................................................. Prepaid Advertising ...................................................... (($3,000 20) 60 = $1,000)
3,000 3,000
1,000 1,000
((Print. cost) 20 60)
(e) Journal Entry None Adjusting Entry Accounts Receivable ............................................................ Sales Revenue ............................................................
14,000 14,000
Ans: N/A, LO 2 & 3, BT: AP, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Ex. 286 Dallison Company has an accounting fiscal year, which ends on June 30. The company also has a policy of paying the weekly payroll on Friday. Payroll records indicate the following salary costs were incurred. Date Amount Monday June 28 $3,200 Tuesday June 29 2,800 Wednesday June 30 2,900 Thursday July 1 3,000 Friday July 2 2,600 Instructions: (a)
Prepare any necessary adjusting journal entries that should be made at year end on June 30.
(b)
Prepare the journal entry to record the payment of the weekly payroll on July 2.
.
Accrual Accounting Concepts
Solution 286
4-97
(10 min.)
(a) June 30 Salaries and Wages Expense ...................................... Salaries and Wages Payable .............................. (To accrue salaries incurred but not yet paid)
8,900 8,900
(June 28, 29 and 30 amounts)
(b) July 2
Salaries and Wages Payable ....................................... Salaries and Wages Expense ...................................... Cash .................................................................... (To record payment of July 2 payroll)
8,900 5,600* 14,500
*(July 1 and 2 amounts) Ans: N/A, LO 5, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Ex. 287 On Friday of each week, Prawn Company pays its personnel weekly wages amounting to $45,000 for a five-day work week. Instructions: (a)
Prepare the necessary adjusting entry at year end, assuming December 31 falls on Wednesday.
(b)
Prepare the journal entry for payment of the week's wages on the payday which is Friday, January 2 of the next year.
Solution 287 (a) Dec. 31
(5 min.) Salaries and Wages Expense ....................................... Salaries and Wages Payable ............................... ([$45,000 5 3 = $27,000)
27,000 27,000
(Weekly wages 5) 3
(b) Jan. 2
Salaries and Wages Payable ........................................ Salaries and Wages Expense ....................................... Cash ....................................................................
27,000 18,000* 45,000
*(Weekly wages – [(Weekly wag. 5) 2]) Ans: N/A, LO 3, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 288 Presented below is the Trial Balance and Adjusted Trial Balance for Stabler Company on December 31. STABLER COMPANY Trial Balance December 31 __________________________________________________________________________ Before Adjustment Dr. Cr. $ 3,000 2,800 2,100 1,200 18,000
Cash Accounts Receivable Prepaid Rent Supplies Equipment Accumulated Depreciation— Equipment Accounts Payable Notes Payable Interest Payable Salaries and Wages Payable Unearned Service Revenue Common Stock Dividends Service Revenue Salaries and Wages Expense Utilities Expense Rent Expense Supplies Expense Depreciation Expense Interest Expense Totals
After Adjustment Dr. Cr. $ 3,000 3,700 1,500 700 18,000
$ 1,300 2,700 10,000
$ 1,500 3,000 10,000 120 800 4,060 8,200
4,460 8,200 3,200
3,200 8,000
2,060 1,800 500
$34,660
$34,660
9,300 2,860 2,100 1,100 500 200 120 $36,980
$36,980
Instructions: Prepare in journal form, with explanations, the adjusting entries that explain the changes in the balances from the trial balance to the adjusted trial balance.
.
Accrual Accounting Concepts
Solution 288
4-99
(20 min.)
Accounts Receivable ........................................................................... Service Revenue ........................................................................ (To record revenue recognized but not yet collected)
900
Rent Expense ..................................................................................... Prepaid Rent .............................................................................. (To record expiration of prepaid rent)
600
Supplies Expense ............................................................................... Supplies ..................................................................................... (To record supplies used)
500
Depreciation Expense ......................................................................... Accumulated Depreciation—Equipment ..................................... (To record depreciation expense)
200
Salaries and Wages Expense .............................................................
800
900
600
500
200
800
Salaries and Wages Payable ..................................................................
(To record salaries owed, not yet paid) Interest Expense ................................................................................. Interest Payable ......................................................................... (To record accrued interest payable)
120
Unearned Service Revenue ................................................................ Service Revenue ........................................................................ (To record revenue recognized)
400
Utilities Expense ................................................................................. Accounts Payable ....................................................................... (To record receipt of utility bill)
300
120
400
300
Ans: N/A, LO 2 & 3, BT: AP, Difficulty: Medium, TOT: 20 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 289 The Golden Petting Zoo operates a drive-through tourist attraction in Colorado. The company adjusts its accounts at the end of each month. The selected accounts appearing below reflect balances after adjusting entries were prepared on April 30. The adjusted trial balance shows the following: Prepaid Rent $ 18,000 Buildings 42,000 Accumulated Depreciation—Buildings 5,500 Unearned Ticket Revenue 600 Other data: 1. Three months' rent had been prepaid on April 1. 2. The buildings are being depreciated at $6,000 per year. 3. The unearned ticket revenue represents tickets sold for future zoo visits. The tickets were sold at $4.00 each on April 1. During April, twenty of the tickets were used by customers. Instructions: (a)
(b)
Calculate the following: 1. Monthly rent expense. 2. The age of the buildings in months. 3. The number of tickets sold on April 1. Prepare the adjusting entries that were made by the Golden Petting Zoo on April 30.
Solution 289 (a)
(15 min.)
1. $9,000. The $18,000 balance on the adjusted trial balance reflects two months remaining on the prepaid rent. This indicates that the monthly rent is $9,000. 2. The buildings are 11 months old. By dividing annual depreciation ($6,000) by 12, the monthly depreciation expense is $500. The accumulated depreciation account shows $5,500 which means that depreciation has been taken for 11 months. [Acc. Dep. bal. ÷ (depr./yr ÷ 12)
3. 170 tickets were originally sold. Twenty tickets were used in April at $4.00 each. The adjusted trial balance shows a balance of $600 indicating that 150 tickets are still outstanding. By adding the 20 used in April to the 150 still remaining to be used, 170 tickets must have been sold on April 1. [(Unear. Tick. Rev. bal. ÷ sell. price/ticket) + tickets used]
(b)
1. Rent Expense ....................................................................... Prepaid Rent ................................................................
9,000
2. Depreciation Expense .......................................................... Accumulated Depreciation—Buildings .........................
500
3. Unearned Ticket Revenue .................................................... Ticket Revenue ............................................................ (20 $4 = $80)
80
9,000 500 80
(Tickets used × sell. pr./ticket) Ans: N/A, LO 2, BT: AP, Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
Accrual Accounting Concepts
4-101
Ex. 290 The adjusted trial balance of Nicks Financial Planners appears below and using the information from the adjusted trial balance, you are to prepare for the month ending December 31: 1. an income statement; 2. a retained earnings statement; and 3. a balance sheet. NICKS FINANCIAL PLANNERS Adjusted Trial Balance December 31, 2017 ___________________________________________________________________________ Debit Credit Cash ................................................................................................... $ 15,400 Accounts Receivable ........................................................................... 2,200 Supplies .............................................................................................. 1,800 Equipment ........................................................................................... 15,500 Accumulated Depreciation—Equipment .............................................. $ 4,000 Accounts Payable ............................................................................... 3,000 Unearned Service Revenue ................................................................ 5,000 Common Stock .................................................................................... 15,000 Retained Earnings .............................................................................. 7,400 Dividends ............................................................................................ 3,500 Service Revenue ................................................................................. 9,500 Supplies Expense ............................................................................... 1,100 Depreciation Expense ......................................................................... 2,500 Rent Expense ..................................................................................... 1,900 $43,900 $43,900 Solution 290
(20 min.)
1.
NICKS FINANCIAL PLANNERS Income Statement For the Month Ended December 31, 2017 ___________________________________________________________________________
Revenues Service Revenue ........................................................................ Expenses Depreciation Expense ................................................................ Rent Expense ............................................................................. Supplies Expense ....................................................................... Total Expenses ..................................................................... Net Income .......................................................................................... (Ser. rev. – (dep. exp. + rent exp. + sup. exp.)
.
$ 9,500 $2,500 1,900 1,100 5,500 $ 4,000
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 290
(cont.)
2.
NICKS FINANCIAL PLANNERS Retained Earnings Statement For the Month Ended December 31, 2017 __________________________________________________________________________
Retained Earnings, December 1 ......................................................... Plus: Net Income ...............................................................................
$7,400 4,000 11,400 3,500 $7,900
Less: Dividends ................................................................................. Retained Earnings, December 31 ....................................................... (Beg. ret. earn. + net inc. – div.)
3.
NICKS FINANCIAL PLANNERS Balance Sheet December 31, 2017 __________________________________________________________________________
Assets Cash .................................................................................................... Accounts Receivable .......................................................................... Supplies .............................................................................................. Equipment ........................................................................................... Less: Accumulated Depreciation—Equipment .................................. Total Assets ...............................................................................
$15,400 2,200 1,800 $15,500 4,000
11,500 $30,900
(Cash + acc. rec. + sup. + equip. – acc. dep.)
Liabilities and Stockholders’ Equity Liabilities Accounts Payable ....................................................................... Unearned Service Revenue ....................................................... Total Liabilities ...................................................................... Stockholders’ Equity Common Stock............................................................................ Retained Earnings ...................................................................... Total Liabilities and Stockholders’ Equity ..............................
$3,000 5,000 $ 8,000 15,000 7,900
22,900 $30,900
(Acc. pay. + unear. ser. rev. + com. st. + end. ret. earn.) Ans: N/A, LO 4, BT: AP, Difficulty: Hard, TOT: 20 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Accrual Accounting Concepts
Ex. 291 The adjusted trial balance shown below is for Rich Company at the end of its fiscal year: RICH COMPANY Trial Balance March 31, 2017 ___________________________________________________________________________ Debit Credit Cash ................................................................................................... $ 12,900 Accounts Receivable ........................................................................... 9,400 Supplies .............................................................................................. 700 Prepaid Insurance ............................................................................... 2,500 Equipment ........................................................................................... 16,000 Accumulated Depreciation—Equipment .............................................. $ 4,800 Accounts Payable ............................................................................... 5,800 Salaries and Wages Payable .............................................................. 1,100 Unearned Rent Revenue .................................................................... 600 Common Stock .................................................................................... 15,000 Retained Earnings .............................................................................. 5,600 Dividends ............................................................................................ 5,800 Service Revenue ................................................................................. 34,600 Rent Revenue ..................................................................................... 14,400 Salaries and Wages Expense ............................................................. 18,100 Supplies Expense ............................................................................... 1,800 Rent Expense ..................................................................................... 12,000 Insurance Expense ............................................................................. 1,500 Depreciation Expense .......................................................................... 1,200 $81,900 $81,900 Instructions: Prepare the closing entries for the temporary accounts at March 31.
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 291 March 31
Service Revenue ............................................................. 34,600 Rent Revenue.................................................................. 14,400 Income Summary.......................................................
49,000
Income Summary............................................................. 34,600 Salaries and Wages Expense ..................................... Rent Expense ............................................................. Supplies Expense ....................................................... Insurance Expense ..................................................... Depreciation Expense ................................................
18,100 12,000 1,800 1,500 1,200
Income Summary............................................................. Retained Earnings ....................................................
14,400 14,400
Retained Earnings .................................................................... Dividends ..........................................................
5,800
31
31 31
5,800
Ans: N/A, LO 4, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
COMPLETION STATEMENTS 292.
The ______________ assumption states that the economic life of a business can be divided into artificial time periods.
Ans: time period, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
293.
The ______________ principle gives accountants guidance as to when revenue is to be recorded.
Ans: revenue recognition, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving
294.
In a service company, revenue is earned when the service is _______________.
Ans: performed, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
295.
The
expense
recognition
principle
attempts
to
match
______________
with
______________. Ans: expenses, revenues, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
Accrual Accounting Concepts
296.
4-105
Expenses paid and recorded in an asset account before they are used or consumed are called _______________. Revenue received and recorded as a liability before it is earned is referred to as _________________.
Ans: prepaid expenses, unearned revenue, LO 1, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
297.
Failure to adjust a prepaid expense account for the amount expired will cause _______________ to be understated and ________________ to be overstated.
Ans: expenses, assets, LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
298.
Depreciation is an __________________ concept, not a ________________ concept.
Ans: allocation, valuation, LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
299.
An adjusting entry recording accrued salaries for a period indicates that Salaries and Wages Expense has been ________________ but has not yet been ________________ or recorded.
Ans: incurred, paid, LO 3, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
300.
An adjusted trial balance proves the ______________ of the total debit and credit balances after all ______________ entries have been made.
Ans: equality, adjusting, LO 4, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
301.
In addition to updating Retained Earnings, ______________ entries produce a zero balance in each ______________ account.
Ans: closing, temporary, LO 4, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
302.
After all closing entries are journalized and posted, a _________________ trial balance is prepared from the ledger.
Ans: post-closing, LO 4, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Answers to Completion Statements 292. 293. 294. 295. 296.
periodicity revenue recognition performed expenses, revenues prepaid expenses, unearned revenue .
298. 299. 300. 301. 302.
allocation, valuation incurred, paid equality, adjusting closing, temporary post-closing
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
expenses, assets
.
Accrual Accounting Concepts
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MATCHING 303. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Periodicity assumption Cash basis Revenue recognition principle Prepaid expenses Expense recognition principle
F. G. H. I. J.
Accrued revenues Depreciation Post-closing trial balance Accrued expenses Book value
____
1. Events recorded only in periods the company receives or pays cash
____
2. Expenses paid before they are incurred
____
3. Cost less accumulated depreciation
____
4. The economic life of a business can be divided into artificial time periods
____
5. Efforts are related to accomplishments
____
6. Includes only permanent—balance sheet—accounts
____
7. Revenue is recognized when the performance obligation is satisfied.
____
8. Revenues earned but not yet received
____
9. Expenses incurred but not yet paid
____ 10. A cost allocation process
Answers to Matching 1. 2. 3. 4. 5.
B D J A E
6. 7. 8. 9. 10.
H C F I G
Ans: N/A, LO 1, 2, 3, 4 BT: K, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
SHORT-ANSWER ESSAY QUESTIONS S-A E 304 You are part of a group of individuals (incorporators) who want to form a new corporation. During discussions on forming the business, Mark Adams makes this statement: Our business will have accounts receivable and accounts payable. It will also acquire a substantial amount of computers and equipment. Will it be acceptable to use the cash basis of accounting? Prepare a response for Mark and the other incorporators. Solution 304 Considering the proper basis of accounting to use is an important decision that should be addressed before the business is started. Thus, this is an excellent time to look at the differences between the cash and accrual basis of accounting. When the cash basis is used, revenue is recorded when cash is received and expenses are recorded when cash is paid. This is not an objective approach in determining net income because the receipt and payment of cash does not reflect the efforts and accomplishments of the business. Also, accounts receivable, accounts payable and depreciation are not recognized in the accounting records. The use of the accrual basis of accounting overcomes these problems. Revenue is recorded when the performance obligation is satisfied and expenses are recorded when they are incurred. This represents an objective way of matching efforts and accomplishments of the accounting period. In addition, accounts receivable and accounts payable are recorded and their balances are shown on the balance sheet. The business has access to these balances during the accounting period and can make important decisions about them. Since the business has computers, it is important to record a portion of their costs each accounting period. This process is called depreciation. Instead of showing the cost as an expense when the computers are purchased (cash basis), the cost is allocated to the accounting periods in which the computers are used (accrual basis). This makes net income more meaningful because it reflects a matching of the expense to the period in which revenues were recognized. The cost of the computers, less the accumulation of depreciation that has been taken, is shown as an asset on the balance sheet. Thus, the user can see that these assets are available for future use. Also, generally accepted accounting principles require the use of the accrual basis of accounting. It will be better to use the accrual basis of accounting. Ans: N/A, LO 1, BT: C, Difficulty: Medium, TOT: 20 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting
.
Accrual Accounting Concepts
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S-A E 305 The income statement is an important financial statement used by individuals who are interested in the operations of a business enterprise. Explain how the periodicity assumption and the revenue recognition and expense recognition principles provide guidance to accountants in preparing an income statement. Solution 305 The periodicity assumption assumes that the financial and operating life of an accounting entity, such as a business enterprise, can be broken up into arbitrary time periods. The revenue recognition and expense recognition principles are the basic rules for allocating revenues and expenses to these arbitrary time periods under the accrual basis of accounting. The revenue recognition principle dictates the time period to which revenue is to be allocated and recognized, that is, on which income statement the revenue is to be reported. The expense recognition principle dictates the time period to which costs are allocated and recognized as expenses, that is, on which income statement the expenses are to be reported and matched against revenues in the determination of net income. Ans: N/A, LO 1, BT: C, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting
S-A E 306 As a recent graduate in accounting, and the financial director of a political candidate in a current election, you have been asked to explain many questions concerning how governmental accounting differs from corporate accounting. Required: (a) Discuss the differences between cash basis and accrual−basis accounting. (b) Prepare a memo to your candidate explaining why governmental entities favor the cash basis of accounting.
.
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Solution 306 (a)
The cash basis of accounting recognizes revenues and expenses when cash is received and paid. This can lead to misleading financial statements by simply speeding up or delaying the cash from sales and expense transactions. The accrual basis of accounting recognizes revenues and expenses when those items occur. Information presented on an accrual basis reveals relationships that are useful in predicting future results.
(b)
TO: Candidate FROM: Financial director SUBJECT: Governmental Accounting Practice Governments favor the cash basis of accounting because expenses are only recognized when paid. This results in a large number of unrecorded liabilities that if recorded, would make the government’s deficits even larger than currently reported. No elected official or governmental bureaucrat wants to be held accountable for increasing the deficit because of changing to the accrual basis of accounting.
Ans: N/A, LO 1, BT: C, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting
S-A E 307 The long-term liability section of Alpha Corporation’s Balance Sheet includes the following accounts Notes Payable Mortgage Payable Salaries and Wages Payable Accumulated Depreciation Total Long-Term Liabilities
$100,000 250,000 75,000 125,000 $550,000
Alpha Corporation is an established company and does not experience any financial difficulties or have any cash flow problems. Discuss at least two items that are questionable as long-term liabilities. Solution 307 Salaries and Wages Payable should not be reported as a long-term liability. This represents the amounts owed to employees. If the corporation does not have any financial difficulties or cash flow problems, the salaries should be paid within one year. Accumulated Depreciation is a contra asset account. The balance is subtracted from the cost of the related asset in the Property, Plant, and Equipment section of the balance sheet. Are all of the notes payable, including the mortgage, actually long-term (due after one year)? If not, the portion due within one year should be reported as a current liability instead. Ans: N/A, LO 1, 2, & 3, BT: C, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting
.
Accrual Accounting Concepts
4-111
S-A E 308 What is the purpose of the preparation of adjusting entries? Solution S-A E 308 Adjusting entries are needed to ensure that the revenue recognition and expense recognition principles are followed. The use of adjusting entries makes it possible to produce accurate financial statements at the end of the period. Their purpose is to bring all accounts up to date. Ans: N/A, LO 1, BT: K, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Communication, IMA: Business Economics
S-A E 309 Briefly distinguish between a deferral and an accrual. Solution 309 A deferral is the postponement of the recognition of an expense already paid or of a revenue already received. An accrual is the recognition of an expense or revenue that has arisen but that has not yet been recorded, and cash has not been paid or received. Ans: N/A, LO 1, BT: C, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Communication, IMA: Business Economics
S-A E 310 In developing an accounting information system, it is important to establish procedures whereby all transactions that affect the components of the accounting equation are recorded. Why then, is it often necessary to adjust the accounts before financial statements are prepared even in a properly designed accounting system? Identify the major types of adjustments that are frequently made and give a specific example of each. Solution 310 Account balances must be adjusted before financial statements are prepared, even in a properly designed accounting system, because (1) some of the recorded transactions have been recognized prematurely and (2) some effects on components of the accounting equation have not been recorded. Deferrals are types of adjustments of recorded transactions that must be allocated to future periods as well as the current period. Examples of deferral-type adjustments are prepaid rent, prepaid insurance, and unearned revenue. Accruals are adjustments of unrecorded transactions that must be recognized in the current period. Examples of accrual-type adjustments are salaries and wages payable, interest payable, and interest receivable. Ans: N/A, LO 1, BT: K, Difficulty: Medium, TOT: 7 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Medium, AICPA PC: Problem Solving, IMA: Business Economics
.
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S-A E 311 Companies are continually under pressure to “Make the Numbers” – to have earnings that are in line with expectations. Explain the terms earnings management and quality of earnings. Solution 311 Earnings management is the planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income. Such action is undertaken to help a company meet target financial numbers. Quality of earnings indicates the level of full and transparent information that a company provides to users of financial statements. Ans: N/A, LO 4, BT: C, Difficulty: Easy, TOT: 5 min., AACSB: Ethics, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting
S-A E 312
(Ethics)
Benson and Jencks is a manufacturing company that specializes in writing instruments. The past year was a difficult one for the company, as it sought to retain its share in a market in which the largest competitors were also rapid innovators. Benson and Jencks introduced a new product late in the year, even though testing was not complete. It was a pen designed with two cartridges: one supplying ink and the other correction fluid. A person could then switch easily between writing and correcting errors. It was priced fairly high, and was never heavily advertised. Even so, the Correct-OPen, as the product was named, was an overwhelming success. The success of the product has Fern Donald, the manager of the New Products division, worried, however. She was concerned that quality problems would begin occurring, since the longevity of the pen and stability of the correction fluid formulation had not been tested. She did not want sales personnel to get the bonuses that appeared to be indicated, since they might aggressively promote a product that would fail in use. She preferred to complete testing of the pen first, so that more confidence could be placed in the results. Top management, however, declined the tests. Ms. Donald then instructed you, the accountant, not to prorate payroll taxes or rent expense for the rest of the year, but to show them as current expenses in total. In this way, the new product would appear to be only slightly profitable. Required: 1. Describe the alternatives that you as an accountant would have in this situation. 2. Indicate which alternative is best.
.
Accrual Accounting Concepts
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Solution 312 1. The choices include: 1. Follow the manager's instructions. 2. Explain to the manager why you cannot follow her instructions. 3. Report the manager's actions to her superior. 4. Resign. There are probably other alternatives as well. Students should be able to come up with at least #1 and #2. 2. Of the choices, #1 is unethical because it will cause the financial statements to be misleading. #3 and #4 are rather drastic measures that do not seem to be indicated, at least not yet. #2, therefore, is the best choice. Ans: N/A, LO 1, BT: E, Difficulty: Medium, TOT: 10 min., AACSB: Ethics, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting
S-A E 313
(Communication)
A new sales representative, Eddy Wherli, has just received his copy of the month-end financial reports. He is puzzled by the term "unearned revenue." He left the following e-mail message for you on the company's bulletin board system: What is this??? Creative Accounting, or what??? Line item 12 on year-to-date financials shows over $25Gs in Unearned Revenue!!! Come on, guys! Either we earned it, or we didn't . . . Right??! Is this how you guys lower our commissions? Reply to e.wherli@sbd
Required: Write a response to send to Eddy. (Since the answer is being prepared for a "bulletin board" type system, it can be in informal language and can respond in kind to the humor. However, proper grammar and spelling are essential, as is the message about what unearned revenue really is.)
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 313 Since the answer is being prepared for a "bulletin board" type system, it can be in informal language and can respond in kind to the humor. However, proper grammar and spelling are essential, as is the message about what unearned revenue really is. A proposed message follows: Eddy—What a pleasant surprise to hear from you! Maybe you can teach those other guys in your department something about living in the present! Do you know some of them still write me notes on paper??? Unbelievable, right??! Now to your question. Your unearned revenue is the sales you made that us smart guys in accounting didn't figure you had earned, so we just took it away from you! Might as well save the company some dough for our own bonuses, right?? Seriously, Eddy—unearned revenue is the result of your getting customers of the kind we like—they pay in advance! When they pay before we can even get their products made or shipped, we can't count the money they pay us as revenue. What we actually have is a liability—an obligation to make and ship products. So that's how us (smart guys) in accounting count it—as a liability. You happened to have about 25% of your sales that fit in that category. When production can catch up with orders, you'll get credit for the sales. (Take heart—It'll seem like Christmas all over again) Thanks again for actually using the system. Talk to me again sometime . . . Reply to
Ans: N/A, LO 1, BT: C, Difficulty: Medium, TOT: 20 min., AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting
.
Accrual Accounting Concepts
4-115
International Financial Reporting Standards True-False Statements 1.
The cash basis of accounting is not in accordance with IFRS.
Ans: T, LO 6, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem solving, IMA: Reporting
2.
The expense recognition principle requires that efforts be matched with accomplishments.
Ans: T, LO 6, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem solving, IMA: Reporting
3.
Adjusting entries are needed to enable financial statements to conform to International Financial Reporting Standards (IFRS).
Ans: T, LO 6, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem solving, IMA: Reporting
Multiple Choice Questions 4.
Which of the following are in accordance with IFRS? a. Accrual basis accounting b. Cash basis accounting c. Both accrual basis and cash basis accounting d. Neither accrual basis nor cash basis accounting
Ans: a, LO 6, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication, IMA: Reporting
5.
Wong Ho Company had the following transactions during 2016: • • • •
Sales of ¥11,000 on account Collected ¥4,000 for services to be performed in 2017 Paid ¥1,250 cash in salaries Purchased airline tickets for ¥500 in December for a trip to take place in 2017
What is Wong Ho’s 2016 net income using accrual accounting? a. ¥9,750. b. ¥13,750. c. ¥13,250. d. ¥9,250. Ans: a, LO 6, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem solving, IMA: Business Economics
6.
Under International Financial Reporting Standards (IFRS) a. The cash-basis method of accounting is accepted. b. Events are recorded in the period in which the event occurs. c. Interim period financial statements are either a calendar year or a fiscal year. d. A fiscal year is an accounting time period encompassing less than 12 months.
Ans: b, LO 6, BT: K, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, AICPA PC: Problem solving, IMA: Business Economics
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
What is the proper adjusting entry at June 30, the end of the fiscal year, based on a prepaid insurance account balance before adjustment, € 20,500, and unexpired amounts per analysis of policies of €4,000? a. Debit Insurance Expense, € 4,000; Credit Prepaid Insurance, € 4,000. b. Debit Insurance Expense, € 20,500; Credit Prepaid Insurance, € 20,500. c. Debit Prepaid Insurance, € 16,500; Credit Insurance Expense, € 16,500. d. Debit Insurance Expense, € 16,500; Credit Prepaid Insurance, € 16,500.
Ans: d, LO 6, BT: AP, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem solving, IMA: Reporting Solution: (€20,500 − €4,000 €16,500)
Karcan, Inc. purchased supplies costing ₤2,500 on January 1, 2017 and recorded the transaction by increasing assets. At the end of the year ₤1,100 of the supplies are still on hand. How will the adjusting entry impact Karcan, Inc.’s statement of financial position at December 31, 2017? a. Decreased assets ₤1,100. b. Increased equity ₤1,100. c. Increased liabilities ₤1,400. d. Decreased assets ₤1,400.
8.
Ans: d, LO 6, BT: AP, Difficulty: Medium, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem solving, IMA: Reporting Solution: (₤2,500 − ₤1,100 ₤1,400)
9.
Karcan, Inc. purchased supplies costing ₤2,500 on January 1, 2017 and recorded the transaction by increasing assets. At the end of the year ₤1,100 of the supplies are still on hand. If Karcan, Inc. does not make the appropriate adjusting entry, what is the impact on its statement of financial position at December 31, 2017? a. Assets overstated by ₤ 1,400. b. Equity understated by ₤ 1,400. c. Equity overstated by ₤ 1,100. d. Assets overstated by ₤ 1,100.
Ans: a, LO 6, BT: AP, Difficulty: Hard, TOT: 4 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem solving, IMA: Reporting Solution: (₤2,500 − ₤1,100 ₤1,400)
10.
Similarities between International Financial Reporting Standards (IFRS) and U.S. GAAP include all of the following except a. Cash-basis accounting is not in accordance with either IFRS or U.S. GAAP. b. Both IFRS and U.S. GAAP allow revaluation of items such as land and buildings to fair value. c. Both IFRS and U.S. GAAP divide the economic life of companies into artificial time periods. d. The revenue recognition principle is very similar under IFRS and U.S. GAAP.
Ans: b, LO 6, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem solving, IMA: Reporting
.
Accrual Accounting Concepts
Brief Exercises 11.
The statements of financial position of Rocky Acre Spread Ltd. include the following: 12/31/17 12/31/16 Interest Receivable €4,300 € -0Supplies 5,000 3,000 Salaries and Wages Payable 3,600 3,800 Unearned Service Revenue -04,000 The income statement for 2017 shows the following: Interest Revenue €14,400 Service Revenue 75,700 Supplies Expense 8,700 Salaries and Wages Expense 36,000 Instructions Calculate the following for 2017: 1. Cash received for interest. 2. Cash paid for supplies. 3. Cash paid for salaries and wages. 4. Cash received for service revenue.
Solution 11 (15 min.) 1. Cash received for interest = Interest Revenue Less: Interest Receivable Cash Received
€10,100 €14,400 4,300 €10,100 €10,700
2. Cash paid for supplies = Supplies Expense Less: Supplies (2016)
€8,700 3,000 5,700 5,000 €10,700
Add: Supplies (2017) Cash Paid 3. Cash paid for salaries and wages = Salaries and Wages Expense Add: Salaries and Wages Payable (2016)
€36,200
Less: Salaries and Wages Payable (2017) Cash Paid
€36,000 3,800 39,800 3,600 €36,200
4. Cash received for revenue = Service Revenue Less: Unearned Service Revenue (2016) Cash Received
€75,700 4,000 €71,700
€71,700
LO 6, BT: AP Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem solving, IMA: Reporting
.
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CHAPTER 5 MERCHANDISING OPERATIONS SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY Item
LO
BT
Item
LO
BT
Item
LO
BT
Item
LO
BT
Item
LO
BT
4 4 4 4 4 4 4 4 4 4 5
C K K K K K K K K C K
45. 46. 47. 48. 49. 50. 51. 52.
5 6 6 6 6 6 *7 *7
K AP C K K K K K
3 3 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 6 6 4 6 6 4 4 6
AN C K K K K K K K K K K K K K K K K K K AP AP AP AP AP AP AP AP AP
169. 170. 171. 172. 173. 174. 175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. 194. 195. 196. 197.
6 4 4 6 6 4 4 5 5 5,6 5,6 5 5 5 5 5 5 5 5 6 6 6 6 6 6 6 6 6 6
AP AP AP AP AP C K C C AP AP AP AP K K AN K AP AP K AP K K K C AP AP AP AP
True-False Statements 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
1 1 1 1 1 1 1 1 1 1 1
K K K K K C C K C K K
12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.
1 1 1 1 2 2 2 2 2 2 2
53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81.
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
K K K K K K K K K K K K C K K K K K K K K K K K K C K K C
82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110.
2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3
K K K K K K K K K AP C
23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33.
3 3 3 3 3 3 3 3 3 3 3
K K K K K K K C K AP K
34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44.
Multiple Choice Questions K AP AP C AP C C AP AP K AN AP AP AN AP AN K AP C C AP AP K K K K K AP AP
.
111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139.
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
AP AP K K AP AP AP AP AP K AP C C K K C AP AP AP K AP AP AP AP K K K AP AP
140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Multiple Choice Questions (Cont.) 198. 199.
6 6
C AP
200. 201.
6 6
AP AP
202. *203.
207. 208.
1,4 2,3
AP AP
209. 210.
2,3 3
AP AP
211. 212.
215. 2 216. 2 217. 2,3 218. 2,3 219. 2,3
AP AP AP AP AP
220. 221. 222. 223. 224.
2,3 2,3 2,3 3 3
AP AP AP AP AP
225. 226. 227. 228. 229.
237. 238.
1 1
K K
239. 240.
1 2
K K
247.
1-6
K
248. 249. 250.
1 3 3
C C C
6 7
AP AP
*204. *205.
7 7
AP AP
*206.
7
AP
213. 214.
5 6
AP AP
230. 231. 232. *233. *234.
5 5 6 7 7
AP AP AP AP AP
*235. *236.
7 7
AP AP
3 3
K K
245. 246.
4 6
K K
2 2
C C
Brief Exercises 4 5
AP AP
Exercises 4 4,6 4,6 4,6 4,6
K AP AP AP AP
Completion Statements 241. 242.
2 3
K K
243. 244.
Matching Short-Answer Essay Questions 251. 252. 253.
3 4 4
C C C
254. 255. 256.
4 6 6
C C K
257. 258.
* This topic is dealt with in an Appendix to the chapter.
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Item
Type
Item
Type
Learning Objective 1 Item Type Item Type
Item
Type
Item
Type
1. 2.
TF TF
10. 11.
TF TF
56. 57.
MC MC
65. 66.
MC MC
74. 75.
MC MC
237. 238.
C C
3.
TF
12.
TF
58.
MC
67.
MC
76.
MC
239.
C
4.
TF
13.
TF
59.
MC
68.
MC
77.
MC
247.
Ma
5.
TF
14.
TF
60.
MC
69.
MC
78.
MC
248.
SA
6.
TF
15.
TF
61.
MC
70.
MC
79.
MC
7.
TF
53.
MC
62.
MC
71.
MC
80.
MC
8.
TF
54.
MC
63.
MC
72.
MC
81.
MC
9.
TF
55.
MC
64.
MC
73.
MC
207.
BE
Learning Objective 2 16.
TF
83.
MC
91.
MC
99.
MC
209.
BE
222.
Ex
17.
TF
84.
MC
92.
MC
100.
MC
215.
Ex
240.
C
18.
TF
85.
MC
93.
MC
101.
MC
216.
Ex
241.
C
19.
TF
86.
MC
94.
MC
102.
MC
217.
Ex
247.
Ma
20.
TF
87.
MC
95.
MC
103.
MC
218.
Ex
257.
SA
21.
TF
88.
MC
96.
MC
104.
MC
219.
Ex
258.
SA
22.
TF
89.
MC
97.
MC
105.
MC
220.
Ex
82.
MC
90.
MC
98.
MC
208.
BE
221.
Ex
.
Merchandising Operations
5-3
Learning Objective 3 Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
23.
TF
106.
MC
117.
MC
128.
MC
139.
MC
222.
Ex
24.
TF
107.
MC
118.
MC
129.
MC
140.
MC
223.
Ex
25.
TF
108.
MC
119.
MC
130.
MC
141.
MC
224.
Ex
26.
TF
109.
MC
120.
MC
131.
MC
208.
BE
242.
C
27.
TF
110.
MC
121.
MC
132.
MC
209.
BE
243.
C
28.
TF
111.
MC
122.
MC
133.
MC
210.
BE
244.
C
29.
TF
112.
MC
123.
MC
134.
MC
217.
Ex
247.
Ma
30.
TF
113.
MC
124.
MC
135.
MC
218.
Ex
249.
SA
31.
TF
114.
MC
125.
MC
136.
MC
219.
Ex
250.
SA
32.
TF
115.
MC
126.
MC
137.
MC
220.
Ex
251.
SA
33.
TF
116.
MC
127.
MC
138.
MC
221.
Ex
Learning Objective 4 34. 35.
TF TF
43. 142.
TF MC
150. 151.
MC MC
159. 160.
MC MC
207. 211.
BE BE
252. 253.
SA SA
36.
TF
143.
MC
152.
MC
163.
MC
225.
Ex
254.
SA
37.
TF
144.
MC
153.
MC
166.
MC
226.
Ex
38.
TF
145.
MC
154.
MC
167.
MC
227.
Ex
39.
TF
146.
MC
155.
MC
170.
MC
228.
Ex
40.
TF
147.
MC
156.
MC
171.
MC
229.
Ex
41.
TF
148.
MC
157.
MC
174.
MC
245.
C
42.
TF
149.
MC
158.
MC
175.
MC
247.
Ma
44. 45.
TF TF
178. 179.
MC MC
182. 183.
MC MC
186. 187.
MC MC
230. 231.
Ex Ex
176.
MC
180.
MC
184.
MC
212.
BE
247.
Ma
177.
MC
181.
MC
185.
MC
213.
BE
Learning Objective 5
Learning Objective 6 46. 47.
TF TF
165. 168.
MC MC
189. 190.
MC MC
197. 198.
MC MC
227. 228.
Ex Ex
48.
TF
169.
MC
191.
MC
199.
MC
229.
Ex
49.
TF
172.
MC
192.
MC
200.
MC
232.
Ex
50.
TF
173.
MC
193.
MC
201.
MC
246.
C
161.
MC
178.
MC
194.
MC
202.
MC
247.
Ma
162.
MC
179.
MC
195.
MC
214.
BE
255.
SA
164.
MC
188.
MC
196.
MC
226.
Ex
256.
SA
Ex Ex
235. 236.
Ex Ex
Learning Objective 7* 51. 52.
TF TF
203. 204.
MC MC
205. 206.
Note: TF = True-False MC = Multiple Choice Ma = Matching
MC MC
233. 234.
C = Completion Ex = Exercise SA = Short Answer Essay .
5-4
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
CHAPTER LEARNING OBJECTIVES 1. Describe merchandising operations and inventory systems. Because of the presence of inventory, a merchandising company has sales revenue, cost of goods sold, and gross profit. To account for inventory, a merchandising company must choose between a perpetual inventory system and a periodic inventory system. 2. Record purchases under a perpetual inventory system. The Inventory account is debited for all purchases of merchandise and for freight costs, and it is credited for purchase discounts and purchase returns and allowances. 3. Record sales under a perpetual inventory system. When inventory is sold, Accounts Receivable (or Cash) is debited and Sales Revenue is credited for the selling price of the merchandise. At the same time, Cost of Goods Sold is debited and Inventory is credited for the cost of inventory items sold. Separate contra revenue accounts are maintained for Sales Returns and Allowances and Sales Discounts. These accounts are debited as needed to record returns, allowances, or discounts related to the sale. 4. Prepare a multiple-step income statement and a comprehensive income statement. In a single-step income statement, companies classify all data under two categories, revenues or expenses, and net income is determined in one step. A multiple-step income statement shows numerous steps in determining net income, including results of nonoperating activities. A comprehensive income statement adds or subtracts any items of other comprehensive income to net income to arrive at comprehensive income. 5. Determine cost of goods sold under a periodic inventory system. The periodic system uses multiple accounts to keep track of transactions that affect inventory. To determine cost of goods sold, first calculate cost of goods purchased by adjusting purchases for returns, allowances, discounts, and freight-in. Then calculate cost of goods sold by adding cost of goods purchased to beginning inventory and subtracting ending inventory. 6. Compute and analyze gross profit rate and profit margin. Profitability is affected by gross profit, as measured by the gross profit rate, and by management’s ability to control costs, as measured by the profit margin. *7. Record purchases and sales of inventory under a periodic inventory system. To record purchases, entries are required for (a) cash and credit purchases, (b) purchase returns and allowances, (c) purchase discounts, and (d) freight costs. To record sales, entries are required for (a) cash and credit sales, (b) sales returns and allowances, and (c) sales discounts.
.
Merchandising Operations
5-5
TRUE-FALSE STATEMENTS 1.
Retailers and wholesalers are both considered merchandising enterprises.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
2.
The operating cycle of a merchandising company ordinarily is shorter than that of a service company.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
3.
Sales revenue minus operating expenses equals gross profit.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
4.
Under a perpetual inventory system, the cost of goods sold is determined each time a sale occurs.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
5.
A periodic inventory system does not require a detailed record of inventory items.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
6.
The operating cycle involves the purchase and sale of merchandise inventory as well as the subsequent collection of cash from credit sales.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
7.
The purchase of inventory and its eventual sale lengthen the operating cycle of a merchandising company.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
8.
Under the periodic inventory system, cost of goods sold is treated as an account.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
9.
An advantage of using the periodic inventory system is that it requires less record keeping than the perpetual inventory system.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
10.
The periodic inventory system provides an up to date amount of inventory on hand.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
11.
A very small business most likely would have to use the perpetual inventory system.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
12.
The computer has increased greatly the use of the periodic inventory system.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Leverage Technology, AICPA PC: None, IMA: Business Economics
.
5-6 13.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Cost of Goods Sold is considered an expense of a merchandising firm.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
14.
Operating expenses are subtracted from revenue for a service enterprise and from gross profit for a merchandising enterprise.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
15.
Net sales minus cost of goods sold is called gross profit.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
16.
Under the perpetual inventory system, purchases of merchandise for sale are recorded in the Inventory account.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
17.
Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
18.
The terms 2/10, net/30 mean that a 2 percent discount is allowed on payments made within the 10 days discount period.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
19.
A buyer who acquires merchandise under credit terms of 1/10, n/30 has 20 days after the invoice date to take advantage of the cash discount.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
20.
Discounts taken by the buyer for early payment of an invoice are called sales discounts by the buyer.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
21.
If merchandise costing $5,000, with terms 2/10, n/30, is paid within 10 days, the amount of the purchase discount is $100.
Ans: T, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
22.
When an invoice is paid within the discount period, the amount of the discount decreases Inventory.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
23.
Sales revenues are only earned during the period cash is collected from the buyer.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
24.
Cash register tapes provide evidence of credit sales.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
Merchandising Operations
25.
5-7
The Sales Returns and Allowances account and the Sales Discount account are both classified as expense accounts.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
26.
The revenue recognition principle applies to merchandising companies by recognizing sales revenues when the performance obligation is satisfied.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
27.
Sales allowances and Sales discounts are both designed to encourage customers to pay their accounts promptly.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Decision Modeling, AICPA PC: None, IMA: Business Economics
28.
Sales Discounts is a contra revenue account to Sales Revenue.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
29.
The normal balance of Sales Returns and Allowances is a credit.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
30.
When the terms of sale include a sales discount, it usually is advisable for the buyer to pay within the discount period.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
31.
Sales Discounts and Sales Returns and Allowances both have normal debit balances.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
32.
Merchandise is sold for $5,000 with terms 1/10, n/30. If $1,000 of the merchandise is returned prior to payment and the invoice is paid within the discount period, the amount of the sales discount is $40.
Ans: T, LO: 3, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
33.
The terms 2/10, n/30 mean that a 2 percent discount is allowed on payments made over 10 but before 30 days after the invoice date.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Quantitative Methods
34.
The multiple-step income statement is considered more useful than the single-step income statement because it highlights the components of net income.
Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
35.
In a single-step income only one step is required in determining net income.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
36.
Freight-out appears as an operating expense in the income statement.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
5-8 37.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Gross profit appears on both the single-step and multiple-step forms of an income statement.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
38.
Nonoperating activities include revenues and expenses that are related to the company’s main line of operations.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
39.
Operating expenses include interest expense and income tax expense.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
40.
Income from operations appears on both the single-step and multiple-step forms of an income statement.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
41.
A merchandising company’s net income is determined by subtracting operating expenses from gross profit.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
42.
Sales revenues, cost of goods sold, and gross profit are amounts on a merchandising company's income statement not commonly found on the income statement of a service company.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
43.
The income statement for a merchandising company presents only two amounts not shown on a service company income statement.
Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
44.
Under the periodic system, the purchases account is used to accumulate all purchases of merchandise for resale.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
45.
With the periodic inventory system, goods available for sale must be calculated before cost of goods sold.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
46.
If net sales are $750,000 and cost of goods sold is $600,000, the gross profit rate is 20%.
Ans: T, LO: 6, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
47.
The gross profit amount is generally considered to be more informative than the gross profit rate.
Ans: F, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
48.
Gross profit rate is computed by dividing cost of goods sold by net sales.
Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Merchandising Operations
49.
5-9
The quality of earnings ratio is calculated as net income divided by net cash provided by operating activities.
Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
50.
A quality of earnings ratio significantly less than 1 suggests that a company may be using more aggressive accounting techniques in order to accelerate income recognition.
Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
*51.
Under the periodic system, when a customer returns goods, Purchases Returns and Allowances is debited.
Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
*52.
Under the periodic inventory system, acquisitions of merchandise are not recorded in the Inventory account.
Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
Answers to True-False Statements 1. 2. 3. 4. 5. 6. 7. 8.
T F F T F T T F
9. 10 11. 12. 13. 14. 15. 16.
T F F F T T T T
17. 18. 19. 20. 21. 22. 23. 24.
T T F F T T F F
25. 26. 27. 28. 29. 30. 31. 32.
F T F T F T T T
33. 34. 35. 36. 37. 38. 39. 40.
F T T T F F F F
41. 42. 43. 44. 45. 46. 47. 48.
T T F T T T F F
49. 50. *51. *52.
F T F T
MULTIPLE CHOICE QUESTIONS 53.
Merchandising companies that sell to retailers are known as a. brokers. b. corporations. c. wholesalers. d. service firms.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
54.
Which of the following would not be considered a merchandising operation? a. Retailer b. Wholesaler c. Service firm d. Merchandising company
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
5-10 55.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Which of the following activities is not a component of the operating cycle? a. Sale of merchandise b. Payment of employees’ salaries c. Collection of cash from merchandise sales d. Purchase of merchandise
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
56.
Which of the following companies would be most likely to use a perpetual inventory system? a. Grain company b. Beauty salon c. Clothing store d. Fur dealer
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
57.
Gross profit equals the difference between a. net income and operating expenses. b. sales revenue and cost of goods sold. c. sales revenue and operating expenses. d. sales revenue and cost of goods sold plus operating expenses.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
58.
Each of the following companies is a merchandising company except a a. wholesale parts company. b. candy store. c. moving company. d. furniture store.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
59.
Net income will result if gross profit exceeds a. cost of goods sold. b. operating expenses. c. purchases. d. cost of goods sold plus operating expenses.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
60.
A merchandiser will earn an operating income of exactly $0 when a. net sales equals cost of goods sold. b. cost of goods sold equals gross margin. c. operating expenses equal net sales. d. gross profit equals operating expenses.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Merchandising Operations
61.
5-11
A merchandiser that sells directly to consumers is a a. retailer. b. wholesaler. c. broker. d. service enterprise.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
62.
Two categories of expenses in merchandising companies are a. cost of goods sold and financing expenses. b. operating expenses and financing expenses. c. cost of goods sold and operating expenses. d. other expenses and cost of goods sold.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
63.
The primary source of revenue for a wholesaler is a. investment income. b. service revenue. c. the sale of merchandise. d. the sale of plant assets the company owns.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
64.
Generally, the revenue account for a merchandising enterprise is called a. Sales Revenue or Sales. b. Investment Income. c. Gross Profit. d. Net Sales.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
65.
Under a perpetual inventory system a. accounting records continuously disclose the amount of inventory. b. increases in inventory resulting from purchases are debited to purchases. c. there is no need for a year-end physical count. d. the account purchase returns and allowances is credited when goods are returned to vendors.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
66.
The operating cycle of a merchandising company is a. always one year in length. b. ordinarily longer than that of a service company. c. about the same as that of a service company. d. ordinarily shorter than that of a service company.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
5-12 67.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Sales revenue less cost of goods sold is called a. gross profit. b. net profit. c. net income. d. marginal income.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
68.
After gross profit is calculated, operating expenses are deducted to determine a. gross margin. b. net income. c. gross profit on sales. d. net margin.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
69.
Which of the following expressions is incorrect? a. Gross profit - Operating expenses = Net income b. Sales revenue - cost of goods sold - Operating expenses = Net income c. Net income + Operating expenses = Gross profit d. Operating expenses - Cost of goods sold = Gross profit
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
70.
Detailed records of goods held for resale are not maintained under a a. perpetual inventory system. b. periodic inventory system. c. double entry accounting system. d. single entry accounting system.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
71.
A perpetual inventory system would most likely be used by a(n) a. automobile dealership. b. hardware store. c. drugstore. d. convenience store.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
72.
Which of the following is a true statement about inventory systems? a. Periodic inventory systems require more detailed inventory records. b. Perpetual inventory systems require more detailed inventory records. c. A periodic system requires cost of goods sold be determined after each sale. d. A perpetual system determines cost of goods sold only at the end of the accounting period.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
Merchandising Operations
73.
5-13
The figure for which of the following items is determined at a different time under the perpetual inventory method than under the periodic method? a. Sales Revenue b. Cost of Goods Sold c. Purchases d. Accounts Receivable
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
74.
In a perpetual inventory system, cost of goods sold is recorded a. on a daily basis. b. on a monthly basis. c. on an annual basis. d. each time a sale occurs.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
75.
The primary difference between a periodic and perpetual inventory system is that a periodic system a. keeps a record showing the inventory on hand at all time. b. provides better control over inventories. c. records the cost of the sale on the date the sale is made. d. determines the inventory on hand only at the end of the accounting period.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
76.
When using the periodic system the physical inventory count is used to determine a. only the sales value of goods in the ending inventory. b. both the cost of the goods in ending inventory and the sales value of goods sold during the period. c. both the cost of the goods sold and the cost of ending inventory. d. only the cost of merchandise sold during the period.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
77.
Inventory becomes part of cost of goods sold when a company a. pays for the inventory. b. purchases the inventory. c. sells the inventory. d. receives payment from the customer.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
78.
Which statement is incorrect? a. Periodic inventory systems provide better control over inventories than perpetual inventory systems. b. Computers and electronic scanners allow more companies to use a perpetual inventory system. c. Freight-in is debited to Inventory when a perpetual inventory system is used. d. Regardless of the inventory system that is used, companies should take a physical inventory count.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
5-14 79.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
If a company determines cost of goods sold each time a sale occurs, it a. must have a computer accounting system. b. uses a combination of the perpetual and periodic inventory systems. c. uses a periodic inventory system. d. uses a perpetual inventory system.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
80.
The periodic inventory system is used most commonly by companies that sell a. low-priced, high-volume merchandise. b. high-priced, high-volume merchandise. c. high-priced, low-volume merchandise. d. high-priced, low and high-volume merchandise.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
81.
What is a difference between merchandising companies and service enterprises? a. Merchandising companies must prepare multiple-step income statements and service enterprises must prepare single-step income statements. b. Merchandising companies generally have a longer operating cycle than service enterprises. c. Cost of goods sold is an expense for service enterprises but not for merchandising companies. d. All are these choices are differences.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
82.
Under the perpetual inventory system, which of the following accounts would not be used? a. Sales Revenue b. Purchases c. Cost of Goods Sold d. Inventory
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
83.
Under a perpetual inventory system, acquisition of merchandise for resale is debited to a. the Inventory account. b. the Purchases account. c. the Supplies account. d. the Cost of Goods Sold account.
Ans: A, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
84.
The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit a. Accounts Payable. b. Purchase Returns and Allowances. c. Sales Revenue. d. Inventory.
Ans: D, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
Merchandising Operations
85.
5-15
Which of the following items does not result in an adjustment in the merchandise inventory account under a perpetual system? a. A purchase of merchandise. b. A return of merchandise inventory to the supplier c. Payment of freight costs for goods shipped to a customer d. Payment of freight costs for goods received from a supplier
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
86.
A company using a perpetual inventory system that returns goods previously purchased on credit would a. debit Accounts Payable and credit Inventory. b. debit Sales and credit Accounts Payable. c. debit Cash and credit Accounts Payable. d. debit Accounts Payable and credit Purchases.
Ans: A, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
87.
If a purchaser using a perpetual inventory system pays the transportation costs, then the a. Inventory account is increased. b. Inventory account is not affected. c. Freight-Out account is increased. d. Delivery Expense account is increased.
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
88.
Freight costs incurred by a seller on merchandise sold to customers will cause an increase a. in the selling expenses of the buyer. b. in operating expenses for the seller. c. to the cost of goods sold of the seller. d. to a contra-revenue account of the seller.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
89.
Conway Company purchased merchandise inventory with an invoice price of $12,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Conway Company pays within the discount period? a. $12,000 b. $11,760 c. $10,800 d. $11,040
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods Solution: $12,000 .98 = $11,760 (Purch. amount (1–.02))
90.
A buyer borrows money at 6% interest to pay a $9,000 invoice with terms 1/10, n/30 on the 10th day of the discount period. The loan is repaid on the 30th day of the invoice. What is the buyer’s net savings for this total event? a. $0 b. $60.00 c. $61.20 d. $120.00
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($9,000 .01) − ($9,000 .06 20/360) = $60
.
5-16
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
((Amount bor.x.01) – (amount bor. .06 20/360))
91.
In the credit terms of 1/10, n/30, the “1” represents the a. number of days in the discount period. b. full amount of the invoice. c. number of days when the entire amount is due. d. percent of the cash discount.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
92.
Farwell Company purchased merchandise with an invoice price of $2,000 and credit terms of 2/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms? a. 4% b. 24% c. 36% d. 72%
Ans: C, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: [360 (30 − 10)] 2% = 36%
93.
Davies Company purchased merchandise inventory with an invoice price of $15,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Davies Company pays within the discount period? a. $15,000 b. $14,760 c. $14,700 d $12,000
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $15,000 .98 = $14,700 (Purch. price (1–.02))
94.
A credit sale of $3,800 is made on April 25, terms 2/10, net/30, on which a return of $200 is granted on April 28. What amount is received as payment in full on May 4? a. $3,528 b. $3,724 c. $3,800 d $3,600
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($3,800 − $200) .98 = $3,528 (Sale amount – ret.) (1 –.02)
95.
Grayson Company purchased merchandise with an invoice price of $2,000 and credit terms of 3/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms? a. 3% b. 8% c. 36% d 54%
Ans: D, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: [360 (30 − 10)] 3% = 54%
.
Merchandising Operations
96.
5-17
A credit sale of $1,400 is made on July 15, terms 2/10, net/30, on which a return of $100 is granted on July 18. What amount is received as payment in full on July 24? a. $1,400 b. $1,274 c. $1,350 d $1,372
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($1,400 − $100) .98 = $1,274 ((Cr. Sale – ret.) (1 – .02))
97.
If a company is given credit terms of 2/10, n/30, it should a. hold off paying the bill until the end of the credit period, while investing the money at 10% annual interest during this time. b. pay within the discount period and recognize a savings. c. pay within the credit period but don't take the trouble to invest the cash while waiting to pay the bill. d. recognize that the supplier is desperate for cash and withhold payment until the end of the credit period while negotiating a lower sales price.
Ans: B, LO: 2, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
98.
A purchase invoice is a document that a. provides support for goods purchased for cash. b. provides evidence of incurred operating expenses. c. provides evidence of credit purchases. d. serves only as a customer receipt.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Internal Controls
99.
Adams Company is a retailer and uses a perpetual inventory system. Which statement is correct? a. Returns of merchandise by Adams Company to a manufacturer are credited to Inventory. b. Freight paid to get merchandise to Adams Company’s store is debited to Freight Expense. c. A return of merchandise by one of Adams Company’s customers is credited to Inventory. d. Discounts taken by Adams Company’s customers are credited to Inventory.
Ans: A, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
100.
As the president of Harter Company, you notice that no discounts have been taken when settling accounts payables. What would be an acceptable explanation? a. All invoices have credit terms of n/30. b. There is not sufficient cash to pay within the discount period. c. Discounts are missed because no one knows how to enter them in the new accounting software. d. The full amount of the invoice is being paid within the discount period and the treasurer is pocketing the discount amount.
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
.
5-18 101.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
When using a perpetual inventory system, why are discounts credited to Inventory? a. The discounts are debited to discount expense and thus the credit has to be made to merchandise inventory. b. The discounts reduce the cost of the inventory. c. The discounts are a reduction of business expenses. d. None of these answers choices are correct.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
102.
Tony’s Market recorded the following events involving a recent purchase of inventory: Received goods for $80,000, terms 2/10, n/30. Returned $1,600 of the shipment for credit. Paid $400 freight on the shipment. Paid the invoice within the discount period. As a result of these events, the company’s inventory a. increased by $76,832. b. increased by $78,800. c. increased by $77,224. d. increased by $77,232.
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($80,000 − $1,600) .98] + $400 = $77,232 (Purch.amount –ret.) (1 − 0.2) + freight
103.
Stan’s Market recorded the following events involving a recent purchase of inventory: Received goods for $120,000, terms 2/10, n/30. Returned $2,400 of the shipment for credit. Paid $600 freight on the shipment. Paid the invoice within the discount period. As a result of these events, the company’s inventory a. increased by $115,248. b. increased by $118,200. c. increased by $115,836. d. increased by $115,848.
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($120,000 − $2,400) .98] + $600 = $115,848 (Purch.amount −ret.) (1 − 0.2) + freight
104.
Assets purchased for resale are recorded in which of the following accounts? a. Supplies b. Inventory c. Equipment d. Patents
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
105.
Under the perpetual system, cash freight costs incurred by the buyer for the transporting of goods is recorded in which account? a. Freight Expense b. Freight-In c. Inventory d. Freight-Out
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
Merchandising Operations
106.
5-19
Which of the following accounts is classified as a contra revenue account? a. Sales Revenue b. Cost of Goods Sold c. Sales Returns and Allowances d. Purchase Discounts
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
107.
Sales revenues are usually considered earned when a. cash is received from credit sales. b. an order is received. c. goods have been transferred from the seller to the buyer. d. adjusting entries are made.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
108.
Sales revenue a. may be recorded before cash is collected. b. will always equal cash collections in a month. c. only results from credit sales. d. is only recorded after cash is collected.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
109.
The journal entry to record a credit sale ignoring cost of goods sold is a. Cash Sales Revenue b. Cash Service Revenue c. Accounts Receivable Sales Returns and Allowances d. Accounts Receivable Sales Revenue
Ans: D, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
110.
Under the perpetual inventory system, in addition to making the entry to record a sale, a company would a. debit Inventory and credit Cost of Goods Sold. b. debit Cost of Goods Sold and credit Purchases. c. debit Cost of Goods sold and credit Inventory. d. make no additional entry until the end of the period.
Ans: C, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
111.
When sales of merchandise are made for cash, the transaction may be recorded by the following entry: a. Debit Sales Revenue, credit Cash b. Debit Cash, credit Sales Revenue c. Debit Sales Revenue, credit Cash Discounts d. Debit Sales Revenue, credit Sales Returns and Allowances
Ans: B, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
5-20 112.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The entry to record a sale of $1,800 with terms of 2/10, n/30 will include a a. debit to Sales Discounts for $36. b. debit to Sales Revenue for $1,764. c. credit to Accounts Receivable for $1,800. d. credit to Sales Revenue for $1,800.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
113.
A sales invoice is prepared when goods a. are sold for cash. b. are sold on credit. c. sold on credit are returned. d. are sold on credit or for cash.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
114.
The Sales Returns and Allowances account is classified as a(n) a. asset account. b. contra asset account. c. expense account. d. contra revenue account.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
115.
The entry to record the return of goods from a customer would include a a. debit to Sales Revenue. b. credit to Sales Revenue. c. debit to Sales Returns and Allowances. d. credit to Sales Returns and Allowances.
Ans: C, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
116.
The entry to record the receipt of payment within the discount period on a sale of $900 with terms of 2/10, n/30 will include a a. credit to Sales Discounts for $18. b. debit to Sales Revenue for $882. c. credit to Accounts Receivable for $900. d. credit to Sales Revenue for $900.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
117.
The entry to record a sale of $900 with terms of 2/10, n/30 will include a a. credit to Sales Discounts for $18. b. debit to Cash for $882. c. credit to Accounts Receivable for $900. d. credit to Sales Revenue for $900.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Merchandising Operations
118.
5-21
The collection of an $1,500 account within the 2 percent discount period will result in a a. debit to Sales Discounts for $30. b. debit to Accounts Receivable for $1,470. c. credit to Cash for $1,470. d. credit to Accounts Receivable for $1,470.
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 1,500 .02 = $30 (Acct. bal. 0.2) = sal. dis.
119.
A sales invoice is used as documentation for a journal entry that requires a debit to a. Cash and a credit to Sales Revenue. b. Sales Returns and Allowances and a credit to Accounts Receivable. c. Accounts Receivable and a credit to Sales Revenue. d. Cash and a credit to Sales Returns and Allowances.
Ans: C, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
120.
If a customer agrees to retain merchandise that is defective because the seller is willing to reduce the selling price, this transaction is known as a sales a. discount. b. return. c. contra asset. d. allowance.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
121.
When goods are returned that relate to a prior cash sale a. the Sales Returns and Allowances account should not be used. b. the Cash account will be credited. c. Sales Returns and Allowances will be credited. d. Accounts Receivable will be credited.
Ans: B, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
122.
The Sales Returns and Allowances account does not provide information to management about a. possible inferior merchandise. b. the percentage of credit sales versus cash sales. c. inefficiencies in filling orders. d. errors in billing customers.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
123.
A Sales Returns and Allowances account is not debited if a customer a. returns defective merchandise. b. receives a credit for merchandise of inferior quality. c. utilizes a prompt payment incentive. d. returns goods that are not in accordance with specifications.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
.
5-22 124.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
As an incentive for customers to pay their accounts promptly, a business may offer its customers a. a sales discount. b. free delivery. c. a sales allowance. d. a sales return.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
125.
The credit terms offered to a customer by a business firm were 2/10, n/30, which means a. the customer must pay the bill within 10 days. b. the customer can deduct a 2% discount if the bill is paid between the 10th and 30th day from the invoice date. c. the customer can deduct a 2% discount if the bill is paid within 10 days of the invoice date. d. two sales returns can be made within 10 days of the invoice date and no returns thereafter.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Decision Modeling, AICPA PC: None, IMA: Business Economics
126.
A sales discount does not a. provide the purchaser with a cash saving. b. reduce the amount of cash received from a credit sale. c. increase a contra revenue account. d. increase an operating expense account.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
127.
Anderson Inc. sells $1,200 of merchandise on account to Baltic Company with credit terms of 2/10, n/30. If Baltic Company remits a check taking advantage of the discount offered, what is the amount of Baltic Company's check? a. $1,176 b. $1,200 c. $1,080 d. $1,120
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $1,200 .98 = $1,176 (Sal. amount (1−.02)
128.
Aber Company sells merchandise on account for $3,000 to Borth Company with credit terms of 2/10, n/30. Borth Company returns $500 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check? a. $2,440 b. $2,460 c. $2,450 d. $2,250
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($3,000 − $500) .98 = $2,450 (Sal. amount –ret.) (1−.02)
.
Merchandising Operations
129.
5-23
Casin Company sells $900 of merchandise on account to Delta Exploration with credit terms of 2/10, n/30. If Delta Exploration remits a check taking advantage of the discount offered, what is the amount of Delta Exploration's check? a. $630 b. $882 c. $810 d. $720
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $900 .98 = $882 (Sales price (1−.02))
130.
Which sales accounts normally have a debit balance? a. Sales Discounts b. Sales Returns and Allowances. c. Both Sales Discounts and Sales Returns and Allowances have debit balances. d. Neither Sales Discounts or Sales Returns and Allowances have debit balances.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
131.
Fehr Company sells merchandise on account for $7,500 to Kelly Company with credit terms of 2/10, n/30. Kelly Company returns $1,500 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check? a. $7,350 b. $7380 c. $6,000 d. $5,880
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($7,500 − $1,500) .98 = $5,880 (Sales Price – ref.) (1−.02))
.
5-24 132.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Piper Company sells merchandise on account for $1,800 to Morton Company with credit terms of 2/10, n/30. Morton Company returns $600 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Piper Company make upon receipt of the check? a. Cash 1,200 Accounts Receivable 1,200 b. Cash Sales Returns and Allowances Accounts Receivable .
1,176 624
c. Cash Sales Returns and Allowances Sales Discounts Accounts Receivable
1,176 600 24
1,800
d. Cash 1,764 Sales Discounts 36 Sales Returns and Allowances Accounts Receivable
1,800
600 1,200
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($1,800 − $600) .02 = $24 Sales discount (Sales Price – ret.) .02
133.
The collection of a $500 account beyond the 2 percent discount period will result in a a. debit to Cash for $490. b. debit to Accounts Receivable for $500. c. debit to Cash for $500. d. debit to Sales Discounts for $10.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $500 − 0 = $500
134.
The collection of an $800 account beyond the 2 percent discount period will result in a a. debit to Cash for $784. b. credit to Accounts Receivable for $800. c. credit to Cash for $800. d. debit to Sales Discounts for $16.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $800 − 0 = $800
135.
Which of the following would not be classified as a contra account? a. Sales Revenue b. Sales Returns and Allowances c. Accumulated Depreciation d. Sales Discounts
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Merchandising Operations
136.
5-25
Which of the following accounts has a normal credit balance? a. Sales Returns and Allowances b. Sales Discounts c. Sales Revenue d. Cost of Goods Sold
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
137.
With respect to the income statement a. contra revenue accounts do not appear on the income statement. b. sales discounts increase the amount of sales. c. contra revenue accounts increase the amount of operating expenses. d. sales discounts are included in the calculation of gross profit.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
138.
When a seller records a return of goods, the account that is credited is a. Sales Revenue. b. Sales Returns and Allowances. c. Inventory. d. Accounts Receivable.
Ans: D, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
139.
The respective normal account balances of Sales, Sales Returns and Allowances, and Sales Discounts are a. credit, credit, credit. b. debit, credit, debit. c. credit, debit, debit. d. credit, debit, credit.
Ans: C, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
140.
Rains Company is a furniture retailer. On January 14, 2017, Rains purchased merchandise inventory at a cost of $60,000. Credit terms were 2/10, n/30. The inventory was sold on account for $100,000 on January 21, 2017. Credit terms were 1/10, n/30. The accounts payable was settled on January 23, 2017 and the accounts receivables were settled on January 30, 2017. Which statement is correct? a. Cash flows were affected on January 14 and January 21. b. Gross profit percentage is 60%. c. On January 30, 2017, customers should remit cash in the amount of $99,000. d. There is not enough information available to answer this question.
Ans: C, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $100,000 .99 = $99,000 (Sal. amount (1−.01)) = cash
141.
Which statement is incorrect? a. The sales revenue account is used to record the sales of goods held for resale to customers. b. Sales discounts are recorded as debits to the sales revenue account. c. The sales revenue account is a revenue account. d. The sales revenue account has a normal credit balance and is closed at the end of the accounting period. .
5-26
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
142.
Indicate which one of the following would not appear on both a single-step income statement and a multiple-step income statement. a. Gross profit b. Operating expenses c. Sales revenue d. Cost of goods sold
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
143.
The form of income statement that derives its name from the fact that the total of all expenses is deducted from the total of all revenues is called a a. multiple-step statement. b. revenue statement. c. report-form statement. d. single-step statement.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
144.
Gross profit does not appear a. on a multiple-step income statement. b. on a single-step income statement. c. to be relevant in analyzing the operation of a merchandising company. d. on either a multiple-step or single-step income statement.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
145.
Gross profit equals the difference between net sales and a. operating expenses. b. cost of goods sold. c. net income. d. cost of goods sold plus operating expenses.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
146.
Positive operating income will result if gross profit exceeds a. costs of goods sold. b. salaries and wages expense. c. cost of goods sold plus operating expenses. d. operating expenses.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
147.
What is the term applied to the excess of net sales over the cost of goods sold? a. Income before income taxes b. Income from operations c. Net income d. Gross profit
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
148.
Operating expenses would include a. interest expense. b. income tax expense. c. freight-out. .
Merchandising Operations
5-27
d. freight-out and interest. Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
149.
Which of the following is not a true statement about a multiple-step income statement? a. Operating expenses do not include income tax expense. b. There may be a section for non-operating activities. c. There may be a section for operating assets. d. There is a section for cost of goods sold.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
150.
An advantage of the single-step income statement over the multiple-step form is a. the amount of information it provides. b. its comprehensiveness. c. its simplicity. d. its use in computing ratios.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
151.
Income from operations appears on a. both a multiple-step and a single-step income statement. b. neither a multiple-step nor a single-step income statement. c. a single-step income statement. d. a multiple-step income statement.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
152.
Income from operations is gross profit less 1. operating expenses and other expenses and losses. 2. operating expenses plus other revenues and gains. 3. operating expenses. a. 1 b. 2 c. 3 d. both 1 and 2
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
153.
Multiple-step income statements show a. gross profit but not income from operations. b. neither gross profit nor income from operations. c. both income from operations and gross profit. d. income from operations but not gross profit.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
154.
Interest expense would be classified on a multiple-step income statement under the heading a. Other expenses and losses. b. Other revenues and gains. c. Operating expenses. d. Cost of goods sold.
Ans: A , LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
5-28 155.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Gross profit for a merchandising company is net sales minus a. operating expenses. b. cost of goods sold. c. sales discounts. d. cost of goods available for sale.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
156.
The sales section of an income statement for a retailer would not include a. Sales discounts. b. Sales revenue. c. Net sales. d. Cost of goods sold.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
157.
The operating expenses section of an income statement for a merchandising company would not include a. Freight-out. b. Utilities expense. c. Cost of goods sold. d. Insurance expense.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
158.
Indicate which one of the following would appear on the income statement of both a merchandising company and a service company. a. Gross profit b. Operating expenses c. Sales revenue d. Cost of goods sold
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
159.
Gross profit does not appear a. on a merchandising company income statement. b. on a service company income statement. c. to be relevant in analyzing the operation of a merchandising company. d. on the income statement if the periodic inventory system is used because it cannot be calculated.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
160.
Financial information is presented below: Operating expenses $ 40,000 Sales revenue 200,000 Cost of goods sold 150,000 Gross profit would be a. $160,000. b. $ 40,000. c. $ 50,000. d. $ 10,000.
Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $200,000 − $150,000 = $50,000 (Sal. rev. – COGS)
.
Merchandising Operations
161.
5-29
Financial information is presented below: Operating expenses $ 40,000 Sales revenue 200,000 Cost of goods sold 150,000 The gross profit rate would be a. .75. b. .20 c. .05. d. .25.
Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($200,000 − $150,000) $200,000 = .25 (Sal. rev − COGS) ÷ Sal. rev.
162.
Financial information is presented below: Operating expenses $ 40,000 Sales revenue 200,000 Cost of goods sold 150,000 The profit margin would be a. .75. b. .05. c. .25. d. .95.
Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($200,000 − $150,000 − $40,000) $200,000 = .05 ((Sal. rev. − COGS − oper.exp.) sal. rev.)
163.
Financial information is presented below: Operating expenses $ 28,000 Sales returns and allowances 7,000 Sales discounts 3,000 Sales revenue 150,000 Cost of goods sold 98,000 Gross profit would be a. $49,000. b. $42,000. c. $45,000. d. $52,000.
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($150,000 − $7,000 − $3,000) − $98,000 = $42,000 ((Sal. rev. − sal.ret./all. − sal.dis.) − COGS)
.
5-30 164.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Financial information is presented below: Operating expenses $ 28,000 Sales returns and allowances 7,000 Sales discounts 3,000 Sales revenue 150,000 Cost of goods sold 98,000 The gross profit rate would be a. .35. b. .30. c. .70. d. .28.
Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $150,000 − $7,000 − $3,000 = $140,000; ($140,000 − $98,000) $140,000 = .30 [(Sal. rev. − sal.ret./all. − sal. disc.) −COGS] Net sal.
165.
Financial information is presented below: Operating expenses $ 28,000 Sales returns and allowances 7,000 Sales discounts 3,000 Sales revenue 150,000 Cost of goods sold 98,000 The profit margin would be a. .28. b. .09. c. .30. d. .10.
Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $150,000 − $7,000 − $3,000 = $140,000; ($140,000 − $98,000 − $28,000) $140,000 = .10 [(Sal.rev. − sal. ret./all. − sal. dis.) − COGS − oper. exp.] Net Sal.
166.
Financial information is presented below: Operating expenses $ 45,000 Sales returns and allowances 3,000 Sales discounts 7,000 Sales revenue 160,000 Cost of goods sold 96,000 The amount of net sales on the income statement would be a. $153,000. b. $150,000. c. $160,000. d. $157,000.
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $160,000 − $3,000 − $7,000 = $150,000 (Sal.rev. − sal. ret./all. − sal. dis.)
.
Merchandising Operations
167.
5-31
Financial information is presented below: Operating expenses $ 45,000 Sales returns and allowances 3,000 Sales discounts 7,000 Sales revenue 160,000 Cost of goods sold 96,000 Gross profit would be a. $61,000. b. $64,000. c. $54,000. d. $67,000.
Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($160,000 − $3,000 − $7,000) − $96,000 = $54,000 [(Sal.rev. − sal. ret./all. − sal. dis.) − C0GS]
168.
Financial information is presented below: Operating expenses $ 45,000 Sales returns and allowances 3,000 Sales discounts 7,000 Sales revenue 160,000 Cost of goods sold 96,000 The gross profit rate would be a. .36. b. .64. c. .40. d. .34.
Ans: A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $160,000 − $3,000 − $7,000 = $150,000; ($150,000 − $96,000) $150,000 = .36 [(sal. rev. – sal. ret. /all. – sal. disc) – COGS] Net sal.
169.
Financial information is presented below: Operating expenses $ 45,000 Sales returns and allowances 3,000 Sales discounts 7,000 Sales revenue 160,000 Cost of goods sold 96,000 The profit margin would be a. .36. b. .05. c. .12. d. .06.
Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $160,000 − $3,000 − $7,000 = $150,000; ($150,000 − $96,000 − $45,000) $150,000 = .06 [(sal. rev. – sal. ret. /all. – sal. disc) – COGS – oper.exp.] Net sal.
.
5-32 170.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Financial information is presented below: Operating expenses $ 42,000 Sales returns and allowances 12,000 Sales discounts 3,000 Sales revenue 165,000 Cost of goods sold 96,000 The amount of net sales on the income statement would be a. $153,000. b. $150,000. c. $165,000. d. $162,000.
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $165,000 − $12,000 − $3,000 = $150,000 (sal. Rev. – sal. ret./all. – sal. dis.)
171.
Financial information is presented below: Operating expenses $ 42,000 Sales returns and allowances 12,000 Sales discounts 3,000 Sales revenue 165,000 Cost of goods sold 96,000 Gross profit would be a. $54,000. b. $57,000. c. $69,000. d. $66,000.
Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($165,000 − $12,000 − $3,000) − $96,000 = 54,000 ((Sal rev. – Sal. ret./all.– sal.dis.) – COGS)
172.
Financial information is presented below: Operating expenses $ 42,000 Sales returns and allowances 12,000 Sales discounts 3,000 Sales revenue 165,000 Cost of goods sold 96,000 The gross profit rate would be a. .64. b. .42. c. .36. d. .37.
Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $165,000 − $12,000 − $3,000 = $150,000; ($150,000 − $96,000) $150,000 = .36 [(Sal. rev. – sal. ret./all. – sal. dis) – COGS] Net sal.
.
Merchandising Operations
173.
5-33
Financial information is presented below: Operating expenses $ 42,000 Sales returns and allowances 12,000 Sales discounts 3,000 Sales revenue 165,000 Cost of goods sold 96,000 The profit margin would be a. .36. b. .18. c. .06. d. .08.
Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $165,000 − $12,000 − $3,000 = $150,000; ($150,000 − $96,000 − $42,000) $150,000 = .08 [(Sal. rev. – sal. ret./all. – sal. dis) – COGS – oper. exp] Net sal.
174.
What is an advantage of using the multiple-step income statement? a. It highlights the components of net income. b. Gross profit is not a separate item. c. It is easier to prepare than the single-step income statement. d. Net income will be higher than net income computed using the single-step income statement.
Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
175.
For a jewelry retailer, which is an example of Other Revenues and Gains? a. Repair revenue b. Unearned revenue c. Gain on sale of display cases d. Discount received for paying for merchandise inventory within the discount period
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
176.
When using a periodic inventory system, which statement concerning the computation of cost of goods sold is correct? a. The amount of ending inventory is determined on the last day of the accounting period. b. Cost of goods available for sale includes net purchases plus the ending inventory. c. Purchases represent cash paid for purchases during the accounting period. d. Freight-in is ignored.
Ans: A, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
177.
When using the periodic inventory system, which of the following is not a step in determining cost of goods purchased? a. Add freight-in b. Subtract purchase returns and allowances c. Subtract cost of ending inventory d. All of these are necessary steps
Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
5-34 178.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
At the beginning of the year, Uptown Athletic had an inventory of $600,000. During the year, the company purchased goods costing $2,250,000. If Uptown Athletic reported ending inventory of $750,000 and sales of $3,000,000, their cost of goods sold and gross profit rate would be a. $1,500,000 and 70%. b. $2,100,000 and 30%. c. $1,500,000 and 30%. d. $2,100,000 and 70%.
Ans: B, LO: 5,6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $600,000 + $2,250,000 − $750,000 = $2,100,000; ($3,000,000 − $2,100,000) $3,000,000 = 30% ((Beg. inv. + purch. – end. inv. = COGS; (Sales – COGS) Sales = G.P. rate)
179.
At the beginning of the year, Wildcat Athletic had an inventory of $300,000. During the year, the company purchased goods costing $1,200,000. If Wildcat Athletic reported ending inventory of $450,000 and sales of $1,500,000, their cost of goods sold and gross profit rate would be a. $750,000 and 70% b. $1,050,000 and 30%. c. $750,000 and 30%. d. $1,050,000 and 70%.
Ans: B, LO: 5,6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $300,000 + $1,200,000 − $450,000 = $1,050,000; ($1,500,000 − $1,050,000) $1,500,000 = 30% (Beg. Inv. + purch. – end inv.); (sales – COGS) ÷sales
180.
During the year, Megan’s Pet Shop’s merchandise inventory decreased by $80,000. If the company’s cost of goods sold for the year was $1,200,000, purchases would have been a. $1,280,000. b. $1,120,000. c. $1,040,000. d. Unable to determine.
Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,200,000 − $80,000 = $1,120,000 (COGS – iNV. Dec.)
181.
During the year, Sarah’s Pet Shop’s merchandise inventory decreased by $50,000. If the company’s cost of goods sold for the year was $750,000, purchases would have been a. $800,000. b. $700,000. c. $650,000. d. Unable to determine.
Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $750,000 − $50,000 = $700,000 (COGS – iNV. dec.)
.
Merchandising Operations
182.
5-35
The amount of cost of good available for sale during the year depends on the amounts of a. beginning merchandise inventory and cost of goods sold. b. beginning merchandise inventory, net cost of purchases, and ending merchandise inventory. c. beginning merchandise inventory, cost of goods sold, and ending merchandise inventory. d. beginning merchandise inventory and net costs of purchases.
Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
183.
Which of the following is not considered in computing net cost of purchases? a. Purchases returns and allowances b. Purchases c. Freight paid on purchased goods d. Freight paid on goods shipped to customers
Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
184.
Assume Grammar Company uses the periodic inventory system and has a beginning inventory balance of $5,000, purchases of $75,000, and sales of $125,000. Grammar closes its records once a year on December 31. In the accounting records, the inventory account would be expected to have a balance on December 31 prior to adjusting and closing entries that was a. equal to $5,000. b. more than $5,000. c. less than $5,000. d. indeterminate.
Ans: A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
185.
All of the following statements are true regarding the periodic inventory system except a. Under the periodic inventory system, the balance of cost of goods sold is calculated at the end of the period. b. Under the periodic inventory system, the balance in ending inventory is calculated at the end of the period. c. Using the periodic inventory system affects the balance sheet contents differently than when the perpetual system is used. d. Under the periodic system, a company uses separate accounts to record freight costs, returns, and discounts.
Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
5-36 186.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Sampson Company's accounting records show the following for the year ending on December 31, 2017. Purchase Discounts $ 11,200 Freight-In 15,600 Purchases 700,020 Beginning Inventory 47,000 Ending Inventory 57,600 Purchase Returns and Allowances 12,800 Using the periodic system, the cost of goods purchased is a. $660,420. b. $708,420. c. $717,220. d. $691,620.
Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $700,020 − $11,200 − $12,800 + $15,400 = $691,620 (Purch. – purch. dis. – purch. ret./all. + fr. –in.)
187.
Sampson Company's accounting records show the following at the year ending on December 31, 2017. Purchase Discounts $ 11,200 Freight-In 15,600 Purchases 700,020 Beginning Inventory 47,000 Ending Inventory 57,600 Purchase Returns and Allowances 12,800 Using the periodic system, the cost of goods sold is a. $702,220. b. $697,820. c. $681,020. d. $719,020.
Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [$47,000 + ($700,020 − $11,200 − $12,800 + $15,600)] − $57,600 = $681,020 (Beg. inv. + (purch. – pur. dis. – pur. ret./all. + fr. – in) – end. inv.)
188.
Which of the following provides the best rationale regarding analysts' views about the information value of the gross profit rate versus the gross profit amount? a. The gross profit amount is more informative than the gross profit rate because it is a dollar amount rather than a ratio. b. The gross profit amount is less informative than the gross profit rate because the latter presents a meaningful relationship between gross profit and net sales. c. The gross profit amount is more informative than the gross profit rate because the gross profit rate is only used to describe a few industries while the gross profit amount is universally used. d. The gross profit amount is more informative than the gross profit rate because high volume operations are able to calculate the gross profit rate but not the gross profit amount.
Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
Merchandising Operations
189.
5-37
Bolton Company's gross profit rate last year was 32.0% and this year it is 28.4%. Which of the following would not be a possible cause for this decline in the gross profit rate? a. Bolton must pay higher prices to suppliers without passing these costs on to customers. b. Bolton may have begun selling products with a higher markup. c. Bolton's average margin between selling price and inventory cost is decreasing. d. Bolton may have seen a decline in total gross profit while maintaining net sales.
Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
190.
Haverty Industries increased its gross profit rate from 18.4% in 2016 to 23.7% in 2017. Which of the following would be a possible explanation for this change? a. Haverty's global sourcing efforts at the beginning of 2017 resulted in a lower cost of merchandise sold. b. Haverty's new profit lines with lower margins in 2017 became a larger component of their sales. c. Haverty increased its product markdowns in 2017. d. Haverty's average margin between the selling price and the inventory cost decreased over this two-year period.
Ans: A, LO: 6, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
191.
Which of the following statements is true regarding profit margin? a. Profit margin can be improved by decreasing the gross profit rate and/or controlling operating expenses and other costs b. Profit margin does not vary across industries. c. Discount stores with high merchandise turnover generally have higher profit margins. d. If the profit margin has a higher value, this suggests favorable return on each dollar of sales.
Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
192.
The gross profit rate is computed by dividing gross profit by a. sales revenue. b. cost of goods sold. c. net sales. d. operating expenses.
Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
193.
A decline in a company’s gross profit could be caused by all of the following except a. selling products with a lower markup. b. clearance of discontinued inventory. c. paying lower prices to its suppliers. d. increasing competition resulting in a lower selling price.
Ans: C, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
5-38 194.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
If Hostell Company has net sales of $500,000 and cost of goods sold of $350,000, Hostell’s gross profit rate is a. 70%. b. 30%. c. 43%. d. 100%.
Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($500,000 − $350,000) $500,000 = 30% (Net sal. – COGS) ÷ Net sal.
195.
If Indiana Ink, Inc. has net sales of $400,000 and cost of goods sold of $320,000, Indiana Ink’s gross profit rate is a. 80%. b. 25% c. 20%. d. 100%.
Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($400,000 − $320,000) $400,000 = 20% (Net sal. – COGS) ÷ Net sal.
196.
A company shows the following balances: Sales Revenue $1,000,000 Sales Returns and Allowances 175,000 Sales Discounts 25,000 Cost of Goods Sold 600,000 What is the gross profit rate? a. 60% b. 75% c. 40% d. 25%
Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($1,000,000 − $175,000 − $25,000) − $600,000] $800,000 = 25% [(sal. rev – sal. ret./all. – sal. dis.) – COGS] ÷ Net sal.
197.
A company shows the following balances: Sales Revenue $ 800,000 Sales Returns and Allowances 75,000 Sales Discounts 25,000 Cost of Goods Sold 490,000 What is the gross profit rate? a. 61% b. 70% c. 30% d. 39%
Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($800,000 − $75,000 − $25,000) − $490,000] $700,000 = 30% [(sal. rev – sal. ret./all. – sal. dis.) – COGS] ÷ Net sal.
.
Merchandising Operations
198.
5-39
What is a difference between the profit margin and the gross profit rate? a. None, these are interchangeable terms. b. The gross profit rate is computed by dividing net sales by gross profit and the profit margin is computed by dividing net sales by net income. c. The gross profit rate will normally be higher than the profit margin ratio. d. A profit margin of 7% means that 7 cents of each net sales dollar ends up in net income and a gross profit rate of 7% means that the cost of the goods were 7% of the selling price.
Ans: C, LO: 6, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
199.
Andrea’s Fashions sold merchandise for $190,000 cash during the month of July. Returns that month totaled $4,000. If the company’s gross profit rate is 40%, Andrea’s will report monthly net sales revenue and cost of goods sold of a. $190,000 and $114,000. b. $186,000 and $74,400. c. $186,000 and $111,600. d. $190,000 and $111,600.
Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $190,000 − $4,000 = $186,000; $186,000 .60 = $111,600 (sales – ret.) × (1 – .40) = cost of goods sold
200.
Betty’s Fabrics sold merchandise for $171,000 cash during the month of July. Returns that month totaled $3,600. If the company’s gross profit rate is 40%, Betty will report monthly net sales revenue and cost of goods sold of a. $171,000 and $102,600. b. $167,400 and $66,960. c. $167,400 and $100,440. d. $171,000 and $100,440.
Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $171,000 − $3,600 = $167,400 .60 = $100,440 (sales – ret.) ×(1 – .40) = cost of goods sold
201.
American Importers reports net income of $60,000 and cost of goods sold of $540,000. If the company’s gross profit rate was 40%, net sales were a. $900,000. b. $1,350,000. c. $1,410,000. d. $990,000.
Ans: A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $540,000 (1 − .40) = $900,000 (COGS ÷(1 – .40))
202.
United Services and Supplies reports net income of $60,000 and cost of goods sold of $360,000. If US&S’s gross profit rate was 40%, net sales were a. $600,000. b. $900,000. c. $960,000. d. $660,000.
Ans: A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
5-40
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution: $360,000 (1 − .40) = $600,000
*203. Erin Corporation purchases $500 of merchandise on credit. Using the periodic inventory approach, Erin would record this transaction as: a. Inventory 500 Accounts Payable 500 b. Accounts Payable 500 Purchases 500 c. Purchases 500 Accounts Payable 500 d. Accounts Payable 500 Inventory 500 Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
*204. Crowder Corporation recorded the return of $200 of goods originally sold on credit to Discount Industries. Using the periodic inventory approach, Crowder would record this transaction as: a. Inventory 200 Accounts Receivable 200 b. Sales Returns and Allowances 200 Accounts Receivable 200 c. Accounts Payable 200 Sales Returns and Allowances 200 d. Accounts Receivable 200 Sales Returns and Allowances 200 Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
*205. Turner Corporation returned $150 of goods originally purchased on credit from Morgan Industries. Using the periodic Inventory approach, Turner would record this transaction as: a. Inventory 150 Accounts Payable 150 b. Accounts Payable 150 Inventory 150 c. Purchase Returns and Allowances 150 Accounts Payable 150 d. Accounts Payable 150 Purchase Returns and Allowances 150 Ans: D, LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Merchandising Operations
5-41
*206. Ramos Company receives a payment on account from Martinez Industries. Based on the original sale of $12,000 using the periodic inventory approach, Ramos honors the 3% cash discount and records the payment. Which of the following is the correct entry for Ramos to record? a. Cash 11,640 Sales Discounts 360 Inventory 12,000 b. Accounts Receivable 12,000 Cash 7,840 Purchase Discounts 160 c. Cash 11,640 Sales Discounts 360 Accounts Receivable 12,000 d. Cash 11,640 Purchase Discounts 360 Accounts Payable 12,000 Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $12,000 .03 = $360 sales discount (sale amount × .03) = sal. disc.
Answers to Multiple Choice Questions 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72.
c c b d b c b d a c c a a b a b d b a b
73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92.
b d d c c a d a b b a d c a a b b b d c
93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112.
c a d b b c a a b d d b c c c a d c b d
113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132.
.
b d c c d a c d b b c a c d a c b c d c
133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152.
c b a c d d c c b a d b b d d c c c d c
153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172.
c a b d c b b c d b b b d b c a d b a c
173. 174. 175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192.
d a c a c b b b b d d a c d c b b a d c
193. 194. 195. 196. 197. 198. 199. 200. 201. 202. *203. *204. *205. *206.
c b c d c c c c a a c b d c
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
5-42
BRIEF EXERCISES Be. 207 Presented here are the components in Rowland Company’s income statement. Determine the missing amounts. Sales Revenue_ $75,000 (c)
Cost of Goods Sold (a) $56,000
Gross _Profit $35,000 $59,000
Operating Expenses (b) $48,000
Net Income $17,000 (d)
Ans: N/A, LO: 1,4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 207 a. b. c. d.
(5 min.)
$ 40,000 (sal. rev. – Gross prof.) $ 18,000 $115,000 (COGS + Gross prof.) $ 11,000
Be. 208 On September 4, Roberta’s Knickknacks buys merchandise on account from Dolan Company. The selling price of the goods is $900 and the cost of goods is $600. Both companies use the perpetual inventory systems Journalize the transactions on the books of both companies. Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 208
(5 min.)
Roberta’s Knickknacks records Sept. 4
Inventory ............................................................................ Accounts Payable ......................................................
900 900
Dolan Company records Sept. 4
Accounts Receivable .......................................................... Sales Revenue ...........................................................
900
Cost of Goods Sold ............................................................ Inventory ...................................................................
600
900
600
Be. 209 Menke Company is a furniture retailer and uses the perpetual inventory system. On January 14, 2017, Menke purchased merchandise inventory at a cost of $45,000. Credit terms were 2/10, n/30. The inventory was sold on account for $60,000 on January 21, 2017. Credit terms were 1/10, n/30. The accounts payable was settled on January 23, 2017, and the accounts receivables were settled on January 30, 2017. Prepare journal entries to record each of these transactions. Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Merchandising Operations
5-43
Solution 209 (10 min.) Jan. 14
Jan. 21
Jan. 23
Jan. 30
Inventory............................................................................. Accounts Payable ......................................................
45,000
Accounts Receivable .......................................................... Sales Revenue...........................................................
60,000
Cost of Goods Sold ............................................................ Inventory ....................................................................
45,000
Accounts Payable ............................................................... Cash ($45,000 × .98) ................................................. Inventory .................................................................... *(Inven. purch. × (1 – .02))
45,000
Cash .................................................................................. Sales Discounts .................................................................. Accounts Receivable.................................................. *(sales price × (1 – .01))
59,400* 600
45,000
60,000
45,000
44,100* 900
60,000
Be. 210 Prepare the journal entries to record the following transactions on Markowitz Company’s books using a perpetual inventory system. On February 6, Markowitz Company sold $105,000 of merchandise to the Lyman Company, terms 2/10, net /30. The cost of the merchandise sold was $70,000. On February 8, the Lyman Company returned $14,000 of the merchandise purchased on February 6. The cost of the merchandise returned was $9,000. On February 16 Markowitz Company received the balance due from the Lyman Company. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 210 Feb 6
Feb 8
Feb 16
(5 min.)
Accounts Receivable ......................................................... Sales Revenue...........................................................
105,000
Cost of Goods Sold ............................................................ Inventory ...................................................................
70,000
Sales Returns and Allowances .......................................... Accounts Receivable .................................................
14,000
Inventory ............................................................................ Cost of Goods Sold ...................................................
9,000
Cash ($91,000 x .98) ......................................................... Sales Discounts ................................................................. Accounts Receivable ($105,000 – $14,000) ..............
89,180* 1,820
*(sales price – return) × (1 – .02)
.
105,000
70,000
14,000
9,000
91,000
5-44
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Be. 211 Lovett Company provides this information for the month of November, 2017: sales on credit $140,000; cash sales $50,000; sales discount $2,000; and sales returns and allowances $8,000. Prepare the sales revenues section of the income statement based on this information. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 211
(5 min.) LOVETT COMPANY Income Statement(Partial) For the Month Ended November 30, 2017
Sales Revenue ................................................................... Less: Sales Returns and Allowances ............................... Sales Discounts ..................................................... Net Sales (sal. rev. – sal. ret./all. – sal. dis.)
$190,000 $ 8,000 2,000 180,000
10,000
Be. 212 Assume that Mitchell Company uses a periodic inventory system and has these account balances: Purchases $570,000; Purchase Returns and Allowances $14,000; Purchases Discounts $9,000; and Freight-In $15,000. Determine net purchases and cost of goods purchased. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 212
(5 min.)
Calculation of Net Purchases and Cost of goods purchased Purchases ........................................................................... Less: Purchases returns and allowances ......................... Purchase discounts ................................................ Net Purchases ................................................................... Add: Freight-in..................................................................... Cost of Goods Purchased ................................................ (Purch. – pur. ret./all. – pur. dis. + fr. – in.)
$570,000 $14,000 9,000
23,000 547,000 15,000 $562,000
Be. 213 Assume that Mitchell Company uses a periodic inventory system and has these account balances: Purchases $620,000; Purchase Returns and Allowances $25,000; Purchases Discounts $11,000; and Freight-In $19,000; beginning inventory of $45,000; ending inventory of $55,000; and net sales of $750,000. Determine the amounts to be reported for cost of goods sold and gross profit. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Merchandising Operations
Solution 213
5-45
(10 min.)
Calculation of cost of goods sold Inventory, beginning ............................................................ Cost of goods sold Purchases ........................................................................... Less: Purchases returns and allowances ......................... $25,000 Purchase discounts ................................................ 11,000 Net purchases ..................................................................... Add: Freight-In .................................................................... Cost of goods purchased .................................................... Cost of goods available for sale .......................................... Inventory, ending ................................................................ Cost of goods sold .............................................................. ((Beg. inv. + purch. pur. ret./all. – pur. dis. + fr. – in.) – end, inv.)
$45,000 $620,000 36,000 584,000 19,000 603,000 648,000 55,000 $593,000
Calculation of gross profit Net sales ............................................................................. Cost of goods sold .............................................................. Gross profit .........................................................................
$750,000 593,000 $157,000
Be. 214 Horner Corporation reported net sales of $150,000, cost of goods sold of $96,000, operating expenses of $35,000, other expenses of $10,000, net income of $9,000. Calculate the following values. 1. Profit margin. 2. Gross profit rate. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 214
(5 min.)
1. Profit margin =
Net income Net sales
=
$ 9,000 $150,000
=6%
2. Gross profit rate =
Gross profit Net sales
=
($150,000 - $96,000) $150,000
= 36%
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
5-46
EXERCISES Ex. 215 Sue Cole is a new accountant with Simon Company. Simon purchased merchandise on account for $9,000. The credit terms are 1/10, n/30. Sue has talked with the company's banker and knows that she could earn 6% on any money invested in the company's savings account. Instructions (a) Should Sue pay the invoice within the discount period or should she keep the $9,000 in the savings account and pay at the end of the credit period? Support your recommendation with a calculation showing which action would be best. (b) If Sue forgoes the discount, it may be viewed as paying an interest rate of 1% for the use of $9,000 for 20 days. Calculate the annual rate of interest that this is equivalent to. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
Solution 215 (a)
(b)
(10 min.)
Yes, Sue should take the discount. Discount of 1% on $9,000 Interest received on $9,000 (for 20 days at 6%) Savings by taking the discount
$90 30 $60
(purch. amount × 1%) ($9,000 6% 20 360)
The equivalent annual interest rate is: 1% 360 20 = 18%.
Ex. 216 This information relates to Sherper Co. 1. 2. 3. 4. 5.
On April 5 purchased merchandise from Newport Company for $22,000, terms 2/10, n/10. On April 6 paid freight costs of $900 on merchandise purchased from Newport. On April 7 purchased equipment on account for $26,000. On April 8 returned some of April 5 merchandise to Newport Company which cost $2,000. On April 15 paid the amount due to Newport Company in full.
Instructions (a) Prepare the journal entries to record the transactions listed above on the books of Sherper Co. Sherper Co. uses a perpetual inventory system. (b) Assume that Sherper Co. paid the balance due to Newport Company on May 4 instead of April 15. Prepare the journal entry to record this payment. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Merchandising Operations
Solution 216 (a)
(1) (2) (3) (4) (5)
(b)
(10 min.)
April 5 April 6 April 7 April 8 April 15
May 4
5-47
Inventory ...................................................... Accounts Payable .................................
22,000
Inventory ...................................................... Cash .....................................................
900
Equipment .................................................... Accounts Payable .................................
26,000
Accounts Payable......................................... Inventory ...............................................
2,000
Accounts Payable ($22,000 – $2,000) ................................... Inventory [($22,000 – $2,000) 2%] ................... Cash ($20,000 98%) ............................ (purch. amount – ret.) × (1 – .02)
Accounts Payable ($22,000 – $2,000) ................. Cash ...........................................................
22,000 900 26,000 2,000 20,000 400 19,600
20,000 20,000
Ex. 217 (a)
Bazil Company purchased merchandise on account from Office Suppliers for $62,000, with terms of 1/10, n/30. During the discount period, Bazil returned some merchandise and paid $59,400 as payment in full. Bazil uses a perpetual inventory system. Prepare the journal entries that Bazil Company made to record the: (1) purchase of merchandise. (2) return of merchandise. (3) payment on account.
(b)
Weaver Company sold merchandise to Moore Company on account for $84,000 with credit terms of ?/10, n/30. The cost of the merchandise sold was $63,000. During the discount period, Moore Company returned $4,000 of merchandise and paid its account in full (minus the discount) by remitting $78,400 in cash. Both companies use a perpetual inventory system. Prepare the journal entries that Weaver Company made to record the: (1) sale of merchandise. (2) return of merchandise. (3) collection on account.
Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
5-48
Solution 217 (a)
To compute the amount due after returns but before the discount divide $59,400 by .99 (100% - 1%). $59,400 .99 = $60,000. (Amount paid ÷ (1 – .01) Subtract $60,000 from $62,000 to determine that $2,000 of merchandise was returned. (1)
(2)
(3)
(b)
(15-20 min.)
Inventory ............................................................................ Accounts Payable ......................................................
62,000
Accounts Payable .............................................................. Inventory ...................................................................
2,000
Accounts Payable ($62,000 - $2,000) ................................ Inventory ($60,000 x .01) ........................................... Cash ($60,000 x .99) .................................................
60,000
62,000
2,000
600 59,400
Moore Company returns $4,000 of merchandise and owes $80,000 to Weaver Company. $78,400 $80,000 = .98 100% - 98% = 2% The missing discount percentage is 2%. $80,000 2% = $1,600 sales discount. $80,000 - $1,600 = $78,400 cash received on account. (1)
(2)
(3)
Accounts Receivable .......................................................... Sales Revenue ...........................................................
84,000
Cost of Goods Sold ............................................................. Inventory ....................................................................
63,000
Sales Returns and Allowances ........................................... Accounts Receivable .................................................
4,000
Inventory ............................................................................. Cost of Goods Sold .................................................... * (cost = sales price x .75 as shown in sales entries)
3,000*
Cash .................................................................................. Sales Discounts ................................................................. Accounts Receivable .................................................
78,400* 1,600
84,000
63,000
4,000
3,000
80,000
*(sales – sal. ret.) × (1 – .02) Ex. 218 June 4
Black Company purchased $9,000 worth of merchandise, terms n/30 from Hayes Company. The cost of the merchandise was $6,300.
12
Black returned $500 worth of goods to Hayes for full credit. The goods had a cost of $350 to Hayes.
12
Black paid the account in full.
.
Merchandising Operations
Ex. 218
5-49
(Cont.)
Instructions Prepare the journal entries to record these transactions in (a) Black’s records and (b) Hayes’ records. Assume use of the perpetual inventory system for both companies. Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 218
(15-20 min.)
(a)
Black’s books
June
4
12
12
Inventory Accounts Payable……………………………….
9,000
Accounts Payable………………………………………… Inventory
500
Accounts Payable………………………………………… Cash……………………………………………….
8,500
(b)
Hayes’ books
June
4
4
12
12
12
9,000
500
8,500
Accounts Receivable…………………………………….. Sales Revenue……………………………………
9,000
Cost of Goods Sold………………………………………. Inventory
6,300
Sales Returns and Allowance…………………………… Accounts Receivable…………………………….
500
Inventory Cost of Goods Sold
350
Cash……………………………………………………….. Accounts Receivable…………………………….
.
9,000
6,300
500
350 8,500 8,500
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
5-50 Ex. 219
On October 1, the Kile Bicycle Store had an inventory of 20 ten speed bicycles at a cost of $150 each. During the month of October the following transactions occurred. Assume Kile uses a perpetual inventory system. Oct. 4
Purchased 180 bicycles at a cost of $145 each from the Nixon Bicycle Company, terms 2/10, n/30.
5
Paid freight of $900 on the October 4 purchase.
6
Sold 10 bicycles from the October 1 inventory to Team America for $250 each, terms 2/10, n/30.
7
Received credit from the Nixon Bicycle Company for the return of 8 defective bicycles.
13
Issued a credit memo to Team America for the return of a wrong clear bicycle.
14
Paid Nixon Bicycle Company in full, less discount.
Instructions Prepare the journal entries to record the transactions assuming the company uses a perpetual inventory system. Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 219 Oct. 4
(15-20 min.)
Inventory ............................................................................ Accounts Payable ......................................................
26,100
Inventory ............................................................................ Cash ..........................................................................
900
Accounts Receivable .......................................................... Sales Revenue ...........................................................
2,500
Cost of Goods Sold ............................................................ Inventory ...................................................................
1,500
Accounts Payable .............................................................. Inventory ...................................................................
1,160
Sales Returns and Allowances ........................................... Accounts Receivable .................................................
250
Inventory ............................................................................ Cost of Goods Sold ...................................................
150
Accounts Payable ($26,100 - $1,160) ................................ Cash ($24,940 .98).................................................. Inventory ($24,940 .02) .......................................... *(Oct. 4 purch. – ret.) × (1 – .02)
24,940
5
6
7
13
14
.
26,100
900
2,500
1,500
1,160
250
150
24,441* 499
Merchandising Operations
5-51
Ex. 220 On September 1, Pennington Supply had an inventory of 20 backpacks at a cost of $25 each. The company uses a perpetual inventory system. During September, the following transactions and events occurred. Sept.
4 Purchased 50 backpacks at $25 each from Sievert, terms 2/10, n/30. 6 Received credit of $100 for the return of 4 backpacks purchased on September 4 that were defective. 9 Sold 25 backpacks for $40 each to Lilly Books, terms 2/10, n/30. 13 Sold 15 backpacks for $40 each to Stoner Office Supply, terms n/30. 14 Paid Sievert in full, less discount.
Instructions Journalize the September transactions for Pennington Supply. Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 220 Sept.
4
6
9
13
14
(15-20 min.)
Inventory ......................................................................... Accounts Payable ..................................................
1,250
Accounts Payable ........................................................... Inventory ................................................................
100
Accounts Receivable ...................................................... Sales Revenue ........................................................
1,000
Cost of Goods Sold ......................................................... Inventory ................................................................
625
Accounts Receivable ...................................................... Sales Revenue ........................................................
600
Cost of Goods Sold ......................................................... Inventory ................................................................
375
Accounts Payable ($1,250 - $100) .................................. Cash ($1,150 .98) ................................................... Inventory ($1,150 .02) ...........................................
1,150
*(Sept. 4 purch. – ret.) × (1 – .02)
.
1,250
100
1,000
625
600
375
1,127* 23
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
5-52 Ex. 221
Petersen Book Store entered into the transactions listed below. In the journal provided, prepare Petersen’s necessary entries, assuming use of the perpetual inventory system. July
6
Purchased $1,600 of merchandise on credit, terms n/30.
8
Returned $100 of the items purchased on July 6.
9
Paid freight charges of $90 on the items purchased July 6.
19
Sold merchandise on credit for $4,400, terms 1/10, n/30. The merchandise had an inventory cost of $2,700.
22
Of the merchandise sold on July 19, $300 of it was returned. The items had cost the store $150.
28
Received payment in full from the customer of July 19.
31
Paid for the merchandise purchased on July 6.
Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 221 July
6
(15-20 min.) Inventory………………………………………………………… Accounts Payable………………………………………
1,600
Accounts Payable……………………………………………… Inventory
100
Inventory………………………………………………………… Cash ……………………………………………………
90
Accounts Receivable …………………………………………. Sales Revenue…………………………………………
4,400
Cost of Goods Sold……………………………………………. Inventory
2,700
Sales Returns and Allowances……………………………….. Accounts Receivable………………………………….
300
Inventory………………………………………………………… Cost of Goods Sold……………………………………
150
Cash ($4,100 x .99) …………………………………………… Sales Discounts………………………………………………… Accounts Receivable
4,059* 41
Accounts Payable ($1,600 - $100)…………………………… Cash *(sale amount – ret.) × (1 – .01)
1,500
8
9
19
22
28
31
.
1,600
100
90
4,400
2,700
300
150
4,100
1,500
Merchandising Operations
5-53
Ex. 222 Presented here are selected transactions for the Leiss Company during April. Leiss uses the perpetual inventory system. April
1
Sold merchandise to Mann Company for $4,000, terms 2/10, n/30. The merchandise sold had a cost of $2,500.
2
Purchased merchandise from Wild Corporation for $8,000, terms 1/10, n/30.
4
Purchased merchandise from Ryan Company for $1,000, n/30.
10
Received payment from Mann Company for purchase of April 1 less appropriate discount.
11
Paid Wild Corporation for April 2 purchase.
Instructions Journalize the April transactions for Leiss Company. Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 222 April
1
2
4
10
11
(12-16 min.) Accounts Receivable .......................................................... Sales Revenue ........................................................
4,000
Cost of Goods Sold ............................................................. Inventory .................................................................
2,500
Inventory ............................................................................. Accounts Payable....................................................
8,000
Inventory ............................................................................. Accounts Payable....................................................
1,000
Cash ($4,000 x .98) ............................................................ Sales Discounts ($4,000 x .02) ........................................... Accounts Receivable ...............................................
3,920* 80
Accounts Payable ............................................................... Inventory ($8,000 x .01)........................................... Cash ($8,000 x .99) .................................................
8,000
*(sale amount × (1 – .02)) **(Apr. purch. × (1 – .01))
.
4,000
2,500
8,000
1,000
4,000
80 7,920**
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
5-54 Ex. 223
Norman Company completed the following transactions in October: Norman uses a perpetual inventory system. Credit Sales Date Amount Oct. 3 $ 800 Oct. 11 1,500 Oct. 17 5,000 Oct. 21 1,700 Oct. 23 6,000
Terms 2/10, n/30 3/10, n/30 1/10, n/30 2/10, n/60 2/10, n/30
Sales Returns Date Amount Oct. 14 Oct. 20 Oct. 23 Oct. 27
Date of Collection Oct. 8 Oct. 16 Oct. 29 Oct. 27 Oct. 28
$ 300 1,200 400 500
Instructions (a) Indicate the cash received for each collection. Show your calculations. (b) Prepare the journal entry for the (1) Oct. 17 sale. The merchandise sold had a cost of $3,000. (2) Oct. 23 sales return. The merchandise returned had a cost of $200. (3) Oct. 28 collection. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 223
$784
[Sales $800 - Sales discount $16 ($800 .02)]
16
$1,164
[Sales $1,500 - Sales return $300 = $1,200; $1,200 - Sales discount $36 ($1,200 .03)]
29
$3,800
[Sales $5,000 - Sales return $1,200 = $3,800; (discount lapsed)]
27
$1,274
[Sales $1,700 - Sales return $400 = $1,300; $1,300 - Sales discount $26 ($1,300 .02)]
28
$5,390
[Sales $6,000 - Sales return $500 = $5,500; $5,500 - Sales discount $110 ($5,500 .02)]
(a) Oct. 8
(b) (1)
(2)
(3)
(20 min.)
Oct. 17
Oct. 23
Oct. 28
Accounts Receivable ........................................ Sales Revenue..........................................
5,000
Cost of Goods Sold............................................ Inventory ...................................................
3,000
Sales Returns and Allowances ......................... Accounts Receivable ................................
400
Inventory............................................................ Cost of Goods Sold ...................................
200
Cash ................................................................. Sales Discounts ................................................ Accounts Receivable ................................
5,390 110
.
5,000 3,000 400 200
5,500
Merchandising Operations
5-55
Ex. 224 The following transactions are for Kale Company. (1) (2) (3)
On December 3 Kale Company sold $500,000 of merchandise to Thomson Co., terms 1/30, n/10. The cost of the merchandise sold was $320,000. On December 8 Thomson Co. was granted an allowance of $20,000 for merchandise purchased on December 3. On December 13 Kale Company received the balance due from Thomson Co.
Instructions (a) Prepare the journal entries to record these transactions on the books of Kale Company. Kale uses a perpetual inventory system. (b) Assume that Kale Company received the balance due from Thomson Co. on January 2 of the following year instead of December 13. Prepare the journal entry to record the receipt of payment on January 2. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 224
(10 min.)
(a) (1) Dec 3 Accounts Receivable........................................ Sales Revenue ..........................................
500,000
Cost of Goods Sold .......................................... Inventory ...................................................
320,000
(2) Dec 8 Sales Returns and Allowances ......................... Accounts Receivable .................................
20,000
(3) Dec. 13 Cash ($480,000 – $4,800)................................ Sales Discounts [($500,000 – $20,000) 1%]...................... Accounts Receivable ($500,000 – $20,000)................... *(sale amount – ret.) × (1 – .01)
475,200*
(b)
Jan 2
Cash................................................................. Accounts Receivable ($500,000 – $20,000)...............................
500,000 320,000 20,000
4,800 480,000
480,000 480,000
Ex. 225 Instructions State the missing items identified by ?. 1. Gross profit - Operating expenses = ? 2. Cost of goods sold + Gross profit = ? 3. Sales revenue - (? + ?) = Net sales 4. Income from operations + ? - ? = Net income 5. Net sales - Cost of goods sold = ? Ans: N/A, LO: 4, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
5-56
Solution 225 (5 min.) 1. 2. 3. 4. 5.
Income from operations (or Net income) Net sales Sales discounts, Sales returns and allowances Other revenues and gains, Other expenses and losses Gross profit
Ex. 226 Financial information is presented here for two companies. King Company $56,000 ? 50,000 33,000 ? 12,000 ?
Sales revenue Sales returns and allowances Net sales Cost of goods sold Gross profit Operating expenses Net income
Queen Company ? 5,000 80,000 ? 32,000 ? 14,000
Instructions (a) Compute the missing amounts. (b) Calculate the profit margin and the gross profit rate for each company. Ans: N/A, LO: 4,6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 226 (a)
(10 min.)
King Company
Sales returns = $6,000 ($56,000 – $50,000 = $6,000) (sal. rev. – net sal.) Gross profit = $17,000 ($50,000 – $33,000 = $17,000) Net income = $5,000 ($17,000 – $12,000) (Net sal. – COGS – oper. exp.) Queen Company Sales revenue = $85,000 ($80,000 + $5,000) Cost of goods sold = $48,000 ($80,000 – $32,000) Operating expenses = $18,000 ($32,000 – $14,000) (b) (Net inc./Net sal.)
King $5,000 = .10 $50,000
Queen $14,000 = .175 $80,000
Gross profit rate (Gross prof./Net sal.)
$17,000 $50,000
$32,000 $80,000
Profit margin
= .34
.
= .40
(Net sal. – gross prof.)
Merchandising Operations
5-57
Ex. 227 The following information is available for Quayle Company: Sales revenue Sales returns and allowances Cost of goods sold Operating expenses Interest expense Interest revenue
$618,000 20,000 398,000 114,000 19,000 20,000
Instructions 1. Use the above information to prepare a multiple-step income statement for the year ended December 31, 2017. 2. Compute the profit margin. Ans: N/A, LO: 4,6, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 227
(20 min.)
1.
QUAYLE COMPANY Income Statement For the Year Ended December 31, 2017
Sales Sales revenue ..................................................................... Less: Sales returns and allowances ................................. Net sales ............................................................................ Cost of goods sold .............................................................. Gross profit .............................................................. Operating expenses . Income from operations ...................................................... Other revenues and gains Interest revenue ...................................................... Other expenses and losses Interest expense ...................................................... Net income.......................................................................... (sal. rev. – sal. ret/all. – COGS – oper. exp. + int. rev. – int. exp.) 2. Profit margin: $87,000 ÷ $598,000 = 14.5% (Net inc. ÷ Net sal.)
.
$618,000 20,000 $598,000 398,000 200,000 114,000 86,000 20,000 19,000 $ 87,000
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
5-58 Ex. 228
The adjusted trial balance of McCoy Company included the following selected accounts: Debit Credit Sales Revenue $645,000 Sales Returns and Allowances $ 50,000 Sales Discounts 9,500 Cost of Goods Sold 396,000 Freight-Out 2,000 Advertising Expense 15,000 Interest Expense 19,000 Salaries and Wages Expense 84,000 Utilities Expense 23,000 Depreciation Expense 3,500 Interest Revenue 25,000 Instructions 1. Use the above information to prepare a multiple-step income statement for the year ended December 31, 2017. 2. Calculate the profit margin and gross profit rate. Ans: N/A, LO: 4,6, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 228 1.
(20 min.) MCCOY COMPANY Income Statement For the Year Ended December 31, 2017
Sales revenue..................................................................... Less: Sales returns and allowances ................................. Sales discounts ...................................................... Net sales ............................................................................ Cost of goods sold .............................................................. Gross profit ......................................................................... Operating expenses Salaries and Wages Expense ....................................... Utilities Expense ........................................................... Advertising Expense ..................................................... Depreciation Expense .................................................. Freight-Out.................................................................... Total operating expenses ........................................ Income from operations ...................................................... Other revenues and gains Interest revenue ............................................................ Other expenses and losses Interest expense ........................................................... Net income .........................................................................
$645,000 $ 50,000 9,500
$ 84,000 23,000 15,000 3,500 2,000
(Sal. rev. – COGS – tot. oper. exp. + int. rev. – int. exp.) 2. Profit margin = $68,000 ÷ $585,500 = 11.6% (Net inc. ÷ Net sal.) Gross profit rate = $189,500 ÷ $585,500 = 32.4% (Gross prof. ÷ Net sal.) .
59,500 585,500 396,000 189,500
127,500 62,000 25,000 19,000 $ 68,000
Merchandising Operations
5-59
Ex. 229 Presented below is information for Zales Company for the month of January 2017. Cost of goods sold $280,000 Freight-out 7,000 Insurance expense 12,000 Salaries and wages expense 42,000
Rent expense Sales discounts Sales returns and allowances Sales revenue
$35,000 8,000 13,000 421,000
Instructions (a) Prepare a multiple-step income statement. (b) Calculate the profit margin and the gross profit rate. Ans: N/A, LO: 4,6, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 229
(20 min.)
(a)
ZALES COMPANY Income Statement For the Month Ended January 31, 2017 ____________________________________________________________________________ Sales Sales revenue ...................................................... $421,000 Less: Sales returns and allowances ........................................... $13,000 Sales discounts.......................................... 8,000 21,000 Net sales.............................................................. 400,000 Cost of goods sold ......................................................... 280,000 Gross profit .................................................................... 120,000 Operating expenses Salaries and wages expense ................................ 42,000 Rent expense........................................................ 35,000 Insurance expense................................................ 12,000 Freight-out ............................................................ 7,000 Total operating expense ............................... 96,000 Net income ................................................................... $ 24,000 (sal. rev. – sal. ret./all. – sal. dis – COGS – oper. exp.) (b) Profit margin =
Gross profit rate =
$24,000 $400,000
= .06
$120,000 $400,000
= .30
Ex. 230 The trial balance of Rachel Company at the end of its fiscal year, August 31, 2017, includes these accounts: Inventory $29,200; Purchases $144,000; Sales Revenue $190,000; Freight-In $8,000; Sales Returns and Allowances $3,000; Freight-Out $1,000; and Purchases Returns and Allowances $5,000. The ending inventory is $25,000. Instructions Prepare a cost of goods sold section for the year ending August 31. .
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
5-60
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 230
(10 min.)
Inventory, September 1, 2016 ................................................. Purchases ............................................................................... Less: Purchase returns and allowances ................................. Net purchases ......................................................................... Add: Freight-in ........................................................................ Cost of goods purchased......................................................... Cost of goods available for sale............................................... Inventory, August 31, 2017...................................................... Cost of goods sold ............................................................ (Beg. inv. + purch. – purch. ret./all. + fr. – in – end. inv.)
$ 29,200 $144,000 5,000 139,000 8,000 147,000 176,200 25,000 $151,200
Ex. 231 Below is a series of cost of goods sold sections for Mikey Inc., Nancie Co., and Oscar Inc. Mikey $ 450 1,700 40 (a) 130 (b) 2,240 310 (c)
Beginning inventory Purchases Purchase returns and allowances Net purchases Freight-in Cost of goods purchased Cost of goods available for sale Ending inventory Cost of goods sold
Nancie $ 120 1,080 (d) 1,020 (e) 1,230 1,350 (f) 1,130
Oscar $ (g) 43,590 (h) 41,590 2,740 (i) 49,530 6,230 43,300
Instructions Fill in the lettered blanks to complete the cost of goods sold sections. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 231
(10 min.)
(a) (b) (c)
$1,660 ($1,700 – $40) $1,790 ($1,660 + $130) (purch. – purch. ret./all. + fr. – in.) $1,930 ($2,240 – $310)
(d) (e) (f)
$60 $210 $220
(g) (h) (i)
$5,200 ($49,530 – $44,330 from (i)) [(COG avail. for sale – (Net purch. + fr. – in)] $2,000 ($43,590 – $41,590) $44,330 ($41,590 + $2,740)
($1,080 – $1,020) (purch. – net purch.) ($1,230 – $1,020) ($1,350 – $1,130) (COG avail. for sale – COGS)
.
Merchandising Operations
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Ex. 232 The following information is available from the annual reports of Flynn Company and Tolan Inc. (Amounts in millions) Flynn Tolan $32,622 $40,457 20,739 24,431 7,428 9,188 4,455 6,838 2,594 4,072
Sales revenue Cost of goods sold Operating expenses Income before taxes Net income Instructions
1. Calculate the profit margin and gross profit rate for each company. 2. What conclusion concerning the relative profitability of the two companies can be drawn from these data? Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 232
(15 min.)
1. Profit margin: (Net inc./sal. rev.) Gross profit rate: (Gross prof./sal. rev.)
Flynn $2,594 ———— = 8.0% $32,622
Tolan $4,072 ———— = 10.1% $40,457
$32,622 - $20,739 ———————— $32,622
$40,457 - $24,431 ———————— $40,457
$11,883 ———— = 36.4% $32,622
$16,026 ———— = 39.6% $40,457
2. Because all of Tolan’s profitability ratios are higher than Flynn’s, it can be concluded that Tolan is the more profitable of the two companies. *Ex. 233 June 4
Deere Company purchased $3,500 worth of merchandise, terms n/30 from Gilbert Company. The cost of the merchandise was $2,500.
13
Deere returned $600 worth of goods to Gilbert for full credit. The goods had a cost of $400 to Gilbert.
13
Deere paid the account in full.
Instructions Prepare the journal entries to record these transactions in (a) Deere’s records and (b) Gilbert’s records. Assume use of the periodic inventory system for both companies. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
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5-62
*Solution 233
(15-20 min.)
(a)
Deere’s books
June
4
13
13
Purchases ……………………………………………….. Accounts Payable……………………………….
3,500
Accounts Payable………………………………………… Purchase Returns and Allowances…………….
600
Accounts Payable………………………………………… Cash……………………………………………….
2,900
(b)
Gilbert’s books
June
4
13
13
3,500
600
2,900
Accounts Receivable…………………………………….. Sales Revenue……………………………………
3,500
Sales Returns and Allowance…………………………… Accounts Receivable…………………………….
600
Cash……………………………………………………….. Accounts Receivable…………………………….
2,900
3,500
600
2,900
*Ex. 234 On September 1, Hendricks Supply had an inventory of 18 backpacks at a cost of $20 each. The company uses a periodic inventory system. During September, the following transactions and events occurred. Sept.
4 Purchased 50 backpacks at $20 each from Neufeld, terms 2/10, n/30. 6 Received credit of $100 for the return of 5 backpacks purchased on Sept. 4 that were defective. 9 Sold 30 backpacks for $30 each to Brewer Books, terms 2/10, n/30. 13 Sold 10 backpacks for $30 each to Stoner Office Supply, terms n/30. 14 Paid Neufeld in full, less discount.
Instructions Journalize the September transactions for Hendricks Supply. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Merchandising Operations
*Solution 234 Sept.
4
6
9
13
14
5-63
(15-20 min.)
Purchases .... ................................................................... Accounts Payable ..................................................
1,000
Accounts Payable ........................................................... Purchase Returns and Allowances .........................
100
Accounts Receivable ...................................................... Sales Revenue ........................................................
900
Accounts Receivable ...................................................... Sales Revenue ........................................................
300
Accounts Payable ($1,000 - $100) .................................. Cash ($900 × .98) ................................................... Purchase Discounts ($900 × .02) ........................... *(purch. – ret. ) × (1 – .02)
900
1,000
100
900
300
882* 18
*Ex. 235 Presented here are selected transactions for the Foyle Company during April. Foyle uses the periodic inventory system. April
1
Sold merchandise to Land Company for $4,000, terms 2/10, n/30. The merchandise sold had a cost of $2,000.
2
Purchased merchandise from Webb Corporation for $6,000, terms 1/10, n/30.
4
Purchased merchandise from Ryan Company for $2,000, n/30.
10
Received payment from Land Company for purchase of April 1 less appropriate discount.
11
Paid Webb Corporation for April 2 purchase.
Instructions Journalize the April transactions for Foyle Company. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
*Solution 235 April
1
2
4
(12-16 min.) Accounts Receivable…………………………………………… Sales Revenue…………………………………………
4,000
Purchases……………………………………………………… Accounts Payable……………………………………..
6,000
Purchases ……… ……………………………………………… Accounts Payable……………………………………..
2,000
.
4,000
6,000
2,000
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
5-64
*Solution 235 (Cont.) 10 Cash ($4,000 x .98) … ……………………………………….. Sales Discounts ($4,000 x .02)……………………………….. Accounts Receivable…………………………………… *(sales amount × (1 – .02)
3,920* 80 4,000
Accounts Payable………………………………………………… Purchase Discounts ($6,000 x .01)….. Cash ($6,000 x .99)……………………………………. *(purch. amount × (1 – .01))
11
6,000 60 5,940*
*Ex. 236 This information relates to Tandi Co. 1. 2. 3. 4. 5.
On April 5 purchased merchandise from Buehler Company for $33,000, terms 2/10, net/30. On April 6 paid freight costs of $900 on merchandise purchased from Buehler Company. On April 7 purchased equipment on account for $26,000. On April 8 returned some of the April 5 merchandise to Buehler Company which cost $3,000. On April 15 paid the amount due to Buehler Company in full.
Instructions (a) Prepare the journal entries to record these transactions on the books of Tandi Co. using a periodic inventory system. (b) Assume that Tandi Co. paid the balance due to Buehler Company on May 4 instead of April 15. Prepare the journal entry to record this payment. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
*Solution 236
(10 min.)
(a)
5
(1) (2) (3) (4)
(5)
(b)
April April April April
6 7 8
April 15
May 4
Purchases ................................................. Accounts Payable ...............................
33,000
Freight-In ................................................... Cash ...................................................
900
Equipment ................................................. Accounts Payable ...............................
26,000
Accounts Payable ...................................... Purchase Returns and Allowances ...... ($33,000 – $3,000)
3,000
Accounts Payable ...................................... Purchase Discounts............................ [($33,000 – $3,000) 2%] Cash ($30,000 .98) .......................... *((purch. amount – purch. ret.) × (1 – .02))
30,000
Accounts Payable ...................................... ($33,000 – $3,000) Cash ...................................................
30,000
.
33,000 900 26,000 3,000
600 29,400*
30,000
Merchandising Operations
5-65
COMPLETION STATEMENTS 237. A _________________ buys and sells inventory rather than performing services as their primary source of revenue. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
238. Cost of goods sold is deducted from net sales revenue for the period in order to arrive at ________________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
239. Inventory on hand can be obtained from detailed inventory records when a ________________ inventory system is maintained. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
240. The acquisition of inventory is debited to the ____________ account when a perpetual inventory system is used. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
241. The freight costs incurred by a seller on outgoing inventory are an ________________ to the seller. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
242. When a customer returns inventory previously purchased on credit, the entry to record the credit granted to the customer requires a debit to the ___________________ account and a credit to the ________________ account. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
243. Every credit sales transaction should be supported by a _________________ that provides written evidence of the sale. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
244. Sales Returns and Allowances and Sales Discounts are both ______________ accounts and have normal _______________ balances. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
245. Gross profit is obtained by subtracting ________________ from ________________. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
246. A useful measure of profitability is the ratio of net income to _____________. Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
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Answers to Completion Statements 237. merchandiser 238. gross profit 239. perpetual 240. Inventory 241. operating expense 242. Sales Returns and Allowances, Accounts Receivable
243. 244. 245. 246.
Sales invoice contra revenue, debit cost of goods sold, net sales net sales
MATCHING 247. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Net sales Sales discount Credit terms Periodic inventory system Gross profit rate
F. G. H. I. J.
Contra revenue Freight-out Gross profit Sales invoice Purchase discount
____
1. A reduction given by the seller for prompt payment of a credit sale.
____
2. Provides support for a credit sale.
____
3. Gross profit divided by net sales.
____
4. Sales less sales returns and allowances and sales discounts.
____
5. Specifies the amount of cash discount and time period during which it is offered.
____
6. Net sales less cost of goods sold.
____
7. Freight cost to deliver goods to customers reported as an operating expense.
____
8. Requires a physical count of goods on hand to compute cost of goods sold.
____
9. A cash discount claimed by a buyer for prompt payment of a balance due.
____ 10. An account that is offset against a revenue account on the income statement. Ans: N/A, LO: 1-6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Answers to Matching 1. 2. 3. 4. 5.
B I E A C
6. 7. 8. 9. 10.
H G D J F
.
Merchandising Operations
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SHORT-ANSWER ESSAY QUESTIONS S-A-E 248 You are at a company picnic and the company president starts a conversation with you. The president says “Since we use the perpetual inventory system, there is no reason to take a physical count of our inventory.” What is your response to the president’s remarks? Ans: N/A, LO: 1, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Communications, IMA: FSA
Solution 248 You have made a very good observation, but human and mechanical shortcomings need to be considered. The perpetual inventory system maintains detailed records of each inventory purchase, sale and return. This does not mean that everything has been correctly recorded. Some possible causes of discrepancies between the goods on hand and the amounts shown in the accounting system include (1) inventory items were coded incorrectly, (2) cashiers failed to properly scan inventory items, (3) inventory items were damaged or stolen, or (4) goods returned by customers were not properly entered in the accounting records. It is necessary to reconcile amounts in the ledger to actual quantities. Discrepancies should be properly accounted for and investigated. S-A E 249 A merchandising company frequently has a need to use contra accounts related to the sale of goods. Identify the contra accounts that have normal debit balances and explain why they are not considered expenses. Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 249 The contra accounts related to the sale of goods that have normal debit balances are Sales Discounts and Sales Returns and Allowances. These accounts have debit balances but are not expenses because they are adjustments of sales, not operating, selling, or administrative expenses. They are an adjustment of the inflow from the sale of goods, rather than a cost used to help earn revenue. S-A E 250 Alice Gray believes revenues from credit sales may be earned before they are collected in cash. Do you agree? Explain. Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 250 Agree. In accordance with the revenue recognition principle, sales revenues are generally considered to be earned when the goods are transferred from the seller to the buyer; that is, when the exchange transaction occurs. The earning of revenue is not dependent on the collection of credit sales.
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
S-A E 251 To encourage bookstores to buy a broader range of book titles many publishers allow bookstores to return unsold books to the publisher. This results in very significant returns each year. To ensure proper recognition of revenues, how should publishing companies account for these returns? Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 251 In most industries returns are not significant, and they are therefore accounted for as they occur. When returns are expected to be significant, the company should make an adjusting entry at the end of the period to estimate the amount of returns that will result from the period's sales, so that revenues will not be overstated during the period. S-A E 252 In a single-step income statement, all data are classified under two categories: (1) Revenues, or (2) Expenses. If the income statement is recast in a multiple-step format, what additional information or intermediate components of income would be presented? Ans: N/A, LO: 4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 252 The items reported in a multiple-step income statement that are not reported in a single-step income statement are: gross revenues as well as net revenues, gross profit, detailed selling and administrative expenses, income from operations, other revenues and gains, and other expenses and losses. For companies using the periodic inventory method the computation of cost of goods sold using beginning and ending inventories, purchases (gross and net) are also broken out. S-A-E 253 Distinguish between cost of goods sold and operating expenses, describe the nature of these two items and their placement on the income statement. Ans: N/A, LO: 4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 253 Cost of goods sold includes the cost of obtaining the goods held for resale; it is deducted directly from net sales on the income statement. Operating expenses, on the other hand, include selling and general administrative expenses; they appear directly below the gross profit on the income statement. S-A E 254 The income statement for a merchandising company presents five amounts not shown on a service company’s income statement. Identify and briefly explain the five unique amounts. Ans: N/A, LO: 4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
.
Merchandising Operations
5-69
Solution 254 The items reported for a merchandising company that are not reported for a service company are sales revenue, sales returns and allowances, sales discounts, cost of goods sold, and gross profit. Sales revenue, sales returns and allowances, and sales discounts comprise net sales. Cost of goods sold represents the total cost of merchandise sold during the period. Gross profit is the excess of net sales over the cost of goods sold. S-A E 255 What factors affect a company's gross profit rate—that is, what can cause the gross profit rate to increase and what can cause it to decrease? Ans: N/A, LO: 6, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 255 Factors affecting a company's gross profit rate include selling products with a higher (or lower) "markup," increased competition that results in lower selling prices, and price increases or decrease from suppliers. S-A E 256 The following are the gross profit percentages for Naylor Company: Year 2015 2016 2017 2018
Gross Profit Percentage 33% 34% 36% 13%
List four possible explanations for the low gross profit percentage in 2018. Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 256 Possible explanations for 2018’s low gross profit percentage: 1. 2. 3. 4. 5. 6.
Errors have occurred. Cost of buying merchandise inventory increased, but the selling price was not increased. Merchandise inventory has been stolen. Some sales were not recorded. The economy is weak and commissioned sales personnel lowered selling prices without authorization. Inferior goods are being sold and customers are subsequently given sales allowances which reduce net sales.
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
S-A E 257
(Ethics)
Hiller Corporation manufactures electronic components for use in many consumer products. Their raw materials are purchased literally from all over the world. Depending on the country involved, purchase terms vary widely. Some suppliers, for example, require full prepayment, while others are content to receive payment within six months of receipt of the goods. Because of this situation, Hiller never closes its books until at least ten days after month end. In this way, it can sort out ownership of goods in transit, and document which goods were received by month end, and which were not. Donna Gordon, a new accountant, was asked to record about $50,000 in inventory as having been received before month end. She argued that the shipping documents clearly showed that the goods were actually received on the 8th of the current month. Her boss, busy with month-end reports, curtly tells Donna to check the shipping terms. She did so, and found the notation "FOB (free on board) shipper's dock" on the document. She hadn't seen that particular notation before, but she reasoned that if the selling company considered it shipped when it reached their dock, Hiller should consider it received when it reached Hiller's dock. She did not record the sale until after month end. Required: 1. Why are accountants concerned with the timing in the recording of purchases? 2. Was there a violation of ethical standards here? Explain. Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 257 1. Accountants are concerned with timing because they seek to make sure that sales are recorded in the proper period so that revenues and expenses are properly matched; to make sure that goods recorded as owned by the company actually are owned as of the last date of the period; and to make certain that sales recorded have been actually completed. 2. The only ethical principle that may be involved is one of competence. Donna does not appear to know enough about reading shipping documents to make a proper determination of ownership. The goods were owned by Hiller as soon as they left the shipper's dock. Otherwise, the goods would have been owned by no one while in transit. It does not appear that Donna compromised her integrity or that she sought some sort of gain from her mistake. It does seem likely that she should have known how to interpret the shipping documents. S-A E 258
(Communication)
Sandy Lang and Mandy Starr, two salespersons in adjoining territories, regularly compete for bonuses. During the last month, their dollar volume of sales, on which the bonuses are based, was nearly equal. On May 30, 2017, each made a large sale. Both orders were shipped on May 31, 2017, the last day of the month, and both were received by the customers on June 5, 2017. Sandy's sale was FOB shipping point (ownership passes to buyer at time of shipping), and Mandy's was FOB destination (ownership passes to buyer at time of receipt). The printed policy of the company states that sales "count" for purposes of calculating bonuses on the date that ownership passes to the purchaser. Sandy's sale was therefore counted in her May monthly total of sales while Mandy's sale was not. Mandy is quite upset. She has asked you to just include it, or to take Sandy's off as well. She also has told you that you are being unethical for allowing Sandy to get a bonus just for choosing a particular shipping method.
.
Merchandising Operations
S-A E 258
5-71
(Cont.)
As the accounting manager write a memo to Mandy on June 15, 2014, and explain your position. Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Communications, IMA: FSA
Solution 258 MEMO TO:
Mandy Starr
FROM:
Accounting Manager
RE:
Sales Bonuses
DATE:
June 15, 2017
As you know, sales bonuses are based upon the revenue generated by each salesperson in accordance with the printed policy of the company. This policy states that you will receive bonus credit based on the date of title transfer for goods sold. Your disputed sale of May 30, 2017, was shipped on May 31, 2017, with terms “FOB Destination”. Our records indicate that this shipment was received by the customer on June 5, 2017. This puts title transfer into your June 2017 bonus payment. I can appreciate your being upset that this large sale was not counted in your May 2017 bonus but it will appear in your June 2017 bonus payment in accordance with the policy which is consistency applied. It would be unethical and unprofessional for me to change the written policy and it would violate the consistency of that policy’s application. I do understand your disappointment, but this sale does count in June—and it just may make the difference in June's bonus. Please call me if I can be of further help. (signature)
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
IFRS QUESTIONS 1.
The Income statement is a. required under GAAP but not under IFRS. b. required under IFRS in the same format as under GAAP. c. required under IFRS but not under GAAP. d. required under IFRS with some differences as compared to GAAP.
Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
2.
The basic accounting entries for merchandising are a. the same under GAAP and under IFRS. b. required under GAAP but not under IFRS. c. required under IFRS but not under GAAP. d. required under IFRS with some differences as compared to GAAP.
Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
3.
Under GAAP, companies can choose which inventory system? Perpetual Periodic a. Yes No b. Yes Yes c. No Yes d. Yes No
Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
4.
Under IFRS, companies can choose which inventory system? Perpetual Periodic a. Yes No b. Yes Yes c. No Yes d. Yes No
Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
5.
Companies cannot use the a. periodic inventory system under GAAP. b. periodic inventory system under IFRS. c. perpetual system under IFRS. d. None of these answer choices are correct.
Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
6.
Inventories are defined by IFRS as a. held-for-sale in the ordinary course of business. b. in the process of production for sale in the ordinary course of business. c. in the form of materials or supplies to be consumed in the production process or in the providing of services. d. All of these answer choices are correct.
Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
Merchandising Operations
7.
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Under GAAP, companies generally classify income statement items by a. function. b. nature. c. nature or function d. date incurred.
Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
8.
Under IFRS, companies must classify income statement items by a. function. b. nature. c. nature or function d. date incurred.
Ans: C, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
9.
Under GAAP, income statement items are generally described as a. administration, distribution, manufacturing, etc. b. salaries, depreciation, utilities, etc. c. administration, depreciation, manufacturing, etc. d. salaries, distribution, utilities, etc.
Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
10.
Under IFRS, income statement items classified by nature are generally described as a. administration, distribution, manufacturing, etc. b. salaries, depreciation, utilities, etc. c. administration, depreciation, manufacturing, etc. d. salaries, distribution, utilities, etc.
Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
11.
For the income statement, IFRS requires a. single-step approach. b. multiple-step approach. c. single-step approach or multiple-step approach. d. no specific income statement approach.
Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
12.
Under IFRS, companies can apply revaluation to a. land, buildings, and intangible assets. b. land, buildings, but not intangible assets. c. intangible assets, but not land. d. no assets.
Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
13.
The use of IFRS results in more transactions affecting a. net income but not other comprehensive income. b. other comprehensive income, but not net income. c. net income and other comprehensive income. d. neither net income nor other comprehensive income.
Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
5-74 14.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Comprehensive income under IFRS a. includes unrealized gains and losses included in net income, in contrast to GAAP. b. includes unrealized gains and losses included in net income, similar to GAAP. c. excludes unrealized gains and losses included in net income, in contrast to GAAP. d. excludes unrealized gains and losses included in net income, similar to GAAP.
Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
15.
The number of years of income statement information to be presented is a. 2 years under both GAAP and IFRS. b. 3 years under both GAAP and IFRS. c. 2 years under GAAP and 3 years under IFRS. d. 3 years under GAAP and 2 years under IFRS.
Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
CHAPTER 6 REPORTING AND ANALYZING INVENTORY SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY Item
LO
BT
Item
LO
BT
Item
LO
BT
Item
LO
BT
Item
LO
BT
2 2 2 2 2 3 3 3 3
K K K K K K K K K
37. 38. 39. 40. *41. *42. *43. *44.
3 3 3 3 4 4 5 5
K C K K K K K K
135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164.
2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 3 3 2 3 3 3 3 3 3 3
C K C AP AP AP K C C C K K K K AP AN AN C AN AN AN AN C K K K C AP AP AP
165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187. *188. *189. *190. *191.
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4 4 5 5 5 5 5
AP C AP AP AP AP K K K AP C C AN AN AN C K AP AP AP AP AP AN AN AN C C
198.
3
AP
True-False Statements 1. 2. 3. 4. 5. 6. 7. 8. 9.
1 1 1 1 1 1 1 1 1
K K K K K K K K K
10. 11. 12. 13. 14. 15. 16. 17. 18.
1 2 2 2 2 2 2 2 2
K K K K K K K K K
45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74.
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2
K K K K K K K K K K K K K K K AP AP K C K K AP AP AP C AP AP AP AP AP
75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104.
2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
AP AP AP AP AP AP AP AP AP K K K C AP AP AP AP K K K K K K K K K AP AP AP AP
19. 20. 21. 22. 23. 24. 25. 26. 27.
2 2 2 2 2 2 2 2 2
K C C C K K K K K
28. 29. 30. 31. 32. 33. 34. 35. 36.
Multiple Choice Questions 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134.
2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
AP K C AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP C C C C C C C C K K
Brief Exercises 192. 193.
1 2
K AP
194. 195.
2 2
AP AP
.
196. 197.
2 3
C AP
6-2
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
199. 200. 201. 202. 203.
1 1 1 2 2
AN AN AN AP AP
204. 205. 206. 207. 208.
2 2 2 2 2
224. 225. 226.
1 1 1
K K K
227. 228. 229.
1 1 2
235.
1-3
K
Exercises AP 209. 2 AP 214. AP 210. 2 AP 215. AP 211. 3 AP *216. AP 212. 3 AN *217. AP 213. 3 AN *218. Completion Statements K 230. 2 K 233. K 231. 2 K 234. K 232. 3 K Matching
Short Answer Essay 236. 1 K 238. 2 C 240. 2 C 242. 237. 2 K 239. 2 K 241. 2 C 243. *This topic is dealt with in an Appendix to the chapter.
3 3 4 4 4
AP AP AP AP AP
3 3
K K
3 3
C C
*219. *220. *221. *222. *223.
5 5 5 5 5
AN AN AN AN AN
244. 245.
1 1
E AN
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Learning Objective 1 Item 1. 2. 3. 4. 5. 6. 7.
Type TF TF TF TF TF TF TF
Item 8. 9. 10. 45. 46. 47. 48.
Type TF TF TF MC MC MC MC
Item 49. 50. 51. 52. 53. 54. 55.
Type MC MC MC MC MC MC MC
Item 63. 192. 199. 200. 201. 224. 225.
Type MC BE Ex Ex Ex CS CS
Item 226. 227. 228. 235. 236. 244. 245.
Type CS CS CS Ma SA SA CS
11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31.
TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF
32. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83.
TF MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC
Learning Objective 2 84. MC 105. MC 85. MC 106. MC 86. MC 107. MC 87. MC 108. MC 88. MC 109. MC 89. MC 110. MC 90. MC 111. MC 91. MC 112. MC 92. MC 113. MC 93. MC 114. MC 94. MC 115. MC 95. MC 116. MC 96. MC 117. MC 97. MC 118. MC 98. MC 119. MC 99. MC 120. MC 100. MC 121. MC 101. MC 122. MC 102. MC 123. MC 103. MC 124. MC 104. MC 125. MC
126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 193. 194.
MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC BE BE
195. 196. 202. 203. 204. 205. 206. 207. 208. 209. 210. 229. 230. 231. 235. 237. 238. 239. 240. 241.
BE BE Ex Ex Ex Ex Ex Ex Ex Ex Ex CS CS CS Ma SA SA SA SA SA
.
Type MC MC MC MC MC MC MC
Item 56. 57. 58. 59. 60. 61. 62.
Reporting and Analyzing Inventory
33. 34. 35. 36. 37. 38. 39. 40. 145. 146.
TF TF TF TF TF TF TF TF MC MC
147. 148. 149. 150. 151. 152. 153. 154. 155. 156.
MC MC MC MC MC MC MC MC MC MC
Learning Objective 3 157. MC 167. MC 158. MC 168. MC 159. MC 169. MC 160. MC 170. MC 161. MC 171. MC 162. MC 172. MC 163. MC 173. MC 164. MC 174. MC 165. MC 175. MC 166. MC 176. MC
177. 178. 179. 180. 197. 198. 211. 212. 213. 214.
MC MC MC MC BE BE Ex Ex Ex Ex
215. 232. 233. 234. 235. 242. 243.
Ex CS CS CS Ma SA SA
216. 217.
Ex Ex
218.
Ex
220. 221.
Ex Ex
222. 223.
Ex Ex
41. 42.
TF TF
181. 182.
MC MC
Learning Objective 4 183. MC 185. MC 184. MC 186. MC
43. 44.
TF TF
187. 188.
MC MC
Learning Objective 5 189. MC 191. MC 190. MC 219. Ex
Note: TF = True-False MC = Multiple Choice Ma = Matching
CS = Completion Ex = Exercise SA = Short Answer Essay
.
6-3
6-4
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
CHAPTER LEARNING OBJECTIVES 1. Discuss how to classify and determine inventory. Merchandisers need only one inventory classification, merchandise inventory, to describe the different items that make up total inventory. Manufacturers, on the other hand, usually classify inventory into three categories: finished goods, work in process and raw materials. To determine inventory quantities, manufacturers (1) take a physical inventory of goods on hand and (2) determine the ownership of goods in transit or on consignment. 2. Apply inventory cost flow methods and discuss their financial effects. The primary basis of accounting for inventories is cost. Cost includes all expenditures necessary to acquire goods and place them in a condition ready for sale. Cost of goods available for sale includes (a) cost of beginning inventory and (b) cost of goods purchased. The inventory cost flow methods are: specific identification and three assumed cost flow methods—FIFO, LIFO, and average-cost. The cost of goods available for sale may be allocated to cost of goods sold and ending inventory by specific identification or by a method based on an assumed cost flow. When prices are rising, the first-in, first-out (FIFO) method results in lower cost of goods sold and higher net income than the average-cost and the last-in, first-out (LIFO) methods. The reverse is true when prices are falling. In the balance sheet, FIFO results in an ending inventory that is closest to current value, whereas the inventory under LIFO is the farthest from current value. LIFO results in the lowest income taxes (because of lower taxable income). 3. Explain the statement presentation and analysis of inventory. Companies use the lowerof-cost-or-market (LCM) basis when the current replacement cost (market) is less than cost. Under LCM, companies recognize the loss in the period in which the price decline occurs. Inventory turnover is calculated as cost of goods sold divided by average inventory. It can be converted to average days in inventory by dividing 365 days by the inventory turnover. A higher inventory turnover or lower average days in inventory suggests that management is trying to keep inventory levels low relative to its sales level. The LIFO reserve represents the difference between ending inventory using LIFO and ending inventory if FIFO were employed instead. For some companies this difference can be significant, and ignoring it can lead to inappropriate conclusions when using the current ratio or inventory turnover. *4. Apply inventory cost flow methods to perpetual inventory records. Under FIFO, the cost of the earliest goods on hand prior to each sale is charged to cost of goods sold. Under LIFO, the cost of the most recent purchase prior to sale is charged to cost of goods sold. Under the average-cost method, a new average cost is computed after each purchase. *5. Indicate the effects of inventory errors on the financial statements. In the income statement of the current year: (1) An error in beginning inventory will have a reverse effect on net income (e.g. overstatement of inventory results in understatement of net income, and vice versa). (2) An error in ending inventory will have a similar effect on net income (e.g. overstatement of inventory results in overstatement of net income). If ending inventory errors are not corrected in the following period, their effect on net income for that period is reversed, and total net income for the two years will be correct. In the balance sheet: Ending inventory errors will have the same effect on total assets and total stockholders’ equity and no effect on liabilities. .
Reporting and Analyzing Inventory
6-5
TRUE-FALSE STATEMENTS 1.
Raw materials inventories are the goods that a manufacturing company has completed and are ready to be sold to customers.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
2.
A manufacturer’s inventory consists of raw materials, work in process, and finished goods.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
3.
When the terms of sale are FOB shipping point, legal title to the goods remains with the seller until the goods reach the buyer.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
4.
Goods in transit shipped FOB shipping point should be included in the buyer’s ending inventory.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
5.
Goods that have been purchased FOB destination but are in transit, should be excluded from a physical count of goods by the buyer.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
6.
If the ownership of merchandise passes to the buyer when the seller ships the merchandise, the terms are stated as FOB destination.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
7.
Under the periodic inventory system, both the sales amount and the cost of goods sold amount are recorded when each item of merchandise is sold.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
8.
Under a periodic inventory system, the merchandise on hand at the end of the period is determined by a physical count of the inventory.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
9.
Consigned goods are held for sale by one party although ownership of the goods is retained by another party.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
10.
Goods held on consignment should be included in the consignor’s ending inventory.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
11.
In accounting for inventory, the assumed flow of costs must match the physical flow of goods.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
6-6 12.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Inventory methods such as FIFO and LIFO deal more with flow of costs than with flow of goods.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
13.
The average cost inventory method relies on a simple average calculation.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
14.
If prices never changed there would be no need for alternative inventory methods.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
15.
The specific identification method of costing inventories tracks the actual physical flow of the goods available for sale.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
16.
Management may choose any inventory costing method it desires as long as the cost flow assumption chosen is consistent with the physical movement of goods in the company.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
17.
The First-in, First-out (FIFO) inventory method results in an ending inventory valued at the most recent cost.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
18.
The expense recognition principle requires that the cost of goods sold be matched against the ending merchandise inventory in order to determine income.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
19.
The specific identification method of inventory valuation is desirable when a company sells a large number of low-unit cost items.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
20.
If a company has no beginning inventory and the unit cost of inventory items does not change during the year, the value assigned to the ending inventory will be the same under LIFO and average cost flow assumptions.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
21.
If the unit price of inventory is increasing during a period, a company using the LIFO inventory method will show less gross profit for the period, than if it had used the FIFO inventory method.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
22.
If a company has no beginning inventory and the unit price of inventory is increasing during a period, the cost of goods available for sale during the period will be the same under the LIFO and FIFO inventory methods.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Reporting and Analyzing Inventory
23.
6-7
A company may use more than one inventory cost flow method at the same time.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
24.
Use of the LIFO inventory valuation method enables a company to report paper or phantom profits.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
25.
The LIFO inventory method agrees with the actual physical movement of goods in most businesses.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
26.
In periods of falling prices, LIFO will result in a higher ending inventory valuation than FIFO.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
27.
In periods of falling prices, FIFO will result in a larger net income than the LIFO method.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
28.
If a company changes its inventory valuation method, the effect of the change on net income should be disclosed in the financial statements.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
29.
A major criticism of the FIFO inventory method is that it magnifies the effects of the business cycle on business income.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
30.
The LIFO method is rarely used because most companies do not sell the last goods they purchase first.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
31.
The LIFO inventory method tends to smooth out the peaks and valleys of a business cycle.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
32.
Computers have made the periodic inventory system more popular and easier to apply.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Leverage Technology, AICPA FC: Leverage Technology, AICPA PC: None, IMA: Business Applications
33.
When the market value of inventory is lower than its cost, the inventory is written down to its market value.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
34.
The lower-of-cost-or-market rule implies that it is unrealistic to carry inventory at a cost that is in excess of its market value.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
6-8 35.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Accountants believe that the write down from cost to market should not be made in the period in which the price decline occurs.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
36.
Under the LCM basis, market is defined as selling price, not current replacement cost.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
37.
The inventory turnover is calculated as cost of goods sold divided by ending inventory.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
38.
An inventory turnover that is too high may indicate that the company is losing sales opportunities because of inventory shortages.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
39.
The LIFO reserve is the difference between ending inventory using LIFO and ending inventory if FIFO were used instead.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
40.
The FIFO reserve is a required disclosure for companies that use FIFO.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
*41.
When the average cost method is applied in a perpetual inventory system, the sale of goods will change the unit cost that remains in inventory.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
*42.
When the average cost method is applied to a perpetual inventory system, a moving average cost per unit is computed with each purchase.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
*43.
An error in the ending inventory of the current period will have a similar effect on net income of the next accounting period.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
*44.
An error that overstates the ending inventory will also cause net income for the period to be overstated.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Reporting and Analyzing Inventory
6-9
Answers to True-False Statements 1. 2. 3. 4. 5. 6. 7. 8.
F T F T T F F T
9. 10. 11. 12. 13. 14. 15. 16.
T T F T F T T F
17. 18. 19. 20. 21. 22. 23. 24.
T F F T T T T F
25. 26. 27. 28. 29. 30. 31. 32.
F T F T T F T F
33. 34. 35. 36. 37. 38. 39. 40.
T T F F F T T F
*41. *42. *43. *44.
F T F T
MULTIPLE CHOICE QUESTIONS 45.
Manufactured inventory that has begun the production process but is not yet completed is a. work in process. b. raw materials. c. merchandise inventory. d. finished goods.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
46.
The factor which determines whether or not goods should be included in a physical count of inventory is a. physical possession. b. legal title. c. management's judgment. d. whether or not the purchase price has been paid.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
47.
If goods in transit are shipped FOB destination a. the seller has legal title to the goods until they are delivered. b. the buyer has legal title to the goods until they are delivered. c. the transportation company has legal title to the goods while the goods are in transit. d. no one has legal title to the goods until they are delivered.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
48.
Independent internal verification of the physical inventory process occurs when a. the employee is required to count all items twice for sake of verification. b. the items counted are compared to the inventory account balance. c. a second employee counts the inventory and compares the result to the count made by the first employee. d. all prenumbered inventory tags are accounted for.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
.
6-10 49.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
An employee assigned to counting computer monitors in boxes should a. estimate the number if there is a large quantity to be counted. b. read each box and rely on the box description for the contents. c. determine that the box contains a monitor. d. rely on the warehouse records of the number of computer monitors.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Internal Controls
50.
After the physical inventory is completed, a. quantities are listed on inventory summary sheets. b. quantities are entered into various general ledger inventory accounts. c. the accuracy of the inventory summary sheets is checked by the person listing the quantities on the sheets. d. unit costs are determined by dividing the quantities on the summary sheets by the total inventory costs.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Internal Controls
51.
When is a physical inventory usually taken? a. When goods are not being sold or received. b. When the company has its greatest amount of inventory. c. At the end of the company’s fiscal year. d. When the company has its greatest amount of inventory and at the end of the company's fiscal year.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
52.
Which of the following should not be included in the physical inventory of a company? a. Goods held on consignment from another company. b. Goods in transit from another company shipped FOB shipping point. c. Goods shipped on consignment to another company. d. All of these answer choices should be included.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
53.
Tidwell Company's goods in transit at December 31 include sales made (1) FOB destination (2) FOB shipping point and purchases made (3) FOB destination (4) FOB shipping point. Which items should be included in Tidwell's inventory at December 31? a. (2) and (3) b. (1) and (4) c. (1) and (3) d. (2) and (4)
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Reporting and Analyzing Inventory
54.
6-11
The term "FOB" denotes a. free on board. b. freight on board. c. free only (to) buyer. d. freight charge on buyer.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
55.
Goods held on consignment are a. never owned by the consignee. b. included in the consignee’s ending inventory. c. kept for sale on the premises of the consignor. d. included as part of no one’s ending inventory.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
56.
Many companies use just-in-time inventory methods. Which of the following is not an advantage of this method? a. It limits the risk of having obsolete items in inventory. b. Companies may not have quantities to meet customer demand. c. It lowers inventory levels and costs. d. Companies can respond to individual customer requests.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
57.
When a perpetual inventory system is used, which of the following is a purpose of taking a physical inventory? a. To check the accuracy of the perpetual inventory records b. To determine cost of goods sold for the accounting period c. To compute inventory ratios d. All are a purpose of taking a physical inventory when a perpetual inventory system is used.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
58.
Which statement is false? a. Taking a physical inventory involves actually counting, weighing, or measuring each kind of inventory on hand. b. No matter whether a periodic or perpetual inventory system is used, all companies need to determine inventory quantities at the end of each accounting period. c. An inventory count is generally more accurate when goods are not being sold or received during the counting. d. Companies that use a perpetual inventory system must take a physical inventory to determine inventory on hand on the balance sheet date and to determine cost of goods sold for the accounting period.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
6-12 59.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Reeves Company is taking a physical inventory on March 31, the last day of its fiscal year. Which of the following must be included in this inventory count? a. Goods in transit to Reeves, FOB destination b. Goods that Reeves is holding on consignment for Parker Company c. Goods in transit that Reeves has sold to Smith Company, FOB shipping point d. Goods that Reeves is holding in inventory on March 31 for which the related Accounts Payable is 15 days past due
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
60.
At December 31, 2017 Mohling Company’s inventory records indicated a balance of $632,000. Upon further investigation it was determined that this amount included the following: • $112,000 in inventory purchases made by Mohling shipped from the seller 12/27/17 terms FOB destination, but not due to be received until January 2nd • $74,000 in goods sold by Mohling with terms FOB destination on December 27th. The goods are not expected to reach their destination until January 6th. • $6,000 of goods received on consignment from Dollywood Company What is Mohling’s correct ending inventory balance at December 31, 2017? a. $520,000 b. $626,000 c. $440,000 d. $514,000
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $632,000 − $112,000 − $6,000 = $514,000 (Inv. bal. − inv. pur. − consign. goods)
61.
At December 31, 2017 Howell Company’s inventory records indicated a balance of $878,000. Upon further investigation it was determined that this amount included the following: • $168,000 in inventory purchases made by Howell shipped from the seller 12/27/17 terms FOB destination, but not due to be received until January 2nd • $111,000 in goods sold by Howell with terms FOB destination on December 27th. The goods are not expected to reach their destination until January 6th. • $9,000 of goods received on consignment from Westwood Company What is Howell’s correct ending inventory balance at December 31, 2017? a. $710,000 b. $869,000 c. $590,000 d. $701,000
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $878,000 − $168,000 − $9,000 = $701,000 (Inv. bal. − inv. pur. − consign. goods)
.
Reporting and Analyzing Inventory
62.
6-13
Manufacturers usually classify inventory into all the following general categories except: a. work in process b. finished goods c. merchandise inventory d. raw materials
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
63.
For companies that use a perpetual inventory system, all of the following are purposes for taking a physical inventory except to: a. check the accuracy of the records. b. determine the amount of wasted raw materials. c. determine losses due to employee theft. d. determine ownership of the goods.
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
64.
Inventory costing methods place primary reliance on assumptions about the flow of a. goods. b. costs. c. resale prices. d. values.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
65.
The LIFO inventory method assumes that the cost of the latest units purchased are a. the last to be allocated to cost of goods sold. b. the first to be allocated to ending inventory. c. the first to be allocated to cost of goods sold. d. not allocated to cost of goods sold or ending inventory.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
66.
Alpha First Company just began business and made the following four inventory purchases in June: June 1 150 units $ 1,040 June 10 200 units 1,560 June 15 200 units 1,680 June 28 150 units 1,320 $5,600 A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the LIFO inventory method, the value of the ending inventory on June 30 is a. $1,456 b. $1,508 c. $1,848 d. $1,824
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,040 + [($1,560 200) (210 − 150)] = $1,508
.
6-14 67.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Baker Bakery Company just began business and made the following four inventory purchases in June: June 1 150 units $ 1,040 June 10 200 units 1,560 June 15 200 units 1,680 June 28 150 units 1,320 $5.600 A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for June is a. $1,456 b. $1,508 c. $1,824 d. $1,848
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,320 + [($1,680 200) (210 − 150)] = $1,824
68.
Charlene Cosmetics Company just began business and made the following four inventory purchases in June: June 1 150 units $ 1,040 June 10 200 units 1,560 June 15 200 units 1,680 June 28 150 units 1,320 $5,600 A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the average cost method, the amount allocated to the ending inventory on June 30 is a. $1,639. b. $1,824. c. $1,764. d. $1,680.
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($5,600 700) 210 = $1,680
69.
Echo Sound Company just began business and made the following four inventory purchases in June: June 1 150 units $ 1,040 June 10 200 units 1,560 June 15 200 units 1,680 June 28 150 units 1,320 $5,600 A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. The inventory method which results in the highest gross profit for June is a. the FIFO method. b. the LIFO method. c. the average cost method. d. not determinable.
Ans: A, LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Reporting and Analyzing Inventory
70.
6-15
Atom Company just began business and made the following four inventory purchases in June: June 1 150 units $ 990 June 10 200 units 1,344 June 15 200 units 1,368 June 28 150 units 1,062 $4,764 A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the LIFO inventory method, the value of the ending inventory on June 30 is a. $1,326. b. $1,320. c. $1,404. d. $1,416.
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $990 + [($1,344 200) (200 − 150)] = $1,326
71.
Quark Inc. just began business and made the following four inventory purchases in June: June 1 150 units $ 990 June 10 200 units 1,344 June 15 200 units 1,368 June 28 150 units 1,062 $4,764 A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for June is a. $1,326. b. $1,320. c. $1,404. d. $1,416.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,062 + [($1,368 200) (200 − 150)] = $1,404
72.
A company just began business and made the following four inventory purchases in June: June 1 150 units $ 990 June 10 200 units 1,344 June 15 200 units 1,368 June 28 150 units 1,062 $4,764 A physical count of merchandise inventory on June 30 reveals that there are 200 units on hand. Using the average-cost method, the amount allocated to the ending inventory on June 30 is a. $1,361. b. $1,416. c. $1,320. d. $1,344.
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($4,764 700) 200] = $1,361
.
6-16 73.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
A company purchased inventory as follows: 200 units at $6.00 300 units at $6.60 The average unit cost for inventory is a. $6.00. b. $6.30. c. $6.36. d. $6.60.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: [($200 $6.00) + (300 $6.60)] (200 + 300) = $6.36
74.
Noise Makers Inc. has the following inventory data: July 1 Beginning inventory 30 units at $19 7 Purchases 105 units at $20 22 Purchases 15 units at $22
$ 570 2,100 330 $3,000 A physical count of merchandise inventory on July 30 reveals that there are 48 units on hand. Using the average cost method, the value of ending inventory is a. $930. b. $960. c. $976. d. $990. Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($3,000 150) 48] = $960
75.
Olympus Climbers Company has the following inventory data: July 1 Beginning inventory 30 units at $19 $ 570 7 Purchases 105 units at $20 2,100 22 Purchases 15 units at $22 330 $3,000 A physical count of merchandise inventory on July 30 reveals that there are 48 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for July is a. $930. b. $990. c. $2,010. d. $2,070.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $570 + [(150 − 48 − 30) $20] = $2,010
.
Reporting and Analyzing Inventory
76.
6-17
Pop-up Party Favors Inc. has the following inventory data: July 1 Beginning inventory 30 units at $19 $ 570 7 Purchases 105 units at $20 2,100 22 Purchases 15 units at $22 330 $3,000 A physical count of merchandise inventory on July 30 reveals that there are 48 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for July is a. $930. b. $990. c. $960. d. $1,056.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $330 + [(48 − 15) $20] = $990
77.
Quiet Phones Company has the following inventory data: July 1 Beginning inventory 30 units at $19 7 Purchases 105 units at $20 22 Purchases 15 units at $22
$ 570 2,100 330 $3,000 A physical count of merchandise inventory on July 30 reveals that there are 48 units on hand. Using the LIFO inventory method, the amount allocated to cost of goods sold for July is a. $930. b. $990. c. $2,010. d. $2,070. Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $330 + [(150 − 48 − 15) $20] = $2,070
78.
Radical Radials Company has the following inventory data: July 1 Beginning inventory 30 units at $19 $ 570 7 Purchases 105 units at $20 2,100 22 Purchases 15 units at $22 330 $3,000 A physical count of merchandise inventory on July 30 reveals that there are 48 units on hand. Using the LIFO inventory method, the amount allocated to ending inventory for July is a. $930 b. $912 c. $960 d. $1,056.
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $570 + [(48 − 30) $20] = $930
.
6-18 79.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Orange-Aide Company has the following inventory data: July 1 Beginning inventory 40 units at $20 7 Purchases 140 units at $21 22 Purchases 20 units at $22
$ 800 2,940 440 $4,180 A physical count of merchandise inventory on July 30 reveals that there are 50 units on hand. Using the average cost method, the value of ending inventory is a. $1,070 b. $1,045 c $1,050 d $1,100 Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($4,180 200) $50] = $1,045
80.
Peach Pink Inc. has the following inventory data: July 1 Beginning inventory 40 units at $20 7 Purchases 140 units at $21 22 Purchases 20 units at $22
$ 800 2,940 440 $4,180 A physical count of merchandise inventory on July 30 reveals that there are 50 units on hand. Using the FIFO inventory method, the amount allocated to cost of goods sold for July is a. $3,110. b. $3,170. c. $3,010. d. $3,080. Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $800 + [(200 − 50 − 40) $21] = $3,110
81.
Grape Gratuities Company has the following inventory data: July 1 Beginning inventory 40 units at $20 $ 800 7 Purchases 140 units at $21 2,940 22 Purchases 20 units at $22 440 $4,180 A physical count of merchandise inventory on July 30 reveals that there are 50 units on hand. Using the FIFO inventory method, the amount allocated to ending inventory for July is a. $1,170. b. $1,010. c. $1,070. d. $1,100.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $440 + [(50 − 20) $21] = $1,070
.
Reporting and Analyzing Inventory
82.
6-19
Apple-A-Day Company has the following inventory data: July 1 Beginning inventory 40 units at $20 7 Purchases 140 units at $21 22 Purchases 20 units at $22
$ 800 2,940 440 $4,180 A physical count of merchandise inventory on July 30 reveals that there are 50 units on hand. Using the LIFO inventory method, the amount allocated to cost of goods sold for July is a. $3,170. b. $3,080. c. $3,110. d. $3,010. Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $440 + [(200 − 50 − 20) $21] = $3,170
83.
Bonkers Bananas has the following inventory data: July 1 Beginning inventory 40 units at $20 7 Purchases 140 units at $21 22 Purchases 20 units at $22
$ 800 2,940 440 $4,180 A physical count of merchandise inventory on July 30 reveals that there are 50 units on hand. Using the LIFO inventory method, the amount allocated to ending inventory for July is a. $1,100. b. $1,010. c. $1,070. d. $1,000. Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $800 + [(50 − 40) $21] = $1,010
84.
Which of the following is an inventory costing method? a. Periodic b. Specific identification c. Perpetual d. Lower of cost or market
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
85.
Inventory costing methods place primary reliance on assumptions about the flow of a. good. b. costs. c. resale prices. d. values.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
6-20 86.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Which of the following terms best describes the assumption made in applying the four inventory methods? a. Goods flow b. Cost flow c. Asset flow d. Physical flow
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
87.
An assumption about cost flow is used a. because it is required by the income tax regulation. b. even when there is no change in the purchase price of inventory. c. only when the flow of goods cannot be determined. d. because prices usually change, and tracking which units have been sold is difficult.
Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
88.
Piper Pipes has the following inventory data: July 1 Beginning inventory 50 units at $120 5 Purchases 300 units at $112 14 Sale 200 units 21 Purchases 150 units at $115 30 Sale 140 units Assuming that a periodic inventory system is used, what is the cost of goods sold on a LIFO basis? a. $18,320 b. $18,370 c. $34,480 d. $38,530
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (150 $115) + [(200 + 140 − 150) $112] = $38,530
89.
Trumpeting Trumpets has the following inventory data: July 1 Beginning inventory 50 units at $120 5 Purchases 300 units at $112 14 Sale 200 units 21 Purchases 150 units at $115 30 Sale 140 units Assuming that a periodic inventory system is used, what is the cost of goods sold on a FIFO basis? a. $18,320 b. $18,370 c. $38,480 d. $38,530
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (50 $120) + [(200 + 140 − 50) $112] = $38,480
.
Reporting and Analyzing Inventory
90.
6-21
Sassy Saxophones has the following inventory data: July 1 Beginning inventory 50 units at $120 5 Purchases 300 units at $112 14 Sale 200 units 21 Purchases 150 units at $115 30 Sale 140 units Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a LIFO basis? a. $18,320 b. $18,370 c. $38,480 d. $38,530
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (50 + 300 − 200 + 150 − 140) =160; (50 $120) + (110 $112) = $18,320
91.
Clear Clarinets has the following inventory data: July 1 Beginning inventory 50 units at $120 5 Purchases 300 units at $112 14 Sale 200 units 21 Purchases 150 units at $115 30 Sale 140 units Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a FIFO basis? a. $18,220 b. $18,370 c. $38,480 d. $38,530
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (50 + 300 − 200 + 150 − 140) = 160; (150 $115) + (10 $112) = $18,370
92.
Which of the following items will increase inventoriable costs for the buyer of goods? a. Purchase returns and allowances granted by the seller b. Purchase discounts taken by the purchaser c. Freight charges paid by the seller d. Freight charges paid by the purchaser
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
93.
Of the following companies, which one would not likely employ the specific identification method for inventory costing? a. Music store specializing in organ sales b. Farm implement dealership c. Antique shop d. Hardware store
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
6-22 94.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
A problem with the specific identification method is that a. inventories can be reported at actual costs. b. management can manipulate income. c. matching is not achieved. d. the lower of cost or market basis cannot be applied.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
95.
The selection of an appropriate inventory cost flow assumption for an individual company is made by a. the external auditors. b. the SEC. c. the internal auditors. d. management.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
96.
Which of the following is not a common cost flow assumption used in costing inventory? a. First-in, first-out b. Middle-in, first-out c. Last-in, first-out d. Average cost
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
97.
The accounting principle that requires that the cost flow assumption be consistent with the physical movement of goods is a. called the matching principle. b. called the consistency principle. c. nonexistent; that is, there is no such accounting requirement. d. called the physical flow assumption.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
98.
Which of the following statements is true regarding inventory cost flow assumptions? a. A company may use more than one costing method concurrently. b. A company must comply with the method specified by industry standards. c. A company must use the same method for domestic and foreign operations. d. A company may never change its inventory costing method once it has chosen a method.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
99.
Which of the following statements is correct with respect to inventories? a. The FIFO method assumes that the costs of the earliest goods acquired are the last to be sold. b. It is generally good business management to sell the most recently acquired goods first. c. Under FIFO, the ending inventory is based on the latest units purchased. d. FIFO seldom coincides with the actual physical flow of inventory.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
Reporting and Analyzing Inventory
100.
6-23
Given equal circumstances, which inventory method would probably be the most time consuming? a. FIFO b. LIFO c. Average cost d. Specific identification.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
101.
Serene Stereos has the following inventory data: Nov. 1 Inventory 30 units @ $6.00 each 8 Purchase 120 units @ $6.45 each 17 Purchase 60 units @ $6.30 each 25 Purchase 90 units @ $6.60 each A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Cost of goods sold under FIFO is a. $657 b. $1,269 c. $632 d. $1,295
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (30 $6.00) + (120 $6.45) + [(300 − 100 − 30 − 120) $6.30] = $1,269
102.
Automobile Audio has the following inventory data: Nov. 1 Inventory 30 units @ $6.00 each 8 Purchase 120 units @ $6.45 each 17 Purchase 60 units @ $6.30 each 25 Purchase 90 units @ $6.60 each A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Ending inventory under FIFO is a. $657 b. $1,269 c. $632 d. $1,295
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (90 $6.60) + [(100 − 90) $6.30] = $657
103.
Carryable CDs has the following inventory data: Nov. 1 Inventory 30 units @ $6.00 each 8 Purchase 120 units @ $6.45 each Purchase 60 units @ $6.30 each 17 25 Purchase 90 units @ $6.60 each A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Cost of goods sold under LIFO is a. $657 b. $1,269 c. $632 d. $1,295
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (90 $6.60) + (60 $6.30) + [(200 − 150) $6.45] = $1,295
.
6-24 104.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Delightful Discs has the following inventory data: Nov. 1 Inventory 30 units @ $6.00 each 8 Purchase 120 units @ $6.45 each 17 Purchase 60 units @ $6.30 each 25 Purchase 90 units @ $6.60 each A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Ending inventory under LIFO is a. $657 b. $632 c. $1,269 d. $1,295
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (30 $6.00) + [(100 − 30) $6.45] = $632
105.
Laser Listening has the following inventory data: Nov. 1 Inventory 30 units @ $6.00 each 8 Purchase 120 units @ $6.45 each 17 Purchase 60 units @ $6.30 each 25 Purchase 90 units @ $6.60 each A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Assuming that the specific identification method is used and that ending inventory consists of 30 units from each of the three purchases and 10 units from the November 1 inventory, cost of goods sold is a. $640. b. $1,286 c. $1,281 d. $1,254
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (20 $6.00) + (90 $6.45) + (30 $6.30) + (60 $6.60) = $1,286
106.
Which inventory costing method should a gasoline retailer use? a. Average cost b. LIFO c. FIFO d. Either LIFO or FIFO.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
107.
In periods of rising prices, which is an advantage of using the LIFO inventory costing method? a. Ending inventory will include latest (most recent) costs and thus be more realistic. b. Cost of goods sold will include latest (most recent) costs and thus will be more realistic. c. Net income will be the highest and thus reflect the prosperity of the company. d. Phantom profits are reported.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Reporting and Analyzing Inventory
108.
6-25
Hogan Industries had the following inventory transactions occur during 2017: Units Cost/unit Feb. 1, 2017 Purchase 108 $45 Mar. 14, 2017 Purchase 186 $47 May 1, 2017 Purchase 132 $49 The company sold 306 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using LIFO? (rounded to whole dollars) a. $14,646 b. $14,190 c. $5,088 d. $4,632
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (132 $49) + [(306 − 132) $47] = $14,646; [(306 $63) − $14,646] = $4,632
109.
Hogan Industries had the following inventory transactions occur during 2017: Units Cost/unit Feb. 1, 2017 Purchase 108 $45 Mar. 14, 2017 Purchase 186 $47 May 1, 2017 Purchase 132 $49 The company sold 306 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, and operating expenses of $1,800, what is the company’s after-tax income using LIFO? (rounded to whole dollars) a. $2,832 b. $3,288 c. $2,302 d. $1,982
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (132 $49) + [(306 − 132) $47] = $14646; [(306 $63) − $14,646] = $4,632; ($4,632 − $1,800) .70 = $1,982
110.
Hogan Industries had the following inventory transactions occur during 2017: Units Cost/unit Feb. 1, 2017 Purchase 108 $45 Mar. 14, 2017 Purchase 186 $47 May 1, 2017 Purchase 132 $49 The company sold 306 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using FIFO? (rounded to whole dollars) a. $14,646 b. $14,190 c. $5,088 d. $4,632
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (108 $45) + (186 $47) + [(306 − 294) $49] = $14,190; [(306 $63) − $14,190] = $5,088
.
6-26 111.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Hogan Industries had the following inventory transactions occur during 2017: Units Cost/unit Feb. 1, 2017 Purchase 108 $45 Mar. 14, 2017 Purchase 186 $47 May 1, 2017 Purchase 132 $49 The company sold 306 units at $63 each and has a tax rate of 30%. Assuming that a periodic inventory system is used and operating expenses of $1,800, what is the company’s after-tax income using FIFO? (rounded to whole dollars) a. $2,832 b. $3,288 c. $2,302 d. $1,982
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (108 $45) + (186 $47) + [(306 − 294) $49] = $14,190; [(306 $63) − $14,190] = $5,088; ($5,088 − $1,800) .70 = $2,302
112.
Dole Industries had the following inventory transactions occur during 2017: Units Cost/unit Feb. 1, 2017 Purchase 90 $90 Mar. 14, 2017 Purchase 155 $94 May 1, 2017 Purchase 110 $98 The company sold 255 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using LIFO? (rounded to whole dollars) a. $24,410 b. $23,650 c. $8,480 d. $7,720
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (110 $98) + [(255 − 110) $94] = $24,410; [(255 $126) − $24,410] = $7,720
113.
Dole Industries had the following inventory transactions occur during 2017: Units Cost/unit Feb. 1, 2017 Purchase 90 $90 Mar. 14, 2017 Purchase 155 $94 May 1, 2017 Purchase 110 $98 The company sold 255 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, and operating expenses of $2,500, what is the company’s after-tax income using LIFO? (rounded to whole dollars) a. $5,220 b. $5,404 c. $4,186 d. $3,654
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (110 $98) + [(255 − 110) $94] = $24,410; [(255 $126) − $24,410] = $7,720; ($7,720 − $2,500) .70 = $3,654
.
Reporting and Analyzing Inventory
114.
6-27
Dole Industries had the following inventory transactions occur during 2017: Units Cost/unit Feb. 1, 2017 Purchase 90 $90 Mar. 14, 2017 Purchase 155 $94 May 1, 2017 Purchase 110 $98 The company sold 255 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, what is the company’s gross profit using FIFO? (rounded to whole dollars) a. $24,410 b. $23,650 c. $8,480 d. $7,720
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (90 $90) + (155 $94) + [(255 − 245) $98] = $23,650; [(255 $126) − $23,650] = $8,480
115
Dole Industries had the following inventory transactions occur during 2017: Units Cost/unit Feb. 1, 2017 Purchase 90 $90 Mar. 14, 2017 Purchase 155 $94 May 1, 2017 Purchase 110 $98 The company sold 255 units at $126 each and has a tax rate of 30%. Assuming that a periodic inventory system is used and operating expenses of $2,500, what is the company’s after-tax income using FIFO? (rounded to whole dollars) a. $5,220 b. $5,980 c. $4,186 d. $3,654
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (90 $90) + (155 $94) + [(255 − 245) $98] = $23,650; [(255 $126) − $23,650] = $8,480; ($8,480 − $2,500) .70 = $4,186
116.
Hoover Company had beginning inventory of $15,000 at March 1, 2017. During the month, the company made purchases of $65,000. The inventory at the end of the month is $17,300. What is cost of goods sold for the month of March? a. $62,700 b. $65,000 c. $80,000 d. $82,300
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($15,000 + $65,000) − $17,300 = $62,700 (Beg. Inv. + purch.− end inv.)
.
6-28 117.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
A company just starting in business purchased three merchandise inventory items at the following prices. First purchase $80; Second purchase $95; Third purchase $85. If the company sold two units for a total of $270 and used FIFO costing, the gross profit for the period would be a. $95. b. $105. c. $90. d. $80.
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $270 − ($80 + $95) = $95 [Sales amount − (1st pur.+2nd pur.)]
118.
At May 1, 2017, Heineken Company had beginning inventory consisting of 300 units with a unit cost of $7. During May, the company purchased inventory as follows: 600 units at $7 900 units at $8 The company sold 1,500 units during the month for $12 per unit. Heineken uses the average cost method. The average cost per unit for May is a. $7.00. b. $7.50. c. $7.60. d. $8.00.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: [(300 + $7) + (600 $7) + (900 $8)] 1,800 = $7.50
119.
At May 1, 2017, Heineken Company had beginning inventory consisting of 300 units with a unit cost of $7. During May, the company purchased inventory as follows: 600 units at $7 900 units at $8 The company sold 1,500 units during the month for $12 per unit. Heineken uses the average cost method. Heineken's gross profit for the month of May is a. $6,750 b. $11,250 c. $13,500 d. $18,000
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [(300 $7) + (600 $7) + (900 $8)] 1,800 = $7.50; [($12 − $7.50)] 1,500 = $6,750
120.
At May 1, 2017, Heineken Company had beginning inventory consisting of 300 units with a unit cost of $7. During May, the company purchased inventory as follows: 600 units at $7 900 units at $8 The company sold 1,500 units during the month for $12 per unit. Heineken uses the average cost method. The value of Heineken's inventory at May 31, 2017 is a. $2,100 b. $2,250 c. $2,400 d. $13,500
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [(300 $7) + (600 $7) + (900 $8)] 1,800 = $7.50; [(1,800 − 1,500) $7.50] = $2,250
.
Reporting and Analyzing Inventory
121.
6-29
Dobler Company uses a periodic inventory system. Details for the inventory account for the month of January 2017 are as follows: Units Per unit price Total Balance, 1/1/2017 300 $5.00 $1,500 Purchase, 1/15/2017 150 5.30 795 Purchase, 1/28/2017 150 5.50 825 An end of the month (1/31/2017) inventory showed that 240 units were on hand. How many units did the company sell during January 2017? a. 90 b. 240 c. 300 d. 360
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: [(300 + 150 + 150) − 240] = 360
122.
Dobler Company uses a periodic inventory system. Details for the inventory account for the month of January 2017 are as follows: Units Per unit price Total Balance, 1/1/2017 300 $5.00 $1,500 Purchase, 1/15/2017 150 5.30 795 Purchase, 1/28/2017 150 5.50 825 An end of the month (1/31/2017) inventory showed that 240 units were on hand. If the company uses FIFO, what is the value of the ending inventory? a. $1,320 b. $1,200 c. $1,302 d. $1,818
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $825 + [(240 − 150) $5.30] = $1,302
123.
Dobler Company uses a periodic inventory system. Details for the inventory account for the month of January 2017 are as follows: Units Per unit price Total Balance, 1/1/2017 300 $5.00 $1,500 Purchase, 1/15/2017 150 5.30 795 Purchase, 1/28/2017 150 5.50 825 An end of the month (1/31/2017) inventory showed that 240 units were on hand. If the company uses LIFO, what is the value of the ending inventory? a. $1,264 b. $1,200 c. $1,302 d. $1,920
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (240 $5.00) = $1,200 (End. inv. units x beg. inv. price/unit)
.
6-30 124.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Dobler Company uses a periodic inventory system. Details for the inventory account for the month of January 2017 are as follows: Units 300 150 150
Balance, 1/1/2017 Purchase, 1/15/2017 Purchase, 1/28/2017
Per unit price $5.00 5.30 5.50
Total $1,500 795 825
An end of the month (1/31/2017) inventory showed that 240 units were on hand. If the company uses FIFO and sells the units for $10 each, what is the gross profit for the month? a. $1,782 b. $1,818 c. $3,600 d. $2,400 Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (300 $5.00) + [(600 − 240 − 300) $5.30] = $1,818; [(600 − 240) $10] − $1,818 = $1,782
125.
In periods of rising prices, the inventory method which results in the inventory value on the balance sheet that is closest to current cost is the a. FIFO method. b. LIFO method. c. average-cost method. d. tax method.
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
126.
In a period of declining prices, which of the following inventory methods generally results in the lowest balance sheet figure for inventory? a. Average cost method b. LIFO method c. FIFO method d. Need more information to answer
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
127.
In a period of rising prices, which of the following inventory methods generally results in the lowest net income figure? a. Average cost method b. LIFO method c. FIFO method d. Need more information to answer
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
128.
Which inventory method generally results in costs allocated to ending inventory that will approximate their current cost? a. LIFO b. FIFO c. Average cost method d. Whichever method that produces the highest ending inventory figure
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
Reporting and Analyzing Inventory
129.
6-31
Two companies report the same cost of goods available for sale but each employs a different inventory costing method. If the price of goods has increased during the period, then the company using a. LIFO will have the highest ending inventory. b. FIFO will have the highest cost of goods sold. c. FIFO will have the highest ending inventory. d. LIFO will have the lowest cost of goods sold.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
130.
If companies have identical inventoriable costs but use different inventory flow assumptions when the price of goods have not been constant, then the a. cost of goods sold of the companies will be identical. b. cost of goods purchased during the year will be identical. c. ending inventory of the companies will be identical. d. net income of the companies will be identical.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
131.
In a period of increasing prices, which inventory flow assumption will result in the lowest amount of income tax expense? a. FIFO b. LIFO c. Average cost method d. Income tax expense for the period will be the same under all assumptions.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
132.
Given equal circumstances and generally rising costs, which inventory method will increase the tax expense the most? a. FIFO b. LIFO c. Average cost d. Income tax expense for the period will be the same under all assumptions.
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
133.
The specific identification method of costing inventories is used when the a. physical flow of units cannot be determined. b. company sells large quantities of relatively low cost homogeneous items. c. company sells large quantities of relatively low cost heterogeneous items. d. company sells a limited quantity of high-unit cost items.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
134.
The specific identification method of inventory costing a. always maximizes a company's net income. b. always minimizes a company's net income. c. has no effect on a company's net income. d. may enable management to manipulate net income.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
6-32 135.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The managers of Hong Company receive performance bonuses based on the net income of the firm. Which inventory costing method are they likely to favor in periods of declining prices? a. LIFO b. Average Cost c. FIFO d. Physical inventory method
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
136.
In periods of inflation, phantom or paper profits may be reported as a result of using the a. perpetual inventory method. b. FIFO costing assumption. c. LIFO costing assumption. d. periodic inventory method.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
137.
Selection of an inventory costing method by management does not usually depend on a. the fiscal year end. b. income statement effects. c. balance sheet effects. d. tax effects.
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
138.
The accountant at Landry Company is figuring out the difference in income taxes the company will pay depending on the choice of either FIFO or LIFO as an inventory costing method. The tax rate is 30% and the FIFO method will result in income before taxes of $17,480. The LIFO method will result in income before taxes of $16,200. What is the difference in tax that would be paid between the two methods? a. $1,280 b. $896 c. $384 d. Cannot be determined from the information provided.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($17,480 − $16,200) .30] = 384 [(FIFO inc. bef. tax - LIFO inc. bef. tax.) x.30)]
139.
The accountant at Patton Company has determined that income before income taxes amounted to $11,000 using the FIFO costing assumption. If the income tax rate is 30% and the amount of income taxes paid would be $900 greater if the LIFO assumption were used, what would be the amount of income before taxes under the LIFO assumption? a. $11,900 b. $14,000 c. $8,000 d. $10,100
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($900 .30) + $11,000] = $14,000 ((Differ. in taxes/.30) + inc. bef. inc. tax)
.
Reporting and Analyzing Inventory
140.
6-33
The manager of Weiser is given a bonus based on net income before taxes. The net income after taxes is $59,500 for FIFO and $49,000 for LIFO. The tax rate is 30%. The bonus rate is 20%. How much higher is the manager's bonus if FIFO is adopted instead of LIFO? a. $15,000 b. $21,000 c. $3,000 d. $10,500
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: [($59,500 − $49,000) .70] = $15,000; $15,000 .20 = $3,000 [(FIFO net inc. − LIFO net inc.) ÷70] ×.20
141.
The consistent application of an inventory costing method enhances a. conservatism. b. accuracy. c. comparability. d. efficiency.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
142.
Ace Company is a retailer operating in an industry that experiences inflation (rising prices). Ace wants to maintain a high current ratio. Which inventory costing method should Ace consider using? a. LIFO b. Average c. FIFO d. No inventory costing method directly affects the current ratio.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
143.
Ace Company is a retailer operating in an industry that experiences inflation (rising prices). Ace wants the most realistic net income. Which inventory costing method should Ace consider using? a. Average because all inventory costs will then represent an average amount. b. Specific identification is the most realistic method because it involves the actual costs. c. LIFO because cost of goods sold represents the latest costs. d. FIFO because cost of goods sold represents the earliest costs.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
144.
Ace Company is a retailer operating in an industry that experiences inflation (rising prices). Ace wants the most realistic ending inventory. Which inventory costing method should Ace consider using? a. Average because all inventory costs will then represent an average amount. b. Specific identification is the most realistic method because it involves the actual costs. c. LIFO because ending inventory represents the earliest costs. d. FIFO because ending inventory represents the latest costs.
Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
6-34 145.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The lower of cost or market basis of valuing inventories is an example of a. comparability. b. the historical cost principle. c. conservatism. d. consistency.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
146.
When applying the lower of cost or market rule to inventory valuation, market generally means a. current replacement cost. b. original cost. c. resale value. d. original cost, less physical deterioration.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
147.
The situation that requires a departure from the cost basis of accounting to the lower of cost or market basis in valuing inventory is necessitated by a. a decline in the value of the inventory. b. an increase in selling price. c. an increase in the value of the inventory. d. a desire for more profit.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
148.
Which statement concerning lower of cost or market (LCM) is incorrect? a. LCM is an example of a company choosing the accounting method that will be least likely to overstate assets and income. b. Under the LCM basis, market does not apply because assets are always recorded and maintained at cost. c. The LCM basis uses current replacement cost because a decline in this cost usually leads to a decline in the selling price of the inventory item. d. LCM is applied after one of the cost flow assumptions has been applied.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
149.
Jenks Company developed the following information about its inventories in applying the lower of cost or market (LCM) basis in valuing inventories: Product A B C
Cost $114,000 80,000 160,000
Market $120,000 76,000 162,000
If Jenks applies the LCM basis, the value of the inventory reported on the balance sheet would be a. $354,000. b. $358,000. c. $350,000. d. $362,000. Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $114,000 + $76,000 + $160,000 = $350,000
.
Reporting and Analyzing Inventory
6-35
(A cost + B mark. + C cost)
150.
Nelson Corporation sells three different products. The following information is available on December 31: Inventory Item X Y Z
Units 300 600 1,500
Cost per unit $4.00 $2.00 $3.00
Market value per unit $3.50 $1.50 $4.00
When applying the lower of cost or market rule to each item, what will Nelson's total ending inventory balance be? a. b. c. d.
$6,900 $6,450 $7,950 $6,600
Ans: B, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (300 $3.50) + (600 $1.50) + (1,500 $3.00) = $6,450
151.
Whitman Corporation sells six different products. The following information is available on December 31: Inventory Item Tin Titanium Stainless Steel Aluminum Iron Fiberglass
Units 60 20 80 80 40 40
Cost per unit $ 500 5,000 2,000 350 400 300
Market value per unit $ 505 4,950 1,910 285 410 295
Estimated Selling Price $515 5,100 1,985 290 425 310
When applying the lower of cost or market rule to each item, what will Whitman's total ending inventory balance be? a. b. c. d.
$346,000 $332,400 $333,100 $332,800
Ans: B, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (60 $500) + (20 $4,950) + (80 $1,910) + (80 + $285) + (40 $400) + (40 295) = $332,400
152.
Johnson Company has a high inventory turnover that has increased over the last year. All of the following statements are true regarding this situation except Johnson Company: a. is minimizing funds tied up in inventory. b. is increasing the amount of inventory on hand relative to sales. c. may be losing sales due to inventory shortages. d. has a cost of goods sold that is increasing relative to its average inventory.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
6-36 153.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Use the following information regarding Black Company and Red Company to answer the question “Which amount is equal to Black Company's "days in inventory" for 2017 (to the closest decimal place)?”
Black Company
Red Company
a. b. c. d.
Year 2015 2016 2017 2015 2016 2017
Inventory Turnover 8.7 8.4
Ending Inventory $26,340 $29,890 $30,100
7.0 7.5
$25,860 $24,750 $22,530
43.5 days 52.1 days 48.7 days 42.0 days
Ans: A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: 365 8.4 = 43.5 (365 ÷ 2017 Black inv. turn.)
154.
Use the following information regarding Black Company and Red Company to answer the question “Which amount is equal to Red Company's "days in inventory" for 2016 (to the closest decimal place)?”
Black Company
Red Company
a. b. c. d.
Year 2015 2016 2017 2015 2016 2017
Inventory Turnover 8.7 8.4
Ending Inventory $26,340 $29,890 $30,100
7.0 7.5
$25,860 $24,750 $22,530
43.5 days 48.7 days 42.0 days 52.1 days
Ans: D, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: 365 7 = 52.1 (365 ÷ Red 2016 inv. turn.)
.
Reporting and Analyzing Inventory
155.
6-37
Use the following information regarding Black Company and Red Company to answer the question “Which of the following is Black Company's "cost of goods sold" for 2016 (to the closest dollar)?”
Black Company
Red Company
a. b. c. d.
Year 2015 2016 2017 2015 2016 2017
Inventory Turnover 8.7 8.4
Ending Inventory $26,340 $29,890 $30,100
6.8 7.5
$25,860 $24,750 $22,530
$252,840 $260,043 $244,601 $260,957
Ans: C, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: 8.7 [($26,340 + $29,890)/2] = $244,601 (Black 2016 inv. turn. × Black ave. inv.)
156.
Use the following information regarding Black Company and Red Company to answer the question “Which of the following is Red Company's "cost of goods sold" for 2017 (to the closest dollar)?”
Black Company
Red Company
a. b. c. d.
Year 2015 2016 2017 2015 2016 2017
Inventory Turnover 8.7 8.2
Ending Inventory $26,340 $29,890 $30,100
7.0 7.5
$25,860 $24,750 $22,530
$260,043 $189,788 $168,975 $177,300
Ans: D, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: 7.5 [($24,750 + $22,530)/2] = $177,300 (Red 2017 inv. turn. × Red ave. inv.)
.
6-38 157.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Which of the following companies would most likely have the highest inventory turnover? a. An art gallery. b. An automobile manufacturer. c. A piano manufacturer. d. A bakery.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
158.
An aircraft company would most likely have a a. high inventory turnover. b. low profit margin. c. high volume. d. low inventory turnover.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
159.
The inventory turnover is calculated by dividing cost of goods sold by a. beginning inventory. b. ending inventory. c. average inventory. d. 365 days.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
160.
Days in inventory is calculated by dividing 365 days by a. average inventory. b. beginning inventory. c. ending inventory. d. the inventory turnover.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
161.
Which of these would cause the inventory turnover ratio to increase the most? a. Increasing the amount of inventory on hand. b. Keeping the amount of inventory on hand constant but increasing sales. c. Keeping the amount of inventory on hand constant but decreasing sales. d. Decreasing the amount of inventory on hand and increasing sales.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
162.
The following information was available for Camara Company at December 31, 2017: beginning inventory $80,000; ending inventory $120,000; cost of goods sold $630,000; and sales $900,000. Camara’s inventory turnover in 2017 was a. 9.0 times. b. 7.9 times. c. 6.3 times. d. 5.3 times.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $630,000 [($80,000 + $120,000) 2] = 6.3 (COGS ÷ [(beg. inv. + end. inv.) ÷ 2])
.
Reporting and Analyzing Inventory
163.
6-39
The following information was available for Camara Company at December 31, 2017: beginning inventory $80,000; ending inventory $120,000; cost of goods sold $630,000; and sales $900,000. Camara’s days in inventory in 2017 was a. 40.6 days. b. 46.2 days. c. 57.9 days. d. 68.9 days.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: 365 6.3 = 57.9 (365 ÷ inv. turn.)
164.
The following information was available for Bowyer Company at December 31, 2017: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $800,000; and sales $1,100,000. Bowyer’s inventory turnover in 2017 was a. 13.8 times. b. 10.0 times. c. 11.4 times. d. 8.9 times.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $800,000 [($90,000 + $70,000) 2] = 10 (COGS ÷ [(beg. inv. + end. inv.) ÷ 2])
165.
The following information was available for Bowyer Company at December 31, 2017: beginning inventory $90,000; ending inventory $70,000; cost of goods sold $800,000; and sales $1,100,000. Bowyer’s days in inventory in 2017 was a. 26.4 days. b. 36.5 days. c. 32.0 days. d. 41.0 days.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: 365 10 = 36.5 (365 ÷ inv. turn.)
166.
A low number of days in inventory may indicate all of the following except a. Sales opportunities may be lost because of inventory shortages. b. There is less chance of having obsolete inventory items. c. The company has fewer funds tied up in inventory. d. Management has achieved the best balance between too much and too little inventory levels.
Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
6-40 167.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Redeker Company had the following records: 2017 $32,650 213,600
Ending inventory Cost of goods sold
2016 $30,490 209,040
What is Redeker’s inventory turnover for 2017? (rounded) a. 6.8 times b. 7.0 times c. 6.6 times d. 6.5 times Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $213,600 [($32,650 + $30,490) 2] = 6.8 (2017 COGS ÷ [(2017 E.I. + 2016 E.I.) ÷ 2])
168.
Redeker Company had the following records: 2017 $32,650 213,600
Ending inventory Cost of goods sold
2016 $30,490 209,040
What is Redeker’s average days in inventory for 2017? (rounded) a. 53.7 days b. 56.2 days c. 55.3 days d. 52.1 days Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: 365 6.8 = 53.7 (365 ÷ inv. turn.)
169.
Barnett Company had the following records: 2017 $32,650 306,300
Ending inventory Cost of goods sold
2016 $30,490 313,600
What is Barnett’s inventory turnover for 2017? (rounded) a. 9.4 times b. 9.7 times c. 9.9 times d. 10.0 times Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $306,300 [($32,650 + $30,490) 2] = 9.7 (2017 COGS ÷ [(2017 E.I. + 2016 E.I.) ÷ 2])
.
Reporting and Analyzing Inventory
170.
6-41
Barnett Company had the following records: 2017 $32,650 306,300
Ending inventory Cost of goods sold
2016 $30,490 313,600
What is Barnett’s average days in inventory for 2017? (rounded) a. 37.6 days b. 38.8 days c. 36.9 days d. 36.5 days Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: 365 9.7 = 37.6 (365 ÷ inv. turn.)
171.
The difference between ending inventory using LIFO and ending inventory using FIFO is referred to as the a. FIFO reserve. b. inventory reserve. c. LIFO reserve. d. periodic reserve.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
172.
The LIFO reserve is a. the difference between the value of the inventory under LIFO and the value under FIFO. b. an amount used to adjust inventory to the lower of cost or market. c. the difference between the value of the inventory under LIFO and the value under average cost. d. the amount used to adjust inventory to historical cost.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
173.
Reporting which one of the following allows analysts to make adjustments to compare companies using different cost flow methods? a. FIFO reserve b. Inventory turnover c. LIFO reserve d. Current replacement cost
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
6-42 174.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Butler Company reported ending inventory at December 31, 2017 of $1,200,000 under LIFO. It also reported a LIFO reserve of $210,000 at January 1, 2017, and $300,000 at December 31, 2017. Cost of goods sold for 2017 was $4,900,000. If Butler Company had used FIFO during 2017, its cost of goods sold for 2017 would have been a. $5,200,000. b. $4,990,000. c. $4,810,000. d. $4,600,000.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [$4,900,000 − ($300,000 − $210,000)] = 4,810,000 (COGS – (end. LIFO res. – beg. LIFO res.))
175.
To adjust a company’s LIFO cost of goods sold to FIFO cost of goods sold a. the ending LIFO reserve is added to LIFO cost of goods sold. b. the ending LIFO reserve is subtracted from LIFO cost of goods sold. c. an increase in the LIFO reserve is subtracted from LIFO cost of goods sold. d. a decrease in the LIFO reserve is subtracted from LIFO cost of goods sold.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
176.
All of the following statements are true regarding the LIFO reserve except: a. Companies using LIFO are required to report the LIFO reserve. b. The equation (LIFO inventory – LIFO reserve = FIFO inventory) adjusts the inventory balance from LIFO to FIFO. c. The financial statement differences of using LIFO normally increase the longer a company uses LIFO. d. Current ratios and the inventory turnover can be significantly affected if a company has material LIFO reserves.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Reporting and Analyzing Inventory
177.
6-43
Use the following information for Boxter, Inc., Clifford Company, Danforth Industries, and Evans Services to answer the question “What is Danforth's LIFO reserve for 2016?” (amounts in $ millions) Inventory Method for 2016 & 2017 2016 Ending inventory assuming LIFO 2016 Ending inventory assuming FIFO 2017 Ending inventory assuming LIFO 2017 Ending inventory assuming FIFO 2016 Current assets (reported on balance sheet) 2016 Current liabilities 2017 Current assets (reported on balance sheet) 2017 Current liabilities 2017 Cost of goods sold a. b. c. d.
Boxter LIFO $324 $427 $436 $578
Clifford FIFO N/A $535 N/A $612
Danforth LIFO $225 $310 $167 $209
Evans FIFO N/A $663 N/A $542
$1,677 $987
$2,031 $1,209
$1,308 $545
$2,748 $1,200
$2,225 $1,306 $4,678
$2,605 $1,410 $5,042
$1,100 $465 $3,000
$2,390 $1,000 $7,000
$535 $85 $42 $58
Ans: B, LO: 3, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $310 − $225 = $85 (2016 FIFO E.I. – 2016 LIFO E.I.)
178.
Use the following information for Boxter, Inc., Clifford Company, Danforth Industries, and Evans Services to answer the question “Using the LIFO reserve adjustment, which company would have the strongest liquidity position for 2017 as expressed by the current ratio?” (amounts in $ millions) Inventory Method for 2016 & 2017 2016 Ending inventory assuming LIFO 2016 Ending inventory assuming FIFO 2017 Ending inventory assuming LIFO 2017 Ending inventory assuming FIFO 2016 Current assets (reported on balance sheet) 2016 Current liabilities 2017 Current assets (reported on balance sheet) 2017 Current liabilities 2017 Cost of goods sold a. Boxter b. Clifford c. Danforth d. Evans
Boxter LIFO $324 $427 $436 $578
Clifford FIFO N/A $535 N/A $612
Danforth LIFO $225 $310 $167 $209
Evans FIFO N/A $663 N/A $542
$1,677 $987
$2,031 $1,209
$1,308 $545
$2,748 $1,200
$2,225 $1,306 $4,678
$2,605 $1,410 $5,042
$1,100 $465 $3,000
$2,390 $1,000 $7,000
Ans: C, LO: 3, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
6-44 179.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Use the following information for Boxter, Inc., Clifford Company, Danforth Industries, and Evans Services to answer the question “Using LIFO, what is Boxter's inventory turnover for 2017 (to the closest decimal place)?” (amounts in $ millions) Inventory Method for 2016 & 2017 2016 Ending inventory assuming LIFO 2016 Ending inventory assuming FIFO 2017 Ending inventory assuming LIFO 2017 Ending inventory assuming FIFO 2016 Current assets (reported on balance sheet) 2016 Current liabilities 2017 Current assets (reported on balance sheet) 2017 Current liabilities 2017 Cost of goods sold a. b. c. d.
Boxter LIFO $324 $427 $436 $578
Clifford FIFO N/A $535 N/A $612
Danforth LIFO $225 $310 $167 $209
Evans FIFO N/A $663 N/A $542
$1,677 $987
$2,031 $1,209
$1,308 $545
$2,748 $1,200
$2,225 $1,306 $4,678
$2,605 $1,410 $5,042
$1,100 $465 $3,000
$2,390 $1,000 $7,000
12.3 times 9.3 times 7.5 times 6.4 times
Ans: A, LO: 3, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $4,678 [($324 + $436) 2] = $12.3 (2017 COGS ÷ [(2016 LIFO E.I. + 2017 LIFO E.I.) ÷ 2])
180.
Use the following information for Boxter, Inc., Clifford Company, Danforth Industries, and Evans Services to answer the question “Using the LIFO adjustment, which company shows the greatest improvement in its current ratio from 2016 to 2017?” (amounts in $ millions) Inventory Method for 2016 & 2017 2016 Ending inventory assuming LIFO 2016 Ending inventory assuming FIFO 2017 Ending inventory assuming LIFO 2017 Ending inventory assuming FIFO 2016 Current assets (reported on balance sheet) 2016 Current liabilities 2017 Current assets (reported on balance sheet) 2017 Current liabilities 2017 Cost of goods sold a. b. c. d.
Boxter LIFO $324 $427 $436 $578
Clifford FIFO N/A $535 N/A $612
Danforth LIFO $225 $310 $167 $209
Evans FIFO N/A $663 N/A $542
$1,677 $987
$2,031 $1,209
$1,308 $545
$2,748 $1,200
$2,225 $1,306 $4,678
$2,605 $1,410 $5,042
$1,100 $465 $3,000
$2,390 $1,000 $7,000
Boxter Clifford Danforth Evans
Ans: B, LO: 3, Bloom: C, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Reporting and Analyzing Inventory
6-45
*181. In a perpetual inventory system, a. LIFO cost of goods sold will be the same as in a periodic inventory system. b. average costs are based entirely on unit cost simple averages. c. a new average is computed under the average cost method after each sale. d. FIFO cost of goods sold will be the same as in a periodic inventory system. Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
*182. Classic Floors has the following inventory data: July 1 Beginning inventory 5 Purchases 14 Sale 21 Purchases 30 Sale
30 units at $6.00 120 units at $6.60 80 units 60 units at $7.20 56 units
Assuming that a perpetual inventory system is used, what is the cost of goods sold on a LIFO basis for July? a. $931.20 b. $472.80 c. $1,404.00 d. $696.00 Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (80 $6.60) + (56 $7.20) = $931.20
*183. Classic Floors has the following inventory data: July 1 Beginning inventory 5 Purchases 14 Sale 21 Purchases 30 Sale
30 units at $6.00 120 units at $6.60 80 units 60 units at $7.20 56 units
Assuming that a perpetual inventory system is used, what is the value of ending inventory on a LIFO basis for July? a. $931.20 b. $1,404.00 c. $708.00 d. $472.80 Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (30 $6.00) + (40 $6.60) + (4 $7.20)= $472.80
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
*184. Snug-As-A-Bug Blankets has the following inventory data: July 1 Beginning inventory 30 units at $60 5 Purchases 180 units at $56 14 Sale 120 units 21 Purchases 90 units at $58 30 Sale 84 units Assuming that a perpetual inventory system is used, what is the cost of goods sold on a LIFO basis for July? a. $11,604 b. $11,544 c. $11,592 d. $11,832 Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (120 $56) + (84 $58) = $11,592
*185. Snug-As-A-Bug Blankets has the following inventory data: July 1 Beginning inventory 30 units at $60 5 Purchases 180 units at $56 14 Sale 120 units 21 Purchases 90 units at $58 30 Sale 84 units Assuming that a perpetual inventory system is used, what is the ending inventory on a LIFO basis for July? a. $5,496 b. $5,508 c. $5,544. d. $5,796 Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (30 $60) + (60 $56) + (6 $58) = $5,508
*186. Snug-As-A-Bug Blankets has the following inventory data: July 1 Beginning inventory 30 units at $60 5 Purchases 180 units at $56 14 Sale 120 units 21 Purchases 90 units at $58 30 Sale 84 units Assuming that a perpetual inventory system is used, what is ending inventory (rounded) under the average cost method for July? a. $5,500 b. $5,568 c. $4,812 d. $5,544 Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [(30 $60) + (180 $56)] 210 = $56.571; [(90 $56.571) + (90 $58)] 180 = $57.286; 96 $57.286 = $5,500
.
Reporting and Analyzing Inventory
6-47
*187. An error in the physical count of goods on hand at the end of a period resulted in a $10,000 overstatement of the ending inventory. The effect of this error in the current period is Cost of Goods Sold Net Income a. Understated Understated b. Overstated Overstated c. Understated Overstated d. Overstated Understated Ans: C, LO: 5, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
*188. If beginning inventory is understated by $10,000, the effect of this error in the current period is Cost of Goods Sold Net Income a. Understated Understated b. Overstated Overstated c. Understated Overstated d. Overstated Understated Ans: C, LO: 5, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
*189. A company uses the periodic inventory method and the beginning inventory is overstated by $4,000 because the ending inventory in the previous period was overstated by $4,000; the ending inventory for this period is correct. The amounts reflected in the current end of the period balance sheet are Asset Stockholders’ Equity a. Overstated Overstated b. Correct Correct c. Understated Understated d. Overstated Correct Ans: B, LO: 5, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
*190. An overstatement of the beginning inventory results in a. no effect on the period’s net income. b. an overstatement of net income. c. an understatement of net income. d. a need to adjust purchases. Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
*191. An overstatement of ending inventory in one period results in a. no effect on net income of the next period. b. an overstatement of net income of the next period. c. an understatement of net income of the next period. d. an overstatement of the ending inventory of the next period. Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Answers to Multiple Choice Questions 45. a 46. b 47. a 48. c 49. c 50. a 51. c 52. a 53. b 54. a 55. a 56. b 57. a 58. d 59. d 60. d 61. d 62. c 63. d 64. b 65. c
66. 67. 68. 69. 70. 71. 72. 73 74. 75. 76. 77. 78. 79. 80. 81 82. 83. 84.
b c d a a c a c b c b d a b a c a b b 85. b 86. b
87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104.
105. 106. 107.
d d c a b d d b d b c a c d b a d b b d b
108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123.
124. 125. 126. 127. 128.
.
d d c c d d c c a a b a b d c b a a c b b
129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142.
143. 144. 145. 146. 147. 148. 149.
c b b a d d a b a c b c c c c d c a a b c
150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168.
b b b a d c d d d c d d c c b b a a a
169.
b
170. a
171. 172. 173. 174. 175. 176. 177. 178. 179. 180. *181. *182. *183 *184. *185. *186. *187. *188. *189. *190. *191.
c a c c c b b c a b d a d c b a c c b c c
Reporting and Analyzing Inventory
6-49
BRIEF EXERCISES Be. 192 Shellan Kamp Company identifies the following items for possible inclusion in the physical inventory. Indicate whether each item should be included or excluded from the inventory taking. 1. Goods shipped on consignment by Shellan Kamp to another company. 2. Goods in transit from a supplier shipped FOB destination. 3. Goods shipped via common carrier to a customer with terms FOB shipping point. 4. Goods held on consignment from another company. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
Solution 192 (5 min.) 1. Included 2. Excluded 3. Excluded 4. Excluded Be. 193 In the first month of operations, Dieker Company made three purchases of merchandise in the following sequence: (1) 200 units at $6, (2) 300 units at $7, and (3) 400 units at $8. Assuming there are 250 units on hand, compute the cost of the ending inventory under (1) the FIFO method and (2) the LIFO method. Dieker uses a periodic inventory system. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 193 (5 min.) 1. FIFO 250 x $8 = $2,000 (units on hand × 3rd purch. cost) 2.
LIFO 200 x $6 = $1,200 (1st purch. units and cost) 50 x $7 = 350 (units on hand − 1st purch. units) × 2nd purch. cost $1,550
Be. 194 Hess Company's inventory records show the following data for the month of September:
Inventory, September 1 Purchases: September 8 September 18
Units 100 450 300
Unit Cost $3.00 3.50 3.70
A physical inventory on September 30 shows 150 units on hand. Calculate the value of ending inventory and cost of goods sold if the company uses FIFO inventory costing and a periodic inventory system. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 194 (5 min.) Ending inventory of 150 units: 150 × $3.70 = $555 (9-30 units × 9-18 unit cost) Cost of goods sold: Units available for sale (100 + 450 + 300) = 850 Units sold 850 – 150 = 700 100 × $3 = 450 × $3.50 = 150 × $3.70 = Cost of goods sold
$
300 1,575 555 $ 2,430
Be. 195 Hess Company's inventory records show the following data for the month of September:
Inventory, September 1 Purchases: September 8 September 18
Units 100 450 300
Unit Cost $3.00 3.50 3.70
A physical inventory on September 30 shows 150 units on hand. Calculate the value of ending inventory and cost of goods sold if the company uses LIFO inventory costing and a periodic inventory system. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 195 (5 min.) Ending inventory: (100 units × $3.00) + (50 units × $3.50) = $475 [(Beg. inv. × 9-1 unit cost) + (9-30 units − 9-1 units) × 9-8 unit cost] Cost of goods sold: (300 units × $3.70) + (400 units × $3.50) = $2,510 Be. 196 The management of Otto Corp. is considering the effects of various inventory costing methods on its financial statements and its income tax expense. Assuming that the price the company pays for inventory is increasing, which method will: 1. result in the lowest income tax expense? 2. provide the highest net income? 3. provide the highest ending inventory? 4. result in the most stable earnings over a number of years? Ans: N/A, LO: 2, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 196 (5 min.) 1. In times of rising costs, the LIFO method will result in the lowest income tax expense. 2. In times of rising costs, the FIFO method will result in the highest net income. 3. In times of rising costs, the FIFO method will result in the highest ending inventory. 4. In times of rising costs, the average cost method will result in the most stable earnings over a number of years. .
Reporting and Analyzing Inventory
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Be. 197 The Entertainment Center accumulates the following cost and market data at December 31. Inventory Categories Camera Camcorders DVDs
Cost Data _ $11,000 8,000 14,000
Market _ Data_ $10,200 8,500 12,600
What is the lower-of-cost-or-market value of the inventory? Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 197
(5 min.) Inventory Categories Camera Camcorders DVDs
Cost Data _ $11,000 8,000 14,000
Market _ Data_ $10,200 8,500 12,600
Lower of Cost or Market $10,200 8,000 12,600 $30,800
Be. 198 At December 31, 2017, the following information (in thousands) was available for Kitselman Inc.: ending inventory $22,600; beginning inventory $21,400; cost of goods sold $198,000; and sales revenue $430,000. Calculate the inventory turnover and days in inventory for Kitselman. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 198
(5 min.) $198,000 ($22,600 + $21,400)/2
Inventory Turnover =
= 9.0 times
COGS/[(beg. inv. + end. inv.)/2]
365 9.0
Days in Inventory = 365 ÷ Inv. turn.
.
= 40.6 days
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
EXERCISES Ex. 199 The Cain Company has just completed a physical inventory count at year end, December 31, 2017. Only the items on the shelves, in storage, and in the receiving area were counted and costed on the FIFO basis. The inventory amounted to $80,000. During the audit, the independent CPA discovered the following additional information: (a) There were goods in transit on December 31, 2017, from a supplier with terms FOB destination, costing $10,000. Because the goods had not arrived, they were excluded from the physical inventory count. (b) On December 27, 2017, a regular customer purchased goods for cash amounting to $1,000 and had them shipped to a bonded warehouse for temporary storage on December 28, 2017. The goods were shipped via common carrier with terms FOB shipping point. The customer picked the goods up from the warehouse on January 4, 2018. Cain Company had paid $500 for the goods and, because they were in storage, Cain included them in the physical inventory count. (c) Cain Company, on the date of the inventory, received notice from a supplier that goods ordered earlier, at a cost of $4,000, had been delivered to the transportation company on December 28, 2017; the terms were FOB shipping point. Because the shipment had not arrived on December 31, 2017, it was excluded from the physical inventory. (d) On December 31, 2017, there were goods in transit to customers, with terms FOB shipping point, amounting to $800 (expected delivery on January 8, 2018). Because the goods had been shipped, they were excluded from the physical inventory count. (e) On December 31, 2017, Cain Company shipped $2,500 worth of goods to a customer, FOB destination. The goods arrived on January 5, 2017. Because the goods were not on hand, they were not included in the physical inventory count. (f) Cain Company, as the consignee, had goods on consignment that cost $3,000. Because these goods were on hand as of December 31, 2017, they were included in the physical inventory count. Instructions Analyze the above information and calculate a corrected amount for the ending inventory. Explain the basis for your treatment of each item. Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Reporting and Analyzing Inventory
Solution 199 Start with Item (a)
(20 min.) $80,000 –
Item (b)
– 500
Item (c)
+ 4,000
Item (d)
–
Item (e)
+ 2,500
Item (f)
– 3,000
Corrected inventory
$83,000
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(Because the goods were shipped FOB destination title will pass to Cain upon arrival. Properly excluded.) (Goods should be excluded. The customer accepted title when the goods left Cain FOB shipping point.) (Goods belong to Cain. Title passed when supplier delivered the goods to the transportation company.) (Because the goods were shipped FOB shipping point Cain no longer has title to these goods. Properly excluded.) (Goods were shipped FOB destination. Cain retains title until the customer receives them.) (These goods are owned by the consignor, not the consignee, and should not be included in Cain's inventory.)
Ex. 200 Dalton Company was undergoing an end of year audit of its financial records. The auditors were in the process of reviewing Dalton’s inventory for year end, December 31, 2017. They completed an end of year inventory. The value of the ending inventory prior to any adjustments was $185,000, but before finishing up they had a few questions. Discussion with Dalton’s accountant revealed the following: (a)
Dalton sold goods costing $60,000 to Summey Company FOB shipping point on December 28. The goods are not expected to reach Summey until January 12. The goods were not included in the physical inventory because they were not in the warehouse.
(b)
The physical count of the inventory did not include goods costing $95,000 that were shipped to Dalton FOB destination on December 27 and were still in transit at year-end.
(c)
Dalton received goods costing $25,000 on January 2. The goods were shipped FOB shipping point on December 26 by Strong Company. The goods were not included in the physical count.
(d)
Dalton sold goods costing $40,000 to Hampton Company FOB destination on December 30. The goods were received by Hampton Company on January 8. Because the goods had been shipped, they were excluded from the physical inventory count.
(e)
Dalton received goods costing $42,000 on January 2 that were shipped FOB destination on December 29. The shipment was a rush order that was suppose to arrive December 31. This purchase was included in the ending inventory of $185,000.
(f)
Dalton Company, as the consignee, had goods on consignment that cost $3,000. Because these goods were on hand as of December 31, they were included in the physical inventory count.
Instructions Analyze the above information and calculate a corrected amount for the ending inventory. Explain the basis for your treatment of each item. Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 200
(20 min.)
Start with
$185,000
Item (a)
–
(Because the goods were shipped FOB shipping point title passed to Summey upon shipping. Properly excluded.)
Item (b)
–
(Goods should be excluded. Title does not pass to Dalton until goods are received).
Item (c)
+25,000
(Goods belong to Dalton. Title passed when supplier delivered the goods to the transportation company.)
Item (d)
+40,000
Item (e)
–42,000
Item (f)
– 3,000
(Because the goods were shipped FOB destination point Dalton has title to these goods.) (Goods were shipped FOB destination. Dalton does not take title until they receive them no matter when expected.) (These goods are owned by the consignor, not the consignee, and should not be included in Dalton's inventory.)
Corrected inventory $205,000 Ex. 201 Dennis Lee, an auditor with Knapp CPAs, is performing a review of Dobson Company's inventory account. Dobson did not have a good year, and top management is under pressure to boost reported income. According to its records, the inventory balance at year-end was $640,000. However, the following information was not considered when determining that amount. 1. Included in the company's count were goods with a cost of $200,000 that the company is holding on consignment. The goods belong to Agler Corporation. 2. The physical count did not include goods purchased by Dobson with a cost of $40,000 that were shipped FOB shipping point on December 28 and did not arrive at Dobson's warehouse until January 3. 3. Included in the inventory account was $22,000 of office supplies that were stored in the warehouse and were to be used by the company's supervisors and managers during the coming year. 4. The company received an order on December 29 that was boxed and was sitting on the loading dock awaiting pick-up on December 31. The shipper picked up the goods on January 1 and delivered them on January 6. The shipping terms were FOB shipping point. The goods had a selling price of $40,000 and a cost of $30,000. The goods were not included in the count because they were sitting on the dock. 5. On December 29, Dobson shipped goods with a selling price of $90,000 and a cost of $70,000 to Central Sales Corporation FOB shipping point. The goods arrived on January 3. Central Sales had only ordered goods with a selling price of $10,000 and a cost of $8,000. However, a sales manager at Dobson had authorized the shipment and said that if Central wanted to ship the goods back next week, it could. 6. Included in the count was $50,000 of goods that were parts for a machine that the company no longer made. Given the high-tech nature of Dobson's products, it was unlikely that these obsolete parts had any other use. However, management would prefer to keep them on the books at cost, "since that is what we paid for them, after all."
.
Reporting and Analyzing Inventory
Ex. 201
6-55
(Cont.)
Instructions Prepare a schedule to determine the correct inventory amount. Provide explanations for each item above, saying why you did or did not make an adjustment for each item. Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 201
(20 min.)
Ending inventory-as reported 1. 2. 3. 4. 5.
6.
$640,000
Subtract from inventory: The goods belong to Agler Corporation. Dobson is merely holding them as a consignee. (200,000) Add to inventory: The goods belong to Dobson as soon as they are shipped (December 28). 40,000 Subtract from inventory: Office supplies should be carried in a separate account. They are not considered inventory held for resale. (22,000) Add to inventory: The goods belong to Dobson until they are shipped (Jan. 1). 30,000 Add to inventory: Central Sales ordered goods with a cost of $8,000. Dobson should record the corresponding sales revenue of $10,000. Dobson's decision to ship extra "unordered" goods does not constitute a sale. The manager's statement that Central could ship the goods back indicates that Dobson knows this overshipment is not a legitimate sale. The manager acted unethically in an attempt to improve Dobson's reported income by over-shipping. 62,000* Subtract from inventory: GAAP requires that inventory be valued at the lower of cost or market. Obsolete parts should be adjusted from cost to zero if they have no other use. (50,000)
Correct inventory
$500,000
*($70,000–$8,000)
Ex. 202 Grother Company uses the periodic inventory method and had the following inventory information available: Units Unit Cost Total Cost 1/1 Beginning Inventory 100 $4 $ 400 1/20 Purchase 500 $5 2,500 7/25 Purchase 100 $7 700 10/20 Purchase 300 $8 2,400 1,000 $6,000 A physical count of inventory on December 31 revealed that there were 350 units on hand.
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 202
(Cont.)
Instructions Answer the following independent questions and show computations supporting your answers. 1. Assume that the company uses the FIFO method. The value of the ending inventory at December 31 is $__________. 2. Assume that the company uses the average cost method. The value of the ending inventory on December 31 is $__________. 3. Assume that the company uses the LIFO method. The value of the ending inventory on December 31 is $__________. 4. Determine the difference in the amount of income that the company would have reported if it had used the FIFO method instead of the LIFO method. Would income have been greater or less? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 202 (20 min.) 1. FIFO: Ending inventory $2,750 300 units @$8 = $2,400 50 units @$7 = 350 350 units $2,750
(10-20 units × 10-20 unit cost) ((12-31 units − 10-20 units) × 7-25 unit cost)
2. Average Cost: Ending inventory $2,100 $6,000 1,000 = $6.00 per unit 350 units = $2,100 ((Tot. cost/Tot. units) × 12-31 units) 3. LIFO: Ending Inventory $1,650 100 units @$4 = $ 400 250 units @$5 = 1,250 350 units $1,650
(1-1 units × 1-1 unit cost) ((12-31 units − 1-1 units) × 1-20 unit cost)
4. FIFO: Cost of goods sold $3,250 100 units @$4 = $ 400 500 units @$5 = 2,500 50 units @$7 = 350 650 units $3,250 LIFO: Cost of goods sold $4,475 300 units @$8 $2,400 100 units @$7 700 250 units @$5 1,250 650 units $4,350 Income would have been $1,100 ($4,350 vs. $3,250) greater if the company used FIFO instead of LIFO. (LIFO COGS − FIFO COGS)
.
Reporting and Analyzing Inventory
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Ex. 203 Hansen Company uses the periodic inventory method and had the following inventory information available: Units Unit Cost Total Cost 1/1 Beginning Inventory 100 $3 $ 300 1/20 Purchase 500 $4 2,000 7/25 Purchase 100 $5 500 10/20 Purchase 300 $6 1,800 1,000 $4,600 A physical count of inventory on December 31 revealed that there were 380 units on hand. Instructions Answer the following independent questions and show computations supporting your answers. 1. Assume that the company uses the FIFO method. The value of the ending inventory at December 31 is $__________. 2. Assume that the company uses the average cost method. The value of the ending inventory on December 31 is $__________. 3. Assume that the company uses the LIFO method. The value of the ending inventory on December 31 is $__________. 4. Determine the difference in the amount of income that the company would have reported if it had used the FIFO method instead of the LIFO method. Would income have been greater or less? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 203 (20 min.) 1. FIFO: Ending inventory $2,200 300 units @$6 = $1,800 80 units @$5 = 400 380 units $2,200
(10/20 units × 10/20 unit cost) ((12/31 units − 10/20 units) × 7/25 unit cost)
2. Average Cost: Ending inventory $1,748 $4,600 1,000 = $4.60 per unit 380 units = $1,748 ((Tot. cost/Tot. units) × 12/31 units) 3. LIFO: Ending Inventory $1,420 100 units @$3 = $ 300 280 units @$4 = 1,120 380 units $1,420 4. FIFO: Cost of goods sold $2,400 100 units @$3 = $ 300 500 units @$4 = 2,000 20 units @$5 = 100 620 units $2,400 LIFO: Cost of goods sold $3,180 300 units @$6 $1,800 100 units @$5 500 220 units @$4 880 620 units $3,180 .
(1/1 units × 1/1 unit cost) ((12/31 units − 1/1 units) × 1/20 unit cost)
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 203
(Cont.)
Income would have been $780; ($3,180 vs. $2,400) greater if the company used FIFO instead of LIFO. (LIFO COGS − FIFO COGS) Ex. 204 Faster Company uses the periodic inventory method and had the following inventory information available: Units Unit Cost Total Cost 1/1 Beginning Inventory 15 $8.00 $ 120 1/20 Purchase 60 $8.80 528 7/25 Purchase 30 $8.40 252 10/20 Purchase 45 $9.60 432 150 $1,332 A physical count of inventory on December 31 revealed that there were 55 units on hand. Instructions Answer the following independent questions and show computations supporting your answers.
1. Assume that the company uses the FIFO method. The value of the ending inventory at December 31 is $__________. 2. Assume that the company uses the Average Cost method. The value of the ending inventory on December 31 is $__________. 3. Assume that the company uses the LIFO method. The value of the ending inventory on December 31 is $__________. 4. Assume that the company uses the FIFO method. The value of the cost of goods sold at December 31 is $__________. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 204
(20 min.)
1. FIFO: Ending inventory $516 45 units @$9.60 = 10 units @$8.40 = 55 units
432 84 $516
(10/20 units × 10/20 unit cost) ((12/31 units − 10/20 units) × 7/25 unit cost)
2. Average Cost: Ending inventory $488 $1,332 150 = $8.88 per unit 55 units = $488 ((Tot. cost/Tot. units) × 12/31 units) 3. LIFO: Ending Inventory $472 15 units @$8.00 = 40 units @$8.80 = 55 units
.
$ 120 352 $472
(1/1 units × 1/1 unit cost) ((12/31 units − 1/1 units) × 1/20 unit cost)
Reporting and Analyzing Inventory
Solution 204
6-59
(Cont.)
4. FIFO: Cost of goods sold $816 15 units @$8.00 = 60 units @$8.80 = 20 units @$8.40 = 95 units
$ 120 528 168 $ 816
Ex. 205 Compute the cost to be assigned to ending inventory for each of the methods indicated given the following information about purchases and sales during the year. January May
1 1
December
31
Beginning Inventory Purchases Total Available Total Sales Ending Inventory
150 items @ $4 = $ 600 450 items @ $6 = 2,700 600 items $3,300 430 items 170
Cost assigned on an average cost basis
$__________
Cost assigned on a FIFO basis
$__________
Costs assigned on a LIFO basis
$__________
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 205 (5 min.) $935 [($3,300/600) x 170] ((Tot. cost/Tot. units) × 12/31 units) $1,020 (170 x $6) $ 720 [(150 x $4)+(20 x $6)] (1/1 items × 1/1 cost) + ((12/31 items − 1/1 items) × 5/1 cost) Ex. 206 Compute the cost to be assigned to ending inventory for each of the methods indicated given the following information about purchases and sales during the year. January May
1 1
December
31
Beginning Inventory Purchases Total Available Total Sales Ending Inventory
100 items @ $7 = $ 700 400 items @ $8 = 3,200 500 items $3,900 360 items 140
Cost assigned on an average cost basis
$__________
Cost assigned on a FIFO basis
$__________
Costs assigned on a LIFO basis
$__________
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 206 (5 min.) $1,092 [($3,900/500) x 140)] ((Tot. cost/Tot. units) × 12/31 units) $1,120 (140 x $8) .
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
$1,020 [(100 x $7)+(40 x $8)] (1/1 items × 1/1 cost) + ((12/31 items − 1/1 items) × 5/1 cost)
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Reporting and Analyzing Inventory
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Ex. 207 Wooderson Company sells many products. Gizmo is one of its popular items. Below is an analysis of the inventory purchases and sales of Gizmo for the month of March. Wooderson Company uses the periodic inventory system. Purchases Sales Units Unit Cost Units Selling Price/Unit 3/1 Beginning inventory 100 $40 3/3 Purchase 60 $50 3/4 Sales 60 $80 3/10 Purchase 200 $55 3/16 Sales 70 $90 3/19 Sales 90 $90 3/25 Sales 60 $90 3/30 Purchase 40 $60 Instructions (a) Using the FIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations) (b) Using the weighted-average method, calculate the amount assigned to the inventory on hand on March 31. (Show computations) (c)
Using the LIFO assumption, calculate the amount assigned to the inventory on hand on March 31. (Show computations)
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 207
3/1 3/3 3/4 3/10 3/16 3/19 3/25 3/30
(20 min.) Units 100 60
Beginning inventory Purchase Sales Purchase Sales Sales Sales Purchase
200
40 400
Purchases Unit Cost $40 $50
Units
Sales Selling Price/Unit
60
$80
70 90 60
$90 $90 $90
$55
$60 280
(a)
Using FIFO - the earliest units purchased were the first sold. 3/1 100 @ $40 = $ 4,000 (3/1 units × 3/1 cost) 3/3 60 @ 50 = 3,000 (3/3 units × 3/3 cost) 3/10 120 @ 55 = 6,600 ((Units sold − 3/1 units − 3/3 units) × 3/10 cost) 280 units $13,600 = the cost of goods sold
(b)
Calculate the weighted average unit cost: $20,400 400 = $51 (COG avail. for sale ÷ tot. units avail.) $51 units in ending inventory (400 available less 280 sold = 120) $51 120 = $6,120 (Ave. unit cost × end. inv. units)
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
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Solution 207 (c)
(Cont.)
There are 120 units in ending inventory. They are comprised of the first units purchased when LIFO is assumed. 3/1 100 @ $40 = $4,000 (3/1 units × 3/1 cost) 3/3 20 @ $50 = 1,000 ((End. inv. units − 3/1 units) × 3/3 cost) 120 units $5,000 = Ending inventory
Ex. 208 Torrey Company uses the periodic inventory system to account for inventories. Information related to Torrey Company's inventory at October 31 is given below: October
1 8 16 24
Beginning inventory Purchase Purchase Purchase Total units and cost
400 800 600 200 2,000
units @ $10.00 = units @ $10.40 = units @ $10.80 = units @ $11.60 = units
$ 4,000 8,320 6,480 2,320 $21,120
Instructions 1. Show computations to value the ending inventory using the FIFO cost assumption if 500 units remain on hand at October 31. 2. Show computations to value the ending inventory using the weighted-average cost method if 500 units remain on hand at October 31. 3. Show computations to value the ending inventory using the LIFO cost assumption if 500 units remain on hand at October 31. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 208
(20 min.)
1. 500 units in ending inventory.
Under FIFO, the units remaining in inventory are the ones purchased most recently. 10/24 200 units @ $11.60 = $2,320 (10/24 units × 10/24 cost) 10/16 300 units @ $10.80 = 3,240 ((10/31 units − 10/24 units) × 10/16 cost) 500 units $5,560 2. 500 units in ending inventory. Under average cost method, the weighted-average cost per unit must be computed. $21,120 2,000 units = $10.56 500 units $10.56 = $5,280 (Tot. cost/tot. units) × 10/31 units) 3. 500 units in ending inventory. Under LIFO, the units remaining are the ones purchased earliest. 10/1 400 units @ $10.00 = $4,000 (10/1 units × 10/1 cost) 10/8 100 units @ $10.40 = 1,040 ((10/31 units − 10/1 units) × 10/8 cost) $5,040
.
Reporting and Analyzing Inventory
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Ex. 209 Hanlin Company uses the periodic inventory system to account for inventories. Information related to Hanlin Company's inventory at January 31 is given below: January
1 8 16 24
Beginning inventory Purchase Purchase Purchase Total units and cost
400 800 600 200 2,000
units @ $12.00 = units @ $12.40 = units @ $12.80 = units @ $13.20 = units
$ 4,800 9,920 7,680 2,640 $25,040
Instructions 1. Show computations to value the ending inventory using the FIFO cost assumption if 600 units remain on hand at January 31. 2. Show computations to value the ending inventory using the weighted-average cost method if 600 units remain on hand at January 31. 3. Show computations to value the ending inventory using the LIFO cost assumption if 600 units remain on hand at January 31. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 209
(20 min.)
1. 600 units in ending inventory.
Under FIFO, the units remaining in inventory are the ones purchased most recently. 1/24 200 units @ $13.20 = $2,640 (1/24 units × 1/24 cost) 1/16 400 units @ $12.80 = 5,120 ((1/31 units − 1/24 units) × 1/16 cost) 600 units $7,760 2. 600 units in ending inventory. Under average cost method, the weighted-average cost per unit must be computed. $25,040 2,000 units = $12.52 600 units $12.52 = $7,512 (Tot. cost/tot. units) × end. inv. units 3. 600 units in ending inventory. Under LIFO, the units remaining are the ones purchased earliest. 1/1 400 units @ 12.00 = $4,800 1/1 units × 1/1 cost 1/8 200 units @ 12.40 = 2,480 ((1/31 units − 1/1 units) × 1/8 cost) 600 units $7,280
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 210 Johnson Company reports the following for the month of June. Date June 1 12 23 30
Explanation Inventory Purchase Purchase Inventory
Units 225 525 750 280
Unit Cost $5 6 7
Total Cost $1,125 3,150 5,250
(a) Compute the cost of the ending inventory and the cost of goods sold under (1) FIFO, (2) LIFO, and (3) average cost. (b) Which costing method gives the highest ending inventory? The highest cost of goods sold? Why? (c) How do the average-cost values for ending inventory and cost of goods sold relate to ending inventory and cost of goods sold for FIFO and LIFO? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 210 (a)
(20 min.) (1) FIFO
Beginning inventory (225 $5) ........................................... Purchases June 12 (525 $6) ....................................................... June 23 (750 $7) ....................................................... Cost of goods available for sale ......................................... Less: Ending inventory (280 $7) ...................................... Cost of goods sold .............................................................
$1,125 $3,150 5,250
8,400 9,525 1,960 $7,565
(2) LIFO Cost of goods available for sale ......................................... Less: Ending inventory (225 $5) + (55 $6) ..................... Cost of goods sold .............................................................
$9,525 1,455 $8,070
(3) AVERAGE COST Cost of Goods Total Units Available for Sale ÷ Available for Sale $9,525 1,500
=
Weighted Average Unit Cost $6.35
Ending inventory (280 $6.35) $1,778 (End. inv. units Ave. unit cost) Cost of goods sold (1,220 $6.35) $7,747 (Units sold Ave. unit cost) or $9,525 – $1,778 = $7,747 (b) The FIFO method will produce the highest ending inventory because costs have been rising. Under this method, the earliest costs are assigned to cost of goods sold, and the latest costs remain in ending inventory. The LIFO method will produce the highest cost of goods sold for Johnson Company. Under LIFO the most recent costs are charged to cost of goods sold and the earliest costs are included in the ending inventory. Solution 210 (Cont.)
.
Reporting and Analyzing Inventory
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(c) The average cost ending inventory ($1,778) is higher than LIFO ($1,455) but lower than FIFO ($1,960). For cost of goods sold, average cost ($7,747) is higher than FIFO ($7,565) but lower than LIFO ($8,070). Ex. 211 Wolf Camera Shop Inc. uses the lower-of-cost-or-market basis for its inventory. The following data are available at December 31. Units
Cost/Unit
Market Value/Unit
5 7
$175 148
$168 152
15 10
125 120
119 135
Cameras Minolta Canon Light Meters Vivitar Kodak Instructions
What amount should be reported on Wolf Camera Shop's financial statements, assuming the lower-of-cost-or-market rule is applied? Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 211
Cameras: Minolta Canon Light Meters: Vivitar Kodak Total
(10 min.)
Cost/Unit
Market Value/Unit
Lower-of-Costor-Market
Units
Inventory at Lower-of-Costor-Market
$175 148
$168 152
$168 148
5 7
$ 840 1,036
125 120
119 135
119 120
15 10
1,785 1,200 $4,861
Ex. 212 This information is available for Groneman, Inc. for 2016 and 2017. (in millions) Beginning inventory Ending inventory Cost of goods sold Sales
2016 $ 2,290 2,522 24,351 43,251
2017 $ 2,522 2,618 23,099 43,232
Instructions Calculate the inventory turnover, days in inventory, and gross profit rate for Groneman., Inc. for 2016 and 2017. Comment on any trends. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 212
(15 min.) .
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
2016 Inventory $24,351 turnover ($2,290 + $2,522) 2 COGS [(Beg. inv. + end inv.) 2]
2017 $23,099 ($2,522 + $2,618) 2
$24,351 = 10.1 times $2,406
$23,099 = 9.0 times $2,570
Days in inventory
365 = 36.1 days 10.1
365 = 40.6 days 9.0
Gross profit rate
$43,251–$24,351 = .44 $43,251
$43,232–$23,099 = .47 $43,232
(365/Inv. turn)
The inventory turnover decreased by approximately 11% from 2016 to 2017 while the days in inventory increased by a similar amount (12%) over the same period. Both of these changes would be considered unfavorable since it's better to have a higher inventory turnover with a corresponding lower days in inventory. Groneman, Inc.'s gross profit rate increased by 6.8% from 2016 to 2017. (Sal. − COGS)/Sal. Ex. 213 Burnham Company reported the following summarized annual data at the end of 2017: Sales revenue Cost of goods sold* Gross margin Operating expenses Income before income taxes
$1,600,000 900,000 700,000 400,000 $ 300,000
*Based on an ending FIFO inventory of $250,000. The income tax rate is 30%. The controller of the company is considering a switch from FIFO to LIFO. He has determined that on a LIFO basis, the ending inventory would have been $205,000.
Instructions (a) (b) (c)
Restate the summary information on a LIFO basis. What effect, if any, would the proposed change have on Burnham’s income tax expense, net income, and cash flows? If you were an owner of this business, what would your reaction be to this proposed change?
Ans: N/A, LO: 3, Bloom: AN, Difficulty: Hard, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
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Reporting and Analyzing Inventory
Solution 213 (a)
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(25 min.)
Restate to a LIFO basis:
Sales revenue Cost of goods sold* Gross margin Operating expenses Income before income taxes
$1,600,000 945,000 655,000 400,000 $ 255,000
[Sales − (COGS + (FIFO inv. − LIFO inv.)) − oper. exp. *Ending inventory would be $45,000 less ($250,000 – $205,000 = $45,000) under LIFO, thereby increasing cost of goods by $45,000. (b)
The taxes on the FIFO basis would be: $300,000 .30 = $90,000 Leaving net income of $210,000; ($300,000 – $90,000 = $210,000). The taxes on the LIFO basis would be: $255,000 .30 = $76,500 Leaving Net Income of $178,500; ($255,000 – $76,500= $178,500). Switching to the LIFO basis will result in $13,500 less income tax expense and less net income of $31,500. The cash effect is $13,500; ($90,000 – $76,500 = $13,500) saved in taxes if LIFO were used.
(c)
Owners of the business may favor the LIFO basis since more cash will be available for use in the business. LIFO results in more cash being retained in the business since less is paid out for income taxes.
Ex. 214 The following information is available from the annual reports of Young and Olde: (Amounts in millions) Young Olde $ 6,031 $ 4,816 6,162 5,044 25,937 31,983 29,656 36,704 227 — 225 —
2017 ending Inventory 2016 ending inventory Cost of goods sold Sales revenue 2017 LIFO reserve 2016 LIFO reserve Instructions (a)
Calculate the inventory turnover and days in inventory for both companies.
(b)
Calculate Young’s inventory turnover after adjusting for the LIFO reserve. Young uses the LIFO inventory method.
(c)
What conclusion concerning the management of inventory can be drawn from these data?
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 214 (a)
(15 min.)
Inventory turnover
Young $25,937
Olde $31,983
($6,031 + $6,162) ÷ 2
($4,816 + $5,044) ÷ 2
$25,937 ———— = 4.25 times $6,096.5
$31,983 ——— = 6.49 times $4,930
365 ÷ 4.25 = 85.9 days
365 ÷ 6.49 = 56.2 days
COGS/[(end. inv. + beg. inv.)/2]
Days in inventory (365/Inv. turn) (b)
2017 $6,031 227 $6,258
LIFO inventory LIFO reserve FIFO inventory LIFO cost of goods sold Less: increase in LIFO reserve ($227 – $225) FIFO cost of goods sold
2016 $6,162 225 $6,387 $25,937 (2) $25,935
Inventory turnover
= $25,935 ÷ [($6,258 + $6,387) ÷ 2] = $25,935 ÷ $6,322.5 = 4.10 (LIFO COGS − LIFO res. inc.)/[(FIFO end. inv. + FIFO beg. inv.)/2 (c) Olde’s inventory turnover ratio is approximately 53% [(6.49 – 4.25) ÷ 4.25)] higher than Young’s ratio. In addition, Olde’s days in inventory is 35% [85.9 – 56.2) ÷ 85.9] lower than Young’s. Generally, a firm prefers to maintain as high an inventory turnover as possible. It can be concluded that Olde is more effective in managing inventory than Young. Ex. 215 The following information is available for Wallace Company for 2017. Wallace uses the LIFO inventory method. Beginning inventory Ending inventory Beginning LIFO reserve Ending LIFO reserve Cost of goods sold Sales
$ 600,000 700,000 200,000 300,000 5,980,000 8,000,000
Instructions (a)
Calculate the inventory turnover and days in inventory for Wallace Company based on LIFO.
(b)
Calculate the inventory turnover and days in inventory after adjusting for the LIFO reserve.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
.
Reporting and Analyzing Inventory
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 215 (15 min.) (a) Inventory turnover
= $5,980,000 ÷ [($600,000 + $700,000) ÷ 2] = $5,980,000 ÷ $650,000 = 9.2 times
(COGS/[(beg. inv. + end. inv.)/2]
Days in inventory =
365 days ÷ 9.2 = 39.7 days
(365/Inv. turn) (b)
Beginning $600,000 200,000 $800,000
LIFO inventory LIFO reserve FIFO inventory
Ending $ 700,000 300,000 $1,000,000
LIFO cost of goods sold Less: increase in LIFO reserve ($300,000 – $200,000) FIFO cost of goods sold Inventory turnover
$5,980,000 (100,000) $5,880,000
= $5,880,000 ÷ [($800,000 + $1,000,000) ÷ 2] = $5,880,000 ÷ $900,000 = 6.5 times
(LIFO COGS − LIFO res. inc.)/[(FIFO beg. inv. + FIFO end. inv.)/2 Days in inventory = 365 days ÷ 6.5 = 56.2 days *Ex. 216 Woodson Company sells many products. Gizmo is one of its popular items. Below is an analysis of the inventory purchases and sales of Gizmo for the month of March. Woodson Company uses the perpetual inventory system.
3/1 3/3 3/4 3/10 3/16 3/19 3/25 3/30
Units 100 60
Beginning inventory Purchase Sales Purchase Sales Sales Sales Purchase
200
40
Purchases Unit Cost $40 $50
Units
Sales Selling Price/Unit
60
$80
90 70 60
$90 $90 $90
$55
$60
Instructions (a)
Using the FIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations)
(b)
Using the LIFO assumption, calculate the amount assigned to the inventory on hand on March 31. (Show computations)
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Reporting and Analyzing Inventory
*Solution 216
3/1 3/3 3/4 3/10 3/16 3/19 3/25 3/30
6-71
(20 min.) Units 100 60
Beginning inventory Purchase Sales Purchase Sales Sales Sales Purchase
200
40 400
Purchases Unit Cost $40 $50
Units
Sales Selling Price/Unit
60
$80
90 70 60
$90 $90 $90
$55
$60 280
(a)
Using FIFO - the earliest units purchased were the first sold. 3/1 100 @ $40 = $ 4,000 3/3 60 @ 50 = 3,000 3/10 120 @ 55 = 6,600 280 units $13,600 = The cost of goods sold
(b)
There are 120 units in ending inventory. The beginning inventory layer was reduced by 20 units and the first two purchases were consumed. The last purchase was made after all sales occurred. 3/1 3/30
80 @ $40 40 @ $60 120 units
= =
$3,200 2,400 $5,600 = Ending inventory
*Ex. 217 Grayson Company sells many products. Gizmo is one of its popular items. Below is an analysis of the inventory purchases and sales of Gizmo for the month of March. Grayson Company uses the perpetual inventory system.
3/1 3/3 3/4 3/10 3/16 3/19 3/25 3/30
Units 100 60
Beginning inventory Purchase Sales Purchase Sales Sales Sales Purchase
200
40
Purchases Unit Cost $55 $60
Units
Sales Selling Price/Unit
60
$120
90 70 50
$130 $130 $130
$65
$75
Instructions (a)
Using the FIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations)
(b)
Using the FIFO assumption, calculate the value of ending inventory for March.
(c)
Using the moving average cost method, calculate the amount assigned to the inventory on hand on March 31. (Show computations) .
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
6-72 *Ex. 217
(Cont.)
(d)
Using the LIFO assumption, calculate the amount assigned to the inventory on hand on March 31. (Show computations)
(e)
Using the LIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations)
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 217
3/1 3/3 3/4 3/10 3/16 3/19 3/25 3/30
(20 min.) Purchases Units Unit Cost 100 $55 60 $60
Beginning inventory Purchase Sales Purchase Sales Sales Sales Purchase
200
40 400
Units
Sales Selling Price/Unit
60
$120
90 70 50
$130 $130 $130
$65
$75 270
(a)
Using FIFO - the earliest units purchased were the first sold. 3/1 100 @ $55 = $ 5,500 3/3 60 @ 60 = 3,600 3/10 110 @ 65 = 7,150 270 units $16,250 = The cost of goods sold
(b)
Using FIFO – the latest purchased units were left in inventory. 3/30 40 @ $ 75 = $ 3,000 3/10 90 @ $ 65 = 5,850 130 $8,850
(c)
Calculate the value of ending inventory using the weighted average cost:
Date 3/1 3/3 3/4 3/10 3/16 3/19 3/25 3/30 (d)
Purchases Cost of Goods Sold Beginning Inventory (60 @ 60) $ 3,600 (60 @ 56.875) (200 @ 65) $13,000 (90 @ 62.292) (70 @ 62.292) (50 @ 62.292) (40 @ 75) $ 3,000
(100 @ 55) (160 @ 56.875) (100 @ 56.875) (300 @ 62.292) (210 @ 62.292) (140 @ 62.292) (90 @ 62.292) (130 @ 66.202)
Balance $ 5,500.00 9,100.00 5,687.50 18,687.50 13,081.32 8,720.88 5,606.28 8,606.28
There are 130 units in ending inventory. They are comprised of the first units purchased prior to each sale when LIFO is assumed. 3/1 90 @ $55 = $4,950 3/3 40 @ $75 = 3,000 120 units $7,950 = Ending inventory
.
Reporting and Analyzing Inventory
*Solution 217 (e)
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(Cont.)
Using LIFO – the latest purchased units purchased prior to the sale were the first sold. 3/3 60 @ $60 = $ 3,600 3/10 90 @ $65 = 5,850 3/10 70 @ $65 = 4,550 3/10 40 @ $65 = 2,600 3/1 10 @ $55 = 550 270 units $17,150
*Ex. 218 Plato Company reports the following for the month of June. Date June 1 12 23 30
Explanation Inventory Purchase Purchase Inventory
Units 225 525 750 330
Unit Cost $5 6 7
Total Cost $1,125 3,150 5,250
Instructions (a)
Calculate the cost of the ending inventory and the cost of goods sold for each cost flow assumption, using a perpetual inventory system. Assume a sale of 570 units occurred on June 15 for a selling price of $8 and a sale of 600 units on June 27 for $9. (Note: For the average-cost method, round unit cost to three decimal places.)
(b)
Why is the average unit cost not $6 [($5 + $6 + $7) 3 = $6]?
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
*Solution 218 (a)
(20 min.)
Date June 1
Purchases
June 12
(525 @ $6) $3,150
FIFO Cost of goods sold
June 15 June 23
(225 @ $5) (345 @ $6)
$1,125 $2,070
(750 @ $7) $5,250
June 27
(180 @ $6) (420 @ $7)
Ending inventory: $2,310. Cost of goods sold: $7,215
.
$1,080 $2,940 $7,215
Balance (225 @ $5) $1,125 (225 @ $5) (525 @ $6)
$4,275
(180 @ $6)
$1,080
(180 @ $6) (750 @ $7)
$6,330
(330 @ $7)
$2,310
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
*Solution 218
(Cont.)
Date June 1
Purchases
June 12
(525 @ $6) $3,150
LIFO Cost of goods sold
June 15 June 23
(525 @ $6) (45 @ $5)
$3,150 $ 225
(750 @ $7) $5,250
June 27
(600 @ $7)
$4,200 $7,575
Balance (225 @ $5) $1,125 (225 @ $5) (525 @ $6)
$4,275
(180 @ $5)
$ 900
(180 @ $5) (750 @ $7)
$6,150
(180 @ $5) (150 @ $7)
$1,950
Ending inventory: $1,950. Cost of goods sold: $7,575 Moving Average Date
Purchases
Cost of goods sold
June 1 June 12 June 15
(525 @ $6) $3,150
June 23
(750 @ $7) $5,250
(570 @ $5.70)
June 27
$3,249
(600 @ $6.748)
$4,049*
Balance (225 @ $5)
$1,125
(750 @ $5.70) (180 @ $5.70)
$4,275 $1,026
(930 @ $6.748*)
$6,276
(330 @ $6.748)
$2,227
$7,298 *rounded Ending inventory: $2,227. Cost of goods sold: $7,298. (b) The simple average would be [($5 + $6 + $7) ÷ 3] or $6. However, the average cost method uses a weighted average unit cost that changes each time a purchase is made rather than a simple average. *Ex. 219 Carter Company reported these income statement data for a 2-year period. Sales Beginning inventory Cost of goods purchased Cost of goods available for sale Ending inventory Cost of goods sold Gross profit
2017 $250,000 40,000 202,000 242,000 50,000 192,000 $ 58,000
2016 $210,000 30,000 173,000 203,000 40,000 163,000 $ 47,000
Carter Company uses a periodic inventory system. The inventories at January 1, 2016, and December 31, 2017, are correct. However, the ending inventory at December 31, 2016, is overstated by $4,000. .
Reporting and Analyzing Inventory
*Ex. 219
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(Cont.)
Instructions (a) (b)
Prepare correct income statement data for the 2 years. What is the cumulative effect of the inventory error on total gross profit for the 2 years?
Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 219 (a)
(15 min.)
Sales ...................................................................... Cost of goods sold Beginning inventory ............................................ Cost of goods purchased .................................... Cost of goods available for sale .......................... Ending inventory ($40,000 – $4,000) .......................................... Cost of goods sold ...................................... Gross profit .............................................................
2016 $210,000
2017 $250,000
30,000 173,000 203,000
36,000 202,000 238,000
36,000 167,000 $ 43,000*
50,000 188,000 $ 62,000
*(Sales − (report. COGS + overst. inv.)) (b) The cumulative effect on total gross profit for the two years is zero as shown below: Incorrect gross profits: Correct gross profits: Difference
$47,000 + $58,000 = $105,000 $43,000 + $62,000 = 105,000 $ 0
*Ex. 220 For each of the independent events listed below, analyze the impact on the indicated items at the end of the current year by placing the appropriate code letter in the box under each item. Code: O = item is overstated U = item is understated NA = item is not affected Items Stockholders’ Cost of Net Events Assets Equity Goods Sold Income 1. The ending inventory in the previous period was overstated. _________________________________________________________________________________________________________________________
2. A physical count of goods on hand at the end of the current year resulted in some goods being counted twice. _________________________________________________________________________________________________________________________
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(Cont.)
3. Goods purchased on account in December of the current year and shipped FOB shipping point were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31. _________________________________________________________________________________________________________________________
4. Goods purchased on account in December of the current year and shipped FOB destination were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31. _________________________________________________________________________________________________________________________
5. The internal auditors discovered that the ending inventory in the previous period was understated $15,000 and that the ending inventory in the current period was overstated $25,000. Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
*Solution 220
(20 min.) Items Stockholders’ Cost of Assets Equity Goods Sold NA NA O O O U U U O NA U O O O U
Events 1. 2. 3. 4. 5.
Net Income U O U U O
*Ex. 221 Condensed income statements for Swift Corporation are shown below for two years.
Sales Cost of Goods Sold Gross Profit Operating Expense Net Income
2016
2017
$75,000 45,000 $30,000 15,000 $15,000
$90,000 54,000 $36,000 15,000 $21,000
Compute the corrected net income for 2016 and 2017 assuming that the inventory as of the end of 2016 was mistakenly understated by $7,000. 2016
$ __________
2017 $__________
Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
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*Solution 221 (5 min.) 2016 = $22,000 (sales − (COGS − inv. understat.) − oper. exp.) 2017 = $14,000
*Ex. 222 Condensed income statements for Werly Corporation are shown below for two years.
Sales Cost of Goods Sold Gross Profit Operating Expense Net Income
2016
2017
$75,000 45,000 $30,000 15,000 $15,000
$90,000 54,000 $36,000 15,000 $21,000
Compute the corrected net income for 2016 and 2017 assuming that the inventory as of the end of 2016 was mistakenly overstated by $5,000. 2016
$ __________
2017 $__________
Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
*Solution 222 (5 min.) 2016 = $10,000 (sales − (COGS + inv. overstat.) − oper. exp.) 2017 = $26,000 *Ex. 223 Arnold Pharmacy reported cost of goods sold as follows: 2016 $ 54,000 847,000 901,000 64,000 $837,000
Beginning inventory Cost of goods purchased Cost of goods available for sale Ending inventory Cost of goods sold
Arnold made two errors: (1) 2016 ending inventory was overstated by $6,000. (2) 2017 ending inventory was understated by $11,000.
.
2017 $ 64,000 891,000 955,000 55,000 $900,000
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*Ex. 223
(Cont.)
Instructions Assuming the errors had not been corrected, indicate the dollar effect that the errors had on the items appearing on the financial statements listed below. Also indicate if the amounts are overstated (O) or understated (U). 2016 2017 Overstated/ Overstated/ Amount Understated Amount Understated Total assets
$_________
_______
$_________
_______
Stockholders’ equity
$_________
_______
$_________
_______
Cost of goods sold
$_________
_______
$_________
_______
Net income
$_________
_______
$_________
_______
Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
*Solution 223
(20 min.) 2016 Overstated/ Amount Understated
2017 Overstated/ Amount Understated
Total assets
$6,000
O
$11,000
U
Stockholders’ equity
$6,000
O
$11,000
U
Cost of goods sold
$6,000
U
$17,000
O
Net income
$6,000
O
$17,000
U
Correct cost of goods sold: 2016 $ 54,000 847,000 901,000 58,000 $843,000*
Beginning inventory Cost of goods purchased Cost of goods available for sale Ending inventory Cost of goods sold
2017 $ 58,000 891,000 949,000 66,000 $883,000
*(Beg. inv. + cost of goods pur. − (report. end inv. − inv. overstat.)
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COMPLETION STATEMENTS 224. In a manufacturing company, goods that are ready to be sold to customers are referred to as ________________, whereas in a merchandising company they are generally referred to as _______________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
225. In a manufacturing company, there are three categories of inventory: they are _____________________, _________________, and _________________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
226. When the terms of sale are FOB ______________, ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
227. The two inventory costing systems used are the ______________ and ______________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
228. When a business holds goods of other parties without taking ownership, and tries to sell them for a fee, the goods are called ____________ goods. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
229. Cost of goods available for sale must be allocated between cost of goods ___________ and ______________. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
230. The ______________ method tracks the actual physical flow of each unit of inventory available for sale; however, management may be able to manipulate ______________ by using this method. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
231. If the unit cost of inventory has continuously increased, the ______________, first-out inventory valuation method will result in a higher valued ending inventory than if the ______________, first-out method had been used. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
232. Under the LCM basis, market is defined as current ______________ cost. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
233. The ______________ is calculated as cost of goods sold divided by average inventory. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
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234. The _____________ is a required disclosure for companies that use LIFO. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Answers to Completion Statements 224. finished goods, merchandise inventory 225. raw materials, work in process and finished goods. 226. shipping point 227. periodic, perpetual. 228. consigned
229. 230. 231. 232. 233. 234.
sold, ending inventory specific identification, income first-in, last-in replacement inventory turnover LIFO reserve
MATCHING 235. Match the items below by entering the appropriate code letter in the space provided. A. Merchandise Inventory B. Work in process C. FOB shipping point D. FOB destination E. Specific identification method
F. G. H. I. J.
First-in, first-out (FIFO) method Last-in, first-out (LIFO) method Average cost method LIFO reserve Inventory turnover ratio
____
1. The difference between inventory reported using LIFO and inventory using FIFO.
____
2. Tracks the actual physical flow for each inventory item available for sale.
____
3. Goods that are only partially completed in a manufacturing company.
____
4. Cost of goods sold consists of the most recent inventory purchases.
____
5. Goods ready for sale to customers by retailers and wholesalers.
____
6. Title to the goods transfers when the public carrier accepts the goods from the seller.
____
7. Ending inventory valuation consists of the most recent inventory purchases.
____
8. The same unit cost is used to value ending inventory and cost of goods sold.
____
9. Title to goods transfers when the goods are delivered to the buyer.
____ 10. Measures the number of times the inventory sold during the period. Ans: N/A, LO: 1-3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
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Answers to Matching 1. 2. 3. 4. 5.
I E B G A
6. 7. 8. 9. 10.
C F H D J
SHORT-ANSWER ESSAY QUESTIONS S-A E 236 The periodic and the perpetual inventory systems are two methods that companies use to account for inventories. Briefly describe the major features of each system and explain why a physical inventory is necessary under both systems. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Business Economics
Solution 236 When a periodic inventory system is used, the Inventory account remains the same throughout the period. Separate accounts are used to record the transactions. Cost of goods sold is determined by the following formula: Beginning inventory + Net purchases - Ending inventory The determination of ending inventory is made by a physical count. When a perpetual inventory system is used, the purchase and sale of goods is recorded directly in the Inventory account, which eliminates the need for separate purchases accounts. Cost of goods sold is recognized for each sale by debiting the account and crediting Inventory. At the end of the period, the ending account balance in inventory represents the amount of inventory that should be on hand. However, a company should conduct a physical inventory count, at least once a year, because differences could result from spoilage, theft, or errors. S-A E 237 What is the primary basis of accounting for inventories? What is the major objective in accounting for inventories? Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Business Economics
Solution 237 The primary basis of accounting for inventories is cost in accordance with the historical cost principle. The major objective of accounting for inventories is the proper determination of net income in accordance with the expense recognition principle.
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S-A E 238 A survey of major U.S. companies revealed that 77% of those companies used either LIFO or FIFO cost flow methods, while 19% used average cost, and only 4% used other methods. Requirement Provide brief, yet concise responses to the following questions. a. Why are LIFO and FIFO so popular? b. Since computers and inventory management software are readily available, why aren’t more companies using specific identification? Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Business Economics
Solution 238 a. FIFO and LIFO are based on cost flow assumptions that may be unrelated to the physical flow of goods. The reasons for using one of these methods involve the effects on the income statement, balance sheet, and taxes that the company must pay. In periods of rising prices (inflation), LIFO provides for a lower net income, thus resulting in a lower tax liability. LIFO reflects the most realistic cost of goods sold (the most recent or highest costs), however the cost of inventory on the balance sheet is distorted because it consists of the earliest or lowest costs. In periods of rising prices, FIFO provides for the most realistic ending inventory cost on the balance sheet (using the most recent or highest costs). On the income statement, FIFO represents the least realistic cost of goods sold because the amount consists of the earliest or lowest costs. This makes net income higher, which is good for the external financial statements but it thus results in a higher tax liability. In periods of falling prices, opposite results apply. Companies must choose an inventory method and follow it each year (consistency) until a proper accounting change is made. The LIFO conformity rule states that if LIFO is used for tax purposes, it must also be used for financial reporting purposes. This rule keeps companies from using LIFO for tax purposes to show the lower net income and FIFO for external reporting to show the higher net income. b. With computers and inventory management software, it would appear that the specific identification method would be the most popular because it matches the actual cost of each item sold to its selling price. However, using computers to keep up with the information does not eliminate some of the problems with using specific identification. One problem is an ethical one. A major disadvantage of the specific identification method is that management may be able to manipulate net income. For example, it can boost net income by selling units purchased at a low cost, or reduce net income by selling units purchased at a high cost. As long as customers receive the units they demand, they are indifferent when the company bought them. This manipulation means that net income is not objectively measured. Another problem is that the costs of maintaining a specific identification system may outweigh the benefits of using such a method. As mentioned in part a, financial statement and tax effects of using FIFO and LIFO are more beneficial to companies than simply being able to match the .
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actual cost of a unit to its selling price. S-A E 239 Your office is on the 68th floor of your building. The CEO’s office is on the 77th floor. The two of you are waiting for an elevator one morning. The CEO states “Our prices are rising and I want the lowest net income for tax purposes and the highest ending inventory for external reporting purposes. Which inventory method should we use? Requirement You have three minutes to respond to the CEO. What is your response? Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Business Economics
Solution 239 You have asked a very good question and I am glad to respond to it. In periods of rising prices, LIFO results in the lowest net income, thus resulting in the lowest income tax. FIFO results in the highest net income, thus resulting in the most favorable external reporting information. Unfortunately companies cannot use LIFO for tax purposes and FIFO for financial reporting purposes. The LIFO conformity rule states that if LIFO is used for tax purposes, it must also be used for financial reporting purposes. This LIFO conformity rule causes company decision makers to weigh all of the pros and cons of each inventory method. While LIFO does produce the lowest net income when prices are rising, there is a danger in using it. Since LIFO ending inventory represents the oldest costs of the company, it becomes necessary to try to maintain a constant level of units of ending inventory. If the level of inventory units falls at the end of the accounting period, phantom, or paper, profits end up in net income. This creates a larger income tax liability. To avoid this problem, and to report the highest net income for external financial purposes, I suggest that the company use FIFO. S-A E 240 Your former college roommate is opening a new retail store and asks you “Which inventory costing method should I use?” What is your response? Include a comparison of the tax effect, balance sheet effect, and income statement effect for FIFO versus LIFO. Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Business Economics
Solution 240 It is always good to hear from you and you have certainly asked a very good question. Since the consistency principle requires that you adopt accounting methods and stay with them (until there is need for a proper change), it is very important to consider the options before starting a business. I suggest that you consider one of the three cost flow assumptions – Average, First-In, First-Out (FIFO), or Last-In, First-Out (LIFO). These methods are based on the assumption of cost flows instead of the actual physical flow of goods.
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Solution 240
(Cont.)
The effects on the income statement, balance sheet, and tax returns depend on whether your company experiences rising prices or falling prices. Here is a summary of the effects for each inventory method, for companies that experience rising prices (the opposite will be true for falling prices). Inventory Tax Method Effect Average Falls between FIFO and LIFO FIFO Highest net income, thus highest taxes
LIFO
Lowest net income, thus lowest taxes (works best if constant levels of inventory units are maintained)
Income Statement Effect Falls between FIFO and LIFO Highest net income. Thus more attractive for external financial reporting Lowest net income (If you use LIFO for tax purposes, you must also use it for external financial reporting.)
Balance Sheet Effect Falls between FIFO and LIFO Most realistic ending inventory because the latest costs are matched to ending inventory Most unrealistic ending inventory because the earliest costs are matched to ending inventory
S-A E 241 FIFO and LIFO are the two most common cost flow assumptions made in costing inventories. The amounts assigned to the same inventory items on hand may be different under each cost flow assumption. If a company has no beginning inventory, explain the difference in ending inventory values under the FIFO and LIFO cost bases when the price of inventory items purchased during the period have been (1) increasing, (2) decreasing, and (3) remained constant. Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Business Economics
Solution 241 The FIFO method determines the ending inventory by the cost of the most recent purchase. The LIFO method determines the ending inventory by the cost of the earliest purchase. Therefore, if the FIFO method is used and the prices during the period are increasing, the ending inventory under FIFO will be greater than under LIFO. Likewise, if the FIFO method is used and the prices during the period are decreasing, the ending inventory under FIFO will be less than under LIFO. If prices remain constant and the company has no beginning inventory, then there will be no difference in ending inventory. S-A E 242 Glenda Carson is studying for the next accounting midterm examination. What should Glenda know about (a) departing from the cost basis of accounting for inventories and (b) the meaning of "market" in the lower-of-cost-or-market method? Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Business Economics
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Solution 242 Glenda should know the following: (a) A departure from the cost basis of accounting for inventories is justified when the value of the goods is no longer as great as its cost. The writedown to market should be recognized in the period in which the price decline occurs. (b) Market means current replacement cost, not selling price. For a merchandising company, market is the cost at the present time from the usual suppliers in the usual quantities. S-A E 243 What is the LIFO reserve? What are the consequences of ignoring a large LIFO reserve when analyzing a company? Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 243 The LIFO reserve is a required disclosure for companies that employ LIFO. It is the difference between ending inventory using LIFO and ending inventory if FIFO were used instead. Ignoring a large LIFO reserve when analyzing a company can distort any comparisons that an analyst might try to make with a company's competitors that used FIFO. S-A E 244 (Ethics) Angie and Neal Fry are department managers in the housewares and shoe departments, respectively, for Calhouns, a large department store. Neal has observed Angie taking inventory from her own department home, apparently without paying for it. He hesitates confronting Angie because he is due to be promoted, and needs Angie's recommendation. He also does not want to notify the company management directly, because he doesn't want an ethics investigation on his record, believing that it will give him a “goody-goody” image. This week, Angie tried on several pairs of expensive running shoes in his department before finding a pair that suited her. She did not, however, buy them. That very pair was missing this morning. Calhouns recently replaced its old periodic inventory system with a perpetual inventory system using scanners and bar codes. In addition, the annual inventory is to be replaced by a monthly inventory conducted by an independent firm. On hearing the news of the changes, Neal relaxes. "The system will catch Angie now," he says to himself. Required: 1. Is Neal's attitude justified? Why or why not? 2. What, if any, action should Neal take now? Ans: N/A, LO: 1, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Internal Controls
Solution 244 1. Neal's attitude is not justified. The system will only be able to detect that merchandise is missing, not to determine who took it. 2. Neal should notify his superiors at once. He has knowledge of what may be criminal acts, and by concealing them, he is very close to becoming a party to the acts. Neal's apparent fear of not being promotable because of a “goody-goody” image seems unjustified. It would seem more likely that Neal's refusal to accept unethical (and illegal) acts by others would make him a more valuable manager. He may even be jeopardizing his career with Calhouns if someone else reports Angie's actions. The resulting investigation may implicate Neal because of his failure to notify the proper authorities in a timely manner. .
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S-A E 245 (Communication) Al Bodkin, a new employee of Crafter's Paradise, recorded $1,000 in consigned goods received as part of the firm's inventory. The goods were received one day after the end of the fiscal period, but Al reasoned that the goods should be included in inventory sooner because Crafter's paid the freight. The mistake was brought to his attention by the purchasing department who said the goods should not have been recorded as Crafter’s inventory at all. Al told Sid Goza, the purchasing supervisor, that nobody needed to worry, because the mistake would cancel itself out the following month. In Al's opinion, there was no reason to get everyone excited over nothing, especially since it was monthly, and not annual, financial statements that were affected. Sid Goza has reported the problem to the accounting department. Required: You are Al's supervisor. Write a memo to Al explaining why the error should have been corrected. Ans: N/A, LO: 1, Bloom: AN, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 245 MEMO
TO:
Al Bodkin, Accounting Department
FROM:
Martha King, Supervisor
DATE:
March 12, 200x
It has come to my attention that $1,000 in consigned goods were included in the inventory reported in our January financial statements. You were informed that this amount should be removed from inventory, which you did not do, apparently believing that February's entries would correct the error. The error would have been corrected in February if it were only a matter of your recording inventory in the wrong month. January's inventory and expenses would have been overstated, and February's understated, but the net effect would have been zero. Since the $1,000 is a fairly large amount, however, that still would not have been appropriate. The error you made, however, was to enter into inventory goods that the company did not own, and will not own. Consigned goods are owned by the consignors until purchased by customers. We only provide our shops for the consignors to sell their goods, and we collect a fee for doing so. Please correct the error at once. We may need to notify some of the other departments of the error as well. Please arrange to meet with me in my office as soon as possible to discuss the matter. (signature)
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IFRS QUESTIONS 1.
The requirements for accounting for and reporting of inventories under IFRS, compared to GAAP, tend to be more a. detailed. b. rules-based. c. principles-based. d. full of disclosure requirements.
Ans: C, LO: 6, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
2.
The major IFRS requirements related to accounting for and reporting inventories are a. the same as GAAP. b. the same as GAAP with a couple of exceptions. c. completely different fom GAAP. d. not comparable to GAAP.
Ans: B, LO: 6, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
3.
Inventory accounting under IFRS differs from GAAP in regard to a. neither the use of LIFO nor lower-of-cost-or-market. b. the use of LIFO but not lower-of-cost-or-market. c. the use of lower-of-cost-or-market but not LIFO. d. the use of LIFO and lower-of-cost-or-market.
Ans: D, LO: 6, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
4.
Under GAAP, companies can choose which inventory system? a. b. c. d.
LIFO
FIFO
Yes Yes No Yes
No Yes Yes No
Ans: B, LO: 6, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
5.
Under IFRS, companies can choose which inventory system? a. b. c. d.
LIFO
FIFO
Yes Yes No Yes
No Yes Yes No
Ans: C, LO: 6, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
.
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Specific Identification can be used for inventory valuation under a. b. c. d.
GAAP
IFRS
Yes Yes No No
No Yes No Yes
Ans: B, LO: 6, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
7.
GAAP’s provision for ownership of goods (goods-in-transit or consigned goods), as well as which costs to include in inventory, as compared to IFRS are: Ownership of goods
a. b. c. d.
Costs to include in inventory
essentially similar essentially different essentially similar essentially different
essentially similar essentially different essentially different essentially similar
Ans: A, LO: 6, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
8.
The only acceptable cost flow assumptions under IFRS are a. FIFO and LIFO. b. FIFO and average. c. LIFO and average. d. FIFO, LIFO and average.
Ans: B, LO: 6, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
9.
LIFO can be used a. under neither GAAP nor IFRS. b. under IFRS but not GAAP. c. under GAAP but not IFRS. d. under both GAAP and IFRS.
Ans: C, LO: 6, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
10.
IFRS defines market for lower-of-cost-or market as a. net realizable value. b. estimated selling price in the ordinary course of business. c. replacement cost. d. replacement cost less costs of disposal.
Ans: A, LO: 6, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
11.
GAAP defines market for lower-of-cost-or market essentially as a. net realizable value. b. estimated selling price in the ordinary course of business. c. replacement cost. d. replacement cost less costs of disposal.
Ans: C, LO: 6, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods
.
CHAPTER 7 FRAUD, INTERNAL CONTROL, AND CASH SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY Item
LO
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9. 10. 11. 12. 13. 14. 15. 16.
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40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72.
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
C K K K K K K K K K K K K K K K K K C C K K K K K K K K K C K K K
73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105.
1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3
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True-False Statements K 17. 1 K 25. K 18. 1 K 26. K 19. 1 K 27. K 20. 1 K 28. K 21. 2 K 29. K 22. 2 K 30. K 23. 2 K 31. K 24. 2 K 32. Multiple Choice Questions K 106. 3 K 139. K 107. 3 K 140. K 108. 3 K 141. K 109. 3 K 142. K 110. 3 K 143. C 111. 3 K 144. C 112. 3 K 145. K 113. 3 K 146. K 114. 3 K 147. K 115. 3 K 148. K 116. 3 K 149. K 117. 3 K 150. K 118. 3 AP 151. K 119. 3 AP 152. K 120. 3 AP 153. K 121. 3 AP 154. K 122. 3 AP 155. K 123. 3 AP 156. K 124. 3 K 157. K 125. 3 K 158. K 126. 3 K 159. K 127. 3 AP 160. K 128. 3 AP 161. K 129. 3 AP 162. K 130. 3 AP 163. K 131. 3 AP 164. K 132. 3 AP 165. C 133. 3 K 166. K 134. 3 AP 167. K 135. 3 AP 168. K 136. 3 AP 169. K 137. 3 K 170. C 138. 3 AP 171.
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33. 34. 35. 36. 37. *38. *39.
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AP C C C C AP AP AP AP AP AP AP AP AP AP C K K K K K K K K K K K AP AP AP K AP AP
172. 173. 174. 175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. *186. *187. *188. *189. *190. *191. *192. *193. *194. *195. *196. *197. *198. *199. *200.
4 4 4 4 4 4 4 4 4 4 4 4 4 4 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5
AP K K AP AP C AP AP AP AP AP K AP AP K K C K AP K AP AP AP AP AP AP AP K K
7-2
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
201. 202. 203.
1 1 2
K K K
204. 205. 206.
2 3 3
212. 213. 214. 215. 216. 217.
1 1 3 3 3 3
C AN AP AP AP AP
218. 219. 220. 221. 222. 223.
3 3 3 3 3 3
239. 240. 241. 242.
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K K K K
243. 244. 245. 246.
1 1 1 2
256.
1-4
K
Brief Exercises 207. 3 AP 210. 208. 3 AP 211. 209. 3 AP Exercises AP 224. 3 AN 230. AP 225. 3 AN 231. AP 226. 3 C 232. K 227. 3 AP 233. AP 228. 3 AP 234. AP 229. 3 AP *235. Completion Statements K 247. 2 K 251. K 248. 3 K 252. K 249. 3 K 253. K 250. 3 K *254. Matching K K K
Short Answer Essay 257. 1 K 259. 1 C 261. 1 C 263. 258. 1 C 260. 1 E 262. 2 K 264. *This topic is dealt with in an Appendix to the chapter.
3 4
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AP AP AP AP AP AP
*236. *237. *238.
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AP AP AP
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K K K K
*255.
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265. 266.
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SUMMARY OF LEARNIG OBJECTIVES BY QUESTION TYPE Learning Objective 1 Item
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16. 17. 19. 20. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50.
TF TF TF TF MC MC MC MC MC MC MC MC MC MC MC
51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65.
MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC
66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 201.
MC MC MC MC MC MC MC MC MC MC MC MC MC MC Be
202. 212. 213. 239. 240. 241. 242. 243. 244. 245. 256. 257. 258. 259. 260.
Be Ex Ex C C C C C C C Ma SA SA SA SA
261. 265. 266.
SA SA SA
.
Fraud, Internal Control, and Cash
7-3
Learning Objective 2 Item
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21. 22. 23. 24. 25.
TF TF TF TF TF
80. 81. 82. 83. 84.
MC MC MC MC MC
85. 86. 87. 88. 89.
MC MC MC MC MC
90. 91. 92. 93. 94.
MC MC MC MC MC
95. 96. 97. 203. 204.
MC MC MC Be Be
246. 247. 256. 262.
C C Ma SA
153. 205. 206. 207. 208. 209. 210. 214. 215. 216. 217. 218. 219. 220. 221.
MC Be Be Be Be Be Be Ex Ex Ex Ex Ex Ex Ex Ex
222. 223. 224. 225. 226. 227. 228. 229. 230. 248. 249. 250. 251. 256. 263.
Ex Ex Ex Ex Ex Ex Ex Ex Ex C C C C Ma SA
179. 180. 181. 182. 183. 184. 185. 211.
MC MC MC MC MC MC MC Be
231. 232. 233. 234. 252. 253. 256. 264.
Ex Ex Ex Ex C C Ma SA
Learning Objective 3
26. 27. 28. 29. 30. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107.
TF TF TF TF TF MC MC MC MC MC MC MC MC MC MC
108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122.
MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC
123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137.
MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC
138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152.
MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC
Learning Objective 4
31. 32. 33. 34. 35. 36. 37. 154.
TF TF TF TF TF TF TF MC
155. 156. 157. 158. 159. 160. 161. 162.
MC MC MC MC MC MC MC MC
163. 164. 165. 166. 167. 168. 169. 170.
.
MC MC MC MC MC MC MC MC
171. 172. 173. 174. 175. 176. 177. 178.
MC MC MC MC MC MC MC MC
7-4
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Learning Objective *5 Item
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38. 39. 186. 187.
TF TF MC MC
188. 189. 190. 191.
MC MC MC MC
192. 193. 194. 195.
MC MC MC MC
196. 197. 198. 199.
MC MC MC MC
200. 235. 236. 237.
MC Ex Ex Ex
238. 254. 255.
Ex C C
Note: TF = True-False MC = Multiple Choice Ma = Matching
C = Completion Ex = Exercise SA = Short Answer Essay
CHAPTER LEARNING OBJECTIVES 1. Define fraud and the principles of internal control. A fraud is a dishonest act by an employee that results in personal benefit to the employee at a cost to the employer. The fraud triangle refers to the three factors that contribute to fraudulent activity by employees: opportunity, financial pressure, and rationalization. Internal control consists of all the related methods and measures adopted within an organization to safeguard its assets, enhance the reliability of its accounting records, increase efficiency of operations, and ensure compliance with laws and regulations. The principles of internal control are establishment of responsibility; segregation of duties; documentation procedures, physical controls, independent internal verification, and human resource controls. 2. Apply internal control principles to cash. Internal controls over cash receipts include: (a) designating only personnel such as cashiers to handle cash; (b) assigning the duties of receiving cash, recording cash, and having custody of cash to different individuals; (c) obtaining remittance advices for mail receipts, cash register tapes or computer records for over-the-counter receipts, and deposit slips for bank deposits; (d) using company safes and bank vaults to store cash with access limited to authorized personnel, and using cash registers in executing over-the-counter receipts; (e) making independent daily counts of register receipts and daily comparisons of total receipts with total deposits; and (f) bonding personnel who handle cash, as well as requiring them to take vacations. Internal controls over cash disbursements include: (a) having only specified individuals such as the treasurer authorized to sign checks and approved vendors; (b) assigning the duties of approving items for payment, paying the items, and recording the payment to different individuals; (c) using prenumbered checks and accounting for all checks, with each check supported by an approved invoice; after payment, stamping each approved invoice “paid”; (d) storing blank checks in a safe or vault with access restricted to authorized personnel, and using a machine with indelible ink to imprint amounts on checks; (e) comparing each check with the approved invoice before issuing the check, and making monthly reconciliations of bank and book balances; and (f) bonding personnel who handle cash, requiring employees to take vacations, and conducting background checks.
.
Fraud, Internal Control, and Cash
7-5
3. Identify the control features of a bank account. In reconciling the bank account, it is customary to reconcile the balance per books and the balance per bank to their adjusted balance. The steps reconciling the Cash account are to determine deposits in transit, and electronic funds transfers received by bank, outstanding checks, errors by the depositor or the bank, and unrecorded bank memoranda. 4. Explain the reporting of cash and the basic principles of cash management. Cash is listed first in the current assets section of the balance sheet. Companies often report cash together with cash equivalents. Cash restricted for a special purpose is reported separately as a current asset or as a noncurrent asset, depending on when the company expects to use the cash. The basic principles of cash management include: (a) increase the speed of receivables collection, (b) keep inventory levels low, (c) monitor the timing of payment of liabilities, (d) plan timing of major expenditures, and (e) invest idle cash. The three main elements of a cash budget are the cash receipts section, cash disbursements section, and financing section. *5. Explain the operation of a petty cash fund. In operating a petty cash fund, a company establishes the fund by appointing a custodian and determining the size of the fund. The custodian makes payments from the fund for documented expenditures. The company replenishes the fund as needed, and at the end of each accounting period. Accounting entries to record payments are made each time the fund is replenished.
TRUE-FALSE STATEMENTS 1.
The most important element of the fraud triangle is rationalization.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: Professional Demeanor, IMA: Internal Controls
2.
Employees sometimes commit fraud because of personal financial problems caused by too much debt.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: Professional Demeanor, IMA: Internal Controls
3.
The safeguarding of assets is an objective of a company's system of internal control.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: Professional Demeanor, IMA: Internal Controls
4.
When one individual is responsible for all related activities, the potential for errors and irregularities is decreased.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: Professional Demeanor, IMA: Internal Controls
5.
Internal control is most effective when several people are responsible for a given task.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Risk Analysis, AICPA PC: Professional Demeanor, IMA: Internal Controls
6.
An effective system of internal control centralizes functions in a single capable individual.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Risk Analysis, AICPA PC: Professional Demeanor, IMA: Internal Controls
.
7-6 7.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The responsibility for keeping the records for an asset should be separate from the physical custody of that asset.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
8.
Requiring employees to take vacations is a weakness in the system of internal controls because it does not promote operational efficiency.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
9.
The extent of internal control features adopted by a company must be evaluated in terms of cost-benefit.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
10.
Bonding means insuring a company against theft by employees.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
11.
It is unlikely that a company would want to bond its employees who handle cash or inventory.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
12.
An effective system of internal control requires that at least two individuals be assigned to one cash drawer so that each can serve as check on the other.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
13.
A good system of internal control will safeguard its assets and enhance the accuracy and reliability of its accounting records.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
14.
A system of internal control cannot be considered good until the possibility of human error has been completely eliminated.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
15.
Only large companies need to be concerned with a system of internal control.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
16.
Under an effective system of internal control, errors occur only as a result of fraud or dishonesty.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
17.
The responsibility for ordering, receiving, and paying for merchandise should be assigned to different individuals.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
.
Fraud, Internal Control, and Cash
18.
7-7
The separation of duties feature of internal control can be negated when several employees are involved in a scheme.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
19.
In order to prevent a transaction from being recorded more than once, a company should maintain only one book of original entry.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
20.
Segregation of duties among employees eliminates the possibility of collusion.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
21.
For efficiency of operations and better control over cash, a company should maintain only one bank account.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
22.
Checks received in the mail should be immediately stamped "NSF" to prevent unauthorized cashing of the check.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
23.
The treasurer should prepare and sign a check only after authorization to issue a check has been provided.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
24.
Control over cash disbursements is improved if major expenditures are paid by check.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
25.
An example of segregation of duties is having a check signer recording cash disbursements.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
26.
Electronic funds transfer (EFT) is a disbursement system that uses a telephone or a computer to transfer cash from one location to another.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Leverage Technology, AICPA PC: None, IMA: None
27.
One example of a periodic independent verification is the bank reconciliation.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
28.
To obtain maximum benefit from a bank reconciliation, the reconciliation should be prepared by the employee authorized to sign checks.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
29.
All reconciling items in determining the adjusted cash balance per books require the depositor to make adjusting journal entries to the cash account.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
7-8 30.
A bank reconciliation is generally prepared by the bank and sent to the depositor along with canceled checks.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
31.
Cash equivalents are highly liquid investments that can be converted into a specific amount of cash.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
32.
Cash equivalents include money market accounts, commercial paper, and U.S. treasury bills held for ninety days or less.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
33.
Cash restricted in use should be separately reported on the balance sheet.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
34.
Sound internal control activities dictate that the amount of cash on hand should be kept to a maximum.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
35.
A basic principle of cash management is to increase the speed of paying liabilities.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Decision Modeling, AICPA PC: None, IMA: Business Economics
36.
If a monthly cash budget is prepared properly, there will never be a cash deficiency at the end of any month.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Decision Modeling, AICPA PC: None, IMA: Business Economics
37.
A cash budget contributes to more effective cash management.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
*38.
A petty cash fund is used to pay relatively large amounts.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
*39.
The petty cash fund eliminates the need for a bank checking account.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
Answers to True-False Statements 1. 2. 3. 4. 5. 6. 7.
F T T F F F T
8. 9. 10. 11. 12. 13. 14.
F T T F F T F
15. 16. 17. 18. 19. 20. 21.
F F T T F F F
22. 23. 24. 25. 26. 27. 28.
.
F T T F T T F
29. 30. 31. 32. 33. 34. 35.
T F T T T F F
36. 37. 38. 39.
F T F F
Fraud, Internal Control, and Cash
7-9
MULTIPLE CHOICE QUESTIONS 40.
Which of the following is not one of the main factors that contribute to fraudulent activity? a. Opportunity. b. Incompatible duties. c. Financial pressure. d. Rationalization.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
41.
All of the following requirements about internal controls were enacted under the Sarbanes Oxley Act except a. independent outside auditors must attest to the level of internal control. b. companies must develop sound internal controls over financial reporting. c. companies must continually assess the functionality of internal controls. d. independent outside auditors must eliminate redundant internal controls.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
42.
Which one of the following is not an objective of a system of internal controls? a. Safeguard company assets. b. Overstate liabilities in order to be conservative. c. Enhance the accuracy and reliability of accounting records. d. Reduce the risks of errors.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
43.
Which one of the following is not an objective of a system of internal controls? a. Safeguard company assets. b. Enhance the accuracy and reliability of accounting records. c. Fairness of the financial statements. d. Reduce the risks of errors.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
44.
All of the following are examples of internal control procedures except a. using prenumbered documents. b. reconciling the bank statement. c. customer satisfaction surveys. d. insistence that employees take vacations.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
45.
Each of the following is a feature of internal control except a. an extensive marketing plan. b. bonding of employees. c. separation of duties. d. recording of all transactions.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
.
7-10 46.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Each of the following is a feature of internal control except a. limited access to assets. b. independent internal verifications. c. authorization of transactions. d. generic design of documents.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
47.
Which of the following is not a limitation of internal control? a. Cost of establishing control procedures should not exceed their benefit. b. The human element. c. Collusion. d. The size of the company.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
48.
Internal controls are concerned with a. only manual systems of accounting. b. the extent of government regulations. c. safeguarding assets. d. preparing income tax returns.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
49.
Internal control is defined, in part, as a plan that safeguards a. all balance sheet accounts. b. assets. c. liabilities. d. capital stock.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
50.
Under the concept of establishment of responsibility, how many people should have the ultimate responsibility? a. Everyone in the organization. b. An individual and his/her supervisor. c. Only one individual. d. The CEO.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
51.
Internal controls are not designed to safeguard assets from a. natural disasters. b. employee theft. c. robbery. d. unauthorized use.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
.
Fraud, Internal Control, and Cash
52.
7-11
Having one person responsible for the related activities of ordering merchandise, receiving goods, and paying for them a. increases the potential for errors and fraud. b. decreases the potential for errors and fraud. c. is an example of good internal control. d. is a good example of safeguarding the company's assets.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
53.
The custodian of a company asset should a. have access to the accounting records for that asset. b. be someone outside the company. c. not have access to the accounting records for that asset. d. be an accountant.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
54.
Internal auditors a. are hired by CPA firms to audit business firms. b. are employees of the IRS who evaluate the internal controls of companies filing tax returns. c. evaluate the system of internal controls for the companies that employ them. d. cannot evaluate the system of internal controls of the company that employs them because they are not independent.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
55.
When two or more people get together for the purpose of circumventing prescribed controls, it is called a. a fraud committee. b. collusion. c. a division of duties. d. bonding of employees.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
56.
From an internal control standpoint, the asset most susceptible to improper diversion and use is a. prepaid insurance. b. cash. c. buildings. d. land.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
57.
A traditional definition of internal control specifically includes all of the following features except a. adherence to prescribed managerial policies. b. promotion of operational efficiency. c. reliability of accounting data. d. insistence that employees not take earned vacations.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
.
7-12 58.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
A consequence of separation of duties is that a. theft by employees becomes impossible. b. operations become extremely inefficient because of constant training of employees. c. more employees will need to be bonded. d. theft is still possible when several employees are involved.
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
59.
A very small company would have the most difficulty in implementing which of the following internal control activities? a. Separation of duties. b. Limited access to assets. c. Periodic independent verification. d. Sound personnel procedures.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
60.
The principle of establishing responsibility does not include a. one person being responsible for one task. b. authorization of transactions. c. independent internal verification. d. approval of transactions.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
61.
The control principle related to not having the same person authorize and pay for goods is known as a. establishment of responsibility. b. independent internal verification. c. separation of duties. d. rotation of duties.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
62.
Two individuals at a retail store work the same cash register. You evaluate this situation as a. a violation of establishment of responsibility. b. a violation of separation of duties. c. supporting the establishment of responsibility. d. supporting internal independent verification.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
63.
An accounts payable clerk also has access to the approved supplier master file for purchases. The control principle of a. establishment of responsibility is violated. b. independent internal verification is violated. c. documentation procedures is violated. d. separation of duties is violated.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
.
Fraud, Internal Control, and Cash
64.
7-13
Related selling activities do not include a. ordering the merchandise. b. making a sale. c. shipping the goods. d. billing the customer.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
65.
Related purchasing activities include a. ordering, receiving, paying. b. ordering, selling, paying. c. ordering, shipping, billing. d. selling, shipping, paying.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
66.
Joe is a warehouse custodian and also maintains the accounting record of the inventory held at the warehouse. An assessment of this situation indicates a. documentation procedures are violated. b. independent internal verification is violated. c. segregation of duties is violated. d. establishment of responsibility is violated.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
67.
Physical controls to safeguard assets do not include a. cashier department supervisors. b. vaults. c. safety deposit boxes. d. locked warehouses.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
68.
In large companies, the independent internal verification procedure is often assigned to a. computer operators. b. management. c. internal auditors. d. outside CPAs.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
69.
Maximum benefit from independent internal verification is obtained when a. it is made on a pre-announced basis. b. it is done by the employee possessing custody of the asset. c. discrepancies are reported to management. d. it is done at the time of the audit.
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
.
7-14 70.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
If employees are bonded a. it means that they are not allowed to handle cash. b. they have worked for the company for at least 10 years. c. they have been insured against misappropriation of assets. d. it is impossible for them to steal from the company.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
71.
In a small business, the lack of certain separations of duties can best be overcome by a. bonding the employees. b. getting the owner actively involved. c. hiring only honest employees. d. holding one person responsible for a given set of transactions.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
72.
Mrs. Smith has worked for Bosco Inc. for 20 years without taking a vacation. An internal control feature that would address this situation would be a. human resource controls. b. establishment of responsibility. c. physical controls. d. documentation procedures.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
73.
A system of internal control a. is infallible. b. can be rendered ineffective by employee collusion. c. invariably will have costs exceeding benefits. d. is premised on the concept of absolute assurance.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
74.
Which of the following statements is correct? a. Due to its liquid nature, cash is the easiest asset to steal. b. A good system of internal control will ensure that employees will not be able to steal cash. c. It takes two or more employees working together to be able to steal cash. d. All of these answer choices are correct.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
75.
Internal control measures a. only apply to publicly traded companies. b. are in place to safeguard assets. c. can eliminate all irregularities in the accounting process. d. All of these answer choices are correct.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
.
Fraud, Internal Control, and Cash
76.
7-15
Sam’s Grocery Store has the following policy. ‘Only one cashier can have access to a cash drawer.’ Which internal control principle supports this policy? a. Documentation procedures. b. Segregation of duties. c. Physical controls. d. Establishment of responsibilities.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
77.
Ron Jones has been a trusted employee for over 10 years. He is responsible for ordering merchandise inventory, receiving the inventory items, and authorizing the payment for these items. Which internal control principle, if any, is being violated? a. None, Ron has proven to be trustworthy and has enough experience to do a good job. b. Documentation procedures. c. Establishment of responsibilities. d. Segregation of duties.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
78.
What is the rationale for the internal control principle, segregation of duties? a. History has shown that employees are generally dishonest and thus cannot be entrusted with performing related duties. b. The work of one employee should, without duplication of effort, provide a reliable basis for evaluating the work of another employee. c. Control is most effective when only one person is responsible for a given task. d. Segregation of duties causes companies to hire more employees and thus it supports the economy.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
79.
Bonding involves all of the following except a. The company obtains insurance protection against misappropriation of assets by a dishonest employee. b. The insurance company screens employees before they are added to the policy. c. The company informs employees that the insurance company will vigorously prosecute all offenders. d. Employees do not commit inappropriate acts because of the threat of prosecution and their loyalty to the employer.
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
80.
Which of the following would not be included in the definition of cash? a. Money on deposit in a bank. b. Coins. c. NSF checks. d. Petty cash.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
7-16 81.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
At Emerson Company, one bookkeeper prepares the cash deposits while the other bookkeeper enters the collections in the journal and ledger. Which of the following is the best explanation of this type of internal control principle over cash receipts? a. Physical controls. b. Documentation procedures. c. Segregation of duties. d. Mechanical controls.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
82.
Which one of the following items would not be considered cash? a. Coins. b. Money orders. c. Currency. d. Postdated checks.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
83.
The reconciliation of the cash register tape with the cash in the register is an example of a. other controls. b. independent internal verification. c. establishment of responsibility. d. segregation of duties.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
84.
Which of the following is not an internal control procedure for cash? a. Payments should be made with cash. b. There should be limited access to cash. c. The amount of cash on hand should be kept to a minimum. d. Cash should be deposited daily.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
85.
Which of the following is not an internal control activity for cash? a. The number of persons who have access to cash should be limited. b. The functions of record keeping and maintaining custody of cash should be combined. c. Surprise audits of cash on hand should be made occasionally. d. All cash receipts should be recorded promptly.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
86.
Supervisors counting cash receipts daily is an example of a. human resource controls. b. independent internal verification. c. establishment of responsibility. d. segregation of duties.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
.
Fraud, Internal Control, and Cash
87.
7-17
Which of the following is not an internal control procedure for cash? a. Only designated personnel are authorized to handle cash. b. The same individual receives the cash and pays the bills. c. Surprise audits of cash on hand should be made occasionally. d. Access to cash is limited.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
88.
Which of the following is not an internal control activity for cash? a. All payments should be made with currency, not checks. b. Banking facilities should be used as much as possible. c. The amount of cash on hand should be kept to a minimum. d. Employees who have access to cash should be bonded.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
89.
Control over cash disbursements is generally more effective when a. all bills are paid in cash. b. disbursements are made by the accounts payable subsidiary clerk. c. payments are made by check. d. all purchases are made on credit.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
90.
Which of the following is not a suggested procedure to establish internal control over cash disbursements? a. Anyone can sign the checks. b. Different individuals approve and make the payments. c. Blank checks are stored with limited access. d. The bank statement is reconciled monthly.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
91.
The use of prenumbered checks is an example of a. documentation procedures. b. independent internal verification. c. establishment of responsibility. d. segregation of duties.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
92.
Before a check authorization is issued, the following documents must be in agreement, except for the a. invoice. b. remittance advice. c. receiving report. d. purchase order.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
.
7-18 93.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Which of the following is an appropriate internal control activity for cash? a. Record keeping and custodianship over cash should be performed by the same person. b. Banking facilities should be used as little as possible. c. All payments should be made with currency, not checks. d. The amount of cash on hand should be kept to a minimum.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
94.
An exception to disbursements being made by check is acceptable when cash is paid a. to an owner. b. to employees as wages. c. from petty cash. d. to employees as loans.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
95.
Allowing only the treasurer to sign checks is an example of a. documentation procedures. b. separation of duties. c. other controls. d. establishment of responsibility.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
96.
Blank checks a. should be safeguarded. b. should be pre-signed. c. do not need to be safeguarded since they must be signed to be valid. d. should not be pre-numbered.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
97.
An employee authorized to sign checks should not record a. owner cash contributions. b. mail receipts. c. cash disbursement transactions. d. sales transactions.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
98.
Electronic funds transfer (EFT) is a disbursement system that transfers cash from one location to another using a. a telephone. b. a telegraph. c. a computer. d. a telephone, telegraph, or computer.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Leverage Technology, AICPA PC: Leverage Technology, IMA: Business Applications
.
Fraud, Internal Control, and Cash
99.
7-19
A bank statement a. lets a depositor know the financial position of the bank as of a certain date. b. is a credit reference letter written by the depositor's bank. c. is a bill from the bank for services rendered. d. shows the activities that increased or decreased the depositor's account balance.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
100.
Which one of the following would not cause a bank to debit a depositor's account? a. Bank service charge. b. Collection of a note receivable. c. Wiring of funds to other locations. d. Checks marked NSF.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
101.
A company maintains the asset account, Cash in Bank, on its books, while the bank maintains a reciprocal account that is a. a contra asset account. b. a liability account. c. also an asset account. d. a stockholders' equity account.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
102.
A deposit made by a company will appear on the bank statement as a a. debit. b. credit. c. debit memorandum. d. credit memorandum.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
103.
All of the following are items that would most likely be paid from a petty cash fund except a. postage due. b. taxi fares. c. administrative wages. d. freight-out.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
104.
All of the following are true regarding bank statements except a. the bank statement will show a credit for deposits received from a company. b. the bank statement balance will always agree with the company recorded balance. c. the bank statement is a copy of the bank's records sent to the customer for periodic review. d. the bank statement will show a debit if a check is paid for a company issuing the check.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
7-20 105.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Which of the following controls would best help detect the removal of a blank check by an employee from the back of a company's checkbook for subsequent misappropriation of funds? a. An accounting policies manual. b. Tracing any debit memorandums from the bank to the company's records. c. The use of prenumbered checks. d. A review of the cash budget.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
106.
On a bank statement, paid checks are shown as a. credits. b. debits c. assets. d. liabilities.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
107.
A NSF check should appear in which section of the bank reconciliation? a. Addition to the balance per books. b. Deduction from the balance per bank. c. Addition to the balance per bank. d. Deduction from the balance per books.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
108.
Which of the following would be deducted from the balance per books on a bank reconciliation? a. Outstanding checks. b. Deposits in transit. c. Notes collected by the bank. d. Service charges.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
109.
Which of the following would be added to the balance per books on a bank reconciliation? a. Outstanding checks. b. Deposits in transit. c. Notes collected by the bank. d. NSF check.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
110.
Which of the following would not be subtracted from the balance per books on a bank reconciliation? a. Outstanding checks. b. NSF checks. c. Check printing charge. d. Service charges.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
Fraud, Internal Control, and Cash
111.
7-21
Which of the following would be deducted from the balance per bank on a bank reconciliation? a. Outstanding checks. b. Deposits in transit. c. Notes collected by the bank. d. Service charges.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
112.
Which of the following would be added to the balance per bank on a bank reconciliation? a. Outstanding checks. b. Deposits in transit. c. Notes collected by the bank. d. Service charges.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
113.
A check returned by the bank marked "NSF" means a. no service fee. b. no signature found. c. not satisfactorily filled out. d. not sufficient funds.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
114.
A debit memorandum would not be issued by the bank for a. a bank service charge. b. the issuance of traveler's checks. c. the wiring of funds. d. the collection of a notes receivable.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
115.
A bank reconciliation should be prepared a. whenever the bank refuses to lend the company money. b. when an employee is suspected of fraud. c. to explain any difference between the depositor's balance per books with the balance per bank. d. by the person who is authorized to sign checks.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
116.
Deposits in transit a. have been recorded on the company's books but not yet by the bank. b. have been recorded by the bank but not yet by the company. c. have not been recorded by the bank or the company. d. are customers’ checks that have not yet been received by the company.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
7-22 117.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
In preparing a bank reconciliation, outstanding checks are a. added to the balance per bank. b. deducted from the balance per books. c. added to the balance per books. d. deducted from the balance per bank.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
118.
If a check correctly written and paid by the bank for $628 is incorrectly recorded on the company's books for $682, the appropriate treatment on the bank reconciliation would be to a. add $54 to the book's balance. b. subtract $54 from the book's balance. c. deduct $54 from the bank's balance. d. deduct $628 from the book's balance.
Ans: A, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
119.
A check written by the company for $167 is incorrectly recorded by a company as $176. On the bank reconciliation, the $9 error should be a. added to the balance per books. b. deducted from the balance per books. c. added to the balance per bank. d. deducted from the balance per bank.
Ans: A, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
120.
For which of the following errors should the appropriate amount be added to the balance per bank on a bank reconciliation? a. Check for $63 recorded by the company as $36. b. Deposit of $600 recorded by the bank as $60. c. A returned $300 check recorded by the bank as $30. d. Check for $75 recorded by the company as $57.
Ans: B, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
121.
For which of the following errors should the appropriate amount be subtracted from the balance per bank on a bank reconciliation? a. Check for $63 recorded by the company as $36. b. Deposit of $600 recorded by the bank as $60. c. A returned $300 check recorded by the bank as $30. d. Check for $75 recorded by the company as $57.
Ans: C, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
122.
For which of the following errors should the appropriate amount be added to the balance per books on a bank reconciliation? a. Check written for $63, but recorded by the company as $36. b. Deposit of $600 recorded by the bank as $60. c. A returned $300 check recorded by the bank as $30. d. Check written for $57, but recorded by the company as $75.
Ans: D, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
Fraud, Internal Control, and Cash
123.
7-23
For which of the following errors should the appropriate amount be subtracted from the balance per books on a bank reconciliation? a. Check written for $63, but recorded by the company as $36. b. Deposit of $600 recorded by the bank as $60. c. A returned $300 check recorded by the bank as $30. d. Check written for $57, but recorded by the company as $75.
Ans: A, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
124.
Which of the following bank reconciliation items would not result in an adjusting entry? a. Service charge. b. Deposits in transit. c. NSF check of customer. d. Collection of a note by the bank.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
125.
Which of the following items on a bank reconciliation would require an adjusting entry on the company’s books? a. An error by the bank. b. Outstanding checks. c. A bank service charge. d. A deposit in transit.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
126.
All of the following bank reconciliation items would result in an adjusting entry on the company’s books except a. interest earned. b. deposits in transit. c. fee for collection of note by bank. d. NSF check of customer.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
127.
Notification by the bank that a deposited customer check was returned NSF requires that the company make the following adjusting entry: a. Accounts Receivable Cash b. Cash Accounts Receivable c. Miscellaneous Expense Accounts Receivable d. No adjusting entry is necessary.
Ans: A, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
7-24 128.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
James Company had checks outstanding totaling $32,400 on its June bank reconciliation. In July, James Company issued checks totaling $233,400. The July bank statement shows that $157,800 in checks cleared the bank in July. A check from one of James Company's customers in the amount of $1,800 was also returned marked "NSF." The amount of outstanding checks on James Company's July bank reconciliation should be a. $75,600. b. $108,000. c. $106,200. d. $43,200.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $32,400 + $233,400 − $157,800 = $108,000 (June out. Checks + book disb – bank disb.)
129.
Dekin Company had checks outstanding totaling $34,000 on its May bank reconciliation. In June, Dekin Company issued checks totaling $212,800. The June bank statement shows that $158,400 in checks cleared the bank in June. A check from one of Dekin Company's customers in the amount of $1,600 was also returned marked "NSF." The amount of outstanding checks on Dekin Company's June bank reconciliation should be a. $86,800. b. $54,400. c. $88,400. d. $20,400.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $34,000 + $212,800 − $158,400 = $88,400 (May out. Checks + book dish. – bank disb.)
130.
Nilson Company gathered the following reconciling information in preparing its August bank reconciliation: Cash balance per books, 8/31 $28,000 Deposits in transit 1,200 Notes receivable and interest collected by bank 6,800 Bank charge for check printing 160 Outstanding checks 16,000 NSF check 1,360 The adjusted cash balance per books on August 31 is a. $33,280. b. $32,080. c. $18,400. d. $19,680.
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $28,000 + $6,800 − $160 − $1,360 = $33,280 (Cash bal. + Note coll. – Print. Char. – NSF check)
.
Fraud, Internal Control, and Cash
131.
7-25
Karlin Company gathered the following reconciling information in preparing its April bank reconciliation: Cash balance per books, 4/30 $17,600 Deposits in transit 2,400 Notes receivable and interest collected by bank 5,920 Bank charge for check printing 200 Outstanding checks 12,000 NSF check 1,120 The adjusted cash balance per books on April 30 is a. $24,600. b. $23,520. c. $22,200. d. $24,440.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $17,600 + $5,920 − $200 − $1,120 = $22,200 (Cash bal. + Note coll. – Print. char. – NSF check)
132.
Clark Company developed the following reconciling information in preparing its September bank reconciliation: Cash balance per bank, 9/30 $46,200 Note receivable collected by bank 25,200 Outstanding checks 37,800 Deposits in transit 18,900 Bank service charges 315 NSF check 5,040 Using the above information, determine the cash balance per books (before adjustments) for the Clark Company. a. $41,055. b. $65,100. c. $7,455. d. $63,000.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($46,200 − $37,800 + $18,900) − $25,200 + $315 + $5,040 = $7,455 ((Cash bal. – out. Checks + dep. In tran.) – Note coll. + ser. char. + NSF check
133.
Bank errors a. occur because of time lags. b. must be corrected by debits. c. are infrequent in occurrence. d. are corrected by making an adjusting entry on the depositor's books.
Ans: C, LO: 3, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
7-26 134.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Higgins Company gathered the following reconciling information in preparing its October bank reconciliation: Cash balance per books, 10/31 $16,800 Deposits in transit 600 Notes receivable and interest collected by bank 3,400 Bank charge for check printing 80 Outstanding checks 8,000 NSF check 680 The adjusted cash balance per books on October 31 is a. $18,840. b. $16,040. c. $11,440. d. $19,440.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $16,800 + $3,400 − $80 − $680 = $19,440 (Cash bal. + Note coll. – Print char. – NSF check)
135.
Dobler Company gathered the following reconciling information in preparing its June bank reconciliation: Cash balance per books, 6/30 $12,600 Deposits in transit 900 Notes receivable and interest collected by bank 2,220 Bank charge for check printing 75 Outstanding checks 4,500 NSF check 420 The adjusted cash balance per books on June 30 is a. $15,225. b. $14,820. c. $14,325. d. $15,165.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $12,600 + $2,220 − $75 − $420 = $14,325 (Cash bal. + Note coll – Print char. – NSF check)
136.
Adler Company developed the following reconciling information in preparing its December bank reconciliation: Cash balance per bank, 12/31 $24,000 Note receivable collected by bank 12,000 Outstanding checks 18,000 Deposits in transit 9,000 Bank service charges 150 NSF check 2,400 Using the above information, determine the cash balance per books (before adjustments) for the Adler Company. a. $5,550. b. $33,000. c. $17,550. d. $24,000.
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($24,000 − $18,000 + $9,000) − $12,000 + $150 + 2,400 = $5,550 ((Cash bal. – out. Checks + dep. In tran) – Note coll. + ser. char. + NSF check)
.
Fraud, Internal Control, and Cash
137.
7-27
An adjusting entry is not required for a. outstanding checks. b. collection of a note by the bank. c. NSF checks. d. bank service charges.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
138.
In the month of November Gavin Company Inc. wrote checks in the amount of $55,500. In December, checks in the amount of $75,948 were written. In November, $50,808 of these checks were presented to the bank for payment, and $65,298 in December. What is the amount of outstanding checks at the end of December? a. $10,650. b. $15,342. c. $4,692. d. $21,300.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($55,500 + $75,948) − ($50,808 + $65,298) = $15,342 (Nov. book disb. + Dec. book disb.) – (Nov. bank disb. + Dec. bank disb.)
139.
In the month of November Gavin Company Inc. wrote checks in the amount of $46,250. In December, checks in the amount of $63,290 were written. In November, $42,340 of these checks were presented to the bank for payment, and $54,415 in December. What is the amount of outstanding checks at the end of December? a. $8,875. b. $3,910. c. $12,785. d. $17,750.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($46,250 + $63,290) − ($42,340 + $54,415) = $12,785 (Nov. book disb. + Dec. book disb.) − (Nov. bank disb. + Dec. bank disb.)
140.
What causes the balance on the bank statement to differ from the cash balance in the general ledger? a. Time lags. b. Errors by the bank. c. Errors by the company. d. All of these answer choices are correct.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
141.
Of the following employees, who should prepare the bank reconciliation? a. Anne, the bookkeeper, because she is aware of all transactions that affected cash. b. Michael, the treasurer, because he has control of the checkbook and has taken more accounting courses than any other employee. c. Mary, the cashier, because she does not pay bills. d. Frank, the purchasing agent, because he does not work in the accounting department.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
.
7-28 142.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
While preparing the bank reconciliation, you notice that a check, written by the company for $750, has been outstanding for 5 months. What is the best action for you to take? a. Void the check. If it has not been cashed in 5 months, it will never be cashed. b. Issue a replacement check because you assume the original check has been lost. c. Wait 3 more months to give the bank more time to clear the check. d. Investigate to determine why the check has not cleared.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
143.
Which of the following is an example of a bank reconciliation item that requires an adjusting entry? a. NSF check. b. Deposit in transit. c. Bank error. d. None of these items requires an adjusting entry.
Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
144.
At April 30, Kessler Company has the following bank information: Cash balance per bank $6,900 Outstanding checks $420 Deposits in transit $825 Credit memo for interest $15 Bank service charge $30 What is Kessler’s adjusted cash balance on April 30? a. $7,290. b. $7,320. c. $6,495. d. $7,305.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $6,900 − $420 + $825 = $7,305 (Cash bal. – out. Checks + dep. In tran.)
145.
At April 30, Mendoza Company has the following bank information: Cash balance per bank $3,600 Outstanding checks $280 Deposits in transit $550 Credit memo for interest $10 Bank service charge $20 What is Mendoza’s adjusted cash balance on April 30? a. $3,860. b. $3,880. c. $3,330. d. $3,870.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $3,600 − $280 + $550 = $3,870 (Cash bal. – out. checks + dep. In tran.)
.
Fraud, Internal Control, and Cash
146.
7-29
Lackey Company wrote checks totaling $38,430 during October and $41,964 during November. $36,540 of these checks cleared the bank in October, and $40,995 cleared the bank in November. What was the amount of outstanding checks on November 30? a. $2,859. b. $519. c. $1,374. d. $4,455.
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($38,430 + $41,964) − ($36,540 + $40,995) = $2,859 (Oct. book disb. + Nov.book disb.) – (Oct. bank disb. + Nov. bank disb.)
147.
Bishop Company wrote checks totaling $51,240 during October and $55,950 during November. $48,720 of these checks cleared the bank in October, and $54,660 cleared the bank in November. What was the amount of outstanding checks on November 30? a. $3,810. b. $690. c. $1,830. d. $5,940.
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($51,240 + $55,950) − ($48,720 + $54,660) = $3,810 (oct. book disb. + Nov.book disb.) – (Oct. bank disb. + Nov. bank disb.)
148.
Russel Company assembled the following information in completing its March bank reconciliation: Balance per bank $19,100 Outstanding checks $3,875 Deposits in transit $6,250 NSF check $400 Bank service charges $125 Cash balance per books $22,000 As a result of this reconciliation, Russel will a. reduce its cash account by $2,375. b. reduce its cash account by $125. c. increase its cash account by $275. d. reduce its cash account by $525.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $400 + $125 = $525 (NSF check + Ser. Char.)
.
7-30 149.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Schwinn Company assembled the following information in completing its March bank reconciliation: Balance per bank $12,224 Outstanding checks $2,480 Deposits in transit $4,000 NSF check $256 Bank service charges $80 Cash balance per books $14,080 As a result of this reconciliation, Schwinn will a. reduce its cash account by $1,520. b. reduce its cash account by $80. c. increase its cash account by $176. d. reduce its cash account by $336.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $256 + $80 = $336 (NSF check + Ser. Char.)
150.
If a check correctly written and paid by the bank for $491 is incorrectly recorded on the company’s books for $419, the appropriate treatment on the bank reconciliation would be to a. add $72 to the book’s balance. b. subtract $72 from the book’s balance. c. deduct $72 from the bank’s balance. d. deduct $491 from the book’s balance.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
151.
A check written by the company for $275 is incorrectly recorded by a company as $257. On the bank reconciliation, the $18 error should be a. added to the balance per books. b. deducted from the balance per books. c. added to the balance per bank. d. deducted from the balance per bank.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
152.
In the month of May, Lopat Company Inc. wrote checks in the amount of $74,000. In June, checks in the amount of $101,264 were written. In May, $67,744 of these checks were presented to the bank for payment, and $87,064 in June. What is the amount of outstanding checks at the end of May? a. $14,200. b. $6,256. c. $20,456. d. $28,400.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $74,000 − $67,744 = $6,256 (May book disb. – May bank disb.)
.
Fraud, Internal Control, and Cash
153.
7-31
In the month of May, Lopat Company Inc. wrote checks in the amount of $64,750. In June, checks in the amount of $88,606 were written. In May, $59,276 of these checks were presented to the bank for payment, and $76,181 in June. What is the amount of outstanding checks at the end of June? a. $12,425. b. $5,474. c. $17,899. d. $24,850.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($64,750 + $88,606) − ($59,276 + $76,181) = $17,899 (May book disb + June book disb.) (May bank disb. + June bank disb.)
154.
Which statement regarding negative cash balances is true? a. The amount is offset against other current assets because users need to know net current assets. b. The amount is shown as a current liability because a company cannot have a cash balance below zero. c. The company must obtain a loan to bring the cash balance to zero before financial statements are prepared. d. The negative cash balance is included as a current asset and discussed in a footnote to the financial statements.
Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
155.
Which item is a current asset? a. Cash – regardless of whether it has a positive or negative balance. b. Cash equivalents. c. Cash that will be used to close a plant in eighteen months. d. Restricted cash that will not be used within the upcoming year.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
156.
Which of the following would not be reported on the balance sheet as a cash equivalent? a. Money market fund. b. Commercial paper. c. Treasury bill. d. Restricted cash.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
157.
Cash equivalents do not include a. money market accounts. b. commercial paper. c. U.S. Treasury bills. d. long-term investment.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
7-32 158.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Restricted cash should be reported a. always as a noncurrent asset. b. separately on the income statement. c. separately on the balance sheet. d. always as a current asset.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
159.
All of the following are true regarding the management and monitoring of cash except a. companies may have plenty of sales, but insufficient cash to support operations. b. the cash to cash operating cycle for a manufacturer is generally shorter than that of a merchandising company. c. manufacturers may experience a significant lag between the purchase of raw materials and the receipt of cash from customers. d. companies should have sufficient cash to meet payments but minimize the amount of non-revenue-generating cash on hand.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
160.
Collier Company has implemented a just-in-time system, which relies on suppliers to deliver goods for resale as needed. This implementation is most consistent with which of the following basic principles of cash management? a. Increasing the speed of receivables collection. b. Planning the timing of major expenditures. c. Keeping inventory levels low. d. Delaying the payment of liabilities.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Leverage Technology, AICPA PC: Project Management, IMA: Business Economics
161.
Management of cash is the responsibility of the company a. accountant. b. president. c. treasurer. d. vice-president.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
162.
Which of the following is not a basic principle of cash management? a. Increase the speed of collection on receivables. b. Maintain idle cash. c. Keep inventory levels low. d. Delay payment of liabilities.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
163.
Which of the following is not a basic principle of cash management? a. Increase collection of receivables. b. Keep inventory levels high. c. Delay payment of liabilities. d. Invest idle cash.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
.
Fraud, Internal Control, and Cash
164.
7-33
Which of the following is not a basic principle of cash management? a. Increase collection of receivables. b. Keep inventory levels low. c. Pay all liabilities early. d. Invest idle cash.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
165.
Which of the following does not appear as a separate section on the cash budget? a. Cash receipts. b. Cash disbursements. c. Cash sales. d. Financing.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
166.
The following information was taken from Mitchell Company cash budget for the month of July: Beginning cash balance $125,000 Cash receipts 120,000 Cash disbursements 170,000 If the company has a policy of maintaining an end of the month cash balance of $125,000, the amount the company would have to borrow is a. $50,000. b. $25,000. c. $75,000. d. $36,000.
Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $125,000 − ($125,000 + $120,000 − $170,000) = $50,000 (End. cash bal. – (beg. Cash. bal. + rec. – disb.))
167.
The following information was taken from Hurlbert Company cash budget for the month June Beginning cash balance $69,000 Cash receipts 93,000 Cash disbursements 117,000 If the company has a policy of maintaining an end of the month cash balance of $60,000, the amount the company would have to borrow is a. $36,000. b. $15,000. c. $24,000. d. $0.
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $60,000 − ($69,000 + $93,000 − $117,000) = $15,000 (End. Cash bal. – (beg. Cash bal. + rec. – disb.))
.
7-34 168.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The following information was taken from Niland Company cash budget for the month of April Beginning cash balance $120,000 Cash receipts 108,000 Cash disbursements 136,000 If the company has a policy of maintaining an end of the month cash balance of $100,000, the amount the company would have to borrow is a. $116,000. b. $28,000. c. $8,000. d. $0.
Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $100,000 − ($120,000 + $108,000 − $136,000) = $8,000 (End cash bal. – (beg. Cash bal. + rec. – disb.))
169.
Which one of the following sections would not appear on a cash budget? a. Cash receipts. b. Financing. c. Investing. d. Cash disbursements.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
170.
The following information was taken from Hobson Company cash budget for the month of June Beginning cash balance $180,000 Cash receipts 174,000 Cash disbursements 204,000 If the company has a policy of maintaining an end-of-the-month cash balance of $150,000, the amount the company would have to borrow is a. $66,000. b. $30,000. c. $0 d. $90,000.
Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $150,000 − ($180,000 + $174,000 − $204,000) = $0 (End cash bal. – (beg. Cash bal. + rec. – disb.))
171.
The following information was taken from Molina Company cash budget for the month of November: Beginning cash balance $144,000 Cash receipts 174,000 Cash disbursements 240,000 If the company has a policy of maintaining an end-of-the-month cash balance of $120,000, the amount the company would have to borrow is a. $66,000. b. $0. c. $42,000. d. $120,000.
Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $120,000 − ($144,000 + $174,000 − $240,000) = $42,000 (End cash bal. – (beg. Cash bal. + rec. – disb.))
.
Fraud, Internal Control, and Cash
172.
7-35
The following credit sales are budgeted by Garcia Company: January $306,000 February 450,000 March 630,000 April 540,000 The company’s past experience indicates that 70% of the accounts receivable are collected in the month of sale, 20% in the month following the sale, and 8% in the second month following the sale. The anticipated cash inflow for the month of March is a. $555,480. b. $504,000. c. $540,000. d. $529,200.
Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($306,000 .08) + ($450,000 .20) + ($630,000 .70) = $555,480 (Jan. sal. × 8%) + (Feb. sal. × 20%) + (mar. sal. × 70%)
173.
The cash receipts section of a cash budget includes all of the following except a. cash sales. b. collections from customers. c. receipts of interest and dividends. d. expected borrowings.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
174.
Which of the following is not included in the cash disbursements section of a cash budget? a. Payments for materials. b. Payments for income taxes. c. Repayments of borrowed funds. d. All of these answer choices are included.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
175.
The following credit sales are budgeted by Gonzalez Company: February 200,000 March 280,000 April 240,000 The company’s past experience indicates that 80% of the accounts receivable are collected in the month of sale, 20% in the month following the sale. The anticipated cash inflow for the month of April is a. $172,800. b. $201,600. c. $216,000. d. $248,000.
Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($280,000 .20) + ($240,000 .80) = $248,000 (Mar. sal. × 20%) + (Apr. sal. × 80%)
.
7-36 176.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The following credit sales are budgeted by Gonzalez Company: January $170,000 February 250,000 March 350,000 The company’s past experience indicates that 80% of the accounts receivable are collected in the month of sale, 20% in the month following the sale. The anticipated cash inflow for the month of March is a. $330,000. b. $280,000. c. $350,000. d. $340,000.
Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($250,000 .20) + ($350,000 .80) = $330,000 (Feb. sal. × 20%) + (mar. sal. × 80%)
177.
If the cash budget showed a projected cash shortage, the company would most likely a. make fewer purchases of inventory so they could control costs. b. lay off workers for that period. c. arrange to borrow the necessary cash for that period. d. cut salaries for that period.
Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
178.
Ferguson Company is preparing a cash budget for September. The company’s cash balance on September 1 is $34,800. The company anticipates cash receipts of $167,700 and cash disbursements of $175,980. If Ferguson desires a cash balance of $36,000, it must a. acquire financing of $1,200. b. acquire financing of $9,480. c. acquire financing of $7,080. d. acquire financing of $27,720.
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $36,000 − ($34,800 + $167,700 − $175,980) = $9,480 (Des. Cash bal. – (beg. Cash bal. + rec. – disb.)
179.
Petersen Company is preparing a cash budget for September. The company’s cash balance on September 1 is $23,200. The company anticipates cash receipts of $111,800 and cash disbursements of $117,320. If Petersen desires a cash balance of $24,000, it must a. acquire financing of $800. b. acquire financing of $6,320. c. acquire financing of $4,720. d. acquire financing of $18,480.
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $24,000 − ($23,200 + $111,800 − $117,320) = $6,320 (Des. Cash bal. – (beg. Cash bal. + rec. – disb.))
.
Fraud, Internal Control, and Cash
180.
7-37
The following credit sales are budgeted by Milford Company: May $476,000 June 700,000 July 980,000 August 840,000 The company’s past experience indicates that 70% of the accounts receivable are collected in the month of sale, 20% in the month following the sale, and 8% in the second month following the sale. The anticipated cash inflow for the month of August is a. $864,080. b. $784,000. c. $840,000. d. $823,200.
Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($700,000 .08) + ($980,000 .20) + ($840,000 .70) = $840,000 (June sal. × 8%) + (July sal. × 20%) + (Aug. sal. × 70%)
181.
A company’s past experience indicates that 60% of its credit sales are collected in the month of sale, 30% in the next month, and 5% in the second month after the sale; the remainder is never collected. Budgeted credit sales were: April $ 250,000 May 150,000 June 375,000 The cash inflow in the month of June is expected to be a. $282,500. b. $213,750. c. $225,000. d. $270,000.
Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($250,000 .05) + ($150,000 .30) + ($375,000 .60) = $282,500 (Apr. sal. × 5%) + (May sal. × 30%) + (June sal. × 60%)
182.
A company’s past experience indicates that 60% of its credit sales are collected in the month of sale, 30% in the next month, and 5% in the second month after the sale; the remainder is never collected. Budgeted credit sales were: July $300,000 August 180,000 September 450,000 The cash inflow in the month of September is expected to be a. $339,000. b. $256,500. c. $270,000. d. $324,000.
Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($300,000 .05) + ($180,000 .30) + ($450,000 .60) = $339,000 (Jul. sal. × 5%) + (Aug. sal. × 30%) + (Sep. sal. × 60%)
.
7-38 183.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Which one of the following items would never appear on a cash budget? a. Office salaries expense. b. Interest expense. c. Depreciation expense. d. Travel expense.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
184.
Expected direct materials purchases in Rees Company are $210,000 in the first quarter and $270,000 in the second quarter. Forty percent of the purchases are paid in cash as incurred, and the balance is paid in the following quarter. The budgeted cash payments for purchases in the second quarter are: a. $288,000. b. $270,000. c. $234,000. d. $216,000.
Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($210,000 .60) + ($270,000 .40) = $234,000 (1st Q. purch × 60%) + (2nd Q. purch. × 40%)
185.
Expected direct materials purchases in Wade Company are $630,000 in the first quarter and $810,000 in the second quarter. Forty percent of the purchases are paid in cash as incurred, and the balance is paid in the following quarter. The budgeted cash payments for purchases in the second quarter are: a. $864,000. b. $810,000. c. $702,000. d. $648,000.
Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($630,000 .60) + ($810,000 .40) = $702,000 (1st Q. purch × 60%) + (2nd Q. purch. × 40%)
*186. A credit balance in Cash Over and Short account is shown as a. an asset. b. a liability. c. a revenue. d. an expense. Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
*187. All of the following activities occur at the time of a cash disbursement from petty cash except a. the petty cash custodian signs the voucher. b. available supporting documents are attached to the voucher. c. a journal entry is made for each cash distribution. d. the individual receiving payment signs the voucher. Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Internal Controls
.
Fraud, Internal Control, and Cash
7-39
*188. All of the following actions would strengthen internal control over a petty cash fund except a. surprise counts by a supervisor. b. cancellation of paid vouchers. c. submission of supporting documents. d. multiple petty cash custodians. Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
*189. Which of the following is not a necessary internal control procedure for the replenishment of the petty cash fund? a. Segregation of duties. b. Documentation procedures. c. Independent internal verification. d. Employee background check. Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
*190. The entry to replenish a petty cash fund includes a credit to a. Petty Cash. b. Cash. c. Freight-In. d. Postage Expense. Ans: B, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
*191. A debit balance in Cash Over and Short is reported as a a. contra asset. b. miscellaneous asset. c. miscellaneous expense. d. miscellaneous revenue. Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
*192. A $250 petty cash fund has cash of $25 and receipts of $200. The journal entry to replenish the account would include a credit to a. Cash for $225. b. Petty Cash for $225. c. Cash Over and Short for $25. d. Cash for $200. Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $250 − $25 = $225 (Fund amount – end. Bal. – rec.)
*193. A $300 petty cash fund has cash of $55 and receipts of $240. The journal entry to replenish the account would include a a. debit to Cash for $240. b. credit to Petty Cash for $245. c. debit to Cash Over and Short for $5. d. credit to Cash for $240. Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $300 − $55 − $240 = $5 (Fund amount – end. bal. – rec.)
.
7-40
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
*194. A $200 petty cash fund has cash of $32 and receipts of $172. The journal entry to replenish the account would include a a. debit to Cash for $168. b. credit to Petty Cash for $168. c. credit to Cash Over and Short for $4. d. credit to Cash for $172. Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $172 − ($200 − $32) = $4 (Rec. – (fund amount – end. bal.))
*195. A $300 petty cash fund has cash of $39 and receipts of $255. The journal entry to replenish the account would include a. debit to Cash for $255. b. credit to Petty Cash for $255. c. debit to Petty Cash for $261. d. credit to Cash for $261. Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $300 − $39 = $261 (Fund amount – end. bal.)
*196. A $150 petty cash fund has cash of $21 and receipts of $126. The journal entry to replenish the account would include a a. debit to Cash for $126. b. credit to Petty Cash for $126. c. credit to Cash Over and Short for $3. d. credit to Cash for $129. Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $150 − $21 = $129 (Fund amount – end. bal.)
*197. A $100 petty cash fund has cash of $16 and receipts of $86. The journal entry to replenish the account would include a. debit to Cash for $86. b. credit to Petty Cash for $86. c. credit to Cash Over and Short for $2. d. credit to Cash for $86. Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $86 − ($100 − $16) = $2 (Rec. – (Fund amount – end. bal.))
*198. A petty cash fund of $250 is replenished when the fund contains $15 in cash and receipts for $230. The entry to replenish the fund would a. credit Cash Over and Short for $5. b. credit Miscellaneous Revenue for $5. c. debit Cash Over and Short for $5. d. debit Miscellaneous Expense for $5. Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $230 – ($250 – $15) = ($5) (Rec. – (Fund amount – end. bal.))
.
Fraud, Internal Control, and Cash
7-41
*199. A petty cash fund should be replenished a. every day. b. at the end of every accounting period. c. once a year. d. as soon as an expense is paid from the fund. Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
*200. Entries are made to the Petty Cash account when a. establishing the fund. b. making payments out of the fund. c. recording shortages in the fund. d. replenishing the fund. Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
Answers to Multiple Choice Questions 40. b 41. d 42. b 43. c 44. c 45. a 46. d 47. c 48. c 49. b 50. c 51. a 52. a 53. c 54. c 55. b 56. b 57. d 58. d 59. a 60. c 61. c 62. a
63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85.
d a a c a c c c b a b a b d d b d c c d b a b
86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108.
b b a c a a b d c d a c d d b b b c b c b d d
109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131.
.
c a a b d d c a d a a b c d a b c b a b c a c
132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154.
c c d c a a b c d d d a d d a a d d b b b c b
155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 176. 177.
b d d c b c c b b c c a b c c c c a d c d a c
178. 179. 180. 181. 182. 183. 184. 185. *186. *187. *188. *189. *190. *191. *192. *193. *194. *195. *196. *197. *198. *199. *200.
b b c a a c c c c c d d b c a c c d d c c b a
7-42
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
BRIEF EXERCISES Be. 201 Below are descriptions of internal control problems. In the space to the left of each item, enter the code letter of the one best internal control principle that is related to the problem described. Internal Control Principles A. Establishment of responsibility B. Segregation of duties C. Physical control devices D. Documentation procedures E. Independent internal verification F. Human resource controls ____
1. The same person opens incoming mail and posts the accounts receivable subsidiary ledger.
____
2. Three people handle cash sales from the same cash register drawer.
____
3. A clothing store is experiencing a high level of inventory shortages because people try on clothing and walk out of the store without paying for the merchandise.
____
4. The person who is authorized to sign checks approves purchase orders for payment.
____
5. Some cash payments are not recorded because checks are not prenumbered.
____
6. Cash shortages are not discovered because there are no daily cash counts by supervisors.
____
7. The treasurer of the company has not taken a vacation for over 20 years.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
.
Fraud, Internal Control, and Cash
Solution 201 1. B 2. A 3. C
(5 min.) 4. B 5. D 6. E
7.
7-43
F
Be. 202 Indicate whether each of the business practices listed below strengthens (S) or weakens (W) a company’s system of internal control. ____
a.
Cashiers are not bonded.
____
b.
All payments are made with checks.
____
c.
Discouraging employees from taking paid vacations.
____
d.
Two people handle cash sales from the same cash register drawer.
____
e.
Using prenumbered sales tickets.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
Solution 202 a. W
(5 min.) b. S
c.
W
d.
W
e.
S
Be. 203 Identify the internal control procedures applicable to cash receipts for Colorado Company in each of the following situations. 1. All cashiers are bonded. 2. The treasurer compares the total cash receipts to the bank deposit daily. 3. The bookkeeper records cash receipts which are held by the treasurer. 4. Only the treasurer holds cash receipts. 5. Deposit slips are completed for each deposit. Ans: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
Solution 203 1. Human resource controls. 2. Independent internal verification. 3. Segregation of duties. 4. Establishment of responsibility. 5. Documentation procedures. Be. 204 Identify the internal control procedures applicable to cash disbursements followed by Tolan Company in each of the following cases. 1. Company checks are pre-numbered. 2. Only the treasurer is authorized to sign checks. 3. Bonding of employees that handle cash. 4. Blank checks are stored in a locked safe. 5. The bookkeeper, not the treasurer, records cash disbursements. Ans: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
.
7-44
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 204 1. Documentation procedures 2. Establishment of responsibility 3. Human resource controls 4. Physical controls 5. Segregation of duties Be. 205 Identify whether each of the following items would be (a) added to the book balance, or (b) deducted from the book balance in a bank reconciliation. 1. EFT transfer to a supplier. 2. Bank service charge. 3. Check printing charge. 4. Error recording check # 214 which was written for $230 but recorded for $320. 5. Collection of note and interest by bank on company’s behalf. Ans: N/A, LO: 3, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
Solution 205 1. b 2. b 3. b 4. a 5. a Be. 206 Identify which of the following reconciling items would require an adjusting entry to be made by Costello Company. 1. Deposits in transit totaled $2,000. 2. A check written to the company for $350 by Grover Company was returned NSF. 3. The bank charged the company $46 for printing checks. 4. Outstanding checks totaled $1,667. 5. A debit memorandum reported an EFT of $178 to Paco Utilities. Ans: N/A, LO: 3, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
Solution 206 Adjusting entries would be required for: 2, 3, and 5 because they are reconciling items for the books. Be. 207 Foyle Company needs to make adjusting entries for each of the following reconciling items. Identify the account to be debited and the account to be credited in each case. 1. A check for $59 written to the company by J. Hammond was returned NSF. 2. The monthly service charge by the bank was $34. 3. The bank collected a $1,000 note plus interest of $60 on the company’s behalf. The company had not accrued the interest. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
Fraud, Internal Control, and Cash
Solution 207 1. Debit: Accounts Receivable 2. Debit: Miscellaneous Expense 3. Debit: Cash
7-45
Credit: Cash Credit: Cash Credit: Notes Receivable, Interest Revenue
Be. 208 The following reconciling items are applicable to the bank reconciliation for the Gunselman Company. Indicate how each item should be shown on a bank reconciliation. a. b. c. d.
Outstanding checks. Bank credit memorandum for collecting a note for the depositor. Bank debit memorandum for service charge. Deposit in transit.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
Solution 208 (5 min.) a. Outstanding checks should be deducted from the balance per bank. b. Bank credit memorandum should be added to the balance per books. c. Bank debit memorandum should be deducted from the balance per books. d. Deposits in transit should be added to the balance per bank. Be. 209 At August 31 Kiner Company has this bank information: cash balance per bank $9,450; outstanding checks $762; deposits in transit $1,700; and a bank service charge $20. Determine the adjusted cash balance per bank at August 31, 2017. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 209
(5 min.) Kiner Company Partial Bank Reconciliation August 31, 2017 Cash balance per bank Add: Deposit in transit Less: Outstanding checks Adjusted cash balance per bank (Bank cash bal. + dep. In tran. – out. Checks)
$ 9,450 1,700 11,150 762 $ 10,388
Be. 210 Given the following information, determine the adjusted cash balance per books; Balance per books as of June 30 $8,800 Outstanding checks $600 NSF check returned with bank statement $130 Deposit mailed the afternoon of June 30 $300 Check printing charges $30 Interest earned on checking account $40 Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 210
(5 min.)
$8,680: ($8,800 - $130 - $30 + $40) (Book bal. – NSF check – print. Char. + inter.) Be. 211 The following information is available for Nichols Company for the month of February: expected cash receipts $40,000; expected cash disbursements $44,000; cash balance February 1, $11,000. Management wishes to maintain a minimum cash balance of $10,000. Prepare a basic cash budget for the month of February. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 211
(5 min.) Nichols Company Cash Budget February Beginning cash balance $11,000 Add: Cash receipts 40,000 Total available cash 51,000 Less: Cash disbursements 44,000 Excess of available cash over cash disbursements 7,000 Financing needed 3,000 Ending cash balance $10,000 *(Min. cash bal. – [Beg. Cash bal. + Cash. rec. – cash disb.])
Exercises Ex. 212 Jim Gant has worked for Dr. Ken Flood for several years. Jim demonstrates a loyalty that is rare among employees. He hasn't taken a vacation in the last three years. One of Jim's primary duties at the medical office is to open the mail and list the checks received. He also takes cash from patients at the cashier window as patients leave. At times it is so hectic that Jim doesn't bother with giving patients a receipt for the cash paid on their accounts. He assures them he will see to it that they receive the proper credit. When the traffic is slow in the office Jim offers to help Lisa post the payments to the patients' accounts receivable. She is always happy to receive his help, because he is a very conscientious worker. Instructions Identify any principles of internal control that may be violated in this medical office situation. Ans: N/A, LO: 1, Bloom: C, Difficulty: Easy, Min: 10, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: Communication, IMA: Internal Controls
.
Fraud, Internal Control, and Cash
7-47
Solution 212 (10 min.) Violations: 1. It is Lisa's responsibility to post payments to patient accounts. In allowing Jim to assist her, the establishment of responsibility principle is violated. 2. Although it appears to be a small office, it is not appropriate that Jim both opens the mail, receives and records cash receipts from patients, and also appears to have custody of cash. This situation violates the segregation of duties principle. By posting to patients' accounts it would be possible to post credits to patient accounts and pocket the cash. 3. The documentation principle is violated when patients are not given cash receipts. Although many professional offices do not have cash registers, computerized or manual receipts are customary and necessary. 4. Independent internal verification is also being violated. There is no independent counting of the cash and comparison to total receipts. 5. Human resource controls are being violated. There is no mention of Jim being bonded. Also, personnel should be required to take vacations. Ex. 213 Listed below are seven errors or problems that might occur in the processing of cash transactions. Also shown is a list of internal control principles. Evaluate each possible error and cite a principle that is listed that would reduce the probability of the error occurring. If none of the principles given will correct the problem, write "None." If you think more than one principle is appropriate, list all principles that apply. Possible Errors or Problems 1. An employee steals the cash collected from a customer for an account receivable and conceals this theft by issuing a credit memorandum indicating that the customer returned the merchandise. 2. A small fire destroys 3 days of cash receipts. 3. The official designated to sign checks is able to steal blank checks and issue them without fear of detection. 4. A salesclerk in serving customers often rings up a sale for less than the actual amount and then keeps the additional cash collected from the customer. 5. Three cashiers use one cash register drawer and the cash in the drawer is often short of the balance kept on hand. 6. Each cashier counts his own register drawer each day and verbally reports the results to the supervisor. 7. Cashiers with over 5-years experience are not bonded.
a. b. c. d. e. f.
Internal Control Principles Establishment of responsibility Segregation of duties Physical control devices Documentation procedures Independent internal verification Human resource controls
Ans: N/A, LO: 1, Bloom: AN, Difficulty: Easy, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 213 1. b 2. c 3. c 4. c
(10 min.) 5. a and e 6. b, d, and e 7. f
Ex. 214 Using the following information, prepare a bank reconciliation for Hintz Company for July 31, 2017. a. b. c. d. e. f.
The bank statement balance is $3,506. The cash account balance is $3,930 Outstanding checks totaled $1,285. Deposits in transit are $1,670. The bank service charge is $30. A check for $98 for supplies was recorded as $89 in the ledger.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 214
(10 min.) Hintz Company Bank Reconciliation July 31, 2017 Cash balance per bank Add: (d) Deposit in transit
$ 3,506 1,670 5,176 1,285 $ 3,891
Less: (c) Outstanding checks Adjusted cash balance per books Cash balance per books Less: (f) Check for supplies error (e) Bank service charge Adjusted cash balance per books (Cash bal. – sup. err. – ser. Char.)
$ 3,930 $ 9 30
39 $ 3,891
Ex. 215 Using the following information, prepare a bank reconciliation for Munoz Company for May 31, 2017. a. b. c. d. e. f.
The bank statement balance is $8,300. The cash account balance is $6,562 Outstanding checks totaled $1,950. Deposits in transit are $600. The bank service charge is $12. Collection of note by bank, $400.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Fraud, Internal Control, and Cash
Solution 215
7-49
(10 min.) Munoz Company Bank Reconciliation May 31, 2017 Cash balance per bank Add: (d) Deposit in transit Less: (c) Outstanding checks Adjusted cash balance per books Cash balance per books Add: (f) Collection of a note Less: (e) Bank service charge Adjusted cash balance per books (Cash bal. + note coll. – ser. char.)
$ 8,300 600 8,900 1,950 $ 6,950 $ 6,562 400 6,962 12 $ 6,950
Ex. 216 Using the following information, prepare a bank reconciliation for Hammond Company for June 30, 2017. a. The bank statement balance is $7,650. b. The cash account balance is $6,422 c. Outstanding checks totaled $1,650. d. Deposits in transit are $900. e. The bank service charge is $22. f. Collection of note by bank, $500. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 216
(10 min.) Hammond Company Bank Reconciliation June 30, 2017 Cash balance per bank Add: (d) Deposit in transit Less: (c) Outstanding checks Adjusted cash balance per books Cash balance per books Add: (f) Collection of a note Less: (e) Bank service charge Adjusted cash balance per books (Cash bal. + Note coll. – ser. char.)
.
$ 7,650 900 8,550 1,650 $ 6,900 $ 6,422 500 6,922 22 $ 6,900
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 217 The Hartman Boat Company's bank statement for the month of November showed a balance per bank of $7,000. The company's Cash account in the general ledger had a balance of $5,659 at November 30. Other information is as follows: (1) Cash receipts for November 30 recorded on the company's books were $6,000 but this amount does not appear on the bank statement. (2) The bank statement shows a debit memorandum for $40 for check printing charges. (3) Check No. 119 payable to Maris Company was recorded in the cash payments journal and cleared the bank for $248. A review of the accounts payable subsidiary ledger shows a $36 credit balance in the account of Maris Company and that the payment to them should have been for $284. (4) The total amount of checks still outstanding at November 30 amounted to $5,800. (5) Check No. 138 was correctly written and paid by the bank for $409. The cash payment journal reflects an entry for Check No. 138 as a debit to Accounts Payable and a credit to Cash in Bank for $490. (6) The bank returned an NSF check from a customer for $560. (7) The bank included a credit memorandum for $2,060 which represents collection of a customer's note by the bank for the company; principal amount of the note was $2,000 and interest was $60. Interest has not been accrued. Instructions (a) Prepare a bank reconciliation for the Hartman Boat Company at November 30. (b) Prepare any adjusting entries necessary as a result of the bank reconciliation. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 217 (a)
(25 min.) HARTMAN BOAT COMPANY Bank Reconciliation November 30 Cash balance per bank Add: (1) Deposit in transit
$ 7,000 6,000 13,000 5,800 $ 7,200
Less: (4) Outstanding checks Adjusted cash balance per books Cash balance per books Add: (5) Accounts payable error (7) Collect $2,000 note and interest $60
$ 5,659 $ 81 2,060
2,141 7,800
Less: (2) Check printing 40 (6) NSF check 560 600 Adjusted cash balance per books $ 7,200 (Cash bal. + A/P err. + Note coll. – print. char. – NSF check) Note: Item (3) is not a reconciling item.
.
Fraud, Internal Control, and Cash
Solution 217 (b)
7-51
(Cont.)
Nov. 30 Cash
81
Accounts Payable (To correct error in recording Check No. 138) 30 Cash
81
2,060
Notes Receivable Interest Revenue (To record collection of note receivable and interest by the bank)
2,000 60
30 Miscellaneous Expense Cash (To record check printing charges)
40
30 Accounts Receivable Cash (To record NSF check)
560
40
560
Ex. 218 The bank statement for Cates Company indicates a balance of $1,730 on June 30. The cash balance per books had a balance of $799 on this date. The following information pertains to the bank transactions for the company. 1. Deposit of $760, representing cash receipts of June 30, did not appear on the bank statement. 2. Outstanding checks totaled $340. 3. Bank service charges for June amounted to $25 4. The bank collected a note receivable for the company for $1,400 plus $56 interest revenue. 5. An NSF check for $80 from a customer was returned with the statement. Instructions a. Prepare a bank reconciliation for June 30. b. Prepare any adjusting entries necessary as a result of the bank reconciliation. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 218 (a)
(25 min.) CATES COMPANY Bank Reconciliation June 30 Cash balance per bank Add: (1) Deposit in transit
$ 1,730 760 2,490 340 $ 2,150
Less: (2) Outstanding checks Adjusted cash balance per books Cash balance per books Add: (4) $1,400 Note collected by bank plus interest of $56 Less: (3) Bank service charge (5) NSF check Adjusted cash balance per books (Cash bal. + Note coll. – ser. char. – NSF check) (b) June 30
30
30
$ 25 80
$ 799 1,456 2,255 105 $ 2,150
Cash ............................................................................... Notes Receivable ................................................... Interest Revenue ..................................................... (To record collection of note receivable and interest by the bank)
1,456
Accounts Receivable ....................................................... Cash ....................................................................... (To record NSF check)
80
Miscellaneous Expense.................................................... Cash ........................................................................
25
1,400 56
80
25
Ex. 219 The bank statement for Adcock Company indicates a balance of $830 on July 31. The cash balance per books had a balance of $390 on this date. The following information pertains to the bank transactions for the company. 1. 2. 3. 4. 5.
Deposit of $840, representing cash receipts of July 31, did not appear on the bank statement. Outstanding checks totaled $390. Bank service charges for July amounted to $30. The bank collected a note receivable for the company for $1,200 plus $48 interest revenue. A NSF check for $328 from a customer was returned with the statement.
Instructions a. Prepare a bank reconciliation for July 31. b. Prepare any adjusting entries necessary as a result of the bank reconciliation. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Fraud, Internal Control, and Cash
Solution 219 (a)
(25 min.) ADCOCK COMPANY Bank Reconciliation July 31
Cash balance per bank Add: (1) Deposit in transit
$
830 840 1,670 390 $ 1,280
Less: (2) Outstanding checks Adjusted cash balance per books Cash balance per books Add: (4) $1,200 Note collected by bank plus interest of $48 Less: (3) Bank service charge (5) NSF Check Adjusted cash balance per books (Cash bal. + Note coll. – ser. char. – NSF check) (b) July
31
31
31
7-53
$
$ 30 328
390 1,248 1,638
358 $ 1,280
Cash ............................................................................... Notes Receivable ................................................... Interest Revenue ..................................................... (To record collection of note receivable and interest by the bank)
1,248
Accounts Receivable ...................................................... Cash ...................................................................... (To record NSF check)
328
Miscellaneous Expense ................................................... Cash .......................................................................
30
1,200 48
328
30
Ex. 220 Grier Food Store used the following information in recording its bank reconciliation for the month of April. Balance per books April 30 $ 905 Balance per bank statement April 30 $11,300 ___________________________________________________________________________ (1) Checks written in April but still outstanding $6,300. (2) Checks written in March but still outstanding $2,800. (3) Deposits of April 30 not yet recorded by bank $4,900. (4) NSF check of customer returned by bank $500. (5) Check No. 210 for $594 was correctly issued and paid by bank but incorrectly entered in the cash payments journal as payment on account for $549. (6) Bank service charge for April was $40. (7) A payment on account was incorrectly entered in the cash payments journal and posted to the accounts payable subsidiary ledger for $824 when Check No. 318 was correctly prepared for $284. The check cleared the bank in April. (8) The bank collected a note receivable for the company of $6,000 plus $240 interest revenue.
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
7-54
Ex. 220 (Cont.) Instructions Prepare a bank reconciliation at April 30. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 220
(20 min.) GRIER FOOD STORE Bank Reconciliation April 30
Cash balance per books Add: (7) Error on check No. 318 (8) Collect $6,000 note and interest $240
$ 905 $ 540 6,240
Cash balance per bank $11,300 Add: (3) Deposit in transit 4,900
16,200
6,780 7,685
Less: Less: (1) Apr. outstanding (4) NSF check 500 checks 6,300 (5) Error on check No. 210 45 (2) Mar. outstanding (6) Bank service Charge 40 585 checks 2,800 9,100 Adjusted cash balance per books $7,100 Adjusted cash balance per bank $ 7,100 (Book bal. + Alperr. + Note coll. – NSF check – check 210 err. – ser. Char.) Ex. 221 Using the code letters below, indicate how each of the items listed would be handled in preparing a bank reconciliation. Enter the appropriate code letter in the space to the left of each item. Code A Add to cash balance per books B Deduct from cash balance per books C Add to cash balance per bank D Deduct from cash balance per bank E Does not affect the bank reconciliation Items: ____ 1. Outstanding checks ____
2. Bank service charge
____
3. Check for $320 correctly written and paid by the bank but incorrectly entered in the cash payments journal for $230
____
4. Deposit in transit
____
5. Bank returns customer deposited check marked NSF
____
6. Bank collects notes receivable and interest for depositor
____
7. Bank debit memorandum for check printing fees
____
8. Petty cash custodian has $86 in paid petty cash vouchers that have not been reimbursed. .
Fraud, Internal Control, and Cash
Ex. 221 ____
7-55
(Cont.) 9. Bank charged a check against the company, which should have been charged to another company.
____ 10. A check for $236 was correctly paid by the bank but was incorrectly entered in the cash payments journal for $263 Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
Solution 221 1. D 2. B 3. B 4. C 5. B
(10 min.) 6. A 7. B 8. E 9. C 10. A
Ex. 222 The cash balance per books for Wellmeyer Company on November 30, 2017, is $10,740.93. The following checks and receipts were recorded for the month of December 2017:
No. 17 18 19 20 21
Amount $372.96 780.62 157.00 587.50 234.15
Checks No. 22 23 24 25
Receipts Amount $ 578.84 1,687.50 921.30 246.03
Amount $ 843.86 941.54 808.58 1,367.00
Date 12/5 12/21 12/27 12/31
In addition, the bank statement for the month of December is presented below:
Balance Last Statement
Deposits and Credits No. Total Amount
Checks and Debits No. Total Amount
Balance This Statement
$5,404.84 5 $9,578.36 10 $3,632.19 $11,351.01 ________________________________________________________________________ Checks and other debits _________________________________________
Deposits
Date
Balance
No. Amount No. Amount No. Amount ________________________________________________________________________ 14 18 19 21
148.29 17 372.96 22 578.84 5,484.38 12/1 $9,875.13 708.62 24 921.30 843.86 12/8 $9,219.03 157.00 25 246.03 941.54 12/23 $9,541.58 234.15 15.00 SC 808.58 12/29 $10,101.01 250.00 NSF 1,500.00 CM 12/31 $11,351.01 ________________________________________________________________________
Symbols: NSF (Not sufficient funds) .
SC (Service charge)
CM (Credit Memo)
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
7-56 Ex. 222
(Cont.)
Check No. 18 was correctly written for $708.62 for a payment on account. The NSF check was from S. Gill, a customer, in settlement of an account receivable. An entry has not been made for the NSF check. The credit memo is for the collection of a note receivable including interest of $60 that has not been accrued. The bank service charge is $15.00. Instructions (a) Prepare a bank reconciliation at December 31. (b) Prepare the adjusting journal entries required by the bank reconciliation. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 30, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 222 (a)
(30-35 min.) WELLMEYER COMPANY Bank Reconciliation December 31, 2017
Cash balance per bank statement ........................................ Add: Deposits in transit .......................................................
$11,351.01 1,367.00 12,718.01
Less: Outstanding checks No. 20 ............................................................... No. 23 ............................................................... Adjusted cash balance per bank ...........................................
$ 587.50 1,687.50
Cash balance per books ....................................................... Add: Error in recording check No. 18 .................................. Note collected by bank ($1,440 principal plus $60 interest) ...
$
2,275.00 $ 10,443.01 $ 9,136.01*
72.00 1,500.00
1,572.00 10,708.01
Less: Bank service charge ................................................... 15.00 NSF check .................................................................. 250.00 265.00 Adjusted cash balance per books ......................................... $ 10,443.01 (12/31 Cash bal. + check #18 err. + Note coll. – ser. Char. – NSF check) *11/30 balance per books + Receipts – Checks written = 12/31 balance per books $10,740.93 + $3,960.98 – $5,565.90 = $9,136.01 (b) Dec. 31 Cash
72.00 Accounts Payable ................................................ (To correct recording error on check No. 18)
31 Cash
72.00
1,500.00 Notes Receivable ................................................ Interest Revenue ................................................. (To record collection of note and interest)
31 Miscellaneous Expense ................................................ Cash .................................................................... (To record bank service charge for the month of December)
.
1,440.00 60.00
15.00 15.00
Fraud, Internal Control, and Cash
Solution 222
7-57
(Cont.)
31 Accounts Receivable—S. Gill ....................................... Cash .................................................................... (To record NSF check)
250.00 250.00
Ex. 223 Seaver Company received a notice with its bank statement that the bank had collected a note receivable for $18,000 plus $600 of interest. The bank had credited these amounts to Seaver's account. Seaver Company had already accrued the interest for this note on its books. (a) How will these items affect Seaver Company's bank reconciliation? (b) Prepare the journal entry that Seaver Company will make to record this information on its books. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 223 (5 min.) (a) Seaver Company must add the amount of the note plus interest to its cash balance per books on the bank reconciliation. Add: Collection of note receivable $18,600 (b)
Cash ........................................................................................... Notes Receivable ............................................................... Interest Receivable ............................................................
18,600 18,000 600
Ex. 224 The cash records of the Dillon Company show the following: 1. The July 31 bank reconciliation indicated that deposits in transit totaled $390. During August the general ledger account, Cash shows deposits of $11,800, but the bank statement indicates that only $9,540 in deposits were received during the month. 2. The July 31 bank reconciliation also reported outstanding checks of $850. During the month of August, the Dillon Company books show that $11,670 of checks were issued, yet the bank statement showed that $10,500 of checks cleared the bank in August. There were no bank debit or credit memoranda and no errors were made by either the bank or the Dillon Company. Answer the following questions: (a) What were the deposits in transit at August 31? (b) What were the outstanding checks at August 31? Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 224 (10 min.) (a) Deposits in Transit: Deposits per books in August ....................................... Deposits per the bank in August .................................. Less: July 31 deposits in transit ................................... August receipts deposited in August ............................ Deposits in transit, August 31 ...................................... (Book dep. – (bank dep. – dep. In + tran.))
$ 11,800 $ 9,540 390 $
9,150 2,650
(b) Outstanding Checks: Checks per books in August ........................................ Checks clearing the bank in August .............................. Less: Outstanding checks, July 31 .............................. August checks clearing in August ................................ Outstanding checks, August 31 .................................... (Book checks. – (bank checks. – out. checks))
$11,670 $10,500 850 9,650 $ 2,020
Ex. 225 The cash records of Grayson Company show the following: 1. In February, deposits per the bank statement totaled $37,700; deposits per books $38,000; and deposits in transit at February 28 were $3,550. 2. In February cash disbursements per books were $37,500; checks clearing the bank were $37,300; and outstanding checks at February 28 were $2,500. There were no bank debit or credit memoranda and no errors were made by either the bank or Grayson Company. Answer the following questions: (a) What were the deposits in transit at January 31? (b) What were the outstanding checks at January 31? Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 225 (10 min.) (a) Deposits in Transit: Deposits per bank statement in February .................. Add: Deposits in transit, February 28 ........................ Total deposits to be accounted for ............................ Less: Deposits per books .......................................... Deposits in transit, January 31 .................................. (Bank dep. + dep. In trans. – book dep.) (b)
$37,700 3,550 41,250 38,000 $ 3,250
Outstanding Checks: Checks clearing the bank in February........................ Add: Outstanding checks, February 28 ...................... Total checks to be accounted for .............................. Less: Cash disbursements per books ....................... Outstanding checks, January 31 ............................... (Bank disb. + out. checks. – book disb.) .
$37,300 2,500 39,800 37,500 $ 2,300
Fraud, Internal Control, and Cash
7-59
Ex. 226 Listed below are items that may be useful in preparing the March 2017, bank reconciliation for the Carrinton Machine Works. Using the code letters below, insert in the space before each item the letter where the amount would be located or otherwise treated in the bank reconciliation process. Code Located or Treated A Add to the cash balance per books B Deduct from the cash balance per books C Add to the cash balance per bank D Deduct from the cash balance per bank E Does not affect the bank reconciliation ____ 1. Included with the bank statement materials was a check from Joe Terrell for $40 stamped "account closed”. ____ 2. A personal deposit by Ron Carrinton to his personal account in the amount of $300 for dividends on his General Electric common stock was credited to the company account. ____ 3. The bank statement included a debit memorandum for $22.00 for four books of blank checks for Carrinton Machine Works. ____ 4. The bank statement contains a credit memorandum for $42.75 interest on the average checking account balance. ____ 5. The daily deposits of March 30 and March 31 for $3,362 and $3,125, respectively, were not included in the bank statement postings. ____ 6. Two checks totaling $316.86, which were outstanding at the end of February, cleared in March and were returned with the March statement. ____ 7. The bank statement included a credit memorandum dated March 28, 2017, for $62.00 for the monthly interest on a 6-month, $15,000 certificate of deposit that the company owns. ____ 8. Four checks, #8712, #8716, #8718, #8719, totaling $5,369.65, did not clear the bank during March. ____ 9. On March 24, 2017, Carrinton Machine Works delivered to the bank for collection a $3,400, 3-month note from Tom Jacobs. A credit memorandum dated March 29, 2017, indicated the collection of the note and $102.00 of interest. ____ 10. The bank statement included a debit memorandum for $20.00 for the collection service on the above note and interest. Ans: N/A, LO: 3, Bloom: C, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 226 1. B 2. D 3. B 4. A 5. C
(10 min.) 6. E 7. A 8. D 9. A 10. B
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 227 On April 30, the bank reconciliation of Baxter Company shows three outstanding checks: no. 354, $650, no. 355, $920, and no. 357, $615. The May bank statement and the May cash payments journal show the following.
Date 5/4 5/2 5/17 5/12 5/20 5/29 5/30
Bank Statement Checks Paid Check No. Amount 354 650 357 615 358 159 359 275 360 890 363 480 362 750
Cash Payments Journal Checks Paid Date Check No. Amount 5/2 358 159 5/5 359 275 5/10 360 890 5/15 361 800 5/22 362 750 5/24 363 480 5/29 364 840
Instructions Using step 2 in the reconciliation procedure, list the outstanding checks at May 31. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 227 (3 min.) The outstanding checks are as follows: No. 355 361 364 Total
Amount $ 920 800 840 $2,560
Ex. 228 The information below relates to the Cash account in the ledger of Remington Company. Balance September 1—$25,720 Cash deposited—$96,000. Balance September 30—$26,100 Checks written—$95,620. The September bank statement shows a balance of $24,635 on September 30 and the following memoranda. Credits Collection of $3,750 note plus interest $50 Interest earned on checking account
$3,800 $65
Debits NSF check: J. E. Hoover Safety deposit box rent
$635 $75
At September 30, deposits in transit were $7,195, and outstanding checks totaled $2,575. Instructions Prepare the bank reconciliation at September 30. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Fraud, Internal Control, and Cash
Solution 228
7-61
(10 min.) REMINGTON COMPANY Bank Reconciliation September 30
Cash balance per bank statement .................................................. Add: Deposits in transit ..................................................................
$24,635 7,195 31,830 2,575 $29,255
Less: Outstanding checks .............................................................. Adjusted cash balance per bank .................................................... Cash balance per books ................................................................ Add: Collection of note receivable ($3,750 + $50) .......................... Interest earned .......................................................................
$26,100 $3,800 65
Less: NSF check ............................................................................ Safety deposit box rent.......................................................... Adjusted cash balance per books .................................................. (Cash bal. + Note coll. + int. earn. – NSF check – dep. box rent)
635 75
3,865 29,965 710 $29,255
Ex. 229 The cash records of Landis Company show the following four situations. 1. The June 30 bank reconciliation indicated that deposits in transit total $1,080. During July the general ledger account Cash shows deposits of $24,820, but the bank statement indicates that only $23,400 in deposits were received during the month. 2. The June 30 bank reconciliation also reported outstanding checks of $1,020. During the month of July, Landis Company books show that $25,800 of checks were issued. The bank statement showed that $24,600 of checks cleared the bank in July. 3. In September, deposits per the bank statement totaled $40,100, deposits per books were $38,100, and deposits in transit at September 30 were $3,150. 4. In September, cash disbursements per books were $35,550, checks clearing the bank were $37,500, and outstanding checks at September 30 were $2,150. There were no bank debit or credit memoranda. No errors were made by either the bank or Landis Company. Instructions Answer the following questions. (a) In situation (1), what were the deposits in transit at July 31? (b) In situation (2), what were the outstanding checks at July 31? (c) In situation (3), what were the deposits in transit at August 31? (d) In situation (4), what were the outstanding checks at August 31? Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
7-62
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 229 (10 min.) (a) Deposits in transit: Deposits per books in July ................................ Less: Deposits per bank in July ........................ Deposits in transit, June 30 ...................... July receipts deposited in July .......................... Deposits in transit, July 31 ................................ (Book dep. – (bank dep. – 6/30 dep. in. tran.)) (b) Outstanding checks: Checks per books in July .................................. Less: Checks clearing bank in July ................... Outstanding checks, June 30 ................... July checks cleared in July ............................... Outstanding checks, July 31 ............................. (Book disb. – (bank disb. – 6/30 out. checks)
$24,820 $23,400 (1,080) 22,320 $ 2,500
$25,800 $24,600 (1,020) 23,580 $ 2,220
(c) Deposits in transit: Deposits per bank statement in September ..... Add: Deposits in transit, September 30 ............. Total deposits to be accounted for .................... Less: Deposits per books .................................. Deposits in transit, August 31 ........................... (Book dep. +9/30 dep. In trans. – book dep.)
$40,100 3,150 43,250 38,100 $ 5,150
(d) Outstanding checks: Checks clearing bank in September.................. Add: Outstanding checks, September 30 .......... Total checks to be accounted for ...................... Less: Cash disbursements per books ............... Outstanding checks, August 31 ........................ (Book disb. + 9/30 out checks – book disb.)
$37,500 2,150 39,650 35,550 $ 4,100
Ex. 230 Lowe Inc.'s bank statement from Western Bank at August 31, 2017, gives the following information. Balance, August 1 August deposits Checks cleared in August Bank credit memorandum: Interest earned
$18,600 71,000 66,678
Bank debit memorandum: Safety deposit box fee Service charge Balance, August 31
$
25 30 22,912
45
A summary of the Cash account in the ledger for August shows the following: balance, August 1, $21,100, receipts $81,000; disbursements $73,570; and balance, August 31, $28,530. Analysis reveals that the only reconciling items on the July 31 bank reconciliation were a deposit in transit for $7,000 and outstanding checks of $4,500. In addition, you determine that there was an error involving a company check drawn in August: A check for $400 to a creditor on account that cleared the bank in August was journalized and posted for $40.
.
Fraud, Internal Control, and Cash
7-63
Instructions (a) Determine deposits in transit. (b) Determine outstanding checks. (c) Prepare a bank reconciliation at August 31. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 230 (10 min.) (a) Deposits in transit = $81,000 – ($71,000 – $7,000) = $17,000 (Book rec. – (bank dep. – 7/31 dep. in trans.)) (b) Outstanding checks = ($73,570 + $360) – ($66,678 – $4,500) = $11,752 (Book rec. – (book err. – bank disb – 7/31 out checks)) (c) LOWE INC. Bank Reconciliation August 31, 2017 Cash balance per bank statement....................................... Add: Deposits in transit ....................................................... Outstanding checks ............................................................ Adjusted cash balance per bank ......................................... Cash balance per books ..................................................... Add: Interest earned ...........................................................
$22,912 17,000 39,912 11,752 $28,160 $28,530 45 28,575
$ 30 Less: Service charge........................................................... Error in recording check ($400 – $40) ........................ 360 Safety deposit box rent............................................... 25 415 Adjusted cash balance per books ....................................... $28,160 (Cash bal. + int. earn – ser. char. – check err. – dep. box rent) Proof of cash balance per bank statement: $18,600 + $71,000 – $66,678 + $45 – $25 – $30 = $22,912 Proof of cash balance per books: $21,100 + $81,000 – $73,570 = $28,530 Ex. 231 Holcomb Company expects to have a cash balance of $43,000 on January 1, 2017. These are the relevant monthly budget data for the first two months of 2017. 1. Collections from customers: January $85,000, February $132,000 2. Payments to suppliers: January $40,000, February $50,000 3. Wages: January $34,000, February $40,000. Wages are paid in the month they are incurred. 4. Administrative expenses: January $24,000, February $31,000. These costs include depreciation of $1,000 per month. All other costs are paid as incurred. 5. Selling expenses: January $15,000, February $20,000. These costs are exclusive of depreciation. They are paid as incurred. 6. Sales of short-term investments in January are expected to realize $12,000 in cash. Holcomb has a line of credit at a local bank that enables it to borrow up to $40,000. The company wants to maintain a minimum monthly cash balance of $25,000. .
7-64 Ex. 231
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
(Cont.)
Instructions Prepare a cash budget for January and February. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 231
(5 min.) HOLCOMB COMPANY Cash Budget For the Two Months Ending February 28, 2017
January February Beginning cash balance ........................................................ $ 43,000 $ 28,000 Add: Receipts Collections from customers .......................................... 85,000 132,000 Sale of short-term investments ..................................... 12,000 0 Total receipts ................................................................ 97,000 132,000 Total available cash............................................................... 140,000 160,000 Less: Disbursements Payments to suppliers .................................................. 40,000 50,000 Wages .......................................................................... 34,000 40,000 Administrative expenses ............................................... 23,000 30,000 Selling expenses .......................................................... 15,000 20,000 Total disbursements ..................................................... 112,000 140,000 Excess (deficiency) of available cash over disbursements .................................................................... 28,000* 20,000 Financing Borrowings ................................................................... 0 5,000 Repayments ................................................................. 0 0 Ending cash balance ............................................................. $ 28,000 $ 25,000 *(Beg. cash bal. + cust. coll. + invest. sell. pr. – sup. pay. – wages – admin. & sell. exp.) Ex. 232 Shatner Company has budgeted sales revenue as follows: January February March April May June
Budgeted Sales Revenues $55,000 80,000 90,000 65,000 50,000 15,000
Past experience has indicated that 80% of sales each month are on credit and that collection of credit sales occurs as follows: 60% in the month of sale, 30% in the month following the sale, and 5% in the second month following the sale. The other 5% is uncollectible. Instructions Prepare a schedule which shows expected cash receipts from sales for the months of April, May, and June. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Fraud, Internal Control, and Cash
.
7-65
7-66
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 232
(20-25 min.) SHATNER COMPANY Expected Cash Receipts from Sales For the Quarter Ended June 30 April
February sales Credit sales: ($80,000 × .80 × .05)
May
June
$ 3,200
March sales Credit sales: ($90,000 × .80 × .30) ($90,000 × .80 × .05)
21,600 $ 3,600
April sales Credit sales: ($65,000 × .80 × .60) ($65,000 × .80 × .30) ($65,000 × .80 × .05) Cash sales: ($65,000 × .20)
31,200 15,600 $ 2,600 13,000
May sales Credit sales: ($50,000 × .80 × .60) ($50,000 × .80 × .30) Cash sales: ($50,000 × .20)
24,000 12,000 10,000
June sales Credit sales: ($15,000 × .80 × .60) 7,200 Cash sales: ($15,000 × .20) 3,000 Total cash receipts $69,000* $53,200 $24,800 (Feb. sal. × 80% × 5%) + (Mar. sal. × 80% ×30%) + (Apr. sal. × 80% × 60%) + (Apr. sal. × 20%) Ex. 233 Palmer Company has budgeted sales revenues as follows: June $35,000 18,000 $53,000
Credit sales Cash sales Total sales
July $30,000 51,000 $81,000
August $28,000 39,000 $67,000
Past experience indicates that 60% of the credit sales will be collected in the month of sale and the remaining 40% will be collected in the following month. Purchases of inventory are all on credit and 50% is paid in the month of purchase and 50% in the month following purchase. Budgeted inventory purchases are: June July August
$65,000 53,000 21,000
.
Fraud, Internal Control, and Cash
7-67
Ex. 233 (Cont.) Other budgeted cash disbursements: (a) selling and administrative expenses of $7,000 each month, (b) dividends of $19,000 will be paid in July, and (c) purchase of a computer in August for $6,000 cash. The company wishes to maintain a minimum cash balance of $10,000 at the end of each month. The company borrows money from the bank at 9% interest, if necessary, to maintain the minimum cash balance. Borrowed money is repaid in months when there is an excess cash balance. The beginning cash balance on July 1 was $10,000. Assume that borrowed money in this case is for one month. Instructions Prepare a cash budget for the months of July and August. Prepare separate schedules for expected collections from customers and expected payments for purchases of inventory. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 233
(25-35 min.) PALMER COMPANY Cash Budget For the Two Months of July and August
July Beginning cash balance $10,000 Add: Receipts Collections from customers 32,000 Cash sales 51,000 Total receipts 83,000 Total available cash 93,000 Less: Disbursements Purchases 59,000 Selling and administrative expenses 7,000 Dividends 19,000 Computer purchase Total disbursements 85,000 Excess (deficiency) of available cash over disbursements 8,000(1) Financing Borrowings 2,000 Repayments Ending cash balance $10,000 (1) (Beg. cash bal. + cust. coll. + cash sal.) – (purch. + sell & adm. exp + div.) *$2,000 × 9% × 1/12 = $15 + $2,000 = $2,015.
August $10,000 28,800 39,000 67,800 77,800 37,000 7,000 6,000 50,000 27,800
(2,015)* $25,785
Schedule of Expected Collections from Customers Credit sales June ($35,000 × 40%) July ($30,000 x 60%), Aug ($30,000 x 40%) August ($28,000 × 60%) Total collections * (June cred. sales × 40%) + (Jul. cred. sal. × 60%) .
July $14,000 18,000 $32,000*
August $ 12,000 16,800 $28,800
7-68
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 233 (Cont.) Schedule of Expected Payments for Purchase of Inventory Inventory purchases June ($65,000 50%) July ($53,000 50%) August ($21,000 50%) Total payments
July $32,500 26,500 $59,000*
August $26,500 10,500 $37,000
*(June purch. × 50%) + (Jul. purch. × 50%) Ex. 234 The management of Morton Company estimates that credit sales for August, September, October, and November will be $180,000, $200,000, $230,000, and $160,000, respectively. Experience has shown that collections are made as follows: In month of sale In first month after sale In second month after sale
25% 60% 10%
Instructions Determine the collections from customers in October and November. Show all computations. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 13, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 234 (13–18min.) Collections from Customers October August Sales ($180,000 × .10) $ 18,000 September Sales ($200,000 × .60) 120,000 ($200,000 × .10) October Sales ($230,000 × .25) 57,500 ($230,000 × .60) November Sales ($160,000 × .25) -0Total collections $ 195,500* *(Aug. sal. × 10%) + (sep. sal. × 60%) + (Oct. sal. × 25%)
November $
-0-
20,000
138,000 40,000 $ 198,000
Ex. *235 On October 1, 2017, Finley Company establishes a petty cash fund by issuing a check for $200 to Sara Mead, the custodian of the petty cash fund. On October 31, 2017, Sara Mead submitted the following paid petty cash vouchers for replenishment of the petty cash fund when there is $7 cash in the fund: Freight-In Supplies Expense Entertainment of Clients Postage Expense
$70 35 60 23
.
Fraud, Internal Control, and Cash
Ex. *235
7-69
(Cont.)
Instructions Prepare the journal entries required to establish the petty cash fund on October 1 and the replenishment of the fund on October 31. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution *235 (10 min.) Oct. 1 Petty Cash .......................................................................... Cash ......................................................................... (To establish a petty cash fund) 31
200 200
Cash Over and Short ......................................................... 5 Freight-In ........................................................................... 70 Supplies Expense .............................................................. 35 Entertainment Expense ...................................................... 60 Postage Expense ............................................................... 23 Cash ......................................................................... 193 (To record expenses for October and to replenish the petty cash fund)
Ex. *236 On September 1, 2017, Watkins Company establishes a petty cash fund by issuing a check for $250 to Mike Martz, the custodian of the petty cash fund. On September 30, 2017, Mike Martz submitted the following paid petty cash vouchers for replenishment of the petty cash fund when there is $35 cash in the fund: Freight-In Supplies Expense Entertainment of Clients Postage Expense
$25 75 37 80
Instructions Prepare the journal entries required to establish the petty cash fund on September 1 and the replenishment of the fund on September 30. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution *236 (10 min.) Sept. 1 Petty Cash .......................................................................... Cash ......................................................................... (To establish a petty cash fund) 30
250 250
Freight-In ........................................................................... 25 Supplies Expense .............................................................. 75 Entertainment Expense ...................................................... 37 Postage Expense ............................................................... 80 Cash Over and Short ................................................ 2 Cash ......................................................................... 215 (To record expenses for September and to replenish the petty cash fund)
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
7-70
Ex. *237 The petty cash fund of $200 for Tomkins Company appeared as follows on December 31, 2017 Cash Petty cash vouchers Freight-in Postage Balloons for a special occasion Meals
$50.60 $58.40 40.00 20.00 25.00
Instructions 1. Briefly describe when the petty cash fund should be replenished. Because there is cash on hand, is there a need to replenish the fund at year end on December 31? Explain. 2. Prepare the general journal entry to replenish the fund. 3. On December 31, the office manager gives instructions to increase the petty cash fund by $50. Make the appropriate journal entry. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution *237 (10 min.) 1. Petty cash should be replenished on a periodic basis or when the cash is low. It must be replenished on the balance sheet date so that the expenses represented by the petty cash vouchers can be recorded in the proper accounting period. 2. Freight-In ....................................................................................... Postage Expense .......................................................................... Miscellaneous Expense ................................................................. Cash Over and Short ..................................................................... Cash .....................................................................................
58.40 40.00 45.00 6.00
3. Petty Cash ..................................................................................... Cash .....................................................................................
50.00
149.40 50.00
Ex. *238 During October, Guiding Light Company experiences the following transactions in establishing a petty cash fund. Oct.
1 31
31
A petty cash fund is established with a check for $150 issued to the petty cash custodian. A count of the petty cash fund disclosed the following items: Currency $19.00 Coins 0.40 Expenditure receipts (vouchers): Office supplies $28.10 Telephone, Internet, and fax 16.40 Postage 75.00 Freight-out 6.80 A check was written to reimburse the fund and increase the fund to $200.
.
Fraud, Internal Control, and Cash
Ex. *238
7-71
(Cont.)
Instructions Journalize the entries in October that pertain to the petty cash fund. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
*Solution 238
(5 min.)
Oct. 1 Petty Cash ............................................................................. Cash ............................................................................... 31
150.00 150.00
Postage Expense ........................................................... Supplies ......................................................................... Miscellaneous Expense .................................................. Freight-Out ..................................................................... Cash Over and Short ...................................................... Cash ($150.00 – $19.40) ............................................
75.00 28.10 16.40 6.80 4.30
Petty Cash ...................................................................... Cash ........................................................................
50.00
130.60
50.00
COMPLETION STATEMENTS 239. Internal control consists of the related methods and measures adopted within a business to ____________ its assets and enhance the ______________ and ______________ of its accounting records. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
240. The principle of internal control that prevents one individual from being responsible for all the related activities of a given task is ______________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
241. The ______________ of an asset should not have access to the accounting records of that asset. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
242. Employees of a company who evaluate the effectiveness of the company's system of internal controls on a year-round basis are called ______________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
243. Using _______________ documents is a control measure that helps to prevent a transaction from being recorded more than once or to prevent the transactions from not being recorded. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
244. Employees who handle cash should be ______________ in order to protect against misappropriation of assets by dishonest employees. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
245. Two limitations of systems of internal control are the concept of ______________ and the ______________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
246. Internal control over cash disbursements is more effective when payments are made by ______________, rather than by ______________. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
247. A disbursement system that uses wire, telephone, computers, etc., to transfer cash from one location to another is referred to as ______________. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Leverage Technology, AICPA PC: Leverage Technology, IMA: Business Economics
248. A debit memorandum issued by the bank ______________ the cash balance in the depositor's account. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
249. The difference between the cash in bank balance shown on the company's books and the cash balance shown on the bank statement may be caused by ______________ and by ______________ in recording transactions by either party. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
250. In preparing a bank reconciliation, outstanding checks are ______________ from the cash balance per ______________. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
251. A check correctly written for $370 was incorrectly entered in the cash payments journal for $730. In preparing a bank reconciliation, $____________ must be ______________ the cash balance per ______________. Ans: N/A, LO: 3, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
252. A basic principle of cash management is to delay payment of _____________. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
253. Three major sections of a cash budget are: (1)________________, (2)_______________, and (3)______________. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
*254. A __________________ fund is used to pay relatively small expenditures. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Fraud, Internal Control, and Cash
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*255. A debit balance in Cash Over and Short is reported in the income statement as ______________. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Answers to Completion Statements 239. 240. 241. 242. 243. 244. 245.
safeguard, accuracy, reliability segregation of duties custodian internal auditors prenumbered bonded reasonable assurance, human element 246. check, cash 247. electronic funds transfer (EFT)
248. 249. 250. 251. 252. 253.
reduces time lags, errors deducted, bank $360, added to, books liabilities cash receipts, cash disbursements financing *254. petty cash *255. miscellaneous expense
MATCHING 256. Match the items below by entering the appropriate code letter in the space provided. A. B.
C. D. E. F.
Prenumbered documents Custody of an asset should be kept separate from the record-keeping for that asset Television monitors, garment sensors and burglar alarms are examples Bonding employees Collusion Cash
G. H. I. J. K. L. M. N.
Cash budget Restricted cash Invest idle cash Canceled checks NSF checks Outstanding checks Petty cash receipt Cash equivalents
____
1. Segregation of duties.
____
2. Cash that is not available for general use, but instead is restricted for a particular purpose.
____
3. Two or more employees circumventing prescribed procedures.
____
4. Prevent a transaction from being recorded more than once.
____
5. Checks which have been returned by the maker's bank for lack of funds.
____
6. Checks which have been paid by the depositor's bank.
____
7. A projection of anticipated cash flows.
____
8. Anything that a bank will accept for deposit.
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
7-74 256. ____
(Cont.) 9. Physical control devices.
____ 10. A basic principle of cash management. ____ 11. Insurance protection against misappropriation of assets. ____ 12. Document indicating the purpose of a petty cash expenditure. ____ 13. Issued checks that have not been paid by the bank. ____ 14. Highly liquid investments. Ans: N/A, LO: 1 - 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Internal Controls
Answers to Matching 1. 2. 3. 4. 5.
B H E A K
6. 7. 8. 9. 10.
J G F C I
11. 12. 13. 14.
D M L N
SHORT-ANSWER ESSAY QUESTIONS S-A E 257 Fraud experts often say that there are three primary factors that contribute to employee fraud. Identify the three factors and explain what is meant by each. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: Communication, IMA: Internal Controls
Solution 257 The three main factors that contribute to employee fraud are opportunity, financial pressure, and rationalization. Opportunities that an employee can take advantage of occur when the workplace lacks sufficient controls to deter and detect fraud. Financial pressure occurs when employees want to lead a lifestyle that they cannot afford on their current salary. Rationalization involves employees justifying fraud because they believe they are underpaid while their employer is making lots of money. S-A E 258 (a) Explain the control principle of independent internal verification? (b) What practices are important in applying this principle? Ans: N/A, LO: 1, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: Communication, IMA: Internal Controls
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Solution 258 (a) Independent internal verification involves the review, comparison, and reconciliation of data prepared by employees. (b) Maximum benefit is obtained from independent internal verification when: (1) The verification is made periodically or on a surprise basis. (2) The verification is done by an employee who is independent of the personnel responsible for the information. (3) Discrepancies and exceptions are reported to a management level that can take appropriate corrective action. S-A E 259 Your friend, Jeff, has opened a movie theater. Jeff states that he does not have time to develop and implement a system of internal controls. a. Provide Jeff with the objectives of a system of internal control. b. Explain to Jeff why he should develop a system of internal control. Ans: N/A, LO: 1, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: Communication, IMA: Internal Controls
Solution 259 a. The objectives of a system of internal control include: 1. safeguarding assets from employee theft, robbery, and unauthorized use 2. enhancing the accuracy and reliability of its accounting records by reducing the risk of errors and irregularities in the accounting process. b. Jeff, here are some reasons why you must develop a system of internal control, 1. You will not be able to oversee every function of your business. For this reason, you must establish policies and procedures for your employees to follow. By designing these policies and procedures around the principles of internal control, you have a foundation for safeguarding assets and enhancing the accuracy and reliability of the accounting records. 2. A good system of internal controls will help you attract investors and creditors because they will value the rewards of the system. 3. A good system of internal controls works to eliminate fraud. No business can assume that fraud will not take place. S-A E 260 One of your accounting professors has alerted you about a job opportunity as an internal auditor. a. What is the role of an internal auditor? b. Is this position justified? Why or Why not? Ans: N/A, LO: 1, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: Communication, IMA: Internal Controls
Solution 260 a. Internal auditors evaluate, on a continuous basis, the effectiveness of a company’s system of internal control. They periodically review the activities of departments and individuals to determine whether prescribed internal controls are being followed.
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 260
(Cont.)
b. Yes, the position is justified. Most fraud is uncovered through internal controls and internal audits. Internal auditors are trained to evaluate the effectiveness of internal control systems and make recommendations for improvements. They are independent of the day-to-day operations and thus can provide objective reviews. Internal auditors can deter fraud and ensure that procedures are being followed. This can help prevent fraud. S-A E 261 Important objectives of a system of internal controls are to safeguard assets and to enhance the accuracy and reliability of the accounting records. Briefly discuss how (1) cost-benefit considerations, (2) the human element, and (3) the size of the business affect the implementation of a system of internal controls. Ans: N/A, LO: 1, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: Communication, IMA: Internal Controls
Solution 261 The implementation of a system of internal controls is affected by cost-benefit considerations, the human element, and the size of the business. A company's system of internal control can provide reasonable assurance, but not absolute assurance, that assets are properly safeguarded and that the accounting records are reliable. The concept of reasonable assurance rests on the premise that the costs of establishing control procedures should not exceed their expected benefit. A very costly set of safeguards may produce something approaching absolute assurance, but the value of the benefits received would not come close to outweighing the costs. The human element can cause a good system of internal control to become ineffective due to employee fatigue, carelessness, or indifference. Additionally, collusion between two or more employees to circumvent prescribed controls may significantly impair the effectiveness of the system. The size of a business impacts internal control because a smaller business may not have the necessary resources available to affect the implementation of desirable controls. S-A E 262 How do these principles apply to cash disbursements: (a) Physical controls? (b) Human resource controls? Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: Communication, IMA: Internal Controls
Solution 262 (a) Physical controls apply to cash disbursements when: blank checks are stored in a safe, and access to the safe is restricted to authorized personnel, and a check-writing machine is used to print amounts on checks with indelible ink. (b) Human resource controls apply when the company bonds personnel who handle cash, requires employees to take vacations, and conducts background checks.
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S-A E 263 The preparation of a bank reconciliation is an important cash control procedure. If a company deposits cash receipts daily and makes all cash disbursements by check, explain why the cash balance per books might not agree with the cash balance shown on the bank statement. Identify specific examples that may cause differences between the cash balance per books and the cash balance per bank. Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Communication, IMA: Business Economics
Solution 263 The cash balance per books will not agree with the cash balance shown on the bank statement due to time lags and errors by either party. A time lag could mean the bank records a transaction in a period later than the company records it (outstanding checks, deposits-in-transit) or the company records a transaction in a period later than the bank records it (NSF check, collection of a note, etc.). S-A E 264 A basic principle of cash management involves the investment of idle cash. a. Explain why this should be done. b. What type of investment is appropriate for the idle cash? Ans: N/A, LO: 4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: Communication, IMA: Business Economics
Solution 264 a. Companies should have a policy for investing idle cash because cash on hand earns nothing. Excess (idle) cash should be invested so it can earn a return for the company. b. The excess cash is generally invested for short periods of time. Thus, it should be invested in highly liquid and risk-free securities. The most common form of liquid investment is interest-paying U.S. government securities. S-A E 265 (Ethics) Samson Instruments is a rapidly growing manufacturer of medical devices. As a result of its growth, the company's management recently modified several of its procedures and practices to improve internal control. Some employees are upset with the changes. They have complained that all these changes just show that the company no longer trusts them. Required: "Internal controls exist because most people can't be trusted." Is this true? Explain. Ans: N/A, LO: 1, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: Communication, IMA: Internal Controls
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 265 Internal controls exist, not because most people can't be trusted, but to protect the company's assets from those few who can't be trusted and to reduce the risk of unintentional errors. It is true that anyone is capable of practically any action, if motivation and opportunity are both present. Since it is extremely difficult to measure motivation to directly or indirectly harm the company, let alone to monitor changes in motivation, a company's best recourse is to prevent opportunity. Rather than feel threatened by internal control measures, honest employees should feel grateful. When responsibility for all activities is clearly defined and when access to company assets is carefully controlled, the honest employees can demonstrate their honesty. When all employees are considered to be honest, on the other hand, and no controls exist, all employees are unfairly tainted when one among them is dishonest. S-A E 266 (Communication) Clinix is a medical office management franchise. There are currently twenty-five medical offices managed by a Clinix franchisee. One of the services provided to franchisees is assistance in training various staff members. Clinix is preparing a manual for the front office staff to use as a reference guide. It will be used in training new employees as well. One of the reasons the manual is being prepared is to stress the importance of strong internal controls. Required: Prepare a short paragraph, to be included in the training materials, describing the benefits of sound internal control, from the viewpoint of the employee. Ans: N/A, LO: 1, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: Communication, IMA: Internal Controls
Solution 266 All the controls discussed in this manual may seem unnecessary to you. It may also seem that management trusts no one. However, these practices and procedures actually benefit you, the employee. First, internal control policies clearly outline who is to be responsible for various activities, such as making the daily deposit of cash in the bank. If a problem arises regarding a deposit, it is very clear to whom the company should turn to resolve the problem. If correct procedures were not followed, blame is not placed on all employees. Only those who did not follow correct procedures are held accountable for their actions. Also, strong internal controls discourage many opportunistic people, who find such opportunities to harm the company are extremely limited. Finally, all these systems, practices, and procedures result in a well-managed company that is less likely to suffer unnecessary losses, and a much better place for you to work and build a career.
.
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7-79
IFRS QUESTIONS 1.
The principles of internal control activities are used a. in the U.S. but not globally. b. internationally but not in the U.S. c. in the U.S. and Canada but not globally. d. globally.
Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
2.
Sarbanes Oxley applies to a. U.S companies but not international companies. b. international companies but not U.S. companies. c. U.S. and Canadian companies but not other international companies. d. U.S and international companies.
Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
3.
The fraud triangle applies to a. U.S companies but not international companies. b. international companies but not U.S. companies. c. U.S. and Canadian companies but not other international companies. d. U.S and international companies.
Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
4.
What percentage of companies worldwide have experienced fraud in a recent 12-month period? a. 1% b. 10% c. 34% d. 100%
Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
5.
IFRS, compared to GAAP, tends to be more a. detailed. b. rules-based. c. principles-based. d. full of disclosures requirements.
Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
7-80 6.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
GAAP, compared to IFRS, tends to be more a. simple in accounting requirements. b. rules-based. c. principles-based. d. simple in disclosures requirements.
Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
7.
GAAP's, accounting and internal control procedures related to cash and the definition of cash equivalents, as compared to IFRS are: Accounting and internal control procedures Definition of cash equivalents a. essentially similar essentially similar b. essentially different essentially similar c. essentially similar essentially different d. essentially different essentially different
Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
8.
Cash is defined by IFRS as a. cash on hand. b. demand deposits. c. cash on hand and demand deposits. d. cash on hand, demand deposits, and highly liquid investments.
Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
9.
Cash equivalents are defined by IFRS as a. cash on hand. b. demand deposits. c. cash on hand and demand deposits. d. short-term, highly liquid investments that are readily convertible into known amounts of cash.
Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
CHAPTER 8 REPORTING AND ANALYZING RECEIVABLES SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY Item
LO
BT
Item
LO
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
1 1 1 1 1 1 1 1 2 2 2
K K K K K K K K K C C
12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.
2 2 2 2 2 2 2 2 2 2 2
56 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86.
1 1 1 1 1 1 1 1 1 1 1 1 2 2 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
K. K K K K K K AP K C AP AP K K K AP C K K K C K AN AN AN K C C AN C AP
87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117.
2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
BT
Item
LO
BT
Item
True-False Statements C 23. 2 K 34. C 24. 2 K 35. C 25. 2 K 36. C 26. 2 C 37. C 27. 2 K 38. C 28. 2 C 39. C 29. 2 C 40. C 30. 2 C 41. K 31. 2 C 42. K 32. 2 K 43. K 33. 2 C 44. Multiple Choice Questions AP 118. 2 AP 149. AP 119. 2 AP 150. AP 120. 2 AP 151. C 121. 2 AP 152. C 122. 2 C 153. K 123. 2 K 154. K 124. 2 C 155. K 125. 2 AP 156. K 126. 2 AP 157. K 127. 2 AP 158. K 128. 2 AP 159. C 129. 2 C 160. AN 130. 2 AP 161. K 131. 2 AP 162. K 132. 2 AN 163. AN 133. 2 AP 164. C 134. 2 AN 165. AP 135. 2 AP 166. C 136. 2 AN 167. AN 137. 2 AP 168. K 138. 2 AN 169. AP 139. 2 K 170. AP 140. 2 C 171. AP 141. 3 K 172. AP 142. 3 K 173. AP 143. 3 K 174. AP 144. 3 K 175. AP 145. 3 AP 176. K 146. 3 AP 177. C 147. 3 AP 178. AP 148. 3 AP 179.
.
LO
BT
Item
LO
BT
3 3 3 3 3 3 3 3 3 3 3
K K K C K K K K C K C
45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55.
3 4 4 4 4 4 4 4 4 4 4
C C C C K AN K K K K K
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4 4 4
AP AP K C K AP AP K AP K AN AN AP AP AP K K AP AP AP C C AP AP C C K K K K K
180. 181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. 194. 195. 196. 197. 198. 199. 200. 201. 202. 203. 204. 205. 206. 207. 208. 209.
4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4
K AP AP AP AP K K AP AP C AN C AP K K AN AN AP C K K K K K AN AP K AP AP K
8-2
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
210. 211. 212.
1 1 1
K AP AP
213. 214. 215.
1 1, 2 2
224. 225. 226. 227.
1 1, 2 1, 2 1, 2
AP AP AP AP
228. 229. 230. 231.
1, 3 2 2 2
244. 245. 246.
1 1 2
K K K
247. 248. 249.
2 2 2
258.
1-4
K
Brief Exercises 216. 2 AP 219. 217. 1, 2 AP 220. 218. 3 AP 221. Exercises AP 232. 2 AP 236. AP 233. 2 AP 237. AP 234. 2 AP 238. AP 235. 3 AN 239. Completion Statements K 250. 2 C 253. K 251. 2 C 254. K 252. 3 AP 255. Matching AP AP AP
Short Answer Essay 259. 3 K 262. 3 K 265. 4 AP 268. 260. 2 AN 263. 4 C 266. 4 K 269. 261. 3 C 264. 4 K 267. 4 C *This topic is dealt with in an Appendix to the chapter.
.
3 3 2
AP AP AP
222. 223.
4 4
AP AP
3 3 3 3
AP AP AP AP
240. 241. 242. 243.
3 4 4 4
AP AN AP AP
3 3 4
C K K
256. 257.
4 4
K K
2 2
E C
Reporting and Analyzing Receivables
8-3
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Item 1 2 3 4 5 6
Type TF TF TF TF TF TF
Item 7 8 56 57 58 59
Type TF TF MC MC MC MC
Item 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
Type TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF
Item 29 30 31 32 33 68 69 72 73 74 75 76 77 78 79 80 81 82 83 84
Type TF TF TF TF TF MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC
Item 34 35 36 37 38 39 40 41 42 43 44
Type TF TF TF TF TF TF TF TF TF TF TF
Item 45 141 142 143 144 145 146 147 148 149 150
Type TF MC MC MC MC MC MC MC MC MC MC
Learning Objective 1 Item Type Item Type 60 MC 66 MC 61 MC 67 MC 62 MC 70 MC 63 MC 71 MC 64 MC 210 BE 65 MC 211 BE Learning Objective 2 Item Type Item Type 85 MC 105 MC 86 MC 106 MC 87 MC 107 MC 88 MC 108 MC 89 MC 109 MC 90 MC 110 MC 91 MC 111 MC 92 MC 112 MC 93 MC 113 MC 94 MC 114 MC 95 MC 115 MC 96 MC 116 MC 97 MC 117 MC 98 MC 118 MC 99 MC 119 MC 100 MC 120 MC 101 MC 121 MC 102 MC 122 MC 103 MC 123 MC 104 MC 124 MC Learning Objective 3 Item Type Item Type 151 MC 162 MC 152 MC 163 MC 153 MC 164 MC 154 MC 165 MC 155 MC 166 MC 156 MC 167 MC 157 MC 168 MC 158 MC 169 MC 159 MC 170 MC 160 MC 171 MC 161 MC 172 MC
.
Item 212 213 214 217 224 225 Item 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 214 215 216 217 Item 218 219 220 228 235 236 237 238 239 240 252
Type BE BE BE BE Ex Ex Type MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC BE BE BE BE Type BE BE BE Ex Ex Ex Ex Ex Ex Ex CS
Item 226 227 228 244 245 258
Type Ex Ex Ex CS CS MA
Item 221 225 226 227 229 230 231 232 233 234 246 247 248 249 250 251 258 260 268 269
Type BE Ex Ex Ex Ex Ex Ex Ex Ex Ex CS CS CS CS CS CS MA SA SA SA
Item 253 254 258 259 261 262
Type CS CS MA SA SA SA
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
8-4
Item 46 47 48 49 50 51 52 53 54 55 173
Type TF TF TF TF TF TF TF TF TF TF MC
Item 174 175 176 177 178 179 180 181 182 183 184
Type MC MC MC MC MC MC MC MC MC MC MC
Item 185 186 187 188 189 190 191 192 193 194 195
Note: TF = True-False MC = Multiple Choice Ma = Matching
Learning Objective 4 Type Item Type MC 196 MC MC 197 MC MC 198 MC MC 199 MC MC 200 MC MC 201 MC MC 202 MC MC 203 MC MC 204 MC MC 205 MC MC 206 MC
Item 207 208 209 222 223 241 242 243 255 256 257
Type MC MC MC BE BE Ex Ex Ex CS CS CS
Item 258 263 264 265 266 267
Type MA SA SA SA SA SA
C = Completion Ex = Exercise SA = Short Answer Essay
CHAPTER LEARNING OBJECTIVES 1. Explain how companies recognize accounts receivable. Receivables are frequently classified as accounts, notes, and other. Accounts receivable are amounts customers owe on account. Notes receivable represent claims that are evidenced by formal instruments of credit. Other receivables include nontrade receivables such as interest receivable, loans to company officers, advances to employees, and income taxes refundable. Companies record accounts receivable when they provide a service on account or at the point-of-sale of merchandise on account. Sales returns and allowances and cash discounts reduce the amount received on accounts receivable. 2. Describe how companies value accounts receivable and record their disposition. The two methods of accounting for uncollectible accounts are the allowance method and the direct write-off method. Under the allowance method, companies estimate uncollectible accounts as a percentage of receivables. It emphasizes the cash realizable value of the accounts receivable. An aging schedule is frequently used with this approach. 3. Explain how companies recognize, value, and dispose of notes receivable. The formula for computing interest is: Face value of note annual interest rate Time in terms of one year. Notes can be held to maturity, at which time the borrower (maker) pays the face value plus accrued interest and the payee removes the note from the accounts. In many cases, however, similar to accounts receivable, the holder of the note speeds up the conversion by selling the receivable to another party. In some situations, the maker of the note dishonors the note (defaults), and the note is written off.
.
Reporting and Analyzing Receivables
8-5
4. Describe the statement presentation of receivables and the principles of receivables management. Companies should identify each major type of receivable in the balance sheet or in the notes to the financial statements. Short-term receivables are considered current assets. Companies report the gross amount of receivables and the allowance for doubtful accounts. They report bad debt and service charge expenses in the income statement as operating (selling) expenses, and interest revenue as other revenues and gains in the nonoperating section of the statement. To properly manage receivables, management must (a) determine to whom to extend credit, (b) establish a payment period, (c) monitor collections, (d) evaluate the liquidity of receivables, and (e) accelerate cash receipts from receivables when necessary. The accounts receivable turnover and the average collection period both are useful in analyzing management’s effectiveness in managing receivables. The accounts receivable aging schedule also provides useful information. If the company needs additional cash, management can accelerate the collection of cash from receivables by selling (factoring) its receivables or by allowing customers to pay with bank credit cards.
TRUE-FALSE STATEMENTS 1.
Trade receivables occur when two companies trade or exchange notes receivables.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
2.
Trade receivables can be an account receivable or a note receivable.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
3.
Other receivables include non-trade receivables such as loans to company officers.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
4.
Advances to employees are referred to as accounts receivable.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
5.
Both accounts receivable and notes receivable represent claims that are expected to be collected in cash.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
6.
Accounts receivable are one of a company’s least liquid assets.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
7.
Accounts receivable are the result of cash and credit sales.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
8.
The two accounting problems with accounts receivable are: (1) recognizing and (2) disposing.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
.
8-6
9.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Receivables are valued and reported in the balance sheet at their gross amount less any sales returns and allowances and less any cash discounts.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
10.
An aging of accounts receivable schedule is based on the premise that the longer the period an account remains unpaid, the greater the probability that it will eventually be collected.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
11.
The allowance method of accounting for bad debts violates the matching principle.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: FSA
12.
When using the allowance method bad debt expense is recorded when an individual customer defaults.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
13.
Uncollectible accounts must be estimated because it is not possible to know which accounts will not be collected.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
14.
If a company uses the allowance method to account for uncollectible accounts, the entry to write off an uncollectible account only involves balance sheet accounts.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
15.
The percentage of receivables basis of estimating uncollectible accounts ignores the existing balance in the allowance account when the bad debt adjusting entry is recorded.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
16.
Under the accounts receivable aging method, the balance in Allowance for Doubtful Accounts must be considered carefully prior to adjusting for estimated uncollectible accounts.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
17.
Under the direct write-off method, no attempt is made to match bad debt expense to sales revenues in the same accounting period.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
18.
Allowance for Doubtful Accounts is debited under the direct write-off method when an account is determined to be uncollectible.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
19.
When the allowance method is used, the write-off of an account receivable results in an expense at the time of write-off.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None,
.
Reporting and Analyzing Receivables IMA: FSA
.
8-7
8-8 20.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Allowance for Doubtful Accounts is a contra account that is deducted from Accounts Receivable on the balance sheet.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
21.
The Allowance for Doubtful Accounts is a liability account.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
22.
Cash realizable value is determined by subtracting Allowance for Doubtful Accounts from Net Sales.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
23.
If bad debt losses are significant, the direct write-off method is acceptable for financial reporting purposes.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
24.
Bad debt losses are a cost of selling on credit.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
25.
The allowance method of handling bad debts violates the matching principle.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
26.
The allowance for doubtful accounts is similar to accumulated depreciation in that it shows the total of all accounts written off over the years.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
27.
The direct write-off method of recognizing uncollectible accounts is not in accordance with good accounting practice.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
28.
When using the direct write-off method year-end adjustments for bad debt expense must be made.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
29.
When using the allowance method year-end adjustments for bad debt expense must be made.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
30.
Under the allowance method, Bad Debt Expense is debited when an account is deemed uncollectible and must be written off.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
31.
Under the allowance method, the cash realizable value of receivables is the same both before and after an account has been written off.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Reporting and Analyzing Receivables
32.
8-9
An aging schedule is prepared only for old accounts receivables that have been past due for more than one year.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
33.
When an account receivable that was previously written off is collected, it is first necessary to reverse the entry to reinstate the customer’s account before recording the collection.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
34.
A note receivable is a written promise by the maker to the payee to pay a specified amount of money at a definite time.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
35.
The two key parties to a note are the maker and the payee.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
36.
In a promissory note, the party to whom payment is to be made is called the maker.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
37.
In computing the maturity date of a note, the date the note is issued is included but the due date is omitted.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
38.
When the due date of a note is stated in months, the time factor in computing interest is the number of months divided by 360 days.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
39.
There is only one way to calculate interest correctly.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
40.
Interest on a 6-month, 10 percent, $10,000 note is calculated by multiplying $10,000 0.10 6/12.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
41.
The basic formula for computing interest on an interest-bearing note is face value of note x annual interest rate x time in terms of one year = interest.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
42.
When a note is written to settle an open account no entry is necessary.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
43.
A dishonored note is a note that is not paid in full at maturity.
.
8-10
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
44.
If a promissory note is dishonored, the payee should not record interest income.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
45.
The holder of a note adjusts for accrued interest by debiting Interest Receivable and crediting Interest Revenue.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
46.
Both the gross amount of receivables and the allowance for doubtful accounts should be reported in the balance sheet.
Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
47.
Bad debt expense and interest revenue are reported in the income statement under other revenues and expenses.
Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
48.
If a company has a significant concentration of credit risk, it is not required to discuss that in its notes to its financial statements as that could increase the related risk.
Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
49.
A concentration of credit risk is a threat of nonpayment from a single customer or class of customers that could adversely affect the financial health of the company.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
50.
If a company has significant concentrations of credit risk, it must discuss this risk in the notes to its financial statements.
Ans: T, LO: 4, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
51.
The accounts receivable turnover ratio is computed by dividing total sales by the average net receivables during the year.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
52.
The average collection period is frequently used to assess the effectiveness of a company’s credit and collection policies.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
53.
A factor buys receivables from businesses for a fee and collects the payment directly from customers.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
54.
A major advantage of national credit cards to retailers is that there is no charge to the retailer by the credit card companies for their services.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None,
.
Reporting and Analyzing Receivables
8-11
IMA: Business Economics
55.
If a retailer accepts a national credit card such as Visa, the retailer must maintain detailed records of customer accounts.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: FSA
Answers to True-False Statements 1. 2. 3. 4. 5. 6. 7. 8.
F T T F T F F F
9. 10. 11. 12. 13. 14. 15. 16.
F F F F T T F T
17. 18. 19. 20. 21. 22. 23. 24.
T F F T F F F T
25. 26. 27. 28. 29. 30. 31. 32.
F F T F T F T F
33. 34. 35. 36. 37. 38. 39. 40.
T T T F F F F T
41. 42. 43. 44. 45. 46. 47. 48.
T F T F T T F F
49. 50. 51. 52. 53. 54. 55.
T T F T T F F
MULTIPLE CHOICE QUESTIONS 56.
Interest is usually associated with a. accounts receivable. b. notes receivable. c. doubtful accounts. d. bad debts.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
57.
The receivable that is usually evidenced by a formal instrument of credit is a(n) a. trade receivable. b. note receivable. c. accounts receivable. d. income tax receivable.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
58.
Which of the following receivables would not be classified as an "other receivable”? a. Advance to an employee b. Refundable income tax c. Notes receivable d. Interest receivable
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
59.
Notes or accounts receivables that result from sales transactions are often called a. sales receivables. b. non-trade receivables. c. trade receivables. d. merchandise receivables.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
8-12 60.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The term "receivables" refers to a. amounts due from individuals or companies. b. merchandise to be collected from individuals or companies. c. cash to be paid to creditors. d. cash to be paid to debtors.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
61.
Receivables are a. one of the most liquid assets and thus are always considered current assets. b. claims that are expected to be collected in cash. c. shown on the income statement at cash realizable value. d. always the result of revenue recognition.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
62.
Non-trade receivables should be reported separately from trade receivables. Why is this statement either true or false? a. It is true because trade receivables are current assets and non-trade receivables are long term. b. It is false because all current receivables must be grouped together in one account. c. It is true because non-trade receivables do not result from business operations and should not be included with accounts receivable. d. It is false because management can decide how to report receivables.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
63.
M. Cornett is a corporation that sells breakfast cereal. Based on the accounts listed below, what are M. Cornett’s total trade receivables? Income tax refund due Advance due to the company from the company president 3-month note due from M. Cornett’s main customer Interest due this month on the above note Due and unpaid from this month’s sales Due and unpaid from last month’s sales a. b. c. d.
$ 500 300 2,000 100 9,000 1,000
$10,000 $12,000 $11,000 $12,900
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $2,000 + $9,000 + $1,000 = $12,000 (3-Mon. Note + this & last mon. unpaid sal.)
64.
Which of the following would probably be the most significant type of a claim held by a company? a. notes receivable b. non-trade receivables c. accounts receivable
.
Reporting and Analyzing Receivables
8-13
d. interest receivable Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
8-14 65.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Dorman Company had the following items to report on its balance sheet: Employee advances Amounts owed by customers for the sale of services (due in 30 days) Refundable income taxes Interest receivable Accepted a formal instrument of credit for services (due in 18 months) A loan to company president Dishonored a note for principal and interest which will eventually be collected
$ 1,580 3,050 1,120 950 2,220 10,000 1,380
Based on this information, what amount should appear in the "Other Receivables" category? a. $20,300 b. $13,650 c. $15,030 d. $17,250 Ans: B, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,580 + $1,120 + $950 + $10,000 = $13,650 (Emp. adv. + inc. tax. ref. + int. rec. + pres. loan.)
66.
On January 15, Nifty Company sells merchandise on account to Martinez Associates for $5,000 with terms 3/10, n/30. On January 20, Martinez returns merchandise worth $1,000 to Nifty. On January 24, payment is received from Martinez for the balance due. What is the amount of cash received? a. $4,000 b. $3,880 c. $3,850 d. $2,800
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($5,000 − $1,000)] .97 = $3,880 (Sale amount – ret.) × (1 – .03)
67.
Wilton sells softball equipment. On November 14, they shipped $4,000 worth of softball uniforms to Paola Middle School, terms 2/10, n/30. On November 21, they received an order from Douglas High School for $2,400 worth of custom printed bats to be produced in December. On November 30, Paola Middle School returned $400 of defective merchandise. Wilton has received no payments from either school as of month end. What amount will be recognized as net accounts receivable on the balance sheet as of November 30? a. $6,400 b. $6,000 c. $4,000 d. $3,600
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $4,000 − $400 = $3,600 (Sale amount – ret.)
.
Reporting and Analyzing Receivables
68.
8-15
Which one of the following is not an accounting problem (issue) associated with accounts receivable? a. Depreciating accounts receivable b. Recognizing accounts receivable c. Valuing accounts receivable d. Accelerating cash receipts from accounts receivable
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
69.
Accounts receivable are valued and reported on the balance sheet a. in the investments section. b. at gross amounts less sales returns and allowances. c. at cash realizable value. d. only if they are not past due.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
70.
Three accounting issues associated with accounts receivable are a. depreciating, returns, and valuing. b. depreciating, valuing, and collecting. c. recognizing, valuing, and accelerating collections. d. accrual, bad debts, and accelerating collections.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
71.
Carson Company on July 15 sells merchandise on account to Tayler Co. for $3,000, terms 2/10, n/30. On July 20, Tayler Co. returns merchandise worth $1,200 to Carson Company. On July 24, payment is received from Tayler Co. for the balance due. What is the amount of cash received? a. $1,800 b. $1,764 c. $1,740 d. $3,000
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($3,000 − $1,200)] .98 = $1,764 (Sale amount – ret.) × (1– .02)
72.
The Allowance for Doubtful Accounts is necessary because a. when recording uncollectible accounts expense, it is not possible to know which specific accounts will not pay. b. uncollectible accounts that are written off must be accumulated in a separate account. c. a liability results when a credit sale is made. d. management needs to accumulate all the credit losses over the years.
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
73.
The account Allowance for Doubtful Accounts is classified as a(n) a. liability. b. contra account of Bad Debt Expense. c. expense. d. contra account to Accounts Receivable.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
.
8-16
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition Reporting
74.
Under the allowance method, Bad Debt Expense is recorded a. when an individual account is written off. b. when the loss amount is known. c. for an amount that the company estimates it will not collect. d. several times during the accounting period.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
75.
The expense recognition a. requires that all credit losses be recorded when an individual customer cannot pay. b. necessitates the recording of an estimated amount for bad debts. c. results in the recording of a known amount for bad debt losses. d. is not involved in the decision of when to expense a credit loss.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
76.
Under the allowance method, writing off an uncollectible account a. affects only balance sheet accounts. b. affects both balance sheet and income statement accounts. c. affects only income statement accounts. d. is not acceptable practice.
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
77.
The net amount expected to be received in cash from receivables is termed the a. cash realizable value. b. cash-good value. c. gross cash value. d. cash-equivalent value.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
78.
If a company fails to record estimated bad debts expense, a. cash realizable value is understated. b. expenses are understated. c. revenues are understated. d. receivables are understated.
Ans: B, LO: 2, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
79.
If the amount of uncollectible account expense is understated at year end a. net income will be understated. b. stockholders’ equity will be understated. c. Allowance for Doubtful accounts will be overstated. d. net Accounts Receivable will be overstated.
Ans: D, LO: 2, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Reporting and Analyzing Receivables
80.
8-17
If the amount of uncollectible account expense is overstated at year end a. net income will be overstated. b. stockholders’ equity will be overstated. c. Allowance for Doubtful accounts will be understated. d. net Accounts Receivable will be understated.
Ans: D, LO: 2, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
81.
The expense recognition principle relates to credit losses by stating that bad debt expense should be recorded a. in the same period as allowed for tax purposes. b. in the period of the sale. c. for an exact amount. d. in the period of the loss.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
82.
When the allowance method is used to account for uncollectible accounts, Bad Debts Expense is debited when a. a sale is made. b. an account becomes bad and is written off. c. management estimates the amount of uncollectibles. d. a customer's account becomes past due.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
83.
When an account becomes uncollectible and must be written off a. Allowance for Doubtful Accounts should be credited. b. Accounts Receivable should be credited. c. Bad Debt Expense should be credited. d. Sales Revenue should be debited.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
84.
The collection of an account that had been previously written off under the allowance method of accounting for uncollectibles a. will increase income in the period it is collected. b. will decrease income in the period it is collected. c. requires a correcting entry for the period in which the account was written off. d. does not affect income in the period it is collected.
Ans: D, LO: 2, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
85.
The direct write-off method of accounting for uncollectible accounts a. emphasizes the matching of expenses with revenues. b. emphasizes balance sheet relationships. c. emphasizes cash realizable value. d. is not generally accepted as a basis for estimating bad debts.
Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
.
8-18 86.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
An aging of a company's accounts receivable indicates that $9,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $2,400 credit balance, the adjustment to record bad debts for the period will require a a. debit to Bad Debt Expense for $9,000. b. debit to Allowance for Doubtful Accounts for $6,600. c. debit to Bad Debt Expense for $6,600. d. credit to Allowance for Doubtful Accounts for $9,000.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $9,000 − $2,400 = $6,600 (Est. Uncoll. accts. – ADA bal.)
87.
An aging of a company's accounts receivable indicates that $9,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $3,200 debit balance, the adjustment to record bad debts for the period will require a a. debit to Bad Debt Expense for $9,000. b. debit to Bad Debt Expense for $12,200. c. debit to Bad Debt Expense for $5,800. d. credit to Allowance for Doubtful Accounts for $9,000.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $9,000 + $3,200 = $12,200 (Est. Uncolls. accts. + ADA bal.)
88.
An aging of a company's accounts receivable indicates that $9,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $3,200 credit balance, the adjustment to record bad debts for the period will require a a. debit to Bad Debt Expense for $9,000. b. debit to Allowance for Doubtful Accounts for $5,800. c. debit to Bad Debt Expense for $5,800. d. credit to Allowance for Doubtful Accounts for $9,000.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $9,000 − $3,200 = $5,800. (Est. Uncoll. accts. – ADA bal.)
89.
An aging of a company's accounts receivable indicates that $9,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $2,400 debit balance, the adjustment to record bad debts for the period will require a a. debit to Bad Debt Expense for $9,000. b. debit to Allowance for Doubtful Accounts for $11,400. c. debit to Bad Debt Expense for $11,400. d. credit to Allowance for Doubtful Accounts for $9,000.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $9,000 + $2,400 = $11,400 (Est. Uncoll. accts. + ADA bal.)
.
Reporting and Analyzing Receivables
90.
8-19
A debit balance in the Allowance for Doubtful Accounts a. is the normal balance for that account. b. indicates that actual bad debt write-offs have exceeded previous provisions for bad debts. c. indicates that actual bad debt write-offs have been less than what was estimated. d. cannot occur if the percentage of receivables method of estimating bad debts is used.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
91.
Under the direct write-off method of accounting for uncollectible accounts, Bad Debt Expense is debited a. when a credit sale is past due. b. at the end of each accounting period. c. whenever a pre-determined amount of credit sales have been made. d. when an account is determined to be uncollectible.
Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
92.
An alternative name for Bad Debt Expense is a. Deadbeat Expense. b. Uncollectible Accounts Expense. c. Collection Expense. d. Credit Loss Expense.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
93.
Bad Debt Expense is considered a. an avoidable cost in doing business on a credit basis. b. an internal control weakness. c. a necessary risk of doing business on a credit basis. d. avoidable unless there is a recession.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
94.
Two methods of accounting for uncollectible accounts are the a. allowance method and the accrual method. b. allowance method and the net realizable method. c. direct write-off method and the accrual method. d. direct write-off method and the allowance method.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
95.
The allowance method of accounting for uncollectible accounts is required if a. the company makes any credit sales. b. bad debts are significant in amount. c. the company is a retailer. d. the company charges interest on accounts receivable.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
8-20 96.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Bad Debt Expense is reported on the income statement as a. part of cost of goods sold. b. an expense subtracted from net sales to determine gross profit. c. an operating expense. d. a contra revenue account.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
97.
When the allowance method of accounting for uncollectible accounts is used, Bad Debt Expense is recorded a. in the year after the credit sale is made. b. in the same year as the credit sale. c. as each credit sale is made. d. when an account is written off as uncollectible.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
98.
To record estimated uncollectible accounts using the allowance method, the adjusting entry would be a a. debit to Accounts Receivable and a credit to Allowance for Doubtful Accounts. b. debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts. c. debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable. d. debit to Loss on Credit Sales and a credit to Accounts Receivable.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
99.
Under the allowance method of accounting for uncollectible accounts, a. the cash realizable value of accounts receivable is greater before an account is written off than after it is written off. b. Bad Debt Expense is debited when a specific account is written off as uncollectible. c. the cash realizable value of accounts receivable in the balance sheet is the same before and after an account is written off. d. Allowance for Doubtful Accounts is closed each year to Income Summary.
Ans: C, LO: 2, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
100.
When using the balance sheet approach, the balance in Allowance for Doubtful Accounts must be considered prior to the end of period adjustment when using which of the following methods? a. Net realizable method b. Direct write-off method c. Accrual method d. Allowance method
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
101.
Allowance for Doubtful Accounts on the balance sheet a. is offset against total current assets. b. increases the cash realizable value of accounts receivable. c. appears under the heading "Other Assets." d. is deducted from accounts receivable.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Reporting and Analyzing Receivables
102.
8-21
When an account is written off using the allowance method, the a. cash realizable value of total accounts receivable will increase. b. net accounts receivable will decrease. c. allowance account will increase. d. net accounts receivable will stay the same.
Ans: D, LO: 2, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
103.
If an account is collected after having been previously written off a. the allowance account should be debited. b. only the control account needs to be credited. c. both income statement and balance sheet accounts will be affected. d. there will be both a debit and a credit to accounts receivable.
Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
104.
You have just received notice that a customer of yours with an account receivable balance of $100 has gone bankrupt and will not make any future payments. Assuming you use the allowance method, the entry you make is to a. debit Allowance for Doubtful Accounts and credit Bad Debt Expense. b. debit Allowance for Doubtful Accounts and credit Accounts Receivable. c. debit Bad Debt Expense and credit Allowance for Doubtful Accounts. d. debit Bad Debt Expense and credit Accounts Receivable.
Ans: B, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
105.
When an account is written off using the allowance method, accounts receivable a. is unchanged and the allowance account increases. b. increases and the allowance account increases. c. decreases and the allowance account decreases. d. decreases and the allowance account increases.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
106.
Under the allowance method, when a specific account is written off a. total assets will be unchanged. b. net income will decrease. c. total assets will decrease. d. total assets will increase.
Ans: A, LO: 2, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
107.
The percentage of receivables basis for estimating uncollectible accounts emphasizes a. cash realizable value. b. the relationship between accounts receivable and bad debts expense. c. income statement relationships. d. the relationship between sales and accounts receivable.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
8-22 108.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Nichols Company uses the percentage of receivables method for recording bad debts expense. The accounts receivable balance is $250,000 and credit sales are $1,000,000. Management estimates that 4% of accounts receivable will be uncollectible. What adjusting entry will Nichols Company make if the Allowance for Doubtful Accounts has a credit balance of $2,500 before adjustment? a. Bad Debt Expense 10,000 Allowance for Doubtful Accounts 10,000 b. Bad Debt Expense 7,500 Allowance for Doubtful Accounts 7,500 c. Bad Debt Expense 7,500 Accounts Receivable 7,500 d. Bad Debt Expense 10,000 Accounts Receivable 10,000
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($250,000 .04) − $2,500 = $7,500 ((A/R bal. × 4%) − ADA bal.)
109.
Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $55,000. If the balance of the Allowance for Doubtful Accounts is $11,000 debit before adjustment, what is the balance after adjustment? a. $55,000 b. $11,000 c. $66,000 d. $44,000
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $55,000 estimated uncollectible accounts
110.
Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $55,000. If the balance of the Allowance for Doubtful Accounts is $11,000 debit before adjustment, what is the amount of bad debt expense for that period? a. $55,000 b. $11,000 c. $66,000 d. $44,000
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $55,000 + $11,000 = $66,000 (Est. uncoll. accts. + ADA bal.)
111.
Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $45,000. If the balance of the Allowance for Doubtful Accounts is $6,000 credit before adjustment, what is the amount of bad debt expense for that period? a. $45,000 b. $39,000 c. $51,000 d. $6,000
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Reporting and Analyzing Receivables
8-23
Solution: $45,000 − $6,000 = $39,000 (Est. uncoll. accts. − ADA bal.)
112.
Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $45,000. If the balance of the Allowance for Doubtful Accounts is $6,000 debit before adjustment, what is the balance after adjustment? a. $45,000 b. $51,000 c. $39,000 d. $6,000
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $45,000 estimated uncollectible accounts
113.
Kinsler Company uses the percentage-of-receivables method for recording bad debt expense. The Accounts Receivable balance is $250,000 and credit sales are $1,000,000. Management estimates that 6% of accounts receivable will be uncollectible. What adjusting entry will Kinsler Company make if the Allowance for Doubtful Accounts has a credit balance of $2,500 before adjustment? a. Bad Debt Expense 17,500 Allowance for Doubtful Accounts 17,500 b. Bad Debt Expense 5,000 Allowance for Doubtful Accounts 5,000 c. Bad Debt Expense 12,500 Allowance for Doubtful Accounts 12,500 d. Bad Debt Expense 10,000 Accounts Receivable 10,000
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($250,000 .06) − $2,500 = $12,500 ((A/R bal. × 6%) – ADA bal.)
114.
Using the percentage-of-receivables method for recording bad debt expense, estimated uncollectible accounts are $44,000. If the balance of the Allowance for Doubtful Accounts is $9,000 debit before adjustment, what is the amount of bad debt expense for that period? a. $44,000 b. $ 9,000 c. $53,000 d. $35,000
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $44,000 + $9,000 = $53,000 (Est. uncoll. accts. + ADA bal.)
115.
Under the allowance method, when a year-end adjustment is made for estimated uncollectible accounts a. total assets decrease. b. total assets are unchanged. c. net income is unchanged. d. liabilities decrease.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
8-24 116.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
One might infer from a debit balance in Allowance for Doubtful Accounts that a. a posting error has been made. b. more accounts have been written off than had been estimated. c. the direct method is being used. d. Bad Debt Expense has been overestimated.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
117.
Using the allowance method, the uncollectible accounts for the year are estimated to be $50,000. If the balance for the Allowance for Doubtful Accounts is a $9,000 credit before adjustment, what is the balance after adjustment? a. $9,000 b. $41,000 c. $50,000 d. $59,000
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $50,000 estimated uncollectible accounts
118.
Using the allowance method, the uncollectible accounts for the year is estimated to be $50,000. If the balance for the Allowance for Doubtful Accounts is a $9,000 credit before adjustment, what is the amount of bad debt expense for the period? a. $9,000 b. $41,000 c. $50,000 d. $59,000
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $50,000 − $9,000 = $41,000 (Est. uncoll. accts. − ADA bal.)
119.
Using the allowance method, the uncollectible accounts for the year is estimated to be $50,000. If the balance for the Allowance for Doubtful Accounts is a $9,000 debit before adjustment, what is the amount of bad debt expense for the period? a. $9,000 b. $41,000 c. $50,000 d. $59,000
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $50,000 + $9,000 = $59,000 (Est. uncoll. accts. + ADA bal.)
120.
In reviewing the accounts receivable, the cash receivable value is $28,000 before the write-off of a $2,000 account. What is the cash receivable value after the write-off? a. $28,000 b. $2,000 c. $30,000 d. $26,000
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $28,000 before and after write-off
.
Reporting and Analyzing Receivables
121.
8-25
In 2017 the Golic Co. had net credit sales of $900,000. On January 1, 2017, the Allowance for Doubtful Accounts had a credit balance of $22,500. During 2017, $36,000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be 10% of the balance in receivables (percentage-of-receivables basis). If the accounts receivable balance at December 31 was $240,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2017? a. $24,000. b. $37,500. c. $46,500. d. $36,000.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($240,000 .10) + ($36,000 − $22,500) = $37,500 (End. A/R bal. × 10 %) + (A/R writ. off – beg. ADA bal.)
122.
The balance of Allowance for Doubtful Accounts prior to making the adjusting entry to record Bad Debt Expense a. is relevant when using the percentage-of-receivables basis. b. is relevant when using the direct write-off method. c. is relevant to both the percentage-of-receivables basis and the direct write-off method. d. will never show a debit balance at this stage in the accounting cycle.
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
123.
The direct write-off method of accounting for bad debts a. uses an allowance account. b. uses a contra asset account. c. does not require estimates of bad debt losses. d. is the preferred method under generally accepted accounting principles.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
124.
Under the direct write-off method of accounting for uncollectible accounts a. the allowance account is increased for the actual amount of bad debt at the time of write-off. b. a specific account receivable is decreased for the actual amount of bad debt at the time of write-off. c. balance sheet relationships are emphasized. d. bad debt expense is always recorded in the period in which the revenue was recorded.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
.
8-26 125.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
A company has an ending accounts receivable balance of $1,800,000 and it estimates that uncollectible accounts will be 2% of the receivable balance. If Allowance for Doubtful Accounts has a credit balance of $4,000 prior to adjustment, its balance after adjustment will be a credit of a. $40,000. b. $36,000. c. $35,920. d. $32,000.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,800,000 .02 = $36,000 (A/R bal. × 2 %)
126.
Net credit sales for the month are $900,000. The accounts receivable balance is $192,000. The allowance is calculated as 5% of the receivables balance using the percentage-of-receivables basis. If the Allowance for Doubtful Accounts has a credit balance of $6,000 before adjustment, what is the balance after adjustment? a. $ 9,600 b. $ 3,600 c. $15,600 d. $ 9,900
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $192,000 .05 = $9,600 (A/R bal. × 5%)
127.
In 2017 Wilkinson Company had net credit sales of $2,250,000. On January 1, 2017, Allowance for Doubtful Accounts had a credit balance of $54,000. During 2017, $90,000 of uncollectible accounts receivable were written off. Past experience indicates that the allowance should be 10% of the balance in receivables (percentage of receivables basis). If the accounts receivable balance at December 31 was $600,000, what is the required adjustment to the Allowance for Doubtful Accounts at December 31, 2017? a. $ 60,000 b. $ 25,000 c. $ 96,000 d. $ 90,000
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($600,000 .10) + ($90,000 − $54,000) = $96,000 [(End A/R bal. × 10%) + (accts. writ. off – beg. ADA bal.)]
.
Reporting and Analyzing Receivables
128.
8-27
An analysis and aging of the accounts receivable of Watts Company at December 31 reveal these data: Accounts receivable $ 3,200,000 Allowance for doubtful accounts per books before adjustment (credit) 200,000 Total estimated uncollectible accounts at December 31 260,000 What is the cash realizable value of the accounts receivable at December 31 after adjustment? a. $2,740,000 b. $3,000,000 c. $3,200,000 d. $2,940,000
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $3,200,000 − $260,000 = $2,940,000 (A/R bal. – exp. Uncoll. amount)
129.
The bookkeeper recorded the following journal entry Allowance for Doubtful Accounts Accounts Receivable – Richard James
1,000 1,000
Which one of the following statements is false? a. This entry is only prepared on the last day of the accounting period. b. There should be written authorization for this transaction from someone who does not have responsibilities related to recording cash. c. There could be a violation of internal control policies. d. James’ account was written off because it was determined to be uncollectible. Ans: A, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
130.
The following information is related to December 31, 2016 balances. • Accounts receivable $1,400,000 • Allowance for doubtful accounts (credit) (120,000) • Cash realizable value 1,280,000 During 2017 sales on account were $390,000 and collections on account were $230,000. Also, during 2017 the company wrote off $22,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that bad debts should be estimated at $144,000. The change in the cash realizable value from the balance at 12/31/16 to 12/31/17 was a. 136,000 increase. b. $160,000 increase. c. $114,000 increase. d. $138,000 increase.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($1,400,000 + $390,000 − $230,000 − $22,000) − $144,000] − $1,280,000 = $114,000 ((A/R bal. + cr. sal. – coll. accts. writ . off – est. bad debts – ADA bal.) – cash real. val.)
.
8-28 131.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The following information is related to December 31, 2016 balances. • Accounts receivable $1,400,000 • Allowance for doubtful accounts (credit) (120,000) • Cash realizable value 1,280,000 During 2017 sales on account were $390,000 and collections on account were $230,000. Also, during 2017 the company wrote off $22,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that bad debts should be estimated at $144,000. Bad debt expense for 2017 is: a. $46,000. b. $24,000. c. $144,000. d. $ 2,000.
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $144,000 − ($120,000 − $22,000) = $46,000 (Est. bad debit – (ADA bal. – accts. writ. off)
132.
During 2017 Sedgewick Inc. had sales on account of $528,000, cash sales of $216,000, and collections on account of $336,000. In addition, they collected $5,800 which had been written off as uncollectible in 2016. As a result of these transactions the change in the accounts receivable balance indicates a a. $402,200 increase. b. $192,000 increase. c. $186,200 increase. d. $408,000 increase.
Ans: B, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $528,000 − $336,000 = $192,000 (Cr. sal. – coll.)
133.
Thompson Corporation’s unadjusted trial balance includes the following balances (assume normal balances): • Accounts receivable $1,865,000 • Allowance for doubtful accounts $ 35,500 Bad debts are estimated to be 6% of outstanding receivables. What amount of bad debt expense will the company record? a. $119,400 b. $76,400 c. $74,270 d. $114,030
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($1,865,000 .06) − $35,500 = $76,400 (A/R bal. × 6%) – ADA bal.)
.
Reporting and Analyzing Receivables
134.
8-29
The following information is related to December 31, 2016 balances. • Accounts receivable $3,150,000 • Allowance for doubtful accounts (credit) (270,000) • Cash realizable value $2,880,000 During 2017 sales on account were $870,000 and collections on account were $516,000. Also during 2017 the company wrote off $48,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that bad debts should be estimated at $324,000. The change in the cash realizable value from the balance at 12/31/16 to 12/31/17 was a a. $300,000 increase. b. $354,000 increase. c. $252,000 increase. d. $306,000 increase.
Ans: C, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($3,150,000 + $870,000 − $516,000 − $48,000) − $324,000] − $2,880,000 = $252,000 (A/R bal. + Cr. sal. – coll. – accts. writ. off – est. bad assets) – cash real. val.)
135.
The following information is related to December 31, 2016 balances. • Accounts receivable $3,150,000 • Allowance for doubtful accounts (credit) (270,000) • Cash realizable value $2,880,000 During 2017 sales on account were $870,000 and collections on account were $516,000. Also during 2017 the company wrote off $48,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that bad debts should be estimated at $324,000. Bad debt expense for 2017 is a. $102,000. b. $ 54,000. c. $324,000. d. $ 6,000.
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $324,000 − ($270,000 − $48,000) = $102,000 (Est. bad debts – (ADA bal. – accts. writ. off)
136.
During 2017 Wheeler Inc. had sales on account of $792,000, cash sales of $324,000, and collections on account of $504,000. In addition, they collected $8,700 which had been written off as uncollectible in 2016. As a result of these transactions the change in the accounts receivable indicates a a. $603,300 increase. b. $288,000 increase. c. $279,300 increase. d. $612,000 increase.
Ans: B, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $792,000 − $504,000 + $8,700 − $8,700 = $288,000 (Cr. sal. – coll. + accts. writ. off – writ. off accts. coll.)
.
8-30 137.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Smithson Corporation’s unadjusted trial balance includes the following balances (assume normal balances): • Accounts Receivable $1,119,000 • Allowances for Doubtful Accounts $ 21,300 Bad debts are estimated to be 6% of outstanding receivables. What amount of bad debt expense will the company record? a. $67,140 b. $45,840 c. $44,562 d. $68,418
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($1,119,000 .06) − $21,300 = $45,840 (A/R bal. × 6%) – ADA bal.)
138.
A write off of a specific accounts receivable under the allowance method a. increases bad debt expense for the accounting period. b. should occur on the last day of the accounting period. c. decreases the cash realizable value of accounts receivable. d. should be formally approved by an authorized employee.
Ans: D, LO: 2, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
139.
The direct write-off method is acceptable for financial reporting purposes only if the bad debt losses are insignificant. a. This is a false statement because the direct write-off method violates the matching principle. b. This is a true statement based on the concept of materiality. c. This is a false statement because the direct write-off method can only be used for tax reporting. d. This is a true statement because companies can choose either the direct write-off or the allowance method for financial reporting, as long as they consistently apply the method.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
140.
Under the allowance method of accounting for bad debts, why must uncollectible accounts receivable be estimated at the end of the accounting period? a. To allow the collection department to schedule work for the next accounting period. b. To determine the gross realizable value of accounts receivable. c. The IRS rules require the company to make the estimate. d. To match bad debt expense to the period in which the revenues were earned.
Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
141.
A promissory note a. is not a formal credit instrument. b. may be used to settle an accounts receivable. c. has the party to whom the money is due as the maker. d. cannot be factored to another party.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Reporting and Analyzing Receivables
142.
8-31
Which of the following is not true regarding a promissory note? a. Promissory notes may not be transferred to another party by endorsement. b. Promissory notes may be sold to another party. c. Promissory notes give a stronger legal claim to the holder than accounts receivable. d. Promissory notes may be bearer notes and not specifically identify the payee by name.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
143.
The two key parties to a promissory note are the a. maker and a bank. b. debtor and the payee. c. maker and the payee. d. sender and the receiver.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
144.
When calculating interest on a promissory note with the maturity date stated in terms of days, the a. maker pays more interest if 365 days are used instead of 360. b. maker pays the same interest regardless if 365 or 360 days are used. c. payee receives more interest if 360 days are used instead of 365. d. payee receives less interest if 360 days are used instead of 365.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
145.
The interest on a $10,000, 10%, 1-year note receivable is a. $10,000. b. $1,000. c. $11,000. d. $10,900.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $10,000 .10 = $1,000 (Face val. × int. rate)
146.
The interest on a $20,000, 6%, 60-day note receivable is a. $1,200. b. $200. c. $400. d. $600.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $20,000 .06 60/360 = $200 (Face val. × 6% × 60/360)
147.
The interest on a $15,000, 6%, 90-day note receivable is a. $900. b. $450. c. $225. d. $675.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $15,000 .06 90/360 = $225 (Face val. × 6% × 90/360)
.
8-32 148.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The interest on a $25,000, 10%, 1-year note receivable is a. $250. b. $208. c. $2,500. d. $27,500.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $25,000 .10 = $2,500 (Face val. × 10%)
149.
The interest on a $15,000, 6%, 60-day note receivable is a. $75. b. $900 c. $450. d. $150.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $15,000 .06 60/360 = $150 (Face val. × 6% × 60/360)
150.
The interest on a $10,000, 9%, 90-day note receivable is a. $225. b. $900. c. $75. d. $150.
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $10,000 .09 90/360 = $225 (Face val. × 9% × 90/360)
151.
A note receivable is a negotiable instrument which a. eliminates the need for a bad debts allowance. b. can be transferred to another party by endorsement. c. takes the place of checks in a business firm. d. can only be collected by a bank.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: None, IMA: Business Economics
152.
When a company receives an interest-bearing note receivable, it will a. debit Notes Receivable for the maturity value of the note. b. credit Notes Receivable for the maturity value of the note. c. debit Notes Receivable for the face value of the note. d. credit Notes Receivable for the face value of the note.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
153.
The face value of a note refers to the amount a. that can be received if sold to a factor. b. borrowed plus interest received at maturity from the maker. c. at which the note receivable is recorded. d. remaining after a service charge has been deducted.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
.
Reporting and Analyzing Receivables
154.
8-33
Rosen Company receives a $9,000, 3-month, 6% promissory note from Bay Company in settlement of an open accounts receivable. What entry will Rosen Company make upon receiving the note? a. Notes Receivable 9,135 Accounts Receivable—Bay Company 9,135 b. Notes Receivable 9,135 Accounts Receivable—Bay Company 9,000 Interest Revenue 135 c. Notes Receivable 5,000 Interest Receivable 135 Accounts Receivable—Bay Company 9,000 Interest Revenue 135 d. Notes Receivable 9,000 Accounts Receivable—Bay Company 9,000
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $9,000 face value
155.
Doane Company receives a $10,000, 3-month, 6% promissory note from Ray Company in settlement of an open accounts receivable. What entry will Doane Company make upon receiving the note? a. Notes Receivable 10,150 Accounts Receivable—Ray Company 10,150 b. Notes Receivable 10,150 Accounts Receivable—Ray Company 10,000 Interest Revenue 150 c. Notes Receivable 10,000 Interest Receivable 150 Accounts Receivable—Ray Company 10,000 Interest Revenue 150 d. Notes Receivable 10,000 Accounts Receivable—Ray Company 10,000
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $10,000 face value
156.
Short-term notes receivable a. have a related allowance account called Allowance for Doubtful Notes Receivable. b. are reported at their gross realizable value. c. use the same estimations and computations as accounts receivable to determine cash realizable value. d. present the same valuation problems as long-term notes receivables.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
157.
A 90-day note dated June 30, 2017, would mature on: a. September 30, 2017. b. September 27, 2017. c. September 28, 2017. d. September 29, 2017.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: 90 − (31 + 31) = 28
.
8-34 158.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The interest rate for a three-month loan would normally be stated in terms of which of the following rates of interest? a. Daily b. Monthly c. Quarterly d. Annual
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
159.
Ramos Company has a 90-day note that carries an annual interest rate of 8%. If the amount of the total interest on the note is equal to $900, then what is the principal of the note? a. $11,250 b. $45,000 c. $64,800 d. $28,800
Ans: B, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: P .08 90/360 = $900; P = ($900 360/90) .08 = $45,000 {(Tot int. × 360/90) ÷ 8%)
160.
Douglas Company has a $60,000 note that carries an annual interest rate of 10%. If the amount of the total interest on the note is equal to $4,500, then what is the duration of the note in months? a. 6 months b. 4 months c. 12 months d. 9 months
Ans: D, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $4,500 ($60,000 .10) = .75; .75 12 = 9 [(Tot. int. ÷ (Face val. × 10%)] × 12
161.
Young Company lends Dobson industries $40,000 on August 1, 2017, accepting a 9month, 9% interest note. If Young prepares its financial statements as of December 31, 2017, what adjusting entry must it make? a. Interest Receivable 1,500 Interest Revenue 1,500 b. Accounts Receivable 1,500 Interest Receivable 1,500 c. Cash 1,500 Interest Revenue 1,500 d. Notes Receivable 1,500 Interest Revenue 1,500
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $40,000 .09 5/12 = $1,500 (Face val. × 9% × 5/12)
.
Reporting and Analyzing Receivables
162.
8-35
Young Company lends Dobson industries $40,000 on August 1, 2017, accepting a 9month, 9% interest note. If Young accrued interest at its December 31, 2017 year-end, what entry must it make to record the collection of the note and interest at its maturity date? a. Cash 42,700 Notes Receivable 40,000 Interest Revenue 2,700 b. Cash 42,700 Notes Receivable 42,700 c. Notes Receivable 40,000 Interest Receivable 1,500 Interest Revenue 1,200 Cash 42,700 d. Cash 42,700 Notes Receivable 40,000 Interest Receivable 1,500 Interest Revenue 1,200
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $40,000 .09 5/12 = $1,500; $40,000 .09 4/12 = $1,200 (Face val. × 12% × 5/12 ); (Face val. × 12% × 4/12)
163.
Young Company lends Dobson industries $40,000 on January 1, 2017, accepting a 9month, 9% interest note. If Dobson dishonors the note and does not pay it in full at maturity but Young expects that it will eventually be able to collect the debt, which of the following entries should most likely be made by Young Company? a. Cash 40,000 Notes Receivable 40,000 b. Accounts Receivable 40,000 Notes Receivable 40,000 c. Accounts Receivable 42,700 Notes Receivable 40,000 Interest Revenue 2,700 d. Accounts Receivable 42,700 Notes Receivable 40,000 Interest Receivable 2,700
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $40,000 .09 9/12 = $2,700 (Face val. × 9% × 9/12)
164.
Which of the following is a way of disposing of a note receivable? a. Honoring it on maturity date. b. Selling it to receive cash before the maturity date. c. Default by the maker. d. All of these are ways to dispose of notes receivable.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics
.
8-36 165.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
A dishonored note receivable a. Is no longer negotiable. b. Must be written off by the lender. c. Creates a claim against the maker for the amount of principal only. d. Is one that is not paid in full within 10 days of maturity.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
166.
The maturity value of a $60,000, 9%, 40-day note receivable dated July 3 is a. $60,000. b. $66,000. c. $65,400. d. $60,600.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $60,000 + ($60,000 .09 40/360) = $60,600 (Face val. + (Face val. × 9% × 40/360)
167.
Barber Company lends Monroe Company $40,000 on April 1, accepting a four-month, 6% interest note. Barber Company prepares financial statements on April 30. What adjusting entry should be made before the financial statements can be prepared? a. Note Receivable 40,000 Cash 40,000 b. Interest Receivable 200 Interest Revenue 200 c. Cash 200 Interest Revenue 200 d. Interest Receivable 600 Interest Revenue 600
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $40,000 .06 1/12 = $200 (Face val. + (Face val. × 6% × 1/12)
168.
The maturity value of a $10,000, 6%, 60-day note receivable dated February 10th is a. $10,100. b. $10,050. c. $10,000. d. $10,600.
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $10,000 + ($10,000 .06 60/360) = $10,100 (Face val. + (Face val. × 6% × 60/360))
169.
When a note is dishonored, the payee’s entry includes a a. debit to Interest Revenue. b. credit to Accounts Receivable. c. debit to Interest Expense. d. credit to Notes Receivable.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
Reporting and Analyzing Receivables
170.
8-37
A note receivable is executed in December. When the note is paid the following February, the payee’s entry includes (assuming a calendar-year accounting period and no reversing entries) a a. credit to Interest Receivable. b. credit to Cash. c. debit to Notes Receivable. d. debit to Interest Income.
Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
171.
The maturity value of a $50,000, 12%, 3-month note receivable is a. $51,500. b. $50,600. c. $56,000. d. $50,500.
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $50,000 + ($50,000 .12 3/12) = $51,500 (Face val. + (Face val. × 12% × 3/12))
172.
Nance Co. holds Gant Inc.’s $30,000, 120 day, 9% note. The entry made by Nance Co. when the note is collected, assuming no interest has previously been accrued is: a. Cash 30,000 Notes Receivable 30,000 b. Accounts Receivable 30,900 Notes Receivable 30,000 Interest Revenue 900 c. Cash 30,900 Notes Receivable 30,000 Interest Revenue 900 d. Accounts Receivable 30,900 Notes Revenue 30,000 Interest Revenue 900
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $30,000 .09 120/360 = $900 (Face val. × 9% × 120/360)
173.
All of the following statements regarding the financial statement presentation of receivables are true except: a. Short-term receivables are reported in the current assets section of the balance sheet. b. The gross amount of receivables less the allowance for doubtful accounts is equal to the net receivables. c. Short-term receivables are reported above the short-term investments in the balance sheet. d. Companies report bad debts expense under "Selling Expenses" in the operating expenses section of the income statement.
Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
8-38 174.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Which of the following is least likely to help a company minimize losses as credit standards are relaxed? a. Require potential customers to provide bank guarantees. b. Ask a potential customer for references regarding payment history. c. Increase the estimate of uncollectible accounts at the end of each period. d. Check a potential customer's credit rating.
Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
175.
Which one of the following is not a principle of sound accounts receivable management? a. Determine to whom to extend credit. b. Delay cash receipts from receivables if necessary. c. Monitor collections. d. Determine a payment period.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
176.
The accounts receivable turnover is computed by dividing a. total sales by average receivables. b. total sales by ending receivables. c. net credit sales by average receivables. d. net credit sales by ending receivables.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
177.
The accounts receivable turnover is used to analyze a. profitability. b. liquidity. c. risk. d. long-term solvency.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
178.
A high accounts receivable turnover ratio indicates a. the company’s sales are increasing. b. a large proportion of the company’s sales are on credit. c. customers are making payments very quickly. d. customers are making payments slowly.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
179.
The accounts receivable turnover is needed to calculate a. the average collection period in days. b. market risk. c. return on assets. d. current ratio.
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
Reporting and Analyzing Receivables
180.
8-39
The average collection period for receivables is computed by dividing 365 days by a. net credit sales. b. average accounts receivable. c. ending accounts receivable. d. accounts receivable turnover.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
181.
The financial statements of the Nelson Manufacturing Company reports net sales of $360,000 and accounts receivable of $50,000 and $30,000 at the beginning of the year and end of year, respectively. What is the accounts receivable turnover for Nelson? a. 4.5 times b. 7.2 times c. 12.0 times d. 9.0 times
Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $360,000 [($50,000 + $30,000) 2] = 9.0 (Net sal. ÷ [(beg. A/R + end. A/R) ÷ 2]
182.
The financial statements of the Melton Manufacturing Company reports net sales of $360,000 and accounts receivable of $50,000 and $30,000 at the beginning of the year and end of year, respectively. What is the average collection period for accounts receivable in days? a. 81.1 b. 40.6 c. 50.7 d. 30.4
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $360,000 [($50,000 + $30,000) 2] = 90; 365 9.0 = 40.6 365 ÷ A/R + turn.
183.
The financial statements of the Phelps Manufacturing Company reports net sales of $600,000 and accounts receivable of $80,000 and $40,000 at the beginning of the year and end of year, respectively. What is the accounts receivable turnover for Phelps? a. 10.0 times b. 15.0 times c. 7.5 times d. 5.0 times
Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $600,000 [($80,000 + $40,000) 2] = 10.0 (Net sal. ÷ [(beg. A/R + end. A/R) ÷ 2])
.
8-40 184.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The financial statements of the Belfry Manufacturing Company reports net sales of $600,000 and accounts receivable of $80,000 and $40,000 at the beginning of the year and end of year, respectively. What is the average collection period for accounts receivable in days? a. 24.3 times b. 73.0 times c. 36.5 times d. 48.7 times
Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $600,000 [($80,000 + $40,000) 2] = 10.0; 365 10.0 = 36.5 (365 ÷ A/R + turn.)
185.
A popular variation of the accounts receivable turnover is the a. credit risk ratio. b. concentration of credit risk. c. bad debts ratio. d. average collection period.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
186.
The accounts receivable turnover a. is computed by dividing net credit sales for the accounting period by the cash realizable value of accounts receivable on the last day of the accounting period. b. can be used to compute the average collection period. c. is a method of evaluating the solvency of net accounts receivable. d. is only important to internal users of accounting information.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
187.
Leary Corporation had net credit sales during the year of $1,200,000 and cost of goods sold of $720,000. The balance in accounts receivable at the beginning of the year was $120,000 and at the end of the year was $180,000. What was the accounts receivable turnover? a. 8.0 b. 10.0 c. 6.7 d. 4.8
Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $1,200,000 [($120,000 + $180,000) 2] = 8.0 (Cr. sal. ÷ [(beg. A/R + end. A/R) ÷ 2])
188.
Windsor Corporation sells its goods on terms of 2/10, n/30. It has an accounts receivable turnover of 6. What is its average collection period (days)? a. 90 b. 40 c. 61 d. 48
Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: 365 6 = 61 (365 ÷ A/R turn.)
.
Reporting and Analyzing Receivables
189.
8-41
All of the following statements are true regarding the average collection period except: a. it is a popular variant of the accounts receivable turnover . b. it is used to assess the effectiveness of a company's credit and collection policies. c. it should generally exceed the credit term period. d. its increase may suggest a decline in the financial health of customers.
Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
190.
In the table below the information for four companies is provided. Company Accounts Receivable Average collection period turnover Martin 13.9 26.3 Lewis 13.3 27.4 Danforth 10.4 35.1 Garner 14.5 25.2 Industry Average 13.0 28.1 If Garner's net credit sales are $435,000, what are its average net accounts receivable? a. $17,262 b. $30,000 c. $63,075 d. $109,620
Ans: B, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $435,000 14.5 = $30,000 (Net Cr. sal. ÷ A/R + turn.)
191.
In the table below the information for four companies is provided. Company Accounts Receivable Average collection period turnover Martin 13.9 26.3 Lewis 13.3 27.4 Danforth 10.4 35.1 Garner 14.5 25.2 Industry Average 13.0 28.1 Assuming all four companies are in the same industry, which company appears to have the greatest likelihood of paying its current obligations? a. Martin b. Lewis c. Danforth d. Garner
Ans: D, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
.
8-42 192.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Simonic Retailers accepted $80,000 of Citibank Visa credit card charges for merchandise sold on July 1. Citibank charges 4% for its credit card use. The entry to record this transaction by Simonic Retailers will include a credit to Sales Revenue of $80,000 and a debit(s) to a. Cash $76,800 and Service Charge Expense $3,200. b. Accounts Receivable $76,800 and Service Charge Expense $3,200. c. Cash $76,800 and Interest Expense $3,200. d. Accounts Receivable $80,000.
Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $80,000 .04 = $3,200 (Sales amount × 4%)
193.
Selling accounts receivables to factors and allowing credit terms such as 2/10, n/30 a. represent common business practices. b. represent ways to accelerate receivables collections. c. result in collections that are less than the gross accounts receivable. d. All of these answer choices are correct.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
194.
Factoring arrangements a. are ways to accelerate receivable collections. b. involve no commissions or service charges because the factor is guaranteed collections on the due date. c. are generally used by businesses that are insolvent. d. are mainly used in the textile and furniture industries.
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: None, IMA: Business Economics
195.
ABC Company accepted a national credit card for a $9,000 purchase. The cost of the goods sold is $7,200. The credit card company charges a 3% fee. What is the impact of this transaction on net operating income? a. Increase by $1,746. b. Increase by $1,800. c. Increase by $1,530. d. Increase by $8,730.
Ans: C, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($9,000 − $7,200) − ($9,000 .03) = $1,530. [(Sale amount – COGS) – (sale amount × 3%)]
196.
XYZ Company accepted a national credit card for a $10,000 purchase. The cost of the goods sold is $8,000. The credit card company charges a 3% fee. What is the impact of this transaction on net operating income? a. Increase by $1,940. b. Increase by $2,000. c. Increase by $1,700. d. Increase by $9,700.
Ans: C, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($10,000 − $8,000) − ($10,000 .03) = $1,700. [(Sale amount – COGS) – (sale amount × 3%)]
.
Reporting and Analyzing Receivables
197.
8-43
A company sells $800,000 of accounts receivable to a factor for cash less a 2% service charge. The entry to record the sale should not include a a. debit to Interest Expense for $16,000. b. debit to Cash for $784,000. c. debit to Service Charge Expense for $16,000. d. credit to Accounts Receivable for $800,000.
Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $800,000 .02) = $16,000 (A/R amount × 2%)
198.
The sale of receivables by a business a. indicates that the business is in financial difficulty. b. is generally the major revenue item on its income statement. c. is an indication that the business is owned by a captive finance company. d. can be a quick way to generate cash for operating needs.
Ans: D, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: None, IMA: Business Economics
199.
If a retailer regularly sells its receivables to a factor, the service charge of the factor should be classified as a(n) a. selling expense. b. interest expense. c. other expense. d. contra asset.
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
200.
The sale or transfer of accounts receivable in order to raise funds is called a. pledging. b. factoring. c. leasing. d. collateralizing.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
201.
If a company sells its accounts receivables to a factor a. the seller pays a commission to the factor. b. the factor pays a commission to the seller. c. there is a gain on the sale of the receivables. d. the seller defers recognition of sales revenue until the account is collected.
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: None, IMA: Business Economics
202.
A captive finance company refers to a. a finance company that is owned by individuals who borrow money from the company. b. finance companies that won't allow early repayment of loans. c. a company that is wholly owned by another company and provides financing to purchasers of its owner company's goods. d. any company that issues a major credit card.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: None, IMA: Business Economics
.
8-44
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
203.
Receivables might be sold to a. lengthen the cash-to-cash operating cycle. b. take advantage of deep discounts on the cash realizable value of receivables. c. generate cash quickly. d. finance companies at an amount greater than cash realizable value.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: None, IMA: Business Economics
204.
A company regularly sells its receivables to a factor who assesses a 2% service charge on the amount of receivables purchased. Which of the following statements is true for the seller of the receivables? a. The loss section of the income statement will increase each time receivables are sold. b. The credit to Accounts Receivable is less than the debit to Cash when the accounts are sold. c. Selling expenses will increase each time accounts are sold. d. The other expenses section of the income statement will increase each time accounts are sold.
Ans: C, LO: 4, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
205.
Gipson Furniture factors $700,000 of receivables to Kwik Factors, Inc. Kwik Factors assesses a 3% service charge on the amount of receivables sold. Gipson Furniture factors its receivables regularly with Kwik Factors. What journal entry does Gipson make when factoring these receivables? a. Cash 679,000 Loss on Sale of Receivables 21,000 Accounts Receivable 700,000 b. Cash 679,000 Accounts Receivable 679,000 c. Cash 500,000 Accounts Receivable 679,000 Gain on Sale of Receivables 21,000 d. Cash 679,000 Service Charge Expense 21,000 Accounts Receivable 700,000
Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $700,000 (1 − .03) = $679,000 (Sales (1 − .03))
206.
When customers make purchases with a national credit card, the retailer a. is responsible for maintaining customer accounts. b. is not involved in the collection process. c. absorbs any losses from uncollectible accounts. d. receives cash equal to the full price of the merchandise sold from the credit card company.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
.
Reporting and Analyzing Receivables
207.
8-45
On April 5 Donna’s Boutique accepted a Visa card for a $750 purchase. Visa charges a 2% service fee. The entry to record this transaction would include a a. credit to Cash of $735. b. debit to Cash of $750. c. debit to Service Charge Expense of $15. d. credit to Service Charge Expense of $15.
Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $750 .02 = $15 (Sale amount × 2%)
208.
Schofield Retailers accepted $40,000 of Silver Bank MasterCard credit card charges for merchandise sold on August 1. Silver Bank charges 4% for its credit card use. The entry to record this transaction by Schofield Retailers will include a credit to Sales Revenue of $40,000 and a debit(s) to a. Cash for $38,400 and Service Charge Expense for $1,600. b. Accounts receivable for $38,400 and Service Charge Expense for $2,400. c. Cash for $40,000. d. Accounts Receivable for $40,000.
Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $40,000 (1 − .04) = $38,400 (Sale amount × (1 – .04))
209.
The retailer considers Visa and MasterCard sales as a. cash sales. b. promissory sales. c. credit sales. d. contingent sales.
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
8-46
Answers to Multiple Choice Questions 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77.
b b c c a b c b c b b d a c c b a d c b a a
78.
b
79.
d
80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97.
d b c b d d c b c c b d b c d b c b
98. 99.
b c
100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117.
d d d d b c a a b a c b a c c a b c
122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137.
a c b b a c d a c a b b c a b b
138 139.
d b
118. 119.
b d
120. 121.
a b
140. 141. 142. 143.
d b a c
.
144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162.
c b b c c d a b c c d d c c d b d a d d
166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186.
d b a d a a c c c b c b c a d d b a c d b
163.
c
164. 165.
a
187.
a
188. 189. 190. 191. 192. 193. 194. 195. 196. 197. 198. 199. 200. 201. 202. 203. 204. 205. 206. 207. 208. 209.
c c b d a d a c c a d a b a c c c d b c a a
Reporting and Analyzing Receivables
8-47
BRIEF EXERCISES Be. 210 Presented below are various receivable transactions entered into by Renner Tool Company. Indicate whether the receivables are reported as accounts receivable, notes receivable, or other receivables on the balance sheet. a. Advanced $1,000 to a trusted employee. b. Accepted a $2,000 promissory note from a customer as payment on account. c. Determined that a $10,000 income tax refund is due from the IRS. d. Sold goods to a customer on account for $5,000. e. Recorded $500 accrued interest on a note receivable due next year. f. Loaned a company officer $4,000. Ans: N/A, LO: 1, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 210 (5 min.) a. Other Receivables b. Notes Receivable c. Other Receivables d. Accounts Receivable e. Other Receivables f. Other Receivables Be. 211 Finney had the following transactions during March 2017. 1. Finney sold and delivered $14,000 of merchandise to LJ Enterprises, terms 2/10, n30. 2. LJ Enterprises also ordered an additional $5,000 worth of goods on the last day of the month. th 3. Finney lent $1,000 to its company president who promised to repay the loan on the 15 day of the next month. 4. Finney sold old storage sheds to Alt Traders on 3/31. Alt Traders gave a $2,500 promissory note to Finney agreeing to pay for the sheds in 3 months. 5. Other current assets totaled $50,000. Finney received no cash arising from the above transactions during March. Based only on the above transactions, and ingnoring beginning balances, compute the percentage accounts receivable is of the total current assets as of month end. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 211 (5 min.) Current Assets: Accounts Receivable Notes Receivable Employee Receivable Other Total Current Assets
$14,000 2,500 1,000 50,000 $67,500
$14,000/$67,500 = 21% Note: LJ Enterprises’ order of $5,000 does not generate a current asset.
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
8-48
Be. 212 The following are sales of The Holiday Store during February. The Store sells seasonal holiday items. 2/3 2/8 2/10 2/14 2/27 2/28
Sold 50 heart balloons for $5 cash each. Sold 100 boxes of chocolates at $10 each, terms 2/10, n/30. Collected within the discount period. Sold 50 heart necklaces for $25 each with no discount. Have not collected as of month end. Sold 100 bouquets of roses at $30 per bouquet. Half the sales were on account. By month end, 75% of the credit sales were collected. Sold 20 leftover heart necklaces to a discount store for $15 each on credit. Sold a display cabinet at a swap meet for $100 on account.
Determine the balance in Accounts Receivable at 2/28. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 212 (5 min.) 2/10 50 necklaces $25 2/14 50 bouquets (½ 100 bouquets) $30 25% 2/27 20 necklaces $15 Total Accounts Receivable
$1,250 375 300 $1,925
Note: The receivable from the sale of the display cabinet should be included as an other receivable. Be. 213 Prepare journal entries to record the following transactions entered into by the Castagno Company: 2017 Nov. 1
Sold merchandise on account to Mercer, Inc., for $18,000, terms 2/10, n/30.
Nov.
5
Mercer, Inc., returned merchandise worth $1,000.
Nov.
9
Received payment in full from Mercer, Inc.
Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 213 (5 min.) 2017 Nov. 1 Accounts Receivable—Mercer, Inc. ................................... Sales Revenue ........................................................... Nov.
Nov.
5
9
Sales Returns and Allowances ........................................... Accounts Receivable—Mercer, Inc. ........................... Cash ................................................................................ Sales Discounts ($17,000 .02) ........................................ Accounts Receivable—Mercer, Inc. ........................... *(sales – ret.) × (1 – .02)
.
18,000 18,000 1,000 1,000 16,660* 340 17,000
Reporting and Analyzing Receivables
8-49
Be. 214 Assuming that the allowance method is being used, prepare general journal entries without explanations to record the following transactions. January 1 February 1 July 1 September 1
Sold merchandise to Mary Baden for $500 on account. Received $300 from Baden. Wrote off Baden’s account as uncollectible. Unexpectedly received payment in full from Baden.
Ans: N/A, LO: 1,2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
(5 – 8 min.) Accounts Receivable—Baden .................................... Sales .................................................................
500
Cash
....................................................................... Accounts Receivable—Baden ...........................
300
Allowance for Doubtful Accounts ................................ Accounts Receivable—Baden ...........................
200
September 1Accounts Receivable—Baden.......................................... Allowance for Doubtful Accounts ......................
200
Cash ......................................................................... Accounts Receivable—Baden ........................... (To record collection on account)
200
Solution 214 January 1 February July 1
1
500 300 200
200 200
Be. 215 The ledger of the Ramirez Company at the end of the current year shows Accounts Receivable of $200,000. Instructions (a) If Allowance for Doubtful Accounts has a credit balance of $3,000 in the trial balance and bad debts are expected to be 8% of accounts receivable, journalize the adjusting entry for end of the period. (Show all calculations.) (b) If Allowance for Doubtful Accounts has a debit balance of $3,000 in the trial balance and bad debts are expected to be 8% of accounts receivable, journalize the adjusting entry for end of the period. (Show all calculations.) Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 215 (5 – 8 min.) (a) Bad Debt Expense ....................................................................... 13,000 Allowance for Doubtful Accounts ($16,000* – $3,000) ........ (To adjust the allowance account to total estimated uncollectible, $200,000 .08 = $16,000) (b) Bad Debt Expense ....................................................................... 19,000 Allowance for Doubtful Accounts ($16,000* + $3,000) ........ (To adjust the allowance account to total estimated uncollectible) *(Acct. Rec. bal. × 8%)
.
13,000
19,000
8-50
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Be. 216 Benson Products uses the allowance method in estimating uncollectible accounts. On December 31, 2017, the balance in Accounts Receivable was $650,000. An aging analysis of the accounts receivable indicated that $29,500 in accounts are expected to be uncollectible. Prepare the adjusting entry to record estimated bad debts expense using the percentage of receivables basis under each of the following independent assumptions: (a) Allowance for Doubtful Accounts has a credit balance of $3,000 before adjustment. (b) Allowance for Doubtful Accounts has a debit balance of $830 before adjustment. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 216 (5 min.) (a) Bad Debt Expense ($29,500 – $3,000) ........................................ Allowance for Doubtful Accounts ........................................... (b) Bad Debt Expense ($29,500 + $830) ........................................... Allowance for Doubtful Accounts ...........................................
26,500 26,500 30,330 30,330
Be. 217 Strickman Company uses the allowance method for estimating uncollectible accounts. Prepare journal entries to record the following transactions: January
5
Sold merchandise to Sue Land for $1,800, terms n/15.
April
15
Received $400 from Sue Land on account.
August
21
Wrote off as uncollectible the balance of the Sue Land account when she declared bankruptcy.
October
5
Unexpectedly received a check for $650 from Sue Land.
Ans: N/A, LO: 1,2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 217 (5 – 8 min.) January 5 Accounts Receivable – S. Land ....................................... Sales Revenue ........................................................ April
1,800 1,800
15 Cash ............................................................................... Accounts Receivable—S. Land ..............................
400
August 21 Allowance for Doubtful Accounts ..................................... Accounts Receivable—S. Land ..............................
1,400
October 5 Accounts Receivable—S. Land ....................................... Allowance for Doubtful Accounts ............................
650
Cash ............................................................................... Accounts Receivable—S. Land ..............................
650
.
400 1,400 650 650
Reporting and Analyzing Receivables
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Be. 218 Compute the maturity value as indicated for each of the following notes receivable. 1. A $9,000, 6%, 3-month note dated July 20. Maturity value $____________. 2. A $16,000, 9%, 150-day note dated August 5. Maturity value $____________. Ans: N/A, LO: 3 Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 218 (5 – 8 min.) 1. Maturity value: $9,135 $9,000 6% 3 12 = $135 + $9,000 = $9,135 (Face val. + (Face val. × 6% × 3/12) 2. Maturity value: $16,600 $16,000 9% 150 360 = $600 + $16,000 = $16,600 (Face val. + (Face val. × 9% × 150/360) Be. 219 Determine the interest on the following notes: (a) (b) (c) (d)
$5,000 at 6% for 90 days. $800 at 9% for 5 months. $6,000 at 8% for 60 days $1,600 at 7% for 6 months
Ans: N/A, LO: .3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 219 (a) $75 (b) $30 (c) $80 (d) $56
(5 min.) ($5,000 × .06 × 90 ÷ 360) (Face val. × 6% × 90/360) ($800 .09 5 ÷ 12) (Face val. × 9% × 5/12) ($6,000 .08 60 ÷ 360) ($1,600 .07 6 ÷ 12)
Be. 220 Trent Distributors has the following transactions related to notes receivable during the last two months of the year. Dec.
1
Loaned $16,000 cash to E. Kinder on a 1-year, 6% note.
16
Sold goods to J. Jones, receiving a $4,800, 60-day, 7% note.
31
Accrued interest revenue on all notes receivable.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
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Be. 220 (cont.) Instructions Journalize the transactions for Trent Distributors. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 220 (10 min.) Dec 1 Notes Receivable ................................................................ Cash ......................................................................... (To record loan made to E. Kinder) Dec 16
Dec. 31
16,000 16,000
Notes Receivable ................................................................ Sales Revenue ........................................................... (To record sale to J. Jones)
4,800
Interest Receivable ............................................................ Interest Revenue* ...................................................... (To record accrued interest)
94
4,800
94
*Calculation of interest revenue Kinder note: $16,000 6% 30/360 = $80 (Face val. × 6% × 30/360) Jones note: 4,800 7% 15/360 = 14 Total accrued interest $94
Be. 221 Merry Co. sells Christmas angels. Merry determines that at the end of December, they have the following aging schedule of Accounts Receivable: Customer
Total Not yet due
K. Brant D. Eaton S Klein C. Sheen
$500 300 150 200 ?
1–30 $300
Number of Days Past Due 31–60 61–90 $200
100
200 50
% uncollectible Total Estimated Uncollectible Amounts ?
Over 90
100
200 300 1%
300 5%
250 10%
200 25%
100 50%
?
?
?
?
?
Compute the net receivables based on the above information at the end of December (There was no beginning balance in the Allowance for Doubtful Accounts). Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Reporting and Analyzing Receivables
Solution 221
(10 min.)
($1,150 – $143 = $1,007) Customer Total
K. Brant D. Eaton S Klein C. Sheen
$500 300 150 200 1,150
% uncollectible Total Estimated Uncollectible Amounts
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$143
Not yet due
Number of Days Past Due 1–30
31–60
61–90
$300
$200
100
Over 90
200 50
200 300 1% $3
300 5% $15
250 10% $25
100 200 25% $ 50
100 50% $50
Be. 222 The following data exists for Mather Company. 2017 $ 80,000 560,000
Accounts Receivable Net Sales
2016 $ 70,000 410,000
Calculate the accounts receivable turnover and the average collection period for accounts receivable in days for 2017. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 222 (5 min.) Accounts receivable turnover =
$560,000 ($80,000 + $70,000)/2
= 7.5 times (Net sal. ÷ ave. A/R)
365 days 7.5
= 48.7 days (365 ÷ A/R + turn.)
Average collection period =
Be. 223 Donaldson Company has the following accounts in its general ledger at July 31: Accounts Receivable $40,000 and Allowance for Doubtful Accounts $2,500. During August, the following transactions occurred. Oct. 15
25
Sold $30,000 of accounts receivable to Fast Factors, Inc. who assesses a 3% finance charge. Made sales of $900 on Visa credit cards. The credit card service charge is 2%.
Instructions Journalize the transactions.
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 223 (a) Oct. 15
25
(5 min.) Cash ............................................................................. Service Charge Expense ($30,000 3%) ..................... Accounts Receivable ............................................. *(Acct. rec. amount × (1 – .03)) Cash ............................................................................. Service Charge Expense ($900 2%) ......................... Sales Revenue .......................................................
29,100* 900 30,000 882 18 900
EXERCISES Ex. 224 On January 10 Donna Stark uses her Baver Co. credit card to purchase merchandise from Baver Co. for $2,600. On February 10, she is billed for the amount due of $2,600. On February 12 Stark pays $1,600 on the balance due. On March 10 Stark is billed for the amount due, including interest at 1% per month on the unpaid balance as of February 12. Instructions Prepare the entries on Baver Co.'s books related to the transactions that occurred on January 10, February 12, and March 10. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 224 (5 min.) Jan. 10 Accounts Receivable—Stark ........................... Sales Revenue .......................................... Feb. 12 Cash ............................................................... Accounts Receivable—Stark ..................... Mar. 10 Accounts Receivable—Stark ......................... Interest Revenue [1% ($2,600 – $1,600)] ...................... (1% (sales – coll.))
2,600 2,600 1,600 1,600 10 10
Ex. 225 At the beginning of the current period, Emler Corp. had balances in Accounts Receivable of $200,000 and in Allowance for Doubtful Accounts of $9,000 (credit). During the period, it had net credit sales of $650,000 and collections of $590,000. It wrote off as uncollectible accounts receivable of $5,000. However, a $3,000 account previously written off as uncollectible was recovered before the end of the current period. Uncollectible accounts are estimated to total $20,000 at the end of the period. Instructions (a) Prepare the entries to record sales and collections during the period. (b) Prepare the entry to record the write-off of uncollectible accounts during the period. (c) Prepare the entries to record the recovery of the uncollectible account during the period. (d) Prepare the entry to record bad debts expense for the period. (e) Determine the ending balances in Accounts Receivable and Allowance for Doubtful Accounts. (f) Calculate the net realizable value of the receivables at the end of the period. Ans: N/A, LO: 1,2, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA
.
Reporting and Analyzing Receivables
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PC: Problem Solving, IMA: FSA
Solution 225 (8 min.) (a) Accounts Receivable ...................................................... 650,000 Sales Revenue .......................................................... Cash ............................................................................... 590,000 Accounts Receivable ................................................. (b) Allowance for Doubtful Accounts .................................... 5,000 Accounts Receivable ................................................. (c) Accounts Receivable ...................................................... 3,000 Allowance for Doubtful Accounts ............................... Cash ............................................................................... 3,000 Accounts Receivable ................................................. (d) Bad Debts Expense ........................................................ 13,000 Allowance for Doubtful Accounts ............................... (Est. uncoll. accts. – (Beg. ADA* bal. + acct. recov. – acct. writ. off))
650,000 590,000 5,000 3,000 3,000 13,000
* Allow. for Doubt. Accts. (e) Accounts Receivable Beg. Bal. 200,000 Collections 590,000 Sales Rev. 650,000 Write-off 5,000 Recovery 3,000 Collections 3,000 End Bal 255,000 (f)
Allowance for Doubtful Accounts Beg. Bal. 9,000 Write-off 5,000 Recovery 3,000 Bad Debts 13,000 End Bal 20,000
Net realizable value of receivables is $235,000 ($255,000 – $20,000) (End. A/R bal. – end. ADA bal.)
Ex. 226 The December 31, 2016 balance sheet of the Kramer Company had Accounts Receivable of $650,000 and a credit balance in Allowance for Doubtful Accounts of $33,000. During 2017, the following transactions occurred: sales on account $1,550,000; sales returns and allowances, $100,000; collections from customers, $1,250,000; accounts written off, $35,000; previously written off accounts of $8,000 were collected. Instructions (a) Journalize the 2017 transactions. (b) If the company uses the percentage of receivables basis to estimate bad debt expense and determines that uncollectible accounts are expected to be 6% of accounts receivable, what is the adjusting entry at December 31, 2017? Ans: N/A, LO: 1, 2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
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Solution 226 (15–20 min.) (a) Accounts Receivable .................................................................... 1,550,000 Sales Revenue.................................................................... (To record credit sales) Sales Returns and Allowances ..................................................... Accounts Receivable .......................................................... (To record credits to customers)
1,550,000
100,000 100,000
Cash ........................................................................................... 1,250,000 Accounts Receivable .......................................................... (To record collection of receivables) Allowance for Doubtful Accounts .................................................. Accounts Receivable .......................................................... (To write off specific accounts)
35,000
Accounts Receivable .................................................................... Allowance for Doubtful Accounts ........................................ (To reverse write-off of account)
8,000
Cash ........................................................................................... Accounts Receivable .......................................................... (To record collection of account)
8,000
1,250,000
35,000
8,000
8,000
(b) Percentage of receivables basis:
Bal.
Bal.
Accounts Receivable 650,000 100,000 1,550,000 1,250,000 8,000 35,000 8,000 815,000
Allowance For Doubtful Accounts 35,000 Bal. 33,000 8,000 Bal. 6,000
Required balance ($815,000 .06) ............................................................ Balance before adjustment ......................................................................... Adjustment required ................................................................................... Dec. 31
Bad Debt Expense ....................................................... Allowance for Doubtful Accounts ......................... ((A/R end. bal. × 6%) – ADA end. bal.)
.
$48,900 6,000 $42,900
42,900 42,900
Reporting and Analyzing Receivables
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Ex. 227 An inexperienced accountant made the following entries. In each case, the explanation to the entry is correct. Dec. 17
27
31
Cash ................................................................................... Sales Discounts .................................................................... Accounts Receivable .................................................... (To record collection of 12/4 sales, terms 2/10, n/30)
2,940 60
Cash ................................................................................... Bad Debt Expense ....................................................... (Collection of account previously written off as uncollectible under allowance method)
1,200
Bad Debt Expense ................................................................ Allowance for Doubtful Accounts .................................. (To recognize estimated bad debts based on 3% of accounts receivable of $600,000)
1,800
3,000
1,200
1,800
Instructions Prepare the correcting entries. Ans: N/A, LO: 1, 2, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 227 (12 min.) Dec. 17 Accounts Receivable ......................................................... Sales Discounts ........................................................ (To correct accounts for granting sales discount when discount period had lapsed) 27
27
31
60 60
Accounts Receivable .......................................................... Allowance for Doubtful Accounts ............................... (To reverse write off of collected account)
1,200
Bad Debt Expense ............................................................. Accounts Receivable ................................................. (To correct erroneous collection entry)
1,200
1,200
Bad Debt Expense ............................................................. 16,200 Allowance for Doubtful Accounts ............................... [To adjust balance in Bad Debts Expense to $18,000 or (3% $600,000); previous allowance is $0] *((A/R bal. × 3%) – bad debt exp. record.)
.
1,200
16,200
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
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Ex. 228 Prepare journal entries to record the following transactions entered into by the Merando Company: 2016 June 1
Received a $10,000, 6%, 1-year note from Dan Gore as full payment on his account.
Nov.
1
Sold merchandise on account to Barlow, Inc., for $14,000, terms 2/10, n/30.
Nov.
5
Barlow, Inc., returned merchandise worth $1,000.
Nov.
9
Received payment in full from Barlow, Inc.
Dec. 31
Accrued interest on Gore's note.
2017 June 1
Dan Gore honored his promissory note by sending the face amount plus interest.
Ans: N/A, LO: 1,3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 228 (15 min.) 2016 June 1 Notes Receivable ............................................................... Accounts Receivable—D. Gore ................................. Nov.
Nov.
Nov.
1
5
9
Dec. 31
2017 June 1
10,000 10,000
Accounts Receivable—Barlow, Inc. .................................... Sales Revenue ...........................................................
14,000
Sales Returns and Allowances ........................................... Accounts Receivable—Barlow, Inc. ...........................
1,000
Cash ................................................................................ Sales Discounts ($13,000 .02) ........................................ Accounts Receivable—Barlow, Inc. ........................... *(sales – ret.) × (1 – .02)
12,740* 260
Interest Receivable ............................................................ Interest Revenue ....................................................... ($10,000 6% 7 12 = $315) (Note face val. × 6% × 7/12)
350
Cash
................................................................................ Notes Receivable ...................................................... Interest Receivable .................................................... Interest Revenue ....................................................... ($10,000 6% 5 12) *((Note face. val. × 6%) + Note face val.)
.
14,000
1,000
13,000
350
10,600* 10,000 350 250
Reporting and Analyzing Receivables
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Ex. 229 The Garvey Sign Company uses the allowance method in accounting for uncollectible accounts. Past experience indicates that 6% of accounts receivable will eventually be uncollectible. Selected account balances at December 31, 2016, and December 31, 2017, appear below: Net Credit Sales Accounts Receivable Allowance for Doubtful Accounts
12/31/2016 $400,000 80,000 4,000
12/31/2017 $500,000 100,000 ?
Instructions (a) Record the following events in 2017. Aug. 10 Determined that the account of Kurt West for $900 is uncollectible. Sept. 12 Determined that the account of Jill Lynch for $3,000 is uncollectible. Oct. 10 Received a check for $300 as payment on account from Kurt West, whose account had previously been written off as uncollectible. (b) Prepare the adjusting journal entry to record the bad debt provision for the year ended December 31, 2017. (c) What is the balance of Allowance for Doubtful Accounts at December 31, 2017? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 229 (a) Aug. 10
Sept. 12
Oct. 10
(b) Dec. 31
(20 min.) Allowance for Doubtful Accounts ............................... Accounts Receivable—Kurt West ..................... (To write off Kurt West account)
900 900
Allowance for Doubtful Accounts ............................... Accounts Receivable—Jill Lynch ...................... (To write off Jill Lynch account)
3,000
Accounts Receivable—Kurt West .............................. Allowance for Doubtful Accounts ...................... (To reinstate Kurt West account previously written off)
300
Cash ......................................................................... Accounts Receivable—Kurt West ..................... (To record collection on account)
300
Bad Debt Expense [($100,000 6%) – $400*] .......... Allowance for Doubtful Accounts ...................... (To record estimate of uncollectible accounts) *($4,000 – $900 – $3,000 + $300 = $400). **(End. A/R × 6%) – end. ADA)
5,600**
3,000
300
300
5,600
(c) Balance of Allowance for Doubtful Accounts at December 31, 2017, is $6,000 or $100,000 6%)
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 230 Erickson Company had a $300 credit balance in Allowance for Doubtful Accounts at December 31, 2017, before the current year's provision for uncollectible accounts. An aging of the accounts receivable revealed the following: Estimated Percentage Uncollectible Current Accounts $170,000 1% 1–30 days past due 15,000 3% 31–60 days past due 12,000 6% 61–90 days past due 5,000 15% Over 90 days past due 9,000 30% Total Accounts Receivable $211,000 Instructions (a) Prepare the adjusting entry on December 31, 2017, to recognize bad debts expense. (b) Assume the same facts as above except that the Allowance for Doubtful Accounts account had a $300 debit balance before the current year's provision for uncollectible accounts. Prepare the adjusting entry for the current year's provision for uncollectible accounts. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 230
(15 min.)
Current Accounts $170,000 1–30 days past due 15,000 31–60 days past due 12,000 61–90 days past due 5,000 Over 90 days past due 9,000 Total Accounts Receivable $211,000 **(A/R amounts × est. uncoll. %)
Estimated Percentage Uncollectible 1% 3% 6% 15% 30%
Estimated Uncollectible $1,700 450 720 750 2,700 $6,320*
(a) Bad Debt Expense ....................................................................... 6,020 Allowance for Doubtful Accounts ($6,320 – $300) ............... (To adjust the allowance account to total estimated uncollectible) (Est. uncoll. amount – end. ADA bal.) (b) Bad Debt Expense ....................................................................... 6,620 Allowance for Doubtful Accounts ($6,320 + $300) ............... (To adjust the allowance account to total estimated uncollectible)
.
6,020
6,620
Reporting and Analyzing Receivables
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Ex. 231 On December 31, 2016, when its Allowance for Doubtful Accounts had a credit balance of $1,500, Leeds Company estimates that 6% of its accounts receivable balance of $95,000 will become uncollectible. On March 3, 2017, Leeds Company determined that Megan Jost’s account of $950 was uncollectible. On May 15, 2017, Jost paid the amount previously written off. Instructions Prepare the journal entries for December 31, 2016, March 3, 2017 and May 15, 2017. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 231 Dec. 31, 2016
Mar. 3, 2017
May 15
May 15
(10 min.) Bad Debt Expense [($95,000 .06) – $1,500] ........ Allowance for Doubtful Accounts ................... (To record the bad debt expense) *((End. A/R × 6%) – end. ADA bal.)
4,200* 4,200
Allowance for Doubtful Accounts ............................ Accounts Receivable—M. Jost ....................... (To write off M. Jost account deemed uncollectible)
950
Accounts Receivable—M. Jost ................................ Allowance for Doubtful Accounts ................... (To reinstate an account previously written off)
950
Cash
950
.................................................................... Accounts Receivable—M. Jost ....................... (To record payment on account in full)
950
950
950
Ex. 232 The percentage of receivables approach to estimating bad debts expense is used by Hayes Company. On February 28, the firm had accounts receivable in the amount of $585,000 and Allowance for Doubtful Accounts had a credit balance of $370 before adjustment. Net credit sales for February amounted to $3,000,000. The credit manager estimated that uncollectible accounts would amount to 5% of accounts receivable. On March 10, an accounts receivable from Mark Dole for $2,100 was determined to be uncollectible and written off. However, on March 31, Dole received an inheritance and immediately paid his past due account in full. (a) Prepare the journal entries made by Hayes Company on the following dates: 1. February 28 2. March 10 3. March 31 (b) Assume no other transactions occurred that affected the allowance account during March. Determine the balance of Allowance for Doubtful Accounts at March 31. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 232 (15 min.) (a) 1. Feb. 28 Bad Debt Expense [($585,000 .05) – $370] ......... Allowance for Doubtful Accounts .................... (To record the bad debt expense for February) *((End. A/R × 5%) – end. ADA bal.)
28,880* 28,880
2. Mar. 10 Allowance for Doubtful Accounts ............................ Accounts Receivable—M. Dole ...................... (To write off M. Dole account deemed uncollectible)
2,100
3. Mar. 31 Accounts Receivable—M. Dole .............................. Allowance for Doubtful Accounts .................... (To reinstate an account previously written off)
2,100
Mar. 31 Cash
.................................................................... Accounts Receivable—M. Dole ...................... (To record payment on account in full)
2,100
2,100
2,100 2,100
(b) $370 + 28,880 – $2,100 + $2,100 = $29,250. Ex. 233 Hess Computer Store has credit sales of $450,000 in 2016 and a debit balance of $600 in the Allowance for Doubtful Accounts at year end. As of December 31, 2016, $130,000 of accounts receivable remain uncollected. The credit manager of Hess prepared an aging schedule of accounts receivable and estimates that $7,800 will prove to be uncollectible. On March 4, 2017 the credit manager authorizes a write-off of the $1,000 balance owed by A. Myers. Instructions (a) Prepare the adjusting entry to record the estimated uncollectible accounts expense in 2016. (b) Show the balance sheet presentation of accounts receivable on December 31, 2016. (c) On March 4, before the write-off, assume the balance of Accounts Receivable account is $145,000 and the balance of Allowance for Doubtful Accounts is a credit of $5,000. Make the appropriate entry to record the write off of the Myers account. Also show the balance sheet presentation of accounts receivable before and after the write-off. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 233 (15 min.) (a) Bad Debt Expense ($7,800 + $600) ............................................. 8,400* Allowance for Doubtful Accounts ........................................ * (Est. uncoll. amount + end. ADA bal.) (b) Accounts Receivable $130,000 Less: Allowance for Doubtful Accounts 7,800
.
8,400
$122,200
Reporting and Analyzing Receivables
Solution 233 (Cont.) (c) Allowance for Doubtful Accounts ................................................. Accounts Receivable—A. Myers ........................................ Accounts Receivable Less: Allowance for Doubtful Accounts Cash Realizable Value
Before Write-off $145,000 5,000 $140,000
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1,000 1,000 After Write-off $144,000 4,000 $140,000
Ex. 234 Hachey Company has accounts receivable of $95,100 at March 31, 2017. An analysis of the accounts shows these amounts. Balance, March 31 2017 2016 $65,000 $75,000 12,600 8,000 10,100 2,400 7,400 1,100 $95,100 $86,500
Month of Sale March February December and January November and October
Credit terms are 2/10, n/30. At March 31, 2017, there is a $2,500 credit balance in Allowance for Doubtful Accounts prior to adjustment. The company uses the percentage of receivables basis for estimating uncollectible accounts. The company's estimates of bad debts are as shown below Estimated Percentage Age of Accounts Uncollectible Current 2% 1–30 days past due 7 31–90 days past due 25 Over 90 days past due 50 Instructions (a) Determine the total estimated uncollectibles. (b) Prepare the adjusting entry at March 31, 2017, to record bad debts expense. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 234 (5 min.) (a) Accounts Receivable Current 1–30 days past due 31–90 days past due Over 90 days past due
Amount $65,000 12,600 10,100 7,400
% 2 7 25 50
Estimated Uncollectible $1,300 882 2,525 3,700 $8,407*
*(A/R amounts × est. uncoll. %) (b)
Mar. 31
Bad Debt Expense ...................................... Allowance for Doubtful Accounts ($8,407 – $2,500) ......................... *(Est. uncoll. amount – end. ADA bal.)
.
5,907* 5,907
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
8-64
Ex. 235 Compute the missing amount for each of the following notes: Principal Annual Interest Rate Time Total Interest ______________________________________________________________________ (a) $50,000 5% 2.5 years ? ______________________________________________________________________ (b) $120,000 ? 9 months $7,200 ______________________________________________________________________ (c) ? 9% 90 days $1,350 ______________________________________________________________________ (d) $60,000 6% ? $1,200 ______________________________________________________________________ Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 235 (a) $6,250 (b) 8% (c) $60,000 (d) 4 months
(15 min.) ($50,000 .05 2.5 years) (Prin. × 5% × 2.5 yrs.) ($120,000 ? 9 12 = $7,200; ? = 8%) [(Tot. int./Prin.) ÷ (90 ÷ 12)] (? .09 90 360 = $1,350; ? = $60,000) [(Tot. int./9%) ÷ (90 ÷ 360)] ($60,000 .06 ? = $1,200; ? = 4 12) [(Tot. int./Prin.) ÷ 6%] × 12
Ex. 236 Record the following transactions in general journal form for the Newell Company. July
1
Received a $9,000, 8%, 3-month note, dated July 1, from Lois Patton in payment of her open account.
Oct.
1
Received notification from Lois Patton that she was unable to honor her note at this time. It is expected that Patton will pay at a later date.
Nov. 15
Received full payment from Lois Patton for note receivable previously dishonored.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 236 (15 min.) July 1 Notes Receivable ............................................................... Accounts Receivable—Lois Patton ............................ (To record acceptance of Lois Patton note as payment on account) Oct.
1
Nov. 15
9,000 9,000
Accounts Receivable— Lois Patton ................................... Notes Receivable ...................................................... Interest Revenue ($9,000 8% 1/4) ....................... (To record dishonored note, $9,000, plus interest) *(Note face val. × 8% 3/12) + (Note face val.)
9,180*
Cash
9,180
................................................................................ Accounts Receivable— Lois Patton ........................... (To record payment on account)
.
9,000 180
9,180
Reporting and Analyzing Receivables
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Ex. 237 Grey Boat Company often requires customers to sign promissory notes for major credit purchases. Journalize the following transactions for Grey Boat Company. Feb. 12
Accepted a $35,000, 6%, 60-day note from Bill Bazil for a 19-foot motorboat built to his specifications.
April 14
Received notification from Bill Bazil that he was unable to honor his promissory note but that he expects to pay the amount owed in May.
May 26
Received a check from Bill Bazil for the total amount owed.
June 10
Received notification by the bank that Bill Bazil’s check was being returned “NSF” and that Mr. Bazil had declared personal bankruptcy.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 237 (15 min.) Feb. 12 Notes Receivable ............................................................... Sales Revenue...........................................................
35,000
April 14
Accounts Receivable—B. Bazil .......................................... Notes Receivable ...................................................... Interest Revenue ($35,000 6% 60 ÷ 360)............. *((Note face val. × 6% 60/360) + Note face val.)
35,350*
Cash .................................................................................. Accounts Receivable—B. Bazil .................................
35,350
Accounts Receivable—B. Bazil .......................................... Cash .........................................................................
35,350
Allowance for Doubtful Accounts ....................................... Accounts Receivable—B. Bazil .................................
35,350
May 26 June 10
.
35,000 35,000 350
35,350 35,350 35,350
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 238 Compute the maturity value as indicated for each of the following notes receivable. 1. An $8,000, 6%, 3-month note dated April 20. Maturity value $____________. 2. A $20,000, 9%, 72-day note dated March 5. Maturity value $____________. 3. A $12,000, 5%, 30-day note dated September 10. Maturity value $____________. 4. A $9,000, 7%, 6-month note dated November 15. Maturity value $____________. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 238 (15 min.) 1. Maturity value: $8,120 $8,000 6% 3 12 = $120 + $8,000 = $8,120 ((Face val. × 6% × 3/12) + face val.) 2. Maturity value: $20,360 $20,000 9% 72 360 = $360 + $20,000 = $20,360 ((Face val. × 9% × 72/360) + face val.) 3. Maturity value: $12,050. $12,000 5% 30 360 = $50 + $12,000 = $12,050 ((Face val. × 5% × 30/360) + face val.) 4. Maturity value: $9,315. $9,000 7% 6 12 = $315 + $9,000 = $9,315 ((Face val. × 7% × 6/12) + face val.) Ex. 239 Great Plains Supply Co. has the following transactions related to notes receivable during the last 2 months of the year. Nov. Dec.
1 11 16 31
Loaned $75,000 cash to B. Benson on a 1-year, 8% note. Sold goods to Roswell, Inc., receiving a $9,000, 90-day, 7% note. Received a $20,000, 6-month, 9% note to settle an open account from M. Ling. Accrued interest revenue on all notes receivable.
Instructions Journalize the transactions for Great Plains Supply Co. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Reporting and Analyzing Receivables
Solution 239 (8 min.) Nov. 1 Notes Receivable.......................................... Cash ...................................................... Dec. 11 Notes Receivable.......................................... Sales Revenue ...................................... 16 Notes Receivable.......................................... Accounts Receivable—M. Ling .............. 31 Interest Receivable ......................................... Interest Revenue* .................................... *Calculation of interest revenue: Benson's note: $75,000 8% 2/12 Roswell's note: 9,000 7% 20/360 Ling's note: 20,000 9% 15/360 Total accrued interest
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75,000 75,000 9,000 9,000 20,000 20,000 1,110 1,110
= $1,000 (Face val. × 8% × 2/12) = 35 = 75 (Face val. × 9% × 15/360) = $1,110
Ex. 240 These transaction took place for Sanders Co. 2016 May
1 Received a $15,000, 1-year, 9% note in exchange for an outstanding account receivable from T. Foley. 31 Accrued interest revenue on the T. Foley note.
Dec. 2017 May
1 Received principal plus interest on the T. Foley note. (No interest has been accrued since December 31, 2016.)
Instructions Record the transactions in general journal. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 240 May
1
Dec.
31
May
1
(5 min.)
2016 Notes Receivable................................................ Accounts Receivable—T. Foley .................... Interest Receivable ............................................. Interest Revenue ($15,000 9% 8/12) . (Face val. × 9% × 8/12) 2017 Cash .................................................................. Notes Receivable ......................................... Interest Receivable ....................................... Interest Revenue ($15,000 9% 4/12) ..... *(Face val. × 9%) + Face val.)
.
15,000 15,000 900 900
16,350* 15,000 900 450
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 241 Presented here is basic financial information (in millions) from the annual reports of Nike and Adidas. Nike $18,627 71.5 78.4 2,566.2 2,873.7
Sales revenue Allowance for doubtful accounts, Jan. 1 Allowance for doubtful accounts, Dec. 31 Accounts receivable balance (gross), Jan 1 Accounts receivable balance (gross), Dec. 31
Adidas $10,299 112 111 1,527 1,570
Instructions Calculate the accounts receivable turnover and average collection period for both companies. Comment on the difference in their collection experiences. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 241
(5 min.)
Accounts receivable turnover
Nike
Adidas
$18,627
$10,299
a
b
($1,415c + $1,459d)/2
($2,494.7 + $2,795.3 )/2 $18,627 $2,645
$10,299 $1,437
= 7.0* times
= 7.2 times
*(Sales ÷ ave. net A/R)
2,566.2 – 71.5
a
2,873.7 – 78.4
b
Average collection period *(365 ÷ A/R + turn.)
365 7.0
1,527 – 112
c
= 52.1 days
1,570 – 111
d
365 7.2
= 50.7 days
Adidas's accounts receivable turnover was about 3% higher [(7.2 – 7.0) ÷ 7.0] than Nike's, which means that Adidas was slightly more efficient than Nike in turning accounts receivable into cash. Ex. 242 The following information is available from the annual reports of Nite and Day Companies. (In millions) Nite Day Sales revenue $112,500 $32,000 Beginning accounts receivable, net 19,000 3,500 Ending accounts receivable, net 18,500 4,400 Instructions (a) Based on the preceding information, compute the following for each company: 1. Accounts receivable turnover. (Assume all sales were credit sales.) 2. Average collection period. (b) What conclusion concerning the management of accounts receivable can be drawn from these data? Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Reporting and Analyzing Receivables
Solution 242 (10 min.) (a) 1. Accounts receivable turnover
2. Average collection period
Nite $112,500 ($19,000 + $18,500) ÷ 2 $112,500 ÷ $18,750 = 6.0 times (sales ÷ ave. Net A/R)
Day $32,000 ($3,500 + $4,400) ÷ 2 $32,000 ÷ $3,950 = 8.1 times
365 days ÷ 6.0 = 60.8 days (365 ÷ A/R + turn.)
365 days ÷ 8.1 = 45.1 days
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(b) Generally, companies like to have a high accounts receivable turnover and a correspondingly low average collection period. Day’s accounts receivable turnover is 35% higher than Nite’s ratio and Day’s average collection period is only 74% (45.1 ÷ 60.8) as long as Nite’s collection period. It can be concluded that Day does a better job of managing its accounts receivable than Nite. Ex. 243 Shafer Company has the following accounts in its general ledger at July 31: Accounts Receivable $49,000 and Allowance for Doubtful Accounts $3,400. During August, the following transactions occurred. Aug. 15
Sold $30,000 of accounts receivable to More Factors, Inc. who assesses a 2% finance charge.
25
Made sales of $2,500 on Visa credit cards. The credit card service charge is 3%.
28
Made sales of $4,000 on Shafer credit cards.
Instructions (a) Journalize the transactions. (b) Indicate the statement presentation of service charges. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 243 (a) Aug. 15
25
28
(10 min.) Cash ............................................................................ Service Charge Expense ($30,000 × 2%) .................... Accounts Receivable ............................................ *(A/R amount × (1 – .02)) Cash ............................................................................ Service Charge Expense ($2,500 × 3%) ...................... Sales Revenue ...................................................... *(sales × (1 – .03) Accounts Receivable .................................................... Sales Revenue .........................................................
(b) Service Charge Expense is reported as a selling expense.
.
29,400* 600 30,000 2,425* 75 2,500 4,000 4,000
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
COMPLETION STATEMENTS 244. Notes and accounts receivable that result from sales transactions are often called ______________ receivables. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
245. Two accounting problems associated with accounts receivable are (1) ______________ and (2) ______________ accounts receivable. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
246. The net amount expected to be collected in cash from receivables is the _____________. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
247. When credit sales are made, _________________ Expense is considered a normal and necessary risk of doing business on a credit basis. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
248. The two methods used in accounting for uncollectible accounts are the ____________ method and the ______________ method. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
249. Allowance for Doubtful Accounts is a _____________ account which is ______________ from Accounts Receivable on the balance sheet. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
250. When the allowance method is used to account for uncollectible accounts, ____________ is debited when an account is determined to be uncollectible. Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
251. The _________________ basis of estimating uncollectibles normally results in the best approximation of _______________ value. Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
252. A 75-day note receivable dated July 5 would mature on ______________. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
253. Collection of a note receivable will result in a credit to ______________ for the face value of the note and a credit to ______________. Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
254. A note that is not paid on the maturity date is said to be ______________. Ans: N/A, LO:3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
.
Reporting and Analyzing Receivables
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255. A concentration of ______________ is a threat of nonpayment from a single customer or class of customers. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
256. The ratio used to assess the liquidity of accounts receivable is the ______________. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
257. A finance company or bank that purchases receivables from businesses is known as a ______________. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: None, IMA: Business Economics
Answers to Completion Statements 244. trade 245. recognizing, valuing 246. cash realizable value 247. Bad Debt 248. allowance, direct write-off 249. contra, deducted 250. Allowance for Doubtful Accounts
251. 252. 253. 254. 255. 256. 257.
percentage of receivables, cash realizable September 18 Notes Receivable, Interest Revenue dishonored credit risk accounts receivable turnover factor
MATCHING 258. Match the items below by entering the appropriate code letter in the space provided. A. Aging the accounts receivable B. Direct write-off method C. Obligation due D. Trade receivables E. Accounts receivable turnover ____ ____ ____ ____ ____ ____ ____ ____ ____
F. G. H. I. J.
Percentage of receivables basis Promissory note Dishonored note Cash net realizable value Credit card sales
1. A written promise to pay a specified amount on demand or at a definite time. 2. Sales that involve the customer, the retailer, and the credit card issuer. 3. A measure of the liquidity of receivables. 4. Notes and accounts receivable that result from sales transactions. 5. A note which is not paid in full at maturity. 6. Analysis of customer account balances by length of time they have been unpaid. 7. Emphasizes expected cash realizable value of accounts receivable. 8. Bad debt losses are not estimated and no allowance account is used. 9. The net amount expected to be received in cash.
Ans: N/A, LO: 1-4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
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Answers to Matching 1. 2. 3. 4. 5.
G J E D H
6. 7. 8. 9.
A F B I
SHORT-ANSWER ESSAY QUESTIONS S-A E 259 a. List the characteristics of promissory notes. b. List the reasons for obtaining promissory notes from customers. c. What action relating to promissory notes must be taken at the end of the accounting period? Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
Solution 259 (5 min.) (a) Characteristics of promissory notes include 1. Promissory notes give the holder stronger legal claims to assets than accounts receivable, thus they are preferable if the maker declares bankruptcy. 2. Promissory notes have definite due dates and bear interest at a stated rate. 3. Promissory notes are formal promises to pay. (b) Reasons for obtaining promissory notes from customers include 1. individuals and companies lending or borrowing money. 2. settlement of accounts receivable. 3. accommodation of transactions for which the credit period exceeds normal limits. (c) At the end of the accounting period, it is necessary to accrue interest from the date of the note to the end of the accounting period. This creates interest revenue that is reported on the income statement and interest receivable that is reported on the balance sheet. S-A E 260 Two methods can be used in accounting for uncollectible accounts. Identify and contrast the two methods. How do the methods differ regarding the time periods in which Bad Debt Expense is recognized? Ans: N/A, LO: 2, Bloom: AN, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
Solution 260 (5 min.) The two methods used in accounting for uncollectible accounts are: (1) the allowance method and (2) the direct write-off method. Under the allowance method, the emphasis is on establishing the proper amount to carry as a balance in the allowance account. Uncollectible accounts receivable are estimated and matched against sales revenue in the same accounting period in which the sales occurred. Under the direct write-off method, bad debt losses are not estimated and no allowance account is used. With the direct write-off method, bad debt expense is often recorded in a period different from the period in which the revenue was recorded.
.
Reporting and Analyzing Receivables
8-73
S-A E 261 Your roommate is uncertain about the advantages of a promissory note. Compare the advantages of a note receivable with those of an account receivable. Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
Solution 261 (5 min.) A promissory note gives the holder a stronger legal claim than one on an account receivable. As a result, it is easier to sell to another party. Promissory notes are negotiable instruments, which means they can be transferred to another party by endorsement. The holder of a promissory note also can earn interest. S-A E 262 Jenkins Company dishonors a note at maturity. What are the options available to the lender? Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
Solution 262 (5 min.) When Jenkins Company has dishonored a note, the lender can renegotiate new terms for the receivable which is equal to the full amount of the note plus the interest due. It will then try to collect the balance due, or as much as possible. If there is no hope of collection, the company will write-off the note receivable. S-A E 263 An article in the Wall Street Journal indicated that companies are selling receivables at a record rate. Why do companies sell their receivables? Ans: N/A, LO: 4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
Solution 263 (5 min.) The reasons companies are selling their receivables are: (1) For competitive reasons, companies often must provide financing to purchasers of their goods. Such financing can result in receivables balances that are larger than the company wishes to hold. Selling the receivables reduces the excessive balance. (2) Receivables may be sold because they may be the only reasonable source of cash. (3) Billing and collection are often time-consuming and costly. As a result, it is often easier for a retailer to sell the receivables to another party that has expertise in billing and collecting receivable S-A E 264 Your friend Mark has opened an office supply store. He will extend open credit to local businesses and is concerned about potential bad debts. What can Mark do to reduce potential bad debts? Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
Solution 264 (5 min.) 1. Establish a reasonable policy for extending credit. The company needs to consider the risks of having either a ‘too tight’ or ‘too loose’ credit policy. Potential credit customers should be screened appropriately.
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 264 (Cont.) 2. The company should decide upon the required payment period and communicate it to customers and employees. This period should be in line with the ones established by competitors. Also, employees should enforce the collection period but yet exercise judgment in unusual circumstances. 3. The company should evaluate the relationship among sales, accounts receivable, and cash collections to monitor trends and watch for potential problems. 4. The company should prepare an accounts receivable aging schedule on a regular basis. The collection department should follow up on past due accounts in a timely and professional manner. There should be a clear company policy regarding collection efforts and when to write off accounts. S-A E 265 Company Net Credit Beginning Ending Name Sales Net Receivables Net Receivables Brown $180,000 $ 5,000 $30,000 Pink $400,000 $52,000 $42,000 Yellow $ 75,000 $ 5,400 $ 5,800 (a) Which company is doing the best job of managing its accounts receivable? Why? Be sure to support your answer with computations. (b) What are your concerns about these companies? Ans: N/A, LO: 4, Bloom: AP, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
Solution 265
(5 min.)
Accounts receivable turnover Brown $180,000 = 10.3 times $ 17,500
Pink $400,000 = 8.5 times $ 47,000
(Net cr. sal. ÷ [(beg. net rec. + end. net rec.) ÷ 2]) Average Collection Period Brown Pink 365 365 = 35.4 days = 42.9 days 10.3 8.5 (365 ÷ A/R turn.)
Yellow $75,000 = 13.4 times $ 5,600
Yellow 365 13.4
= 27.2 days
(a) Yellow is doing the best job of managing its accounts receivable because it has the shortest collection period. It is able to collect accounts receivable in about 27 days.
.
Reporting and Analyzing Receivables
Solution 265
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(Cont.)
(b) 1
Yellow is the smallest company in size of net credit sales and accounts receivable. Its average collection period may be lower because it has well established customers and is not trying to expand.
2
The net receivables for Brown increased $25,000 or 500% during the year. This indicates that Brown is expanding and increasing its credit sales. The company should have appropriate policies for extending credit and making collections. One major concern is whether the credit sales can be collected.
3
It is taking Pink about 43 days to collect its receivables. Management should determine if this period can be shortened.
S-A E 266 Banks that issue credit cards generally charge retailers a fee of 2 to 4% of the amount of sale. List reasons why companies are willing to pay these fees. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: None, IMA: Business Economics
Solution 266 (5 min.) 1. The use of bank credit cards increases sales. Many people want to use credit cards to make purchases. If a company does not offer this service, customers will buy from a competitor that does offer the services. 2. Bad debts are absorbed by the credit card company. 3. The company receives its cash (less the fees) immediately. 4. The company does not have to hire employees to approve credit and make collections for these sales. S-A E 267 Customer purchases using credit cards are a significant source of revenue for many retailers. From the standpoint of a retailer, briefly discuss some advantages and disadvantages of a retail store having its own credit card as opposed to accepting one of the national credit cards (e.g., Visa or MasterCard). Ans: N/A, LO: 4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
Solution 267 (5 min.) The advantages of a retail store using its own credit card are the avoidance of a 2 to 6 percent charge by the national credit card and the ability to issue credit to the customers of its choice. In addition, with its own credit card operation the retailer earns the interest on the unpaid balances. The disadvantages of a retail store using its own credit card are the risk of nonpayment (bad debts), the delay in receiving cash from the sales (cash is collected immediately from the national credit card company), and the costs of record keeping and managing (approving credit and collection) its own credit operation.
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
S-A E 268 (Ethics) Two Brothers, a small book publishing company, wrote off the debt of The Learning Place, and the Academy of Basic Education, both small private schools, after it determined that the schools were facing serious financial difficulty. No notice of the action was sent to the schools; Two Brothers simply stopped sending bills. Nearly a year later, The Learning Place was given a large endowment and a government grant. The resulting publicity brought the school to the attention of Two Brothers, which immediately reinstated the account, and sent a new bill to the school, including interest for the entire time the debt was outstanding. No further action was taken regarding the Academy of Basic Education, which was still operational. Required: Did Two Brothers act ethically in reinstating the debt of one client, and not the other? Explain. Ans: N/A, LO: 2, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: None, IMA: Business Economics
Solution 268 (5 min.) Yes, it is ethical to reinstate the debt of The Learning Place, especially since there was no evidence given that The Learning Place attempted to negotiate a reduction or elimination of the debt, or even that it was aware that the debt had been written off by Two Brothers. Two Brothers' discovery that one bad debt may be collectible places the company under no obligation to attempt to collect any or all of its other bad debts, so it need not have reinstated the other account receivable. The addition of interest to the debt is another question. Whether the interest would be collectible depends upon the laws of the state, and whether the addition of interest was specified as a possibility when the debt was incurred. It is questionable whether Two Brothers can collect also because they apparently did not include interest in earlier bills sent to these clients, and because they stopped sending bills for some period of time. Note that this solution is different from the case in which a debt is written off because of a bankruptcy. Had The Learning Place become bankrupt, Two Brothers could not have legally reinstated the debt, even if The Learning Place became solvent at some time in the future. S-A E 269 (Communication) Schmidt Company received a letter from Deborah Stine, a customer. Deborah had purchased $325 worth of clothing from Schmidt on credit. She has made two payments of $50 each. She has missed the last two payments, and has received a collection letter from Schmidt. Her total debt presently, with interest and late fees, is $251.13. Deborah sent a letter to Schmidt in which she asked for her debt to be forgiven. She said she had heard that companies make allowances for accounts they are doubtful about collecting, and that Schmidt certainly should have been doubtful about her—that as a college student she had changed her major three times. She also said that she could not enjoy a high quality of life when making such high payments, but that she didn't want to be embarrassed by bill collectors, either. She especially didn't want her parents to find out that she had not paid her debts. Having Schmidt write off her account seemed to her the best solution in the circumstances. She added that the clothes she bought at Schmidt were among the best she had ever owned, and that she "told everybody" that Schmidt was definitely the best place to get clothes.
.
Reporting and Analyzing Receivables
S-A E 269
8-77
(Cont.)
Required: You are the accounting manager for Schmidt. Write a short letter to Deborah explaining why her debt cannot be written off. Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: None, IMA: Business Economics
Solution 269
(5 min.)
(Letterhead) (Date) Ms. Deborah Stine 123 College View Apartments, #717 Lakeland University Lakeland, Michigan 60771 Dear Ms. Stine: Thank you for your recent letter explaining your delay in paying your account. We appreciated hearing about your satisfaction with Schmidt clothing, and we're glad you tell your friends about us. As you know, your account is becoming seriously past due. Presently, the total charges, including late payment penalties and interest (detailed on the attached billing form) are $251.13. Your account cannot be simply "forgiven" as you request in your letter. Our "Allowance for Doubtful Accounts" does not mean that we have certain customers whose debts we are willing to cancel readily. When Schmidt extends credit to anyone, it is our expression of confidence in that person's ability and willingness to pay. In other words, we aren't "doubtful" about any of our customers. The Allowance account is simply our recognition that a few customers, though very willing to pay, may become unable to do so because of circumstances beyond their control. If we detect some problem that may indicate a present or future unwillingness to pay, we do not extend credit. To do so would not be fair to Schmidt or to the customer. We were sure about your ability and willingness to pay when we granted you credit. We were very pleased to receive your first two payments right on time. Won't you reconsider, and send your next payment today? If you need to renegotiate the size of the payments, you may contact Beverly in the Credit Department to discuss the matter. I look forward to receiving your payment. Sincerely,
Martha King Accounting Manager
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
IFRS QUESTIONS 1.
Which receivables accounting and reporting issue is not essentially the same for IFRS and GAAP? a. The use of allowance accounts and the allowance method. b. How to record discounts. c. How to record factoring. d. All of these answer choices are essentially the same for IFRS and GAAP.
Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
2.
Which receivables accounting and reporting issue is essentially the same for IFRS and GAAP? a. The use of allowance accounts and the allowance method. b. How to record discounts. c. How to record factoring. d. All of these answer choices are essentially the same for IFRS and GAAP.
Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
3.
IFRS requires loans and receivables to be recorded at a. amortized cost. b. amortized cost, adjusted for allowances for doubtful accounts. c. unamortized cost. d. unamortized cost, adjusted for allowances for doubtful accounts.
Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
4.
IFRS sometimes refers to allowances as a. revenues. b. discounts. c. provisions. d. reserves.
Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
5.
IFRS a. implies that receivables with different characteristics should be reported separately. b. requires that receivables with different characteristics should be reported separately. c. implies that receivables with different characteristics should be reported as one unsegregated amount. d. requires that receivables with different characteristics should be reported as one unsegregated amount.
Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
.
Reporting and Analyzing Receivables
6.
8-79
Which board(s) has(have) worked to implement fair value measurement for financial instruments? a. FASB, but not IASB. b. IASB, but not FASB. c. both FASB and IASB. d. neither FASB nor IASB.
Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
7.
Which board(s) has(have) faced bitter opposition when working to implement fair value measurement for financial instruments? a. FASB, but not IASB. b. IASB, but not FASB. c. Both FASB and IASB. d. Neither FASB nor IASB.
Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
8.
Which is part of IFRS accounting for financial instruments? Disclosure of fair value information Optional recording of some financial for receivables in the notes instruments at fair value a. Yes Yes b. Yes No c. No Yes d. No No
Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
9.
Which requires a two-tiered approach to test whether the value of loans and receivables are impaired? GAAP IFRS a. yes no b. yes yes c. no no d. no yes
Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
10.
What criteria are used to determine how to record a factoring transaction? GAAP IFRS a. risks and rewards, and loss of control risks and rewards, and loss of control b. risks and rewards, and loss of control loss of control c. loss of control loss of control d. loss of control risks and rewards, and loss of control
Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
.
8-80 11.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Which permits partial derecognition of receivables? GAAP IFRS a. yes no b. yes yes c. no no d. no yes
Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
.
CHAPTER 9 REPORTING AND ANALYZING LONG-LIVED ASSETS SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXOMONY Item
LO
BT
Item
LO
1. 2. 3. 4. 5. 6. 7. 8. 9.
1 1 1 1 1 1 1 2 2
K K K K K K K K K
10. 11. 12. 13. 14. 15. 16. 17. 18.
2 2 2 2 2 2 2 2 2
46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84.
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2
AP AP K K K K K K K K AP AP AP AP AP AP AP K C C AP AP AP AP AP AP AP AP K K K K K K K K K K K
85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123.
2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 1, 2 2 1, 2 1, 2 1, 2
BT
Item LO BT Item True-False Statements K 19. 2 K 28. K 20. 2 K 29. K 21. 2 K 30. K 22. 2 K 31. K 23. 2 K 32. K 24. 2 K 33. K 25. 3 K 34. K 26. 3 K 35. K 27. 3 K 36. Multiple Choice Questions K 124. 2 AP 163. K 125. 2 C 164. K 126. 2 C 165. K 127. 1 K 166. K 128. 1 K 167. K 129. 2 AP 168. AP 130. 2 AP 169. AP 131. 2 AP 170. AP 132. 2 AP 171. AP 133. 2 AP 172. AN 134. 2 AP 173. AN 135. 2 K 174. AP 136. 2 K 175. AP 137. 2 K 176. C 138. 2 C 177. C 139. 2 C 178. K 140. 2 C 179. K 141. 2 K 180. K 142. 2 AP 181. C 143. 3 AP 182. AP 144. 3 K 183. AP 145. 3 K 184. AP 146. 3 K 185. AP 147. 3 AP 186. AP 148. 3 AP 187. K 149. 3 AP 188. AN 150. 3 AP 189. AN 151. 3 AP 190. AP 152. 3 AP 191. AP 153. 3 C 192. AP 154. 3 C 193. AP 155. 3 K 194. AP 156. 3 AP 195. AP 157. 3 AP 196. AP 158. 3 AP 197. AP 159. 3 C 198. AP 160. 3 AP 199. AP 161. 3 AP 200. AP 162. 3 AN 201.
.
LO
BT
Item
LO
BT
3 3 3 3 4 4 4 4 4
K K K K K C K K K
37. 38. 39. 40. 41. 42. 43. *44. *45.
4 4 4 5 5 5 5 6 6
K K K K K K K K K
3 3 3 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 5 5 5 5 5 5 5 5 5 5 5 5 5
AP AP AP K K K C C K K AP AP K K K K K AP AP K K K K K C K AN AN AN AN C C AP AP AP K C K AP
202. 203. *204. *205. *206. *207. *208. *209. *210. *211. *212. *213. *214. *215. *216. *217. *218. *219. *220. *221.
5 5 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6
K AP AP AP AP AP AP AP AP AP AP AP C C AP AP AP AP AP C
9-2
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Brief Exercises 228. 1 K 231. 229. 1 K 232. 230. 2,4 K 233. Exercises 234. 1 AN 241. 3 AP 248. 4 AP *255. 235. 1 AP 242. 3 AP 249. 4 AP *256. 236. 1 AP 243. 3 AP 250. 4 AP *257. 237. 1, 2 AP 244. 3 AP 251. 4 AP *258. 238. 2 AN 245. 3 AP 252. 5 AP *259. 239. 2 AN 246. 3 AP 253. 5 AP *260. 240. 3 AP 247. 4 AP 254. 5 AP *261. Completion Statements 264. 1 K 269. 1 AP 274. 2 K 279. 265. 1 K 270. 2 K 275. 1 K 280. 266. 1 K 271. 2 K 276. 1 K 281. 267. 1 K 272. 2 K 277. 2 K 282. 268. 1 K 273. 2 K 278. 3 K 283. Matching 287. 1,2 K 288. 3,4 K Short-Answer Essay 289. 1 K 292. 2 C 295. 2 C 298. 290. 1 K 293. 2 K 296. 4 C 291. 2 C 294. 3 K 297. 4 E * This topic is dealt with in an Appendix to the chapter. 222. 223. 224.
1 1 1, 2
K K AP
225. 226. 227.
1 2 2
AP AP AP
5 5 6
AP K AP
2,6 2,6 2,6 2,6 2,6 2,6 2,6
AP AP AP AP AP AP AP
*262. *263.
2,6 2, 3,6
AN AP
3 3 4 4 4
K AP K K K
284. 285. *286.
5 5 6
K K K
1, 2, 3
S
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Learning Objective 1 Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
1. 2. 3. 4. 5. 6. 7. 46. 47. 48. 49.
TF TF TF TF TF TF TF MC MC MC MC
50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60.
MC MC MC MC MC MC MC MC MC MC MC
61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71.
MC MC MC MC MC MC MC MC MC MC MC
72. 73. 74. 75. 76. 119. 121. 122. 123. 127. 128.
MC MC MC MC MC MC MC MC MC MC MC
222. 223. 224. 225. 228. 229. 234. 235. 236. 237. 264.
Be Be Be Be Be Be Ex Ex Ex Ex C
265. 266. 267. 268. 269. 275. 276. 287. 289. 290. 298.
C C C C C C C Ma SA SA
.
SA
Reporting and Analyzing Long-Lived Assets
9-3
Learning Objective 2 8.
TF
24.
TF
92.
MC
108.
MC
124.
MC
256.
Ex
9.
TF
77.
MC
93.
MC
109.
MC
125.
MC
262.
Ex
10.
TF
78.
MC
94.
MC
110.
MC
126.
MC
263.
Ex
11.
TF
79.
MC
95.
MC
111.
MC
129.
MC
270.
C
12.
TF
80.
MC
96.
MC
112.
MC
130.
MC
271.
C
13.
TF
81.
MC
97.
MC
113.
MC
140.
MC
272.
C
14.
TF
82.
MC
98.
MC
114.
MC
141.
MC
273.
C
15.
TF
83.
MC
99.
MC
115.
MC
142.
MC
274.
C
16.
TF
84.
MC
100.
MC
116.
MC
224.
Be
277.
C
17.
TF
85.
MC
101.
MC
117.
MC
226.
Be
287.
Ma
18.
TF
86.
MC
102.
MC
118.
MC
227.
Be
291.
SA
19.
TF
87.
MC
103.
MC
119.
MC
230.
Be
292.
SA
20.
TF
88.
MC
104.
MC
120.
MC
237.
Ex
293.
SA
21.
TF
89.
MC
105.
MC
121.
MC
238.
Ex
295.
SA
22.
TF
90.
MC
106.
MC
122.
MC
239.
Ex
298.
SA
23.
TF
91.
MC
107.
MC
123.
MC
255.
Ex
Learning Objective 3 25.
TF
144.
MC
152.
MC
160.
MC
242.
Ex
280.
C
26.
TF
145.
MC
153.
MC
161.
MC
243.
Ex
288.
Ma
27.
TF
146.
MC
154.
MC
162.
MC
244.
Ex
294.
SA
28.
TF
147.
MC
155.
MC
163.
MC
245.
Ex
298.
SA
29.
TF
148.
MC
156.
MC
164.
MC
246.
Ex
30.
TF
149.
MC
157.
MC
165.
MC
263.
Ex
31.
TF
150.
MC
158.
MC
240.
Ex
278.
C
143.
MC
151.
MC
159.
MC
241.
Ex
279.
C
Learning Objective 4 Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
32. 33. 34. 35. 36. 37. 38. 39.
TF TF TF TF TF TF TF TF
166. 167. 168. 169. 170. 171. 172. 173.
MC MC MC
174. 175. 176. 177. 178. 179. 180. 181.
MC MC MC MC MC MC
182. 183. 184. 185. 186. 187. 188. 230.
MC MC MC MC MC MC MC Be
247. 248. 249. 250. 251. 281. 282. 283.
Ex Ex Ex Ex Ex C C C
288. 296. 297.
Ma SA SA
MC MC MC MC MC
.
MC MC
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
9-4
Learning Objective 5 Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
40. 41. 42. 43. 189. 190.
TF TF TF TF MC MC
191. 192. 193. 194. 195. 196.
MC MC MC MC MC MC
197. 198. 199. 200. 201. 202.
MC MC MC MC MC MC
203. 231. 232. 252. 253. 254.
MC Be Be Ex Ex Ex
284. 285.
C C
Item
Type
Learning Objective 6 Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
44. 45. 204. 205. 206. 207.
TF TF MC MC MC MC
208. 209. 210. 211. 212. 213.
MC MC MC MC MC MC
214. 215. 216. 217. 218. 219.
MC MC MC MC MC MC
220. 221. 233. 255. 256. 257.
MC MC Be Ex Ex Ex
258. 259. 260. 261. 262. 263.
Ex Ex Ex Ex Ex Ex
286.
C
Note: TF = True-False MC = Multiple Choice Ma = Matching
C = Completion Ex = Exercise SA = Short Answer Essay
CHAPTER LEARNING OBJECTIVES 1. Explain the accounting for plant asset expenditures. The cost of plant assets includes all expenditures necessary to acquire the asset and make it ready for its intended use. Once cost is established, a company uses that amount as the basis of accounting for the plant asset over its useful life. 2. Apply depreciation methods to plant assets. Depreciation is the process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner. Depreciation is not a process of valuation, and it is not a process that results in an accumulation of cash. Depreciation reflects an asset’s decreasing usefulness and revenueproducing ability, resulting from wear and tear and from obsolescence. The formula for straight-line depreciation is: Cost – Salvage value Useful life (in years) The expense patterns of the three depreciation methods are as follows: Method Annual Depreciation Pattern Straight-line Constant amount Declining-balance Decreasing amount Units-of-activity Varying amount Companies make revisions of periodic depreciation in present and future periods, not retroactively.
.
Reporting and Analyzing Long-Lived Assets
9-5
3. Explain how to account for the disposal of plant assets. The procedure for accounting for the disposal of a plant asset through sale or retirement is (a) eliminate the book value of the plant asset at the date of disposal; (b) record cash proceeds, if any; and. (c) account for the difference between the book value and the cash proceeds as a gain or a loss on disposal. 4. Identify the basic issues related to reporting intangible assets. Companies report intangible assets at their cost less any amounts amortized. If an intangible asset has a limited life, its cost should be allocated (amortized) over its useful life. Intangible assets with indefinite lives should not be amortized. 5. Discuss how long-lived assets are reported and analyzed. Companies usually show plant assets under “Property, plant, and equipment”; they show intangibles separately under “Intangible assets”. Either within the balance sheet or in the notes, companies disclose the balances of the major classes of assets, such as land, buildings, and equipment, and accumulated depreciation by major classes or in total. They describe the depreciation and amortization methods used, and disclose the amount of depreciation and amortization expense for the period. In the statement of cash flows, depreciation and amortization expense are added back to net income to determine net cash provided by operating activities. The investing section reports cash paid or received to purchase or sell property, plant, and equipment. Plant assets may be analyzed using the return on assets ratio and the asset turnover ratio. The return on assets ratio consists of two components: the asset turnover ratio and the profit margin ratio. *6. Compute periodic depreciation using the declining-balance method and the units-ofactivity method. The depreciation expense calculation for each of these methods is: Declining balance: =
Book value at beginning of year
X
Decliningbalance rate
=
Depreciation Expense
Units-of-activity: =
Depreciation cost per unit
X
Units of activity during year
=
Depreciation Expense
.
9-6
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
TRUE-FALSE STATEMENTS 1.
All plant assets (fixed assets) must be depreciated for accounting purposes.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
2.
When purchasing land, the costs for clearing, draining, filling, and grading should be charged to a Land Improvements account.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
3.
When purchasing delivery equipment, sales taxes and motor vehicle licenses should be charged to Equipment.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
4.
Land improvements are generally charged to the Land account.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
5.
Once cost is established for a plant asset, it becomes the basis of accounting for the asset unless the asset appreciates in value, in which case, market value becomes the basis for accountability.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
6.
Under an operating lease, both the leased asset and the liability are shown on the balance sheet.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
7.
Certain types of leases, called capital leases, allow the lessee to account for the transaction as a rental.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
8.
The book value of a plant asset is always equal to its fair market value.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
9.
Recording depreciation on plant assets affects the balance sheet and the income statement.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
10.
The depreciable cost of a plant asset is its original cost minus obsolescence.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
11.
Recording depreciation each period is an application of the matching principle.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
12.
The Accumulated Depreciation account represents a cash fund available to replace plant assets.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
.
Reporting and Analyzing Long-Lived Assets
13.
9-7
In calculating depreciation, both plant asset cost and useful life are based on estimates.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
14.
The declining-balance method of depreciation is called an accelerated depreciation method because it depreciates an asset in a shorter period of time than the asset's useful life.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
15.
Using the units-of-activity method of depreciating factory equipment will generally result in more depreciation expense being recorded over the life of the asset than if the straightline method had been used.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
16.
The IRS does not require the taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
17.
A change in the estimated useful life of a plant asset may cause a change in the amount of depreciation recognized in the current and future periods, but not in prior periods.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
18.
A change in the estimated salvage value of a plant asset requires a restatement of prior years' depreciation.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
19.
When a change in estimate is made, there is no correction of previously recorded depreciation expense.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
20.
Additions and improvements to a plant asset that increase the asset's operating efficiency, productive capacity, or expected useful life are generally expensed in the period incurred.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
21.
Capital expenditures are expenditures that increase the company's investment in productive facilities.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
22.
Ordinary repairs should be recognized when incurred as revenue expenditures.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
23.
A characteristic of capital expenditures is that the expenditures occur frequently during the period of ownership.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
.
9-8
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
24.
A permanent decline in the market value of an asset is referred to as an impairment.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
25.
Companies only dispose of plant assets by either sale or exchange.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
26.
If the proceeds from the sale of a plant asset exceed its book value, a gain on disposal occurs.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
27.
The book value of a plant asset is the amount originally paid for the asset less anticipated salvage value.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
28.
A loss on disposal of a plant asset as a result of a sale or a retirement is calculated in the same way as a gain on disposal.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
29.
A plant asset must be fully depreciated before it can be removed from the books.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
30.
If a plant asset is sold at a gain, the gain on disposal should reduce the cost of goods sold section of the income statement.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
31.
A loss on disposal of a plant asset occurs if the cash proceeds received from the asset sale is less than the asset's book value.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
32.
Research and development costs that result in a successful product that is patentable are charged to the Patent account.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
33.
Franchises are classified as a plant asset.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
34.
Goodwill is recorded only when there is an exchange transaction that involves the purchase of an entire business.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
35.
Intangible assets are rights, privileges, and competitive advantages that result from ownership of long-lived assets without physical substance.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
.
Reporting and Analyzing Long-Lived Assets
36.
9-9
The cost of an intangible asset must be amortized over a 20-year period.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
37.
The cost of a patent should be amortized over its legal life or useful life, whichever is shorter.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
38.
If an acquired franchise or license is for an indefinite time period, then the cost of the asset should not be amortized.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
39.
When an entire business is purchased, goodwill is the excess of cost over the book value of the net assets acquired.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
40.
The return on assets ratio indicates how efficiently a company uses its assets.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
41.
The return on assets ratio can be computed from the profit margin ratio and the asset turnover ratio.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
42.
The asset turnover is calculated as net sales divided by ending total assets.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
43.
In the notes to the financial statements, the depreciation and amortization methods used should be described.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
*44.
Salvage value is not subtracted from plant asset cost in determining depreciation expense under the declining-balance method of depreciation.
Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
*45.
Under the double-declining-balance method, the depreciation rate used each year remains constant.
Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Answers to True-False Statements 1. 2. 3. 4. 5. 6. 7.
F F F F F F F
8. 9. 10. 11. 12. 13. 14.
F T F T F F F
15. 16. 17. 18. 19. 20. 21.
F T T F T F T
22. 23. 24. 25. 26. 27. 28. .
T F T F T F T
29. 30. 31. 32. 33. 34. 35.
F F T F F T T
36. 37. 38. 39. 40. 41. 42.
F T T F F T F
43. T *44. T *45. T
9-10
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
MULTIPLE CHOICE QUESTIONS 46.
A company purchased land for $350,000 cash. Real estate brokers' commission was $25,000 and $35,000 was spent for demolishing an old building on the land before construction of a new building could start. Under the historical cost principle, the cost of land would be recorded at a. $385,000. b. $350,000. c. $375,000. d. $410,000.
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $350,000 + $25,000 + $35,000 = $410,000
47.
A company purchased land for $94,000 cash. Real estate brokers' commission was $5,000 and $7,000 was spent for demolishing an old building on the land before construction of a new building could start. Proceeds from salvage of the demolished building was $1,200. Under the historical cost principle, the cost of land would be recorded at a. $104,800. b. $94,000. c. $99,800. d. $106,000.
Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $94,000 + $5,000 + ($7,000 − $1,200) = $104,800 (Pur.price + brok. Com. + bldg. demo. – sal. proc.)
48.
Which of the following is not properly classified as property, plant, and equipment? a. Building used as a factory. b. Land used in ordinary business operations. c. A truck held for resale by an automobile dealership. d. Land improvement, such as parking lots and fences.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
49.
A characteristic of a plant asset is that it is a. intangible. b. used in the operations of a business. c. held for sale in the ordinary course of the business. d. not currently used in the business but held for future use.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
50.
Which one of the following items is not considered a part of the cost of a truck purchased for business use? a. Sales tax. b. Truck license. c. Freight charges. d. Cost of lettering on side of truck.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
.
Reporting and Analyzing Long-Lived Assets
51.
9-11
Which of the following would not be included in the Equipment account? a. Installation costs. b. Freight costs. c. Cost of trial runs. d. Electricity used by the machine.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
52.
Which of the following assets does not decline in service potential over the course of its useful life? a. Equipment. b. Furnishings. c. Land. d. Fixtures.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
53.
The four subdivisions for plant assets are a. land, land improvements, buildings, and equipment. b. intangibles, land, buildings, and equipment. c. furnishings and fixtures, land, buildings, and equipment. d. property, plant, equipment, and land.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
54.
The cost of land does not include a. real estate brokers' commission. b. annual property taxes. c. accrued property taxes assumed by the purchaser. d. title fees.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
55.
The Land account would include all of the following costs except a. drainage costs. b. the cost of building a fence. c. commissions paid to real estate agents. d. the cost of tearing down a building.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
56.
Whyte Clinic purchases land for $420,000 cash. The clinic assumes $4,500 in property taxes due on the land. The title and attorney fees totaled $3,000. The clinic had the land graded for $6,600. What amount does Whyte Clinic record as the cost for the land? a. $426,600. b. $420,000. c. $434,100. d. $427,500.
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $420,000 + $4,500 + $3,000 + $6,600 = $434,100 (Pur.price + taxes + attor. tees. + grad. cost.)
.
9-12 57.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Burke Company purchases land for $180,000 cash. Burke assumes $5,000 in property taxes due on the land. The title and attorney fees totaled $2,000. Burke has the land graded for $4,400. They paid $20,000 for paving of a parking lot. What amount does Burke record as the cost for the land? a. $186,400. b. $211,400. c. $191,400. d. $180,000.
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $180,000 + $5,000 + $2,000 + $4,400 = $191,400 (Pur.price + taxes + attor. tees. + grad. cost.)
58.
Aber Company buys land for $145,000 on 12/31/16. As of 3/31/17, the land has appreciated in value to $151,000. On 12/31/17, the land has an appraised value of $155,400. By what amount should the Land account be increased in 2017? a. $0. b. $6,000. c. $4,400. d. $10,400.
Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
59.
Givens Retail purchased land for a new parking lot for $125,000. The paving cost $175,000 and the lights to illuminate the new parking area cost $60,000. Which of the following statements is true with respect to these additions? a. $300,000 should be debited to the Land account. b. $235,000 should be debited to Land Improvements. c. $360,000 should be debited to the Land account. d. $360,000 should be debited to Land Improvements.
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $175,000 + $60,000 = $235,000 (Pav. Cost + lights)
60.
Shaffer Company acquires land for $77,000 cash. Additional costs are as follows. Removal of shed $ 300 Filling and grading 1,500 Salvage value of lumber of shed 120 Broker commission 1,130 Paving of parking lot 10,000 Closing costs 560 Shaffer will record the acquisition cost of the land as a. $77,000. b. $78,690. c. $80,610. d. $80,370.
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $77,000 + ($300 − $120) + $1,500 + 1,130 + $560 = $80,370 (Pur. Price + remov. Cost – sal. val. + fill. + comm + clos.costs)
.
Reporting and Analyzing Long-Lived Assets
61.
9-13
Ramirez Company acquires land for $240,000 cash. Additional costs are as follow. Removal of shed $ 2,000 Filling and grading 6,000 Salvage value of lumber of shed 1,280 Broker commission 4,520 Paving of parking lot 40,000 Closing costs 3,400 Ramirez will record the acquisition cost of the land as a. $254,640. b. $257,200. c. $255,920. d. $240,000.
Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $240,000 + ($2,000 − $1,280) + $6,000 + $4,520 + $3,400 = $254,640 (Pur. Price + remov. Cost – sal. val. + fill. + comm + clos.costs)
62.
Wesley Hospital installs a new parking lot. The paving cost $60,000 and the lights to illuminate the new parking area cost $24,000. Which of the following statements is true with respect to these additions? a. $60,000 should be debited to the Land account. b. $24,000 should be debited to Land Improvements. c. $84,000 should be debited to the Land account. d. $84,000 should be debited to Land Improvements.
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $60,000 + $24,000 = $84,000 (Pav. Cost + lights)
63.
Land improvements should be depreciated over the useful life of the a. land. b. buildings on the land. c. land or land improvements, whichever is longer. d. land improvements.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
64.
National Molding is building a new plant that will take three years to construct. The construction will be financed in part by funds borrowed during the construction period. There are significant architect fees, excavation fees, and building permit fees. Which of the following statements is true? a. Excavation fees are capitalized but building permit fees are not. b. Architect fees are capitalized but building permit fees are not. c. Interest is capitalized during the construction as part of the cost of the building. d. The capitalized cost is equal to the contract price to build the plant less any interest on borrowed funds.
Ans: C, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
.
9-14 65.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
A company purchases a remote building site for computer operations. The building will be suitable for operations after some expenditures. The wiring must be replaced to computer specifications. The roof is leaky and must be replaced. All rooms must be repainted and recarpeted and there will also be some plumbing work done. Which of the following statements is true? a. The cost of the building will not include the repainting and recarpeting costs. b. The cost of the building will include the cost of replacing the roof. c. The cost of the building is the purchase price of the building, while the additional expenditures are all capitalized as Building Improvements. d. The wiring is part of the computer costs, not the building cost.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
66.
Arnold Company purchases a new delivery truck for $45,000. The sales taxes are $2,500. The logo of the company is painted on the side of the truck for $1,200. The truck’s annual license is $120. The truck undergoes safety testing for $220. What does Arnold record as the cost of the new truck? a. $49,040. b. $48,920. c. $47,500. d. $46,920.
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $45,000 + $2,500 + $1,200 + $220 = $48,920 (Pur price + sal. tax. + logo + test.)
67.
Rodgers Company purchased equipment and these costs were incurred: Cash price $55,000 Sales taxes 3,600 Insurance during transit 640 Installation and testing 860 Total costs $60,100 Rodgers will record the acquisition cost of the equipment as a. $55,000. b. $58,600. c. $59,240. d. $60,100.
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $55,000 + $3,600 + $640 + $860 = $60,100 (Cash price + sal. tax . + insur. + inst.)
68.
Kathy’s Blooms purchased a delivery van with a $60,000 list price. The company was given a $6,000 cash discount by the dealer, and paid $3,000 sales tax. Annual insurance on the van is $1,500. As a result of the purchase, by how much will Kathy’s Blooms increase its van account? a. $60,000. b. $54,000. c. $58,500. d. $57,000.
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $60,000 − $6,000 + $3,000 = $57,000 (List price – disc. + sal. tax)
.
Reporting and Analyzing Long-Lived Assets
69.
9-15
Rains Company purchased equipment on January 1 at a list price of $125,000, with credit terms 2/10, n/30. Payment was made within the discount period. Rains paid $6,250 sales tax on the equipment, and paid installation charges of $2,200. Prior to installation, Rains paid $5,000 to pour a concrete slab on which to place the equipment. What is the total cost of the new equipment? a. $131,250. b. $135,950. c. $138,450. d. $126,250.
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($125,000 .98) + $6,250 + $2,200 + $5,000 = $135,950 (List price × (1 –, 02) + sal. tax + inst. + conc. Slab)
70.
Carpino Company purchased equipment and these costs were incurred: Cash price $75,000 Sales taxes 3,500 Insurance during transit 750 Installation and testing 1,500 Total costs $80,750 What amount should be recorded as the cost of the equipment? a. $75,000. b. $78,500. c. $79,250. d. $80,750.
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $75,000 + $3,500 + $750 + $1,500 = $80,750 (cash price + sal. tax. + insur. + insut.)
71.
Ryan, Inc. purchased a delivery truck with a $48,000 list price. The company was given a $4,800 cash discount by the dealer, and paid $2,400 sales tax. Annual insurance on the truck is $1,200. As a result of the purchase, by how much will Ryan, Inc. increase its truck account? a. $48,000. b. $43,200. c. $46,800. d. $45,600.
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $48,000 − $4,800 + $2,400 = $45,600 (List price – disc. + sal. tax)
72.
Runge Company purchased machinery on January 1 at a list price of $300,000, with credit terms 2/10, n/30. Payment was made within the discount period. Runge paid $15,000 sales tax on the machinery, and paid installation charges of $5,300. Prior to installation, Runge paid $12,000 to pour a concrete slab on which to place the machinery. What is the total cost of the new machinery? a. $314,300. b. $326,300. c. $332,300. d. $309,000.
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($300,000 .98) + $15,000 + $5,300 + $12,000 = $326,300 [(List price × (1 – .02)] + Sal. tax + inst. Char. + conc. Slab)
.
9-16 73.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Schrock Company purchases a new delivery van for $70,000. The sales taxes are $5,250. The logo of the company is painted on the side of the van for $1,400. The van’s annual license is $140. The van undergoes safety testing for $250. What does Schrock record as the cost of the new van? a. $77,040. b. $76,900. c. $75,250. d. $76,650.
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $70,000 + $5,250 + $1,400 + $250 = $76,900 (Pur. Price + sal. + taxes + logo + test.)
74.
All leases are classified as either a. capital leases or long-term leases. b. capital leases or operating leases. c. operating leases or current leases, d. long-term leases or current leases.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
75.
Interest may be included in the acquisition cost of a plant asset a. during the construction period of a self-constructed asset. b. if the asset is purchased on credit. c. if the asset acquisition is financed by a long-term note payable. d. if it is a part of a lump-sum purchase.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
76.
Which of the following is included in the cost of constructing a building? a. Cost of paving a parking lot. b. Cost of repairing vandalism damage incurred shortly after construction is complete. c. Interest incurred during construction. d. Cost of removing the demolished building existing on the land when it was purchased.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
77.
The balance in the Accumulated Depreciation account represents the a. cash fund to be used to replace plant assets. b. amount to be deducted from the cost of the plant asset to arrive at its fair market value. c. amount charged to expense in the current period. d. amount charged to expense since the acquisition of the plant asset.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
78.
The term applied to the periodic expiration of a plant asset’s cost is a. amortization. b. depletion. c. depreciation. d. cost expiration.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
.
Reporting and Analyzing Long-Lived Assets
79.
9-17
Which one of the following items is not a consideration when recording periodic depreciation expense on plant assets? a. Salvage value. b. Estimated useful life. c. Cash needed to replace the plant asset. d. Cost.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
80.
Depreciation is the process of allocating the cost of a plant asset over its useful life in a(n) a. equal and equitable manner. b. accelerated and accurate manner. c. systematic and rational manner. d. conservative market-based manner.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
81.
The cost of a long-term asset is expensed a. when it is paid for. b. as the asset benefits the company. c. in the period in which it is acquired. d. in the period in which it is disposed of.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
82.
The book value of an asset is equal to the a. asset's fair value less its historical cost. b. blue book value relied on by secondary markets. c. replacement cost of the asset. d. asset's cost less accumulated depreciation.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
83.
Accountants do not attempt to measure the change in a plant asset's market value during ownership because a. the assets are not held for resale. b. plant assets cannot be sold. c. losses would have to be recognized. d. it is management's responsibility to determine fair values.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: FSA
84.
Depreciation is a process of a. asset devaluation. b. cost accumulation. c. cost allocation. d. asset valuation.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
.
9-18 85.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Recording depreciation each period is necessary in accordance with the a. going concern principle. b. historical cost principle. c. expense recognition principle. d. asset valuation principle.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
86.
In computing depreciation, salvage value is a. the fair value of a plant asset on the date of acquisition. b. subtracted from accumulated depreciation to determine the plant asset's depreciable cost. c. an estimate of a plant asset's value at the end of its useful life. d. ignored in all the depreciation methods.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
87.
When estimating the useful life of an asset, accountants do not consider a. the cost to replace the asset at the end of its useful life. b. vulnerability to obsolescence. c. expected repairs and maintenance. d. the intended use of the asset.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
88.
All the following are needed for the computation of depreciation except a. training costs of manufacturing personnel. b. cost. c. salvage value. d. estimated useful life.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
89.
All of the following statements are false regarding depreciation except a. depreciation is an asset valuation process. b. depreciation does not apply to land improvements. c. recognizing depreciation results in the accumulation of cash for asset replacement. d. depreciation does not apply to land.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
90.
All of the following statements about the useful life factor associated with depreciation are true except a. useful life is also called service life. b. useful life is an estimate of productive life. c. past experience with similar assets is helpful in establishing useful life. d. useful life is also called expected trade-in value.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
.
Reporting and Analyzing Long-Lived Assets
91.
9-19
Equipment was purchased for $150,000. Freight charges amounted to $7,000 and there was a cost of $20,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $30,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be a. $35,400. b. $29,400. c. $24,600. d. $24,000.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($150,000 + $7,000 + $20,000 − $30,000) 5 = $29,400 (Pur. Price + freight + found. – Sal. value) ÷ 5yrs.
92.
Equipment was purchased for $85,000 on January 1, 2016. Freight charges amounted to $3,500 and there was a cost of $10,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $15,000 salvage value at the end of its 5-year useful life. What is the amount of accumulated depreciation at December 31, 2017, if the straight-line method of depreciation is used? a. $33,400. b. $16,700. c. $14,300. d. $28,600.
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($85,000 + $3,500 + $10,000 − $15,000) 5] 2 = $33,400 [(Pur. Price + freight + found. – sal. val. )÷5 yrs] × 2
93.
Equipment with a cost of $640,000 has an estimated salvage value of $60,000 and an estimated life of 4 years or 12,000 hours. It is to be depreciated by the straight-line method. What is the amount of depreciation for the first full year, during which the equipment was used 3,000 hours? a. $160,000. b. $175,000. c. $165,000. d. $145,000.
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($640,000 − $60,000) 4] = $145,000 [(Cost – sal. val.) ÷ 4 yrs.
94.
Equipment with a cost of $300,000 has an estimated salvage value of $20,000 and an estimated life of 4 years or 10,000 hours. It is to be depreciated by the straight-line method. What is the amount of depreciation for the first full year, during which the equipment was used 2,700 hours? a. $75,000. b. $70,000. c. $75,600. d. $72,500.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($300,000 − $20,000) 4 = $70,000 (Cost – sal. val.) ÷ 4 yrs
.
9-20 95.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
A machine was purchased for $180,000 and it was estimated to have an $12,000 salvage value at the end of its useful life. Monthly depreciation expense of $1,750 was recorded using the straight-line method. The annual depreciation rate is a. 15.0%. b. 2.5%. c. 10.0%. d. 12.5%.
Ans: D, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($1,750 12) ($180,000 − $12,000) = 12.5% (Mon. dep. × 12) (Cost –sal. val.)
96.
A machine was purchased for $54,000 and it was estimated to have a $9,000 salvage value at the end of its useful life. Monthly depreciation expense of $600 was recorded using the straight-line method. The annual depreciation rate is a. 20%. b. 1.6%. c. 12.8%. d. 16.0%.
Ans: D, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($600 12) ($54,000 − $9,000) = 16% (Mon. dep. × 12) (Cost –sal. val.)
97.
A company purchased factory equipment on April 1, 2017, for $128,000. It is estimated that the equipment will have a $16,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2017, is a. $12,800. b. $11,200. c. $8,400. d. $9,600.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($128,000 − $16,000) 10] 9/12 = $8,400 [(Cost – sal. val.) ÷ 10yrs] × 9/12
98.
A company purchased factory equipment on June 1, 2017, for $128,000. It is estimated that the equipment will have a $8,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2017, is a. $12,000. b. $7,000. c. $6,000. d. $5,000.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($128,000 − $8,000) 10] 7/12 = $7,000 [(Cost – sal. val.) ÷10 yrs] × 7/12
.
Reporting and Analyzing Long-Lived Assets
99.
9-21
The declining-balance method of depreciation produces a(n) a. decreasing depreciation expense each period. b. increasing depreciation expense each period. c. declining percentage rate each period. d. constant amount of depreciation expense each period.
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
100.
Which of the following methods will result in the highest depreciation in the first year? a. Sum-of-year’s-digits. b. Time valuation. c. Straight-line. d. Declining-balance.
Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
101.
The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method that a. is used for tax purposes. b. must be used for financial statement purposes. c. is required by the SEC. d. expenses an asset over a single year because capital acquisitions must be expensed in the year purchased.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
102.
Which of the following methods of computing depreciation is production based? a. Straight-line. b. Declining-balance. c. Units-of-activity. d. None of these answer choices are correct.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
103.
Management should select the depreciation method that a. is easiest to apply. b. best measures the plant asset's market value over its useful life. c. best measures the plant asset's contribution to revenue over its useful life. d. has been used most often in the past by the company.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
104.
The depreciation method that applies a constant percentage to depreciable cost in calculating depreciation is a. straight-line. b. units-of-activity. c. sum-of-year’s-digits. d. None of these answer choices are correct.
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
.
9-22 105.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
On November 1, 2016, Love Company places a new asset into service. The cost of the asset is $90,000 with an estimated 5-year life and $10,000 salvage value at the end of its useful life. What is the depreciation expense for 2017 if Love Company uses the straightline method of depreciation? a. $4,000. b. $16,000. c. $2,667. d. $9,000.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($90,000 − $10,000) 5] = $16,000 [(Cost – sal. val.) ÷5 yrs]
106.
On October 1, 2017, Mann Company places a new asset into service. The cost of the asset is $120,000 with an estimated 5-year life and $30,000 salvage value at the end of its useful life. What is the depreciation expense for 2017 if Mann Company uses the straightline method of depreciation? a. $4,500. b. $24,000. c. $6,000. d. $12,000.
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($120,000 − $30,000) 5] 3/12 = $4,500 [(Cost – sal. val.) ÷ 5 yrs] 3/12
107.
On January 1, a machine with a useful life of five years and a salvage value of $25,000 was purchased for $125,000. What is the depreciation expense for year 2 under straightline depreciation? a. $15,000. b. $75,000. c. $20,000. d. $60,000.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($125,000 − $25,000) 5 = $20,000 [(Cost – sal. val.) ÷ 5 yrs]
108.
On January 1, a machine with a useful life of four years and a salvage value of $16,000 was purchased for $80,000. What is the depreciation expense for year 2 under straightline depreciation? a. $20,000. b. $32,000. c. $16,000. d. $40,000.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($80,000 − $16,000) 4 = $16,000 [(Cost – sal. val.) ÷ 4 yrs]
.
Reporting and Analyzing Long-Lived Assets
109
9-23
On January 1, a machine with a useful life of four years and a salvage value of $15,000 was purchased for $95,000. What is the depreciation expense for year 2 under straightline depreciation? a. $10,000. b. $20,000. c. $40,000. d. $23,750.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($95,000 − $15,000) 4 = $20,000 [(Cost – sal. val.) ÷ 4 yrs]
110.
Which depreciation method is most frequently used in businesses today? a. Straight-line. b. Declining-balance. c. Units-of-activity. d. Double-declining-balance.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
111.
A plant asset was purchased on January 1 for $75,000 with an estimated salvage value of $15,000 at the end of its useful life. The current year's depreciation expense is $5,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $35,000. The remaining useful life of the plant asset is a. 15 years. b. 12 years. c. 7 years. d. 5 years.
Ans: D, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($75,000 − $15,000) $5,000 = 12; 12 − ($35,000 $5,000) = 5 [(Cost – sal. val.) ÷ dep. exp. = use. life; (Use. life – (A/D ÷ dep. exp.))
112.
A plant asset was purchased on January 1 for $55,000 with an estimated salvage value of $5,000 at the end of its useful life. The current year's depreciation expense is $5,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $25,000. The remaining useful life of the plant asset is a. 10 years. b. 11 years. c. 6 years. d. 5 years.
Ans: D, LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($55,000 − $5,000) $5,000 = 10; 10 − ($25,000 $5,000) = 5 [(Cost – sal. val.) ÷ dep. exp. = use. life; (Use. life – (A/D ÷ dep. exp.))
113.
Mitchell Corporation bought equipment on January 1, 2017. The equipment cost $300,000 and had an expected salvage value of $50,000. The life of the equipment was estimated to be 6 years. The depreciable cost of the equipment is a. $300,000. b. $250,000. c. $50,000. d. $41,667.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $300,000 − $50,000 = $250,000
.
9-24
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
[(Cost – sal. val.)
114.
Mitchell Corporation bought equipment on January 1, 2017. The equipment cost $300,000 and had an expected salvage value of $50,000. The life of the equipment was estimated to be 6 years. The depreciation expense using the straight-line method of depreciation is a. $58,333. b. $60,000. c. $41,667. d. none of these answer choices are correct.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($300,000 − $50,000) 6 = $41,667 [(Cost – sal. val.) ÷ 6 yrs.
115.
Mitchell Corporation bought equipment on January 1, 2017. The equipment cost $300,000 and had an expected salvage value of $50,000. The life of the equipment was estimated to be 6 years. The book value of the equipment at the beginning of the third year would be a. $300,000. b. $250,000. c. $216,666. d. $83,333.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($300,000 − $50,000) 6 = $41,667; $300,000 − ($41,667 × 2) = $216,666 (Cost – sal. val.) ÷ 6 = ann. dep; (Cost – (ann. dep. × 2)
116.
Pearson Company bought a machine on January 1, 2017. The machine cost $180,000 and had an expected salvage value of $30,000. The life of the machine was estimated to be 5 years. The depreciable cost of the machine is a. $180,000. b. $150,000. c. $50,000. d. $30,000.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $180,000 − $30,000 = $150,000 (Cost – sal. val.)
117.
Pearson Company bought a machine on January 1, 2017. The machine cost $180,000 and had an expected salvage value of $30,000. The life of the machine was estimated to be 5 years. The depreciation expense using the straight-line method of depreciation is a. $50,000. b. $36,000. c. $30,000. d. none of these answer choices are correct.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($180,000 − $30,000) 5 = $30,000 ((Cost – sal. val.) ÷ 5 yrs.)
.
Reporting and Analyzing Long-Lived Assets
118.
9-25
Pearson Company bought a machine on January 1, 2017. The machine cost $180,000 and had an expected salvage value of $30,000. The life of the machine was estimated to be 5 years. The book value of the machine at the beginning of the third year would be a. $180,000. b. $150,000. c. $120,000. d. $60,000.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($180,000 − $30,000) 5 = $30,000; $180,000 − ($30,000 2) = $120,000 ((Cost – sal. val.) ÷ 5 yrs.) = ann. dep. (Cost − (ann. dep. × 2))
119.
Stine Company purchased machinery with a list price of $96,000. They were given a 10% discount by the manufacturer. They paid $600 for shipping and sales tax of $4,500. Stine estimates that the machinery will have a useful life of 10 years and a residual value of $30,000. If Stine uses straight-line depreciation, annual depreciation will be a. $6,150. b. $6,108. c. $9,150. d. $5,640.
Ans: A, LO: 1, 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($96,000 .90) + $600 + $4,500 − $30,000] 10 = $6,150 ([List price × (1 – .10)] + ship. sal. tax – sal. val.) ÷ 10 yrs.
120.
Bates Company purchased equipment on January 1, 2016, at a total invoice cost of $1,200,000. The equipment has an estimated salvage value of $30,000 and an estimated useful life of 5 years. What is the amount of accumulated depreciation at December 31, 2017, if the straight-line method of depreciation is used? a. $240,000. b. $480,000. c. $234,000. d. $468,000.
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($1,200,000 − $30,000) 5] 2 = $468,000 ((Cost – sal. val.) ÷ 5 yrs.) × 2 yrs.
121.
Newell Company purchased a machine with a list price of $160,000. They were given a 10% discount by the manufacturer. They paid $1,000 for shipping and sales tax of $7,500. Newell estimates that the machine will have a useful life of 10 years and a salvage value of $50,000. If Newell uses straight-line depreciation, annual depreciation will be a. $10,250. b. $10,180. c. $15,250. d. $9,400.
Ans: A, LO: 1, 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($160,000 .90) + $1,000 + $7,500 − $50,000] 10 = $10,250 ([List price × (1 – .10)] + ship. sal. tax – sal. val. ) ÷ 10 yrs.
.
9-26 122.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Machinery was purchased for $340,000. Freight charges amounted to $14,000 and there was a cost of $40,000 for building a foundation and installing the machinery. It is estimated that the machinery will have a $60,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be a. $78,800. b. $66,800. c. $57,200. d. $56,000.
Ans: B, LO: 1, 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($340,000 + $14,000 + $40,000 − $60,000) 5] = $66,800 (Cost + freight + found. – sal. val.) ÷ 5 yrs.
123.
Machinery was purchased for $340,000 on January 1, 2017. Freight charges amounted to $14,000 and there was a cost of $40,000 for building a foundation and installing the machinery. It is estimated that the machinery will have a $60,000 salvage value at the end of its 5-year useful life. What is the amount of accumulated depreciation at December 31, 2018, if the straight-line method of depreciation is used? a. $133,600. b. $66,800. c. $57,200. d. $114,400.
Ans: A, LO: 1, 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($340,000 + $14,000 + $40,000 − $60,000) 5] 2 = $133,600 (Cost + freight + found. – sal. val.) ÷ 5 yrs.]× 2 yrs.
124.
A machine that was purchased on January 1 for $60,000 has an estimated salvage value of $12,000. If the machine’s depreciation rate is 20%, its annual depreciation is a. b. c. d.
$12,000. $48,000. $9,600. $14,400.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($60,000 − $12,000) .20 = $9,600 (Pur. price – sal. val.) × 20%
125.
A change in the estimated useful life of equipment requires a. a retroactive change in the amount of periodic depreciation recognized in previous years. b. that no change be made in the periodic depreciation so that depreciation amounts are comparable over the life of the asset. c. that the amount of periodic depreciation be changed in the current year and in future years. d. that income for the current year be increased.
Ans: C, LO:2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
.
Reporting and Analyzing Long-Lived Assets
126.
9-27
Grant Company has decided to change the estimate of the useful life of an asset that has been in service for 2 years. Which of the following statements describes the proper way to revise a useful life estimate? a. Revisions in useful life are permitted if approved by the IRS. b. Retroactive changes must be made to correct previously recorded depreciation. c. Only future years will be affected by the revision. d. Both current and future years will be affected by the revision.
Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
127.
Expenditures that add to the utility of plant assets for more than one accounting period are a. committed expenditures. b. revenue expenditures. c. current expenditures. d. capital expenditures.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
128.
An expenditure for which of the following items would be considered a revenue expenditure? a. Plant asset. b. Ordinary repair. c. Addition. d. Improvements.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
129.
Jack's Copy Shop bought equipment for $240,000 on January 1, 2016. Jack estimated the useful life to be 3 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2017, Jack decides that the business will use the equipment for a total of 5 years. What is the revised depreciation expense for 2017? a. $80,000. b. $32,000. c. $40,000. d. $60,000.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($240,000 − 0) 3 = $80,000; ($240,000 − $80,000) (5 − 1) = $40,000 (Cost – sal. val.) ÷ 3 yrs. = dep./yr.; (Cost – A/D) ÷ (5 − 1)
130.
An asset was purchased for $400,000. It had an estimated salvage value of $80,000 and an estimated useful life of 10 years. After 5 years of use, the estimated salvage value is revised to $64,000 but the estimated useful life is unchanged. Assuming straight-line depreciation, depreciation expense in Year 6 would be a. $48,000. b. $35,200. c. $24,000. d. $33,600.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($400,000 − $80,000) 5/10 = $160,000; [($400,000 − $160,000) − $64,000] (10 − 5) = $35,200 (Cost – sal. val.) × 5/10 = A/D: (Cost – A/D − sal. val.) ÷ (10 − 5)
.
9-28 131.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Equipment costing $60,000 with a salvage value of $12,000 and an estimated life of 8 years has been depreciated using the straight-line method for 2 years. Assuming a revised estimated total life of 5 years and no change in the salvage value, the depreciation expense for Year 3 would be a. $7,200. b. $16,000. c. $12,000. d. $9,600.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($60,000 − $12,000) 2/8 = $12,000; [($60,000 − $12,000) − $12,000] (5 − 2) = $12,000 (Cost – sal. val.) × 2/8 = A/D: (Cost – A/D − sal. val.) (5 − 2)
132.
Ron's Quik Shop bought equipment for $140,000 on January 1, 2016. Ron estimated the useful life to be 5 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2017, Ron decides that the business will use the equipment for a total of 6 years. What is the revised depreciation expense for 2017? a. $22,400. b. $11,200. c. $18,666. d $28,000.
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($140,000 − 0) 5 = $28,000; ($140,000 − $28,000) (6 − 1) = $22,400 (Cost – sal. val.) 5 yrs = dep. /yr; (Cost – A/D) ÷ (6−1)
133.
An asset was purchased for $140,000. It had an estimated salvage value of $35,000 and an estimated useful life of 10 years. After 5 years of use, the estimated salvage value is revised to $28,000 but the estimated useful life is unchanged. Assuming straight-line depreciation, depreciation expense in Year 6 would be a. b. c. d.
$21,000. $14,875. $11,900. $17,500.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($140,000 − $35,000) 5/10 = $52.500; [($140,000 − $52,500) − $28,000] (10 − 5) = $11,900 [(Cost – sal. val.) × 5/10] = A/D; [(Cost – A/D) – sal. val.] ÷ (10 – 5)
134.
Equipment costing $105,000 with a salvage value of $21,000 and an estimated life of 8 years has been depreciated using the straight-line method for 2 years. Assuming a revised estimated total life of 6 years and no change in the salvage value, the depreciation expense for Year 3 would be a. $15,750. b. $14,000. c. $21,000. d. $10,500.
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($105,000 − $21,000) 8] 2 = $21,000; [($105,000 − $21,000) − $21,000] (6 − 2) = $15,750 [(Cost – sal. val.) ÷ 8] × 2= A/D; [(Cost – A/D) – sal. val.] (6 – 2)
.
Reporting and Analyzing Long-Lived Assets
135.
9-29
Expenditures that maintain the operating efficiency and expected productive life of a plant asset are generally a. expensed when incurred. b. capitalized as a part of the cost of the asset. c. debited to the Accumulated Depreciation account. d. not recorded until they become material in amount.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
136.
Which of the following is not true of ordinary repairs? a. They primarily benefit the current accounting period. b. They can be referred to as revenue expenditures. c. They maintain the expected productive life of the asset. d. They increase the productive capacity of the asset.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Reporting
137.
Additions and improvements a. occur frequently during the ownership of a plant asset. b. normally involve immaterial expenditures. c. increase the company’s investment in productive facilities. d. typically only benefit the current accounting period.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
138.
All of the following statements regarding impairments are true except a. an impairment is a permanent decline in an asset's market value. b. after an impairment write-down, depreciation is generally lower in a subsequent periods. c. immediate recognition of impairment write-downs is now required. d. impairments are generally recorded when the book value falls below the market value.
Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
139.
Compton Inc. made a $500 ordinary repair to a piece of equipment. Compton's accountant debited this amount to the asset account, Equipment and credited Cash. Was this the correct entry and if not, why not? a. Yes, this was the correct entry. b. No, the correct entry would be a debit to Maintenance and Repairs Expense and a credit to Cash. c. No, the correct entry would be a debit to Cash and a credit to Maintenance and Repairs Expense. d. No, the correct entry would be a debit to Service Revenue and a credit to Cash.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
140.
Jamison, Inc. is a regional air cargo carrier. Jamison made a $4,500 improvement to one of its airplanes. If Jamison's accountant expensed this amount, which of the following statements is true? a. The entry will improperly understate net income for the year. b. The entry will improperly overstate net income for the year. c. The entry is the correct treatment. d. The entry will overstate the balance sheet for the year.
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
.
9-30 141.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
All of the following are factors that a company should consider before a write-down impairment of an asset is recorded except a. an appraisal of the asset. b. market trends. c. company profits. d. obsolescence of the asset.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
142.
Brevard Corporation purchased a taxicab on January 1, 2016 for $34,000 to use for its shuttle business. The cab is expected to have a five-year useful life and no salvage value. During 2017, it retouched the cab's paint at a cost of $1,600, replaced the transmission for $4,000 (which extended its life by an additional 2 years), and tuned-up the engine for $200. If Brevard Corporation uses straight-line depreciation, what annual depreciation will Brevard report for 2017? a. $6,800. b. $5,200. c. $5,500. d. $5,467.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($34,000 − $6,800) + $4,000] (5 − 1+ 2) = $5,200 [(Pur. price –acc. dep.) + trans, cost] ÷ (5 – 1+2)
143.
In 2017, Blanchard Corporation has plant equipment that originally cost $120,000 and has accumulated depreciation of $48,000. A new processing technique has rendered the equipment obsolete, so it is retired. Which of the following entries should Blanchard use to record the retirement of the equipment? a. Loss on Disposal of Plant Assets 72,000 Equipment 72,000 b. Accumulated Depreciation – Equipment 48,000 Loss on Disposal of Plant Assets 72,000 Equipment 120,000 c. Loss on Disposal of Plant Assets 72,000 Accumulated Depreciation – Equipment 72,000 d. Plant Equipment 120,000 Accumulated Depreciation – Equipment 48,000 Loss on Disposal of Plant Assets 72,000
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $0 − ($120,000 − $48,000) = ($72,000) (Sell. price – (cost − acc. dep.)
144.
A gain or loss on disposal of a plant asset is determined by comparing the a. replacement cost of the asset with the asset's original cost. b. book value of the asset with the asset's original cost. c. original cost of the asset with the proceeds received from its sale. d. book value of the asset with the proceeds received from its sale.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
.
Reporting and Analyzing Long-Lived Assets
145.
9-31
When an asset is sold, a gain occurs when the a. sale price exceeds the book value of the asset sold. b. sale price exceeds the original cost of the asset sold. c. book value exceeds the sale price of the asset sold. d. sale price exceeds the depreciable cost of the asset sold.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
146.
The book value of a plant asset is the difference between the a. replacement cost of the asset and its historical cost. b. cost of the asset and the amount of depreciation expense for the year. c. cost of the asset and the accumulated depreciation to date. d. proceeds received from the sale of the asset and its original cost.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
147.
A company sells a plant asset that originally cost $375,000 for $125,000 on December 31, 2017. The accumulated depreciation account had a balance of $150,000 after the current year's depreciation of $37,500 had been recorded. The company should recognize a a. $250,000 loss on disposal. b. $100,000 gain on disposal. c. $100,000 loss on disposal. d. $62,500 loss on disposal.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $125,000 − ($375,000 − $150,000) = ($100,000) (Sell. price – (cost − acc. dep.))
148.
A company sells a plant asset that originally cost $360,000 for $120,000 on December 31, 2017. The accumulated depreciation account had a balance of $180,000 after the current year's depreciation of $30,000 had been recorded. The company should recognize a a. b. c. d.
$60,000 loss on disposal. $40,000 gain on disposal. $120,000 loss on disposal. $120,000 gain on disposal.
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $120,000 − ($360,000 − $180,000) = ($60,000) (Sell. price – (cost – A/D))
149.
A truck costing $72,000 and on which $60,000 of accumulated depreciation has been recorded was discarded as having no value. The entry to record this event would include a a. gain of $12,000. b. loss of $12,000. c. credit to Accumulated Depreciation for $60,000. d. credit to Accumulated Depreciation for $72,000.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $0 − ($72,000 − $60,000) = ($12,000) (Sell. price – (cost – A/D))
.
9-32 150.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Equipment that cost $90,000 and on which $50,000 of accumulated depreciation has been recorded was disposed of for $45,000 cash. The entry to record this event would include a a. gain of $5,000. b. loss of $5,000. c. credit to the Equipment account for $15,000. d. credit to Accumulated Depreciation for $15,000.
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $45,000 − ($90,000 − $50,000) = $5,000 (Sell. price – (cost – A/D))
151.
A truck costing $75,000 and on which $65,000 of accumulated depreciation has been recorded was discarded as having no value. The entry to record this event would include a a. gain of $10,000. b. loss of $10,000. c. credit to Accumulated Depreciation for $65,000. d. credit to Accumulated Depreciation for $75,000.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $0 − ($75,000 − $65,000) = $10,000 (Sell. price – (cost – A/D))
152.
Equipment that cost $144,000 and on which $120,000 of accumulated depreciation has been recorded was disposed of for $36,000 cash. The entry to record this event would include a a. gain of $12,000. b. loss of $12,000. c. credit to the Equipment account for $36,000. d. credit to Accumulated Depreciation for $120,000.
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $36,000 − ($144,000 − $120,000) = $12,000 (Sell. price – (cost – A/D))
153.
If disposal of a plant asset occurs during the year, depreciation is a. not recorded for the year. b. recorded for the whole year. c. recorded for the fraction of the year to the date of the disposal. d. not recorded if the asset is scrapped.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
154.
If a plant asset is retired and is fully depreciated a. a gain on disposal will be recorded. b. phantom depreciation must be taken as though the asset were still on the books. c. a loss on disposal will be recorded. d. no gain or loss on disposal will be recorded.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
.
Reporting and Analyzing Long-Lived Assets
155.
9-33
The book value of an asset will equal its fair value at the date of sale if a. a gain on disposal is recorded. b. no gain or loss on disposal is recorded. c. the plant asset is fully depreciated. d. a loss on disposal is recorded.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
156.
A machine costing $176,000 was destroyed when it caught fire. At the date of the fire, the accumulated depreciation on the machine was $80,000. An insurance check for $200,000 was received based on the replacement cost of the machine. The entry to record the insurance proceeds and the disposition of the machine will include a a. gain on disposal of $24,000. b. credit to the Equipment account for $120,000. c. credit to the Accumulated Depreciation account for $80,000. d. gain on disposal of $104,000.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $200,000 − ($176,000 − $80,000) = $104,000 (Ins. proc. – (cost – acc. dep.))
157.
On July 1, 2017, Dillman Kennels sells equipment for $110,000. The equipment originally cost $300,000, had an estimated 5-year life and an expected salvage value of $50,000. The Accumulated Depreciation account had a balance of $175,000 on January 1, 2017, using the straight-line method. The gain or loss on disposal is a. $15,000 gain. b. $10,000 loss. c. $15,000 loss. d. $10,000 gain.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: [($300,000 – $50,000) 5] 6/12 = $25,000; $110,000 − ($300,000 − $200,000) = $10,000 [(Cost − sal. val.) ÷ 5] × 6/12= 2017 dep; [Sell. Price – (cost – acc. dep.)
158.
A plant asset with a cost of $300,000 and accumulated depreciation of $285,000 is sold for $35,000. What is the amount of the gain or loss on disposal of the plant asset? a. $35,000 loss. b. $20,000 loss. c. $20,000 gain. d. $35,000 gain.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $35,000 − ($300,000 − $285,000) = $20,000 (Sell. price – (cost – A/D))
159.
A loss on disposal of a plant asset is reported in the financial statements a. in the Other Revenues and Gains section of the income statement. b. in the Other Expenses and Losses section of the income statement. c. as a direct increase to the capital account on the balance sheet. d. as a direct decrease to the capital account on the balance sheet.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
.
9-34 160.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Sprague Associates sold office furniture for $48,000. The furniture had an original cost of $144,000 and accumulated depreciation of $72,000. Ignoring the tax effect, as a result of the sale a. net income will increase $48,000. b. net income will increase $24,000. c. net income will decrease $24,000. d. net income will decrease $48,000.
Ans: C, LO:3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $48,000 − ($144,000 − $72,000) = ($24,000) (Sell. price – (cost – A/D))
161.
Nix Corporation sold equipment for $40,000. The equipment had an original cost of $120,000 and accumulated depreciation of $60,000. Ignoriing the tax effect, as a result of the sale a. net income will increase $40,000. b. net income will increase $20,000. c. net income will decrease $20,000. d. net income will decrease $40,000.
Ans: C, LO:3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $40,000 − ($120,000 − $60,000) = ($20,000) (Sell. price – (cost – A/D))
162.
Morton’s Courier Service recorded a loss of $7,500 when it sold a van that originally cost $70,000 for $12,500. Accumulated depreciation on the van must have been a. $65,000. b. $20,000. c. $62,500. d. $50,000.
Ans: D, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($70,000 − $12,500) − $7,500 = $50,000) (Cost − sell. price – loss)
163.
Equipment costing $280,000 was destroyed when it caught on fire. At the date of the fire, the accumulated depreciation on the equipment was $112,000. An insurance check for $320,000 was received based on the replacement cost of the equipment. The entry to record the insurance proceeds and the disposition of the equipment will include a a. gain on disposal of $40,000. b. credit to the Equipment account of $168,000. c. credit to the Accumulated Depreciation account for $112,000. d. gain on disposal of $152,000.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $320,000 − ($280,000 − $112,000) = ($152,000) (Ins. proc – (cost – A/D))
.
Reporting and Analyzing Long-Lived Assets
164.
9-35
On July 1, 2016, Fleming Company sells machinery for $240,000. The machinery originally cost $600,000, had an estimated 5-year life and an expected salvage value of $100,000. The Accumulated Depreciation account had a balance of $350,000 on January 1, 2017, using the straight-line method. The gain or loss on disposal is a. $40,000 gain. b. $10,000 loss. c. $20,000 loss. d. $10,000 gain.
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($600,000 − $100,000) 5] 6/12 = $50,000; $240,000 − [$600,000 − ($350,000 + $50,000)] = $40,000 [(Cost – sal. val.) ÷ 5] × 6/12 = ann. dep; (sell. price. – (Cost – A/D))
165.
A plant asset with a cost of $600,000 and accumulated depreciation of $570,000 is sold for $70,000. What is the amount of the gain or loss on disposal of the plant asset? a. $70,000 loss. b. $40,000 loss. c. $40,000 gain. d. $70,000 gain.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $70,000 − ($600,000 − $570,000) = ($40,000) (sell. price – (cost – A/D))
166.
Goodwill a. is only recorded when generated internally. b. can be subdivided and sold in parts. c. can only be identified with the business as a whole. d. can be defined as normal earnings less accumulated amortization.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
167.
In recording the acquisition cost of an entire business a. goodwill is recorded as the excess of cost over the fair value of identifiable net assets. b. assets are recorded at the seller's book values. c. goodwill, if it exists, is never recorded. d. goodwill is recorded as the excess of cost over the book value of identifiable net assets.
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
168.
Research and development costs a. are classified as intangible assets. b. must be expensed when incurred under generally accepted accounting principles. c. should be included in the cost of the patent they relate to. d. are capitalized and then amortized over a period not to exceed 20 years.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
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9-36 169.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
A computer company has $3,500,000 in research and development costs. Before accounting for these costs, the net income of the company is $2,800,000. What is the amount of net income or loss before taxes after these research and development costs are accounted for? a. $700,000 loss. b. $2,800,000 net income. c. $0. d. Cannot be determined from the information provided.
Ans: A, LO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $2,800,000 − $3,500,000 = ($700,000) (Net inc. – R & D costs)
170.
A computer company has $4,000,000 in research and development costs. Before accounting for these costs, the net income of the company is $4,800,000. What is the amount of net income or loss before taxes after these research and development costs are accounted for? a. $800,000 loss. b. $4,000,000 net income. c. $800,000 net income. d. Cannot be determined from the information provided.
Ans: C, LO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $4,800,000 − $4,000,000 = $800,000 (Net inc. – R & D costs)
171.
Goodwill a. may be expensed upon purchase if desired. b. can be sold by itself to another company. c. can be purchased and charged directly to stockholders’ equity. d. is only recorded when the purchase of an entire business occurs.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
172.
Which of the following is not an intangible asset that is reported on the balance sheet? a. Goodwill. b. Trademarks. c. Employees. d. Copyrights.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
173.
Hopson Company incurred $900,000 of research and development costs in its laboratory to develop a new product. It spent $120,000 in legal fees for a patent granted on January 2, 2017. On July 31, 2017, Hopson paid $90,000 for legal fees in a successful defense of the patent. What is the total amount that should be debited to Patents through July 31, 2017? a. $900,000. b. $210,000. c. $1,110,000. d. Some other amount.
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $120,000 + $90,000 = $210,000 (Leg. fees + def. leg. fees)
.
Reporting and Analyzing Long-Lived Assets
174.
9-37
Given the following account balances at year end, compute the total intangible assets on the balance sheet of Janssen Enterprises. Cash $1,500,000 Accounts Receivable 1,000,000 Trademarks 1,200,000 Goodwill 2,500,000 Research & Development Costs 2,000,000 a. $9,700,000. b. $5,700,000. c. $3,700,000. d. $7,700,000.
Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,200,000 + $2,500,000 = $3,700,000 (Trade. + Good.)
175.
Intangible assets are the rights and privileges that result from ownership of long-lived assets that a. must be generated internally. b. are depreciated over their useful life. c. have been exchanged at a gain. d. do not have physical substance.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
176.
A patent should a. be amortized over a period of 20 years. b. not be amortized. c. be amortized over its useful life or 20 years, whichever is longer. d. be amortized over its useful life or 20 years, whichever is shorter.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
177.
The cost of successfully defending a patent in an infringement suit should be a. charged to Legal Expenses. b. deducted from the book value of the patent. c. added to the patents account. d. recognized as a loss in the current period.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
178.
An asset that cannot be sold individually in the market place is a. a patent. b. goodwill. c. a copyright. d. a trade name.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Goodwill can be recorded a. when customers keep returning because they are satisfied with the company's products. b. when the company acquires a good location for its business. c. when the company has exceptional management. d. only when there is an exchange transaction involving the purchase of an entire business.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
180.
On July 1, 2017, Linden Company purchased the copyright to Norman Computer Tutorials for $210,000. It is estimated that the copyright will have a useful life of 5 years. The amount of amortization expense recognized for the year 2017 would be a. $42,000. b. $19,687. c. $38,850. d. $21,000.
Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($210,000 5) 6/12 = $21,000 (Cost ÷ 5 yrs) × 6/12
181.
On May 1, 2017, Irwin Company purchased the copyright to Quick Computer Tutorials for $120,000. It is estimated that the copyright will have a useful life of 5 years. The amount of amortization expense recognized for the year 2017 would be a. $24,000. b. $16,000. c. $12,000. d. $12,800.
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($120,000 5) 8/12 = $16,000 (Cost ÷ 5 yrs) × 6/12
182.
Which of the following is not an intangible asset arising from a government grant? a. Goodwill. b. Patent. c. Trademark. d. Trade name.
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
183.
Which of the following is not considered an intangible asset? a. Goodwill. b. An oil well. c. A franchise. d. A patent.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
184.
The cost of an intangible asset with an indefinite life should a. be amortized over 20 years. b. be amortized over the life of the creator plus 70 years. c. not be amortized. d. None of these answer choices are correct.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
.
Reporting and Analyzing Long-Lived Assets
185.
9-39
Cost allocation of an intangible asset is referred to as a. amortization. b. depreciation. c. accretion. d. capitalization.
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
186.
A patent a. has a legal life of 20 years. b. is not amortized. c. can be renewed indefinitely. d. is rarely subject to litigation because it is an exclusive right.
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
187.
If a company incurs legal costs in successfully defending its patent, these costs are recorded by debiting a. Legal Expense. b. the Intangible Loss account. c. the Patent account. d. a revenue expenditure account.
Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
188.
Copyrights are granted by the federal government a. for the life of the creator or 70 years, whichever is longer. b. for the life of the creator plus 70 years. c. for the life of the creator or 70 years, whichever is shorter. d. and therefore cannot be amortized.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
189.
The following information is provided for Nguyen Company and Northwest Corporation. (in $ millions) Nguyen Company Northwest Corporation Net income 2017 $165 $420 Net sales 2017 1,650 4,900 Total assets 12/31/15 1,000 2,400 Total assets 12/31/16 1,050 3,000 Total assets 12/31/17 1,150 4,000 What is Nguyen's return on assets for 2017? a. 150.0% b. 15.7% c. 15.0% d. 14.3%
Ans: C, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $165 [($1,050 + $1,150) ÷ 2] = 15.0% [Net inc. ÷ [(beg. tot. assets + end. tot. assets.) ÷ 2]
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The following information is provided for Nguyen Company and Northwest Corporation. (in $ millions) Nguyen Company Northwest Corporation Net income 2017 $165 $420 Net sales 2017 1,650 4,900 Total assets 12/31/15 1,000 2,400 Total assets 12/31/16 1,050 3,000 Total assets 12/31/17 1,150 4,000 What is Northwest's return on assets for 2017? a. 15.6% b. 10.5% c. 14.0% d. 12.0%
Ans: D, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $420 [($3,000 + $4,000) 2] = 12.0% [Net inc. ÷ [(beg. tot. assets + end. tot. assets) ÷ 2]
191.
The following information is provided for Nguyen Company and Northwest Corporation. (in $ millions) Nguyen Company Northwest Corporation Net income 2017 $165 $420 Net sales 2017 1,650 4,900 Total assets 12/31/15 1,000 2,400 Total assets 12/31/16 1,050 3,000 Total assets 12/31/17 1,150 4,000 What is Nguyen's asset turnover for 2017? a. 4.00 times b. 1.50 times c. 0.25 times d. 0.67 times
Ans: B, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $1,650 [($1,050 + $1,150) 2] = 1.50 [Net sal. ÷ [(beg. tot. assets + end. tot. assets) ÷ 2]
192.
The following information is provided for Nguyen Company and Northwest Corporation. (in $ millions) Nguyen Company Northwest Corporation Net income 2017 $165 $420 Net sales 2017 1,650 4,900 Total assets 12/31/15 1,000 2,400 Total assets 12/31/16 1,050 3,000 Total assets 12/31/17 1,150 4,000 What is Northwest's asset turnover for 2017? a. 1.40 times b. 1.63 times c. 1.81 times d. 1.23 times
Ans: A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $4,900 [($3,000 + $4,000) 2] = 1.40 [Net sal. ÷ [(beg. tot. assets + end. tot. assets) ÷ 2]
.
Reporting and Analyzing Long-Lived Assets
193.
9-41
The following information is provided for Nguyen Company and Northwest Corporation. (in $ millions) Nguyen Company Northwest Corporation Net income 2017 $165 $420 Net sales 2017 1,650 4,900 Total assets 12/31/15 1,000 2,400 Total assets 12/31/16 1,050 3,000 Total assets 12/31/17 1,150 4,000 If Nguyen and Northwest are in the same industry and the industry average for asset turnover is equal to 1.20 times, which of the following statements is true? a. Nguyen is operating more efficiently than the industry. b. Northwest is operating more efficiently than Nguyen. c. Both Nguyen and Northwest are operating more efficiently than the average company in their industry. d. The asset turnover does not address the question of efficient operations.
Ans: C, LO: 5, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
194.
The following information is provided for Nguyen Company and Northwest Corporation. (in $ millions) Nguyen Company Northwest Corporation Net income 2017 $165 $420 Net sales 2017 1,650 4,900 Total assets 12/31/15 1,000 2,400 Total assets 12/31/16 1,050 3,000 Total assets 12/31/17 1,150 4,000 If Nguyen and Northwest are in the same industry and the industry average for return on assets is equal to 30%, which of the following statements is true? a. Nguyen is more profitable than the average company in its industry. b. Northwest is more profitable than Nguyen. c. Both Nguyen and Northwest are more profitable than the average company in their industry. d. Nguyen is more profitable than Northwest.
Ans: D, LO: 5, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
195.
Using the following data for Stevenson Industries, compute the return on assets. Net Income $ 180,000 Total Assets 12/31/17 2,410,000 Total Assets 12/31/16 1,980,000 Net Sales 250,000 a. 7.5% b. 10.4% c. 8.2% d. 11.4%
Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $180,000 [($2,410,000 + $1,980,000)] 2 = .082 [Net sal. ÷ [(end. tot. assets + beg. tot. assets) ÷ 2]
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
During 2017, Ronald Corporation reported net sales of $2,000,000, net income of $900,000, and depreciation expense of $100,000. Ronald also reported beginning total assets of $1,000,000, ending total assets of $1,500,000, plant assets of $800,000, and accumulated depreciation of $500,000. Ronald’s asset turnover is a. 2.0 times. b. 1.6 times. c. 1.33 times. d. 0.72 times.
Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $2,000,000 [($1,000,000 + $1,500,000)] 2 = 1.6 [Net sal. ÷ [(beg. tot. assets + end. tot. assets) ÷ 2)]
197.
During 2017, Phelps Corporation reported net sales of $2,500,000, net income of $1,320,000, and depreciation expense of $80,000. Phelps also reported beginning total assets of $1,000,000, ending total assets of $1,500,000, plant assets of $800,000, and accumulated depreciation of $500,000. Phelps’s asset turnover is a. 1.3 times. b. 1.1 times. c. 1.7 times. d. 2.0 times.
Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $2,500,000 [($1,000,000 + $1,500,000)/2] = 2.0 [Net sal. ÷ [(beg. tot. assets + end. tot. assets) ÷ 2)]
198.
Trademarks are generally shown on the balance sheet under a. Intangibles. b. Investments. c. Property, Plant, and Equipment. d. Current Assets.
Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
199.
Which of the following statements concerning financial statement presentation is false? a. Intangibles are reported separately under Intangible Assets. b. The balances of major classes of assets may be disclosed in the footnotes. c. The balances of the accumulated depreciation of major classes of assets may be disclosed in the footnotes. d. The balances of all individual assets, as they appear in the subsidiary plant ledger, should be disclosed in the footnotes.
Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
200.
Intangible assets a. should be reported under the heading Property, Plant, and Equipment. b. are not reported on the balance sheet because they lack physical substance. c. should be reported as Current Assets on the balance sheet. d. should be reported as a separate classification on the balance sheet.
Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
.
Reporting and Analyzing Long-Lived Assets
201.
9-43
A company has the following assets: Buildings and Equipment, less accumulated depreciation of $5,000,000 $25,000,000 Copyrights 2,400,000 Patents 10,000,000 Land 12,000,000 The total amount reported under Property, Plant, and Equipment would be a. $49,400,000. b. $37,000,000. c. $47,000,000. d. $39,400,000.
Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $25,000,000 + $12,000,000 = $37,000,000 (Bldg. & Equip. + Land)
202.
Plant assets are ordinarily presented in the balance sheet a. at current market values. b. at replacement costs. c. at cost less accumulated depreciation. d. in a separate section along with intangible assets.
Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
203.
A company has the following assets: Buildings and Equipment, less accumulated depreciation of $4,000,000 $23,000,000 Copyrights 1,500,000 Patents 3,000,000 Land 5,000,000 The total amount reported under Property, Plant, and Equipment would be a. $32,500,000. b. $27,000,000. c. $29,500,000. d. $28,000,000.
Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $23,000,000 + $5,000,000 = $28,000,000 (Bldg. & Equip. + Land)
*204. A company purchased office equipment for $30,000 and estimated a salvage value of $6,000 at the end of its 8-year useful life. The constant percentage to be applied against book value each year if the double-declining-balance method is used is a. 8%. b. 12.5%. c. 25.0%. d. 2.5%. Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (100% 8) 2 = 25% (100% ÷ use. life) × 2
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
*205. A company purchased factory equipment for $450,000. It is estimated that the equipment will have a $45,000 salvage value at the end of its estimated 5-year useful life. If the company uses the double-declining-balance method of depreciation, the amount of annual depreciation recorded for the second year after purchase would be a. $180,000. b. $108,000. c. $162,000. d. $97,200. Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($450,000 − $0) .40 = $180,000; ($450,000 − $180,000) .40 = $108,000 (Cost – AD) × (1/5 × 2) = end. AD; (Cost – end. A/D) × (1/5 × 2)
*206. A plant asset cost $192,000 and is estimated to have a $24,000 salvage value at the end of its 8-year useful life. The annual depreciation expense recorded for the third year using the double-declining-balance method would be a. $16,080. b. $27,000. c. $23,625. d. $18,375. Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($192,000 − $0) .25 = $48,000; ($192,000 − $48,000) .25 = $36,000; ($192,000 − $84,000) .25 = $27,000 (Cost – AD) × (1/8 × 2) = end. AD; (Cost – end. A/D) × (1/8 × 2)
*207. On January 1, a machine with a useful life of five years and a residual value of $80,000 was purchased for $240,000. What is the depreciation expense for year 2 under the double-declining-balance method of depreciation? a. $57,600. b. $96,000. c. $76,800. d. $46,080. Ans: A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($240,000 − $0) .40 = $96,000; ($240,000 − $96,000) .40 = $57,600 (Cost – AD) × (1/5 × 2) = end. AD; (Cost – end. A/D) × (1/5 × 2)
*208. A factory machine was purchased for $140,000 on January 1, 2017. It was estimated that it would have a $28,000 salvage value at the end of its 5-year useful life. It was also estimated that the machine would be run 40,000 hours in the 5 years. If the actual number of machine hours ran in 2017 was 4,000 hours and the company uses the units-of-activity method of depreciation, the amount of depreciation expense for 2017 would be a. $14,000. b. $22,400. c. $28,000. d. $11,200. Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($140,000 − $28,000) 40,000 = $2.80, $2.80 4,000 = $11,200. (Cost – sal. val) ÷ 40,000 hrs = dep. /hr.; dep./hr.
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Reporting and Analyzing Long-Lived Assets
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*209. A machine with a cost of $640,000 has an estimated salvage value of $40,000 and an estimated useful life of 5 years or 15,000 hours. It is to be depreciated using the units-ofactivity method of depreciation. What is the amount of depreciation for the second full year, during which the machine was used 5,000 hours? a. $200,000. b. $120,000. c. $173,333. d. $173,333. Ans: A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($640,000 − $40,000) 15,000 = $40; $40 5,000 = $200,000 (Cost – sal. val) ÷ 15,000 hrs = dep. /hr.; dep./hr.
*210. Equipment with a cost of $640,000 has an estimated salvage value of $40,000 and an estimated life of 4 years or 15,000 hours. It is to be depreciated using the units-of-activity method. What is the amount of depreciation for the first full year, during which the equipment was used 3,300 hours? a. $160,000. b. $180,800. c. $132,000. d. $150,000. Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($640,000 − $40,000) 15,000 = $40; $40 3,300 = $132,000 (Cost – sal. val) ÷ 15,000 hrs = dep. /hr.; dep./hr. × 3,300 hrs.
*211. Equipment with a cost of $450,000 has an estimated salvage value of $30,000 and an estimated life of 4 years or 10,000 hours. It is to be depreciated by the units-of-activity method. What is the amount of depreciation for the first full year, during which the equipment was used 2,700 hours? a. $112,500. b. $105,000. c. $113,400. d. $108,750. Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($450,000 − $30,000) 10,000 = $42; $42 2,700 = $113,400 (Cost – sal. val) ÷ 10,000 hrs = dep. /hr.; dep./hr. × 2,700 hrs.
*212. On October 1, 2017, Hess Company places a new asset into service. The cost of the asset is $120,000 with an estimated 5-year life and $30,000 salvage value at the end of its useful life. What is the book value of the plant asset on the December 31, 2017, balance sheet assuming that Hess Company uses the double-declining-balance method of depreciation? a. $78,000. b. $90,000. c. $108,000. d. $114,000. Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($120,000 − $0) .40] 3/12 = $12,000; $120,000 − $12,000 = $108,000 [(Cost − A/D) (1/5 × 2)] × 3/12 = end. A/D; (Cost − end. A/D)
.
9-46
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
*213. Vickers Company uses the units-of-activity method in computing depreciation. A new plant asset is purchased for $36,000 that will produce an estimated 110,000 units over its useful life. Estimated salvage value at the end of its useful life is $3,000. What is the depreciation cost per unit? a. $3.00. b. $3.27. c. $0.30. d. $0.33. Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($36,000 − $3,000) 110,000 = $0.30 (Cost – sal. val) ÷ est. tot. units)
*214. Units-of-activity is an appropriate depreciation method to use when a. it is impossible to determine the productivity of the asset. b. the asset's use will be constant over its useful life. c. the productivity of the asset varies significantly from one period to another. d. the company is a manufacturing company. Ans: C, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
*215. The calculation of depreciation using the declining-balance method a. ignores salvage value in determining the amount to which a constant rate is applied. b. multiplies a constant percentage times the previous year's depreciation expense. c. yields an increasing depreciation expense each period. d. multiplies a declining percentage times a constant book value. Ans: A, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
*216. Foyle Company purchased a new van for floral deliveries on January 1, 2017. The van cost $56,000 with an estimated life of 5 years and $14,000 salvage value at the end of its useful life. The double-declining-balance method of depreciation will be used. What is the depreciation expense for 2017? a. $11,200. b. $8,400. c. $16,800. d. $22,400. Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($56,000 − $0) .40 = $22,400 (Cost –A/D) (1/5 × 2)
*217. Foyle Company purchased a new van for floral deliveries on January 1, 2016. The van cost $56,000 with an estimated life of 5 years and $14,000 salvage value at the end of its useful life. The double-declining-balance method of depreciation will be used. What is the balance of the Accumulated Depreciation account at the end of 2017? a. $8,960. b. $26,880. c. $35,840. d. $13,440. Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($56,000 − $0) .40 = $22,400; [($56,000 − $22,400) .40] + $22,400 = $35,840 (Cost –A/D) (1/5 × 2) = end. A/D; [(Cost – end. A/D) ×.40] + 2016. dep.
.
Reporting and Analyzing Long-Lived Assets
9-47
*218. Conley Company purchased equipment for $120,000 on January 1, 2015, and will use the double-declining-balance method of depreciation. It is estimated that the equipment will have a 5-year life and a $6,000 salvage value at the end of its useful life. The amount of depreciation expense recognized in the year 2017 will be a. $17,280. b. $27,360. c. $28,800. d. $16,416 Ans: A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($120,000 − $0) .40 = $48,000; ($120,000 − $48,000) .40 = $28,800; ($120,000 − $76,800) .40 = $17,280 (Cost –A/D) (1/5 × 2) = end. A/D; [(Cost – end. A/D) ×.40]
*219. Interline Trucking purchased a tractor trailer for $112,000. Interline uses the units-ofactivity method for depreciating its trucks and expects to drive the truck 1,000,000 miles over its 12-year useful life. Salvage value is estimated to be $16,000. If the truck is driven 80,000 miles in its first year, how much depreciation expense should Interline record? a. $7,110. b. $8,960. c. $7,680. d. $8,296. Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($112,000 − $16,000) 1,000,000 = $.096 80,000 = $7,680 [(Cost – sal. val.) ÷ 1,000,000 miles] × 80,000 miles
*220. Danford Trucking purchased a tractor trailer for $147,000. Danford uses the units-ofactivity method for depreciating its trucks and expects to drive the truck 1,000,000 miles over its 12-year useful life. Salvage value is estimated to be $21,000. If the truck is driven 80,000 miles in its first year, how much depreciation expense should Danford record? a. $9,333. b. $11,760. c. $10,080. d. $10,888. Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($147,000 − $21,000) 1,000,000] 80,000 = $10,080 [(Cost – sal. val.) ÷ 1,000,000 miles] × 80,000 miles
*221. All of the following statements are true regarding the declining-balance method of depreciation except a. the declining-balance method ignores salvage value when calculating depreciation. b. the declining-balance method produces lower depreciation expense in the early years as opposed to the later years. c. the declining-balance method is compatible with the matching principle. d. the declining-balance method is appropriate when assets lose their usefulness rapidly. Ans: B, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
9-48
Answers to Multiple Choice Questions 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71.
d a c b b d c a b b c c a b d a d d c b b d d b d d
72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97.
b b b a c d c c c b d a c c c a a d d b a d b d d c
98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123.
b a d a c c a b a c c b a d d b c c b c c a d a b a
.
124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149.
c c d d b c b c a c a a d c d b a c b b d a c c a b
150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175.
a b a c d b d d c b c c d d a c c a b a c d c b c d
176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. 194. 195. 196. 197. 198. 199. 200. 201.
d c b d d b a b c a a c b c d b a c d c b d a d d b
202. 203. *204. *205. *206. *207. *208. *209. *210. *211. *212. *213. *214. *215. *216. *217. *218. *219. *220. *221.
c d c b b a d a c c c c c a d c a c c b
Reporting and Analyzing Long-Lived Assets
9-49
BRIEF EXERCISES Be. 222 Indicate whether each of the following expenditures should be classified as land (L), land improvements (LI), buildings (B), equipment (E), or none of these (X). _____ 1. Parking lots _____ 2. Electricity used by a machine _____ 3. Excavation costs _____ 4. Interest on building construction loan _____ 5. Cost of trial runs for machinery _____ 6. Drainage costs _____ 7. Cost to install a machine _____ 8. Fences _____ 9. Unpaid (past) property taxes assumed _____10. Cost of tearing down a building when land and a building on it are purchased Ans: N/A, LO: 1, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 222 (5 min.) 1. 2. 3. 4. 5.
LI X B B E
6. 7. 8. 9. 10.
L E LI L L
Be. 223 Indicate whether each of the following expenditures should be classified as land (L), land improvements (LI), buildings (B), equipment (E), or none of these (X). _____ 1. Computer installation cost _____ 2. Driveway cost _____ 3. Architect’s fee _____ 4. Surveying costs _____ 5. Grading costs _____ 6. Cost of lighting for parking lot _____ 7. Insurance while in transit and freight on computer purchased _____ 8. Material and labor costs incurred to construct factory _____ 9. Cost of tearing down a warehouse on land just purchased _____10. Utility cost during first year Ans: N/A, LO: 1, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
9-50
Solution 223 (5 min.) 1. 2. 3. 4. 5.
E LI B L L
6. 7. 8. 9. 10.
LI E B L X
Be. 224 Dobler Company purchased factory equipment with an invoice price of $78,000. Other costs incurred were freight costs, $1,300; installation wiring and foundation, $2,200; material and labor costs in testing equipment, $700; oil lubricants and supplies to be used with equipment, $500; fire insurance policy covering equipment, $1,500. The equipment is estimated to have a $5,000 salvage value at the end of its 8-year useful service life. Instructions (a) Compute the acquisition cost of the equipment. Clearly identify each element of cost. (b) If the straight-line method of depreciation was used, the annual rate applied to the depreciable cost would be __________. Ans: N/A, LO: 1, 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 224 (5-8 min.) (a)
Invoice cost Freight costs Installation wiring and foundation Material and labor costs in testing Acquisition cost
$78,000 1,300 2,200 700 $82,200
(b)
If the straight-line method of depreciation was used, the annual rate applied to the depreciable cost would be 12.5% (100% ÷ 8 years).
Be. 225 Revson Corporation purchased land adjacent to its plant to improve access for trucks making deliveries. Expenditures incurred in purchasing the land were as follows: purchase price, $55,000; broker’s fees, $6,000; title search and other fees, $5,000; demolition of an old building on the property, $5,700; grading, $1,200; digging foundation for the road, $3,000; laying and paving driveway, $25,000; lighting $7,500; signs, $1,500. List the items and amounts that should be included in the Land account. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 225 (5 min.) Purchase price Broker’s fees Title search and other fees Demolition of old building Grading Land acquisition cost
$55,000 6,000 5,000 5,700 1,200 $72,900
.
Reporting and Analyzing Long-Lived Assets
9-51
Be. 226 Equipment was acquired on January 1, 2013, at a cost of $75,000. The equipment was originally estimated to have a salvage value of $5,000 and an estimated life of 10 years. Depreciation has been recorded through December 31, 2016, using the straight-line method. On January 1, 2017, the estimated salvage value was revised to $7,000 and the useful life was revised to a total of 8 years. Instructions Determine the depreciation expense for 2017. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 226 (5 min.) Calculate the book balue at the time of the revision: $75,000 - $5,000 10 years
= $7,000 annual depreciation expense
4 years have been depreciated: $7,000 4 = $28,000 Book value at the time of the revision: $75,000 – $28,000 = $47,000 (Cost – (ann.dep. × 4 yrs.)) Calculate the revised annual depreciation: $47,000 - $7,000 4 years remaining
= $10,000 revised annual depreciation (Book val. –sal. val.) ÷ (8 yrs. – 4 yrs.)
The depreciation expense for 2017 is $10,000. Be. 227 Equipment was acquired on January 1, 2014, at a cost of $170,000. The equipment was originally estimated to have a salvage value of $10,000 and an estimated life of 10 years. Depreciation has been recorded through December 31, 2016, using the straight-line method. On January 1, 2017, the estimated salvage value was revised to $16,000 and the useful life was revised to a total of 8 years. Instructions Determine the depreciation expense for 2017. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 227 (5 min.) Calculate the book value at the time of the revision: $170,000 - $10,000 10 years
= $16,000 annual depreciation expense
3 years have been depreciated: $16,000 3 = $48,000 Book value at the time of the revision: $170,000 – $48,000 = $122,000 (Cost – (ann.dep. × 3 yrs.)) .
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
9-52
Solution 227 (Cont.) Calculate the revised annual depreciation: $122,000 - $16,000 5 years remaining
= $21,200 revised annual depreciation Book val. –sal. val.) ÷ (8 yrs. – 3 yrs.)
The depreciation expense for 2017 is $21,200. Be. 228 Gunselman Company purchased a machine on January 1, 2017. In addition to the purchase price paid, the following additional costs were incurred: (a) sales tax paid on the purchase price, (b) transportation and insurance costs while the machinery was in transit from the seller, (c) personnel training costs for initial operation of the machinery, (d) installation costs necessary to secure the machinery to the building flooring, (e) major overhaul to extend the life of the machinery, (f) lubrication of the machinery gearing before the machinery was placed into service, (g) lubrication of the machinery gearing after the machinery was placed into service, and (h) annual city operating license. Instructions Indicate whether the items (a) through (h) are capital or revenue expenditures in the spaces provided: C = Capital, R = Revenue. (a)_____________
(b)______________
(c)______________
(d)______________
(e)_____________
(f)______________
(g)______________
(h)______________
Ans: N/A, LO: 1, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 228 (5 min.) (a) Capital
(b) Capital
(c) Revenue
(d) Capital
(e) Capital
(f)
(g) Revenue
(h) Revenue
Capital
Be. 229 Identify the following expenditures as capital expenditures or revenue expenditures. (a) Replacement of worn out gears on factory machinery. (b) Construction of a new wing on an office building. (c) Painting the exterior of a building. (d) Oil change on a company truck. (e) Replacing an old computer chip with a faster chip, which increases productive capacity. No extension of useful life expected. (f) Overhaul of a truck motor. One year extension in useful life is expected. (g) Purchased a wastebasket at a cost of $10. (h) Painting and lettering of a used truck upon acquisition of the truck. Ans: N/A, LO: 1, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
.
Reporting and Analyzing Long-Lived Assets
9-53
Solution 229 (5 min.) (a) (b) (c) (d)
Revenue Capital Revenue Revenue
(e) (f) (g) (h)
Capital Capital Revenue Capital
Be. 230 For each item listed below, enter a code letter in the blank space to indicate the allocation terminology for the item. Use the following codes for your answer: A—Amortization
D—Depreciation
N—None of these
____ 1. Copyrights
_____
6. Research and Development Costs
____ 2. Land
_____
7. Equipment
____ 3. Buildings
_____
8. Franchises
____ 4. Patents
_____
9. Annual licensing fees
____ 5. Trademarks
_____ 10. Land Improvements
Ans: N/A, LO: 2, 4, Bloom: K, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 230 (10 min.) 1. 2. 3. 4. 5.
A N D A A
6. 7. 8. 9. 10.
N D A N D
Be. 231 Using the following data for Hayes, Inc., compute its asset turnover and the return on assets ratio. Hayes, Inc. Net Income 2017 $ 123,000 Total Assets 12/31/17 2,243,000 Total Assets 12/31/16 1,880,000 Net Sales 2017 2,135,000 Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 231 (5 min.) Asset Turnover:
Net Sales Avg. Total Assets*
Return on Assets:
Net Income Avg. Total Assets*
* (End tot. assets + beg. tot. assets) ÷ 2
.
=
=
$2,135,000 ($2,243,000 + $1,880,000) ÷ 2
= 1.04 times
$123,000 ($2,243,000 + $1,880,000) ÷ 2
= 6.0%
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
9-54 Be. 232
Indicate in the blank spaces below, the section of the balance sheet where the following items are reported. Use the following code to identify your answer: PPE I O N/A
Property, Plant, and Equipment Intangibles Other Not on the balance sheet
_____ 1.
Goodwill
_____ 6. Research and Development Costs
_____ 2.
Land Improvements
_____ 7. Land
_____ 3.
Buildings
_____ 8. Franchises
_____ 4.
Accumulated Depreciation
_____ 9. Licenses
_____ 5.
Trademarks
_____ 10. Equipment
Ans: N/A, LO: 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 232 (5 min.) 1. 2. 3. 4. 5.
I PPE PPE PPE I
Goodwill Land Improvements Buildings Accumulated Depreciation Trademarks
6. 7. 8. 9. 10.
N/A PPE I I PPE
Research and Development Costs Land Franchises Licenses Equipment
*Be 233 Kinney Company purchased a truck for $66,000. The company expected the truck to last four years or 100,000 miles, with an estimated residual value of $8,000 at the end of that time. During the second year the truck was driven 27,000 miles. Compute the depreciation for the second year under each of the methods below and place your answers in the blanks provided. Units-of-activity
$
Double-declining-balance
$
Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
*Solution 233 (5-8 min.) Units-of-activity [($66,000 – $8,000) ÷ 100,000] × 27,000 = $15,660) [(Cost – sal. val.) ÷ est. tot. miles] × 2nd. yr. miles
$_
15,660
Double-declining-balance $_ 16,500 (year 1— [$66,000 × (1 ÷ 4 × 2)] = $33,000) (Cost × (1/4 × 2) (year 2— [($66,000 – $33,000) × (1 ÷ 4) × 2)] = $16,500) (Cost –acc. dep.) (Cost × (1/4 × 2))
.
Reporting and Analyzing Long-Lived Assets
9-55
EXERCISES Ex. 234 For each entry below make a correcting entry if necessary. If the entry given is correct, then state "No entry required." (a)
The $70 cost of repairing a printer was charged to Equipment.
(b)
The $5,500 cost of a major engine overhaul was debited to Maintenance and Repairs Expense. The overhaul is expected to increase the operating efficiency of the truck.
(c)
The $6,000 closing costs associated with the acquisition of land were debited to Operating Expenses.
(d)
A $300 charge for transportation expenses on new equipment purchased was debited to Freight-In.
Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 234 (10 min.) (a)
(b)
(c)
(d)
Maintenance and Repairs Expense ............................................. Equipment ..........................................................................
70
Equipment ................................................................................... Maintenance and Repairs Expense ....................................
5,500
Land ........................................................................................... Operating Expenses ...........................................................
6,000
Equipment ................................................................................... Freight-In ............................................................................
300
70
5,500
6,000
300
Ex. 235 Kendrick Company was organized on January 1. During the first year of operations, the following expenditures and receipts were recorded in random order. Debits 1. Cost of real estate purchased as a plant site (land and building) 2. Accrued real estate taxes paid at the time of the purchase of the real estate 3. Cost of demolishing building to make land suitable for construction of a new building 4. Architect's fees on building plans 5. Excavation costs for new building 6. Cost of filling and grading the land 7. Insurance and taxes during construction of building 8. Cost of repairs caused by a small fire shortly after completion of building 9. Interest paid during the year, of which $45,000 pertains to the construction period 10. Full payment to building contractor 11. Cost of parking lots and driveways 12. Real estate taxes paid for the current year on the land Total Debits
.
$ 130,000 4,000 10,000 14,000 30,000 5,000 6,000 7,000 74,000 955,000 36,000 4,000 $1,275,000
9-56 Ex. 235
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
(Cont.)
Credits 13. Proceeds from salvage of demolished building Total Credits
$3,500 $3,500
Instructions Analyze the foregoing transactions using the following tabular arrangement. Insert the number of each transaction in the Item space and insert the amounts in the appropriate columns. Item
Land
Buildings
Other
Account Title
Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 235 (15 min.) Item 1 2 3 4 5 6 7 8 9 10 11 12 13 Totals
Land $130,000 4,000 10,000
Buildings
$
Other
Account Title
$ 7,000
Maintenance and Repairs Expense Interest Expense
14,000 30,000
5,000 6,000
45,000 955,000
(3,500) $145,500
__ $1,050,000
29,000 36,000 4,000 _____ $76,000
Land Improvements Property Tax Expense
Ex. 236 On March 1, 2017, Geoffrey Company acquired real estate, on which it planned to construct a small office building, by paying $85,000 in cash. An old warehouse on the property was demolished at a cost of $8,200; the salvaged materials were sold for $2,200. Additional expenditures before construction began included $1,500 attorney's fee for work concerning the land purchase, $5,500 real estate broker's fee, $9,100 architect's fee, and $16,000 to put in driveways and a parking lot. Instructions (a) Determine the amount to be reported as the cost of the land. (b) For each cost not used in part (a), indicate the account to be debited. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Reporting and Analyzing Long-Lived Assets
9-57
Solution 236 (5 min.) (a)
(b)
Cost of land Cash paid ............................................................................ $85,000 Net cost of removing warehouse ($8,200 – $2,200) ............ 6,000 Attorney's fee ...................................................................... 1,500 Real estate broker's fee ....................................................... 5,500 Total ............................................................................. $98,000 (pur. price. + demo cost –salv. + attor. fee + brok. fee) The architect's fee ($9,100) should be debited to the building account. The cost of the driveways and parking lot ($16,000) should be debited to Land Improvements.
Ex. 237 Mark’s Repair Service uses the straight-line method of depreciation. The company's fiscal year end is December 31. The following transactions and events occurred during the first three years. 2016
July
1
Nov. 3 Dec. 31
Purchased equipment from the Equipment Center for $5,500 cash plus sales tax of $305, and shipping costs of $250. Incurred ordinary repairs on computer of $240. Recorded 2016 depreciation on the basis of a four-year life and estimated salvage value of $455
2017
Dec. 31
Recorded 2017 depreciation.
2018
Jan.
Paid $1,800 for a major upgrade of the equipment. This expenditure is expected to increase the operating efficiency and capacity of the equipment.
1
Instructions Prepare the necessary entries. (Show computations.) Ans: N/A, LO: 1, 2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 237 (15 min.) 2016
July Nov.
1 3
Dec. 31
2017 2018
Dec. 31 Jan.
1
Equipment ............................................................... Cash ...............................................................
6,055
Maintenance and Repairs Expense ......................... Cash ...............................................................
240
Depreciation Expense ............................................. Accumulated Depreciation .............................. [($6,055 – $455) ÷ 4 × 1/2] (pur. price. + sal. cost + ship. − salv.) ÷ 4) × 1/2 Depreciation Expense ............................................. Accumulated Depreciation ($5,600 ÷ 4) ..........
700
Equipment ............................................................... Cash ...............................................................
.
6,055 240 700
1,400 1,400 1,800 1,800
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
9-58 Ex. 238
Mike Geary, the controller of Shellhammer Company, has reviewed the expected useful lives and salvage values of selected depreciable assets at the beginning of 2017. Here are his findings: Useful Life Accumulated (in Years) Salvage Value Date Depreciation, Type of Acquired Jan. 1, 2017 Cost Old Proposed Old Proposed Asset Building Jan. 1, 2009 $2,700,000 $516,000 40 50 $120,000 $84,000 Warehouse Jan. 1, 2012 240,000 46,000 25 20 10,000 8,000 All assets are depreciated by the straight-line method. Shellhammer Company uses a calendar year in preparing annual financial statements. After discussion, management has agreed to accept Mike's proposed changes. (The "Proposed" useful life is total life, not remaining life.) Instructions (a) Compute the revised annual depreciation on each asset in 2017. (Show computations.) (b) Prepare the entry (or entries) to record depreciation on the building in 2017. Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 238 (10 min.) (a) Cost ................................................................... —Accumulated depreciation .............................. Book value, 1/1/17 ............................................. Less: Salvage value .......................................... Depreciable cost (1) ........................................... Revised remaining useful life in years (2) *(50 – 8) **(20 – 5) Revised annual depreciation (1) (2) (Dep. Cost ÷ (Prop. use. life – yrs. used) (b)
Dec. 31
Depreciation Expense ................................ Accumulated Depreciation — Buildings ........................................
Type of Asset Building Warehouse $2,700,000 $240,000 – 516,000 – 46,000 $2,184,000 $194,000 84,000 8,000 $2,100,000 $186,000 42*
15**
$50,000
$12,400
50,000 50,000
Ex. 239 On January 1, 2014, Keller Company purchased and installed a telephone system at a cost of $20,000. The equipment was expected to last five years with a salvage value of $3,000. On January 1, 2015, more telephone equipment was purchased to tie-in with the current system for $10,000. The new equipment is expected to have a useful life of four years and no salvage value. Through an error, the new equipment was debited to Utilities Expense. Keller Company uses the straight-line method of depreciation.
.
Reporting and Analyzing Long-Lived Assets
9-59
Instructions Prepare a schedule showing the effects of the error on Utilities Expense, Depreciation Expense, and Net Income for each year and in total beginning in 2015 through the useful life of the new equipment. Utilities Expense Depreciation Expense Net Income Overstated Overstated Overstated Year (Understated) (Understated) (Understated) —————————————————————————————————————————— 2015 2016 2017 2018 Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 239 (15 min.) Utilities Expense Depreciation Expense Net Income Overstated Overstated Overstated Year (Understated) (Understated) (Understated) —————————————————————————————————————————— 2015 $10,000 $(2,500)* $(7,500) 2016 (2,500) 2,500 2017 (2,500) 2,500 2018 (2,500) 2,500 Total $10,000 $(10,000) -0*(2015 equip. cost ÷ 4 yrs.) Ex. 240 (a)
Faster Company purchased equipment in 2010 for $104,000 and estimated an $8,000 salvage value at the end of the equipment's 10-year useful life. At December 31, 2016, there was $67,200 in the Accumulated Depreciation account for this equipment using the straightline method of depreciation. On March 31, 2017, the equipment was sold for $21,000. Prepare the appropriate journal entries to remove the equipment from the books of Faster Company on March 31, 2017.
(b)
Lewis Company sold equipment for $11,000. The equipment originally cost $25,000 in 2014 and $6,000 was spent on a major overhaul in 2017 (charged to the Equipment account). Accumulated Depreciation on the equipment to the date of disposal was $20,000. Prepare the appropriate journal entry to record the disposition of the equipment.
(c)
Selby Company sold equipment that had a book value of $13,500 for $15,000. The equipment originally cost $45,000 and it is estimated that it would cost $57,000 to replace the equipment. Prepare the appropriate journal entry to record the disposition of the equipment.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
9-60
Solution 240 (15 min.) (a)
(b)
(c)
Depreciation Expense.................................................................. Accumulated Depreciation—Equipment ............................. (To record depreciation expense for the first 3 months of 2017. $9,600 × 1/4 = $2,400) [(Cost – sal. val.) ÷ 10 yrs] × 3/12 Cash ........................................................................................... Loss on Disposal of Plant Assets ................................................. Accumulated Depreciation—Equipment ($67,200 + $2,400) ....... Equipment .......................................................................... (To record sale of equipment at a loss) *((Cost – acc. depr.) – sell price)
2,400 2,400
21,000 13,400* 69,600 104,000
Cash ........................................................................................... Accumulated Depreciation—Equipment....................................... Equipment........................................................................... (To record disposition on equipment at book value)
11,000 20,000
Cash ........................................................................................... Accumulated Depreciation—Equipment....................................... Equipment........................................................................... Gain on Disposal of Plant Assets ........................................ (To record disposal of office equipment at a gain) *((Sell. price – (Cost–acc. depr.)
15,000 31,500
31,000
45,000 1,500
Ex. 241 Prepare the journal entries to record the following transactions for Reese Company, which has a calendar year end and uses the straight-line method of depreciation. (a)
On September 30, 2017, the company sold old equipment for $46,000. The equipment was purchased on January 1, 2015, for $96,000 and was estimated to have a $16,000 salvage value at the end of its 5-year life. Depreciation on the equipment has been recorded through December 31, 2016.
(b)
On June 30, 2017, the company sold old equipment for $24,000. The equipment originally cost $36,000 and had accumulated depreciation to the date of disposal of $15,000.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Reporting and Analyzing Long-Lived Assets
9-61
Solution 241 (15 min.) (a) September 30, 2017 Depreciation Expense ................................................................... Accumulated Depreciation—Equipment ................................ (To record depreciation expense for the first 9 months of 2014. $80,000 ÷ 5 years = $16,000 × 9/12 = $9,000) [(Cost – sal. val.) ÷ 5 yrs] × 9/12 Cash .................................................................................................. Accumulated Depreciation—Equipment ($32,000 + $12,000) ........... Loss on Disposal of Plant Assets ($52,000 – $46,000) ...................... Equipment ............................................................................ (To record sale of delivery equipment at a loss) *((Cost – acc. dep.) – sell price) (b) June 30, 2017 Cash .............................................................................................. Accumulated Depreciation—Equipment ........................................ Equipment ............................................................................ Gain on Disposal of Plant Assets ($24,000 – $21,000) ......... (To record sale of office equipment at a gain) *(sell. price – (Cost – acc. dep.)
12,000 12,000
46,000 44,000 6,000 96,000
24,000 15,000 36,000 3,000
Ex. 242 a. A machine that cost $36,000 and on which $26,500 of depreciation had been recorded was disposed of for $10,200. Indicate whether a gain or loss should be recorded, and for what amount. b. Assume that the machine of Part a, above, was instead discarded. Indicate whether a gain or loss should be recorded, and for what amount. c. Assume that the machine of Part a, above, was instead sold for $9,400. Indicate whether a gain or loss should be recorded, and for what amount. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 242 (12 min.) a. $700 gain: ($36,000 – $26,500 = $9,500 book value; $10,200 – $9,500 = $700 gain) *(sell. price – (Cost – acc. dep.) *((Cost – acc. dep.) – sell price) b. $9,500 loss: ($36,000 – $26,500 = $9,500 book value, all loss) c. $100 loss: ($36,000 – $26,500 = $9,500 book value; $9,400 – $9,500 = $100 loss)
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
9-62 Ex. 243
Presented below are selected transactions for the Tinker Company for 2018. Jan.
1
Retired a piece of equipment that was purchased on January 1, 2008. The equipment cost $75,000 on that date, and had a useful life of 10 years with no salvage value.
April 30
Sold equipment for $38,000 that was purchased on January 1, 2015. The equipment cost $105,000, and had a useful life of 5 years with no salvage value.
Dec. 31
Discarded equipment that was purchased on June 30, 2014. The equipment cost $42,000 and was depreciated on a 5-year useful life with a salvage value of $2,000.
Instructions Journalize all entries required as a result of the above transactions. Tinker Company uses the straight-line method of depreciation and has recorded depreciation through December 31, 2017. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 243 (15 min.) Jan.
1
April 30
Dec. 31
Accumulated Depreciation—Equipment .............................. Equipment ..................................................................
75,000
Depreciation Expense ......................................................... Accumulated Depreciation—Equipment ..................... ($105,000 × 1/5 × 4/12 = $7,000) [(Cost – $0) ÷ 5] × 4/12
7,000
Cash ................................................................................... Accumulated Depreciation—Equipment ($21,000 × 3 1/3) .. Equipment .................................................................. Gain on Disposal of Plant Assets ($38,000 – $35,000) *(sell. price – (Cost – acc. dep.)
38,000 70,000
Depreciation Expense ......................................................... Accumulated Depreciation—Equipment .....................
8,000
Accumulated Depreciation—Equipment ($8,000 × 4 1/2) ... Loss on Disposal of Plant Assets ........................................ Equipment ................................................................. *((Cost – acc. dep.) – sell price)
36,000 6,000
Ex. 244 Vineyard Company sold the following two pieces of equipment in 2017: Equipment A Equipment B Cost $116,000 $63,000 Purchase date 7/1/13 1/1/14 Useful life 8 years 5 years Salvage value $4,000 $3,000 Depreciation method Straight-line Straight-line Date sold 7/1/17 9/1/17 Sales price $49,000 $20,000
.
75,000 7,000
105,000 3,000
8,000
42,000
Reporting and Analyzing Long-Lived Assets
9-63
Instructions Journalize all entries required to update depreciation and record the sales of the two assets in 2017. The company has recorded depreciation on the equipment through December 31, 2016. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 244 (20 min.) Equipment A July 1 Depreciation Expense ............................................................. Accumulated Depreciation—Equipment A ....................... ($116,000 – $4,000) ÷ 8 years × 6/12 = $7,000 [(Cost – acc. dep.) ÷ 8 yrs.] × 6/12 Cash ....................................................................................... Accumulated Depreciation—Equipment A* ............................. Loss on Disposal of Plant Assets ($60,000 – $49,000) ........... Equipment A .................................................................... *((Cost – acc. dep.) – sell price. *2013 ($116,000 – $4,000) ÷ 8 years 6/12 = $7,000 14 ($116,000 – $4,000) ÷ 8 years = $14,000 15 $14,000 16 $14,000 2017 ($116,000 – $4,000) ÷ 8 years 6/12 = $7,000 Total accumulated depreciation at date of disposal = $56,000 Equipment B Sept. 1 Depreciation Expense ............................................................. Accumulated Depreciation—Equipment B ....................... ($63,000 – $3,000) ÷ 5 years 8/12 = $8,000 [(Cost – sal. val.) ÷ 5 yrs.] × 8/12 Cash ..................................................................................... Accumulated Depreciation—Equipment B** ............................ Equipment B .................................................................... Gain on Disposal of Plant Assets ($20,000 – $19,000) ... *(sell. price – (Cost – acc. dep.) **2014 ($63,000 – $3,000) ÷ 5 years = $12,000 15 $12,000 16 $12,000 2017 ($63,000 – $3,000) ÷ 5 years 8/12 = $8,000 Total accumulated depreciation at date of disposal = $44,000
7,000 7,000
49,000 56,000 11,000* 116,000
8,000 8,000
20,000 44,000 63,000 1,000*
Ex. 245 Phill Co. has equipment that cost $50,000 and has been depreciated $30,000. Instructions Record entries for the disposal under the following assumptions. (a) It was scrapped as having no value. (b) It was sold for $23,000. (c) It was sold for $18,000. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
9-64
Solution 245 (10 min.) (a)
(b)
(c)
Accumulated Depreciation—Equipment............................... Loss on Disposal of Plant Assets ......................................... Equipment..................................................................
30,000 20,000
Cash .................................................................................... Accumulated Depreciation—Equipment............................... Gain on Disposal of Plant Assets ................................ Equipment.................................................................. *(sell. price – (Cost – acc. dep.)
23,000 30,000
Cash .................................................................................... Accumulated Depreciation—Equipment............................... Loss on Disposal of Plant Assets .................. Equipment.................................................................. *((Cost – acc. dep.) – sell. Price)
18,000 30,000 2,000
50,000
3,000 50,000
50,000
Ex. 246 Here are selected 2017 transactions of Howe Corporation. Jan.
1
Retired a piece of equipment that was purchased on January 1, 2007. The equipment cost $55,000 and had a useful life of 10 years with no salvage value.
June 30
Sold equipment that was purchased on January 1, 2015. The equipment cost $78,000 and had a useful life of 3 years with no salvage value. The equipment was sold for $9,000 cash.
Dec. 31
Sold equipment for $12,500 cash. The equipment cost $43,000 when it was purchased on January 1, 2014, and was depreciated based on a 5-year useful life with a $3,000 salvage value.
Instructions Journalize all entries required on the above dates, including entries to update depreciation on assets disposed of, where applicable. Howe Corporation uses straight-line depreciation. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 246 (12 min.) Jan. 1 June 30
Accumulated Depreciation—Equipment .......................... Equipment ...............................................................
55,000
Depreciation Expense ................................................... Accum. Depreciation—Equipment ($78,000 1/3 6/12) ..................................... [(Cost – $0) ÷ 3yrs. ] × 6/12
13,000
Cash................................................................................ Accumulated Depreciation—Equipment .......................... ($78,000 2/3 = $52,000; $52,000 + $13,000) Loss on Disposal of Plant Assets [$9,000 – ($78,000 – $65,000)] Equipment .......................................................... *((Cost – acc. dep.) – sell. Price)
9,000 65,000
.
55,000
13,000
4,000* 78,000
Reporting and Analyzing Long-Lived Assets
9-65
Solution 246 (Cont.) Dec. 31
31
Depreciation Expense ...................................................... Accumulated. Depreciation—Equipment [($43,000 – $3,000) 1/5) ..................................
8,000
Cash ............................................................................. Accumulated Depreciation—Equipment [($43,000 – 3,000) 4/5] ......................................... Gain on Disposal of Plant Assets ...................... Equipment ......................................................... *(sell. price – (Cost – acc. dep.)
12,500
8,000
32,000 1,500 43,000
Ex. 247 During the current year Knight Company incurred several expenditures. Briefly explain whether the expenditures listed below should be recorded as an operating expense or as an intangible asset. If you view the expenditure as an intangible asset, indicate the number of years over which the asset should be amortized. Explain your answer. (a)
Spent $30,000 in legal costs in a patent defense suit. The patent was unsuccessfully defended.
(b)
Purchased a trademark from another company. The trademark can be renewed indefinitely. Knight Company expected the trademark to contribute to revenue indefinitely.
(c)
Knight Company acquires a patent for $2,000,000. The company selling the patent has spent $1,000,000 on the research and development of it. The patent has a remaining life of 15 years.
(d)
Knight Company is spending considerable time and money in developing a different patent for another product. So far $3,000,000 has been spent this year on research and development. Knight Company is very confident they will obtain this patent in the next few years.
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 247 (10 min.) (a)
Operating Expense. Only successful patent defense costs can be capitalized.
(b)
Intangible Asset. Trademarks are considered to have indefinite lives, thus they are not amortized.
(c) Intangible Asset. The patent cost of $2,000,000 should be amortized over its remaining useful life of 15 years since this is shorter than the maximum allowable period of 20 years. The selling company’s costs are not relevant, or normally available, to the buyer. (d)
Operating Expense. Research and development costs are required by GAAP to be expensed.
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
9-66 Ex. 248
Nelson Company, organized in 2017, has these transactions related to intangible assets in that year: Jan. Apr. July Sept.
2 1 1 1
Purchased a patent (5-year life) $325,000. Goodwill purchased (indefinite life) $360,000. Acquired a 9-year franchise; expiration date July 1, 2026, $720,000. Research and development costs $185,000.
Instructions (a) Prepare the necessary entries to record these intangibles. All costs incurred were for cash. (b) Make the entries as of December 31, 2017, recording any necessary amortization. (c) Indicate what the balance should be on December 31, 2017. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 248 (12 min.) (a)
1/2/17
Patents ......................................................... Cash ........................................................
325,000
Goodwill ....................................................... Cash ........................................................ (Part of the entry to record purchase of another company)
360,000
Franchise ..................................................... Cash ........................................................
720,000
Research and Development Expense .......... Cash ........................................................
185,000
Amortization Expense—Patents ($325,000 5).......... Amortization Expense—Franchise [($720,000 9) 6/12] ......................................... Patent .................................................................... Franchise ............................................................... *[(Fran. cost ÷ 9) 6/12]
65,000
4/1/17
7/1/17 9/1/17
(b)
(c)
Ending balances, 12/31/17: Patents = $260,000 ($325,000 – $65,000) Goodwill = $360,000 Franchises = $680,000 ($720,000 – $40,000)
.
325,000 360,000
720,000 185,000
40,000* 65,000 40,000
Reporting and Analyzing Long-Lived Assets
9-67
Ex. 249 (a)
A company purchased a patent on January 1, 2017, for $2,500,000. The patent's legal life is 20 years but the company estimates that the patent's useful life will only be 5 years from the date of acquisition. On June 30, 2017, the company paid legal costs of $162,000 in successfully defending the patent in an infringement suit. Prepare the journal entry to amortize the patent at year end on December 31, 2017.
(b)
Milner Company purchased a franchise from the Tasty Food Company for $450,000 on January 1, 2017. The franchise is for an indefinite time period and gives Milner Company the exclusive rights to sell Tasty Wings in a particular territory. Prepare the journal entry to record the acquisition of the franchise and any necessary adjusting entry at year end on December 31, 2017.
(c)
Huerter Company incurred research and development costs of $500,000 in 2017 in developing a new product. Prepare the necessary journal entries during 2017 to record these events and any adjustments at year end on December 31, 2017.
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 249 (15 min.) (a)
(b)
(c)
December 31, 2017 Amortization Expense ................................................................. Patent ................................................................................ (To record patents amortization) $2,500,000 ÷ 5 years $500,000 $162,000 ÷ 54 months = $3,000 × 6 18,000* $518,000 *[Legal costs ÷ (60 mon. – 6 mon.)] × 6 mon.
518,000 518,000
January 1, 2017 Franchise ................................................................................... 450,000 Cash .................................................................................. (To record acquisition of Tasty Food franchise) December 31, 2017 (No amortization of the franchise is required since it has an indefinite life.) 2017 Research and Development Expense ......................................... Cash ................................................................................... (To record research and development expense for the current year) December 31—no entry.
.
450,000
500,000 500,000
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
9-68 Ex. 250
a. A patent that was acquired for $800,000 at the beginning of the current year expires in 20 years and is expected to have a useful life of 5 years. Present the adjusting entry to amortize the patent for the current year. b. Research and development costs of $300,000 were incurred during the current fiscal year. Determine the minimum amount to be expensed for the current fiscal year. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 250 (10 min.) a. Amortization Expense ………....…………………………… Patents………………………………………………….. ($800,000 ÷ 5 = $160,000)
160,000 160,000
b. $300,000. Research and development costs are usually expensed when incurred. Ex. 251 For each of the following unrelated transactions, (a) determine the amount of the amortization for the current year, and (b) present the adjusting entries required to record amortization at year end. (1)
Costs (it was not acquired) of $39,000 were incurred on January 1 to obtain a patent. On January 31, $38,610 was spent in legal costs to successfully defend the patent against competitors. The patent has an estimated legal life of 12 years.
(2)
A company acquired a copyright for $160,000. The copyright has a useful life of 50 years.
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 251 (10 min.) (1)
(a)
(b)
(2)
Legal costs to successfully defend a patent are capitalized. Therefore the legal costs will be amortized for 11 years, 11 months. (The remaining useful life of the patent.) The amortization will be ($38,610 ÷ 143 remaining months × 11 months = $2,970) + ($39,000 ÷ 12 years = $3,250) = $6,220. *(Pat. cost ÷ 12 yrs.) + [(legal costs ÷ 143 mon.) × 11 mon.] Amortization Expense ......................................................... 6,220 Patents .................................................................... 6,220
(a)
Maximum allowable write-off period is life of creator plus 70 years. Thus the 50 years of useful life is used. $160,000 ÷ 50 years = $3,200 per year.
(b)
Amortization Expense ......................................................... Copyrights ...............................................................
.
3,200 3,200
Reporting and Analyzing Long-Lived Assets
9-69
Ex. 252 Forcum Company reports the following information (in millions) during a recent year: net sales, $12,408.5; net earnings, $344.9; total assets, ending, $4,312.6; and total assets, beginning, $4,254.3. Instructions (a) Calculate the (1) return on assets, (2) asset turnover, and (3) profit margin ratios. (b) Prove mathematically how the profit margin and asset turnover ratios work together to explain return on assets, by showing the appropriate calculations. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 252 (10 min.) (a) ($ in millions) (1) Return on assets
$344.9 ($4,312.6 + $4,254.3) ÷ 2 [Net inc. ÷ [(end. tot. assets + beg. tot. assets) ÷ 2
(2) Asset turnover
$12,408.5 = 2.9 times ($4,312.6 + $4,254.3) ÷ 2 [Net inc. ÷ [(end. tot. assets + beg. tot. assets) ÷ 2
(3) Profit margin
$344.9 $12,408.5 [Net inc. ÷ Net sal.]
= 8.1%
= 2.8%
(b) Profit Margin Asset Turnover - Return on Assets = 2.8% 2.9 times = 8.1% Ex. 253 The following information is available from the annual reports of Reser Company and Trent Company (Amounts in millions) Reser Trent Net Income $ 965 $ 1,271 Sales 22,653 33,812 Total Assets (average) 21,188 36,167 Instructions (a) Based on the preceding information, compute the following values for each company: 1. Asset turnover 2. Return on assets (b) What conclusion concerning the management of plant assets can be drawn from these data? Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
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Solution 253 (10 min.) (a) 1. Asset turnover
Reser Trent $22,653 ÷ $21,188 = 1.07 times $33,812 ÷ $36,167 = .93 times (Sales ÷ ave. tot. assets) 2. Return on assets $965 ÷ $21,188 = 4.6% $1,271 ÷ $36,167 = 3.5% (Net inc. ÷ sales.) (b) Reser’s asset turnover is 15% higher than Trent's asset turnover. In addition, Reser’s return on assets is 31% higher than Trent’s ratio. It can be concluded that Reser is utilizing its assets more efficiently than Trent. Ex. 254 Presented below is information related to plant assets and intangible assets at year end on December 31, 2017, for Looper Company: Buildings Goodwill Patents Land Accumulated Depreciation
$1,180,000 370,000 480,000 390,000 650,000
Instructions Prepare a partial balance sheet for Looper Company that shows how the above listed items would be presented. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 254 (10 min.) LOOPER COMPANY Balance Sheet (Partial) December 31, 2017 Property, Plant, and Equipment Buildings Less: Accumulated Depreciation Land Total Property, Plant, and Equipment (Build. – Acc. Dep. + Land) Intangibles Assets Goodwill Patents Total Intangibles
.
$1,180,000 650,000
$530,000 390,000 $920,000
$370,000 480,000 $850,000
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*Ex. 255 Jensen Company purchased a new machine on October 1, 2017, at a cost of $104,000. The company estimated that the machine has a salvage value of $8,000. The machine is expected to be used for 80,000 working hours during its 8-year life. Instructions Compute depreciation using the following methods in the year indicated. (a) Straight-line for 2017 and 2018, assuming a December 31 year-end. (b) Declining-balance using double the straight-line rate for 2017 and 2018. (c) Units-of-activity for 2017, assuming machine usage was 2,900 hours. (Round depreciation per unit to the nearest cent.) Ans: N/A, LO: 2,6, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
*Solution 255 (12 min.) (a) Straight-line method:
$104,000 - $8,000 8 years
= $12,000 per year
2017 depreciation = $12,000 3/12 = $3,000 2018 depreciation = $12,000. (b)
Declining-balance method:
2017 depreciation = $104,000 25%* 3/12 = $6,500 [(Cost × (1/8 × 2)] × 3/12 Book value January 1, 2017 = $104,000 – $6,500 = $97,500 2018 depreciation = $97,500 25% = 24,375. [(Cost – acc. dep.) × (1/8 × 2)] *(1/8) 2 = 25% (c) Units-of-activity method:
$104,000 - $8,000 80,000 hours
= $1.20 per hour
2017 depreciation = 2,900 hours $1.20 = $3,480. [(Cost – sal. val.) ÷ tot. hrs.] × 2017 hours *Ex. 256 Nichols Company purchased a new machine for $250,000. It is estimated that the machine will have a $25,000 salvage value at the end of its 5-year useful service life. The double-decliningbalance method of depreciation will be used. Instructions Prepare a depreciation schedule that shows the annual depreciation expense on the machine for its 5-year life. Ans: N/A, LO: 2,6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
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*Solution 256 (10 min.) Declining-balance rate = 1 ÷ 5 × 2 = 40% Book Value Annual End of Year Beginning Depreciation Depreciation Accumulated Book Value Year of Year × Rate = Expense Depreciation End of Year 1 $250,000 × 40% $100,000 $ 100,000 $150,000 2 150,000 × 40% 60,000 160,000 90,000 3 90,000 × 40% 36,000 196,000 54,000 4 54,000 × 40% 21,600 217,600 32,400 5 32,400 × 40% 7,400* 225,000 25,000 (1) (cost – acc. dep.) × (1/5 × 2) *Adjusted to $7,400 because ending book value should not be less than expected salvage value. *Ex. 257 Redeker Company purchased equipment on January 1, 2016, for $90,000. It is estimated that the equipment will have a $5,000 salvage value at the end of its 5-year useful life. It is also estimated that the equipment will produce 100,000 units over its 5-year life. Instructions Answer the following independent questions. 1. Compute the amount of depreciation expense for the year ended December 31, 2016, using the straight-line method of depreciation. 2. If 16,000 units of product are produced in 2016 and 24,000 units are produced in 2017, what is the book value of the equipment at December 31, 2017? The company uses the units-ofactivity depreciation method. 3. If the company uses the double-declining-balance method of depreciation, what is the balance of the Accumulated Depreciation—Equipment account at December 31, 2018? Ans: N/A, LO: 2,6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
*Solution 257 (15 min.) 1. Straight-line method:
Cost - Salvage Years
=
$90,000 – $5,000 5
= $17,000 per year
2. Units-of-activity method:
Cost – Salvage Units
=
$90,000 – $5,000 100,000 units
= $0.85 per unit
2016 16,000 units × $.85 2017 24,000 units × $.85 Accumulated Depreciation Cost of asset Less: Accumulated Depreciation Book value at December 31, 2017
.
=$ 13,600 [(Cost – sal. val.) ÷ tot. units] × 2016 units = 20,400 = $34,000 $90,000 34,000 $56,000
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Solution 257 (Cont.) 3. Double-declining-balance method: Book Value Beginning of Year 2016 $90,000 2017 54,000 2018 32,400 *(Cost – acc. dep.) × (1/5 × 2)
Declining Balance Rate 40% 40% 40%
Depreciation = Expense $36,000 21,600 12,960
Accumulated Depreciation $36,000 57,600 70,560
*Ex. 258 A plant asset acquired on October 1, 2017, at a cost of $800,000 has an estimated useful life of 10 years. The salvage value is estimated to be $50,000 at the end of the asset's useful life. Instructions Determine the depreciation expense for the first two years using the: (a) straight-line method. (b) double-declining-balance method. Ans: N/A, LO: 2,6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
*Solution 258 (10 min.) (a)
Straight-line method
$800,000 – $50,000 10 years *[(Cost – sal. val.) ÷ 10 yrs] × 3/12 Year 1
Year 2 (b)
= $75,000 × (3 ÷ 12) = $18,750*
$75,000
Double-declining-balance method Constant rate — 1 ÷ 10 = 10% × 2 = 20% Year 1
$800,000 × 20% × (3 ÷ 12) = $40,000
Year 2
$760,000 × 20% = $152,000
*[(Cost – acc. dep.) × (1/10 × 2)] × 3/12
*Ex. 259 Tony’s, a popular pizza hang-out, has a thriving delivery business. Tony’s has a fleet of three delivery automobiles. Prior to making the entry for this year's depreciation expense, the subsidiary ledger for the fleet is as follows: Accumulated Estimated Depr.—Beg. Miles Operated Car Cost Salvage Value Life in Miles of the Year During Year 1 $35,000 $5,000 75,000 $2,100 20,000 2 25,000 4,000 60,000 1,890 22,000 3 23,500 2,500 70,000 2,000 19,000
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Instructions (a) Determine the depreciation rates per mile for each car. (b) Determine the Depreciation Expense for each car for the current year. (c) Make one compound journal entry to record the annual Depreciation Expense for the fleet. Ans: N/A, LO: 2, 6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
*Solution 259 (10 min.) (a) Car 1
$35,000 – $5,000 75,000 miles
= 0.40 per mile
Car 2
$25,000 – $4,000 60,000 miles
= 0.35 per mile
Car 3
$23,500 – $2,500 70,000 miles
= 0.30 per mile
20,000 miles × .40 = $8,000 22,000 miles × .35 = $7,700 19,000 miles × .30 = $5,700
(Miles/yr. × [(Cost – sal. val.) ÷ Est. miles life])
(b)
Car 1— Car 2— Car 3—
(c)
Depreciation Expense.................................................................. Accumulated Depreciation—Car 1 ...................................... Accumulated Depreciation—Car 2 ...................................... Accumulated Depreciation—Car 3 ......................................
21,400 8,000 7,700 5,700
*Ex. 260 The Rowland Clinic purchased a new surgical laser for $84,000. The estimated salvage value is $4,000. The laser has a useful life of five years and the clinic expects to use it 10,000 hours. It was used 1,600 hours in year 1; 2,100 hours in year 2; 2,400 hours in year 3; 1,900 hours in year 4; 2,000 hours in year 5. Instructions (a)
Compute the annual depreciation for each of the five years under each of the following methods: (1) straight-line. (2) units-of-activity.
(b)
If you were the administrator of the clinic, which method would you deem as most appropriate? Justify your answer.
(c)
Which method would result in the lower reported income in the first year? Which method would result in the lower total reported income over the five-year period?
Ans: N/A, LO: 2,6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
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*Solution 260 (10 min.) (a)
(1)
$84,000 – $4,000 Straight-line method: ———————— = $16,000 per year 5 years
(2)
$84,000 – $4,000 Units-of-activity method: ———————— = $8.00/hour 10,000 hours
Year 1 2 3 4 5
Year 1 Year 2 Year 3 Year 4 Year 5 Total
1,600 2,100 2,400 1,900 2,000
× × × × ×
$8.00 8.00 8.00 8.00 8.00
Straight-line $16,000 16,000 16,000 16,000 16,000 $80,000
= $ 12,800 × [(Cost – sal. val.) ÷ tot. hrs.] × ann. hrs. = 16,800 = 19,200 = 15,200 = 16,000 Units of Activity $ 12,800 16,800 19,200 15,200 16,000 $80,000
(b)
The units-of-activity method can be justified based on the variable usage the laser will receive during its useful life.
(c)
The straight-line method provides the higher depreciation expense for the first year, and therefore the lower first year income. Over the five-year period, both methods result in the same total depreciation expense ($80,000) and, therefore, the same total income.
*Ex. 261 Mideast Airlines purchased a 777 aircraft on January 1, 2015 at a cost of $40,000,000. The estimated useful life of the aircraft is 20 years, with an estimated salvage value of $6,000,000. Instructions Compute the accumulated depreciation and book value at December 31, 2017 using the straightline method and the double-declining-balance method. Ans: N/A, LO: 2,6, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
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*Solution 261 (20 min.) Straight-line Depreciation × Rate = 5% 5% 5%
Annual Depreciation $1,700,000 $1,700,000 $1,700,000
Accumulated Depreciation $1,700,000 3,400,000 5,100,000
Book Value $38,300,000 36,600,000 34,900,000
Declining-balance Book Value Depreciation Annual Year Beginning Year × Rate = Depreciation* 2015 $40,000,000 10% $4,000,000 2016 36,000,000 10% 3,600,000 2017 32,400,000 10% 3,240,000 *(Cost – acc. dep.) × (1/20 × 2)
Accumulated Depreciation $4,000,000 7,600,000 10,840,000
Book Value $36,000,000 32,400,000 29,160,000
Year 2015 2016 2017
Depreciable Cost $34,000,000 $34,000,000 $34,000,000
*Ex. 262 Railsback Company purchased a machine on January 1, 2017, at a cost of $72,000. The machine is expected to have an estimated salvage value of $4,000 at the end of its 5-year life. The company capitalized the machine and depreciated it in 2017 using the double-decliningbalance method of depreciation. The company has a policy of using the straight-line method to depreciate equipment but the company accountant neglected to follow company policy when he used the double-declining-balance method. Net income for the year ended December 31, 2017, was $45,000 before taxes as the result of depreciating the machine incorrectly. Instructions Using the method of depreciation that the company normally follows, prepare the correcting entry and determine the corrected net income for 2017. (Show computations.) Ans: N/A, LO: 2,6, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
*Solution 262 (10 min.) Depreciation taken: ($72,000 – 0) × .40 = Correct depreciation: ($72,000 – $4,000) ÷ 5 yrs. = Overstatement of depreciation =
$28,800 *(Cost – acc. dep.) × (1/20 × 2) 13,600 $15,200
Accumulated Depreciation—Equipment ......................................... Depreciation Expense ........................................................... Correct net income: Net income as reported Add: Overstatement of depreciation expense Correct net income
.
$45,000 15,200 $60,200
15,200 15,200
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*Ex. 263 Stan's Lumber Mill sold two pieces of equipment in 2017. The following information pertains to the two pieces of equipment: Purchase Useful Salvage Depreciation Sales Machine Cost Date Life Value Method Date Sold Price #1 $86,000 7/1/13 5 yrs. $6,000 Straight-line 7/1/17 $20,000 #2 $95,000 1/1/16 5 yrs. $5,000 Double-declining12/31/17 $37,000 balance Instructions (a)
Compute the depreciation on each piece of equipment to the date of disposal.
(b)
Prepare the journal entries in 2017 to record 2017 depreciation and the sale of each piece of equipment.
Ans: N/A, LO: 2, 3, 6, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
*Solution 263 (20 min.) (a) Machine #1 Year Depreciable Cost 2013 $80,000 2014 2015 2016 2017 *One-half a year.
Depreciation Rate = 20%
Annual Depreciation $ 8,000* 16,000 16,000 16,000 8,000*
Accumulated Depreciation $ 8,000 24,000 40,000 56,000 64,000
Machine #2 Book Value Year Beginning of Year 2016 $95,000 2017 57,000 *(Cost – acc. dep.) × (1/5 × 2)
DDB Rate 40% 40%
(b) Depreciation Expense Accumulated Depr.—Equipment Cash Loss on Disposal of Plant Assets Accumulated Depreciation—Equipment Equipment Gain on Disposal of Plant Assets
Annual Depreciation* $38,000 22,800
Accumulated Depreciation $38,000 60,800
Machine 1 8,000 8,000
Machine 2 22,800 22,800
20,000 2,000* 64,000
37,000 -060,800 86,000 -0-
95,000 2,800**
*$86,000 – $64,000 = $22,000; $22,000 – $20,000 = $2,000. *(Cost – acc. dep.) – sell. Price) **$95,000 – $60,800 = $34,200; $37,000 – $34,200 = $2,800. (Sell. Price – (Cost – acc. dep.)
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COMPLETION STATEMENTS 264. The _______________ price is equal to the fair market value of the asset given up or the fair value of the asset received. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
265. With the exception of land, plant assets experience a ______________ in service potential over their useful lives. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
266. When vacant land is acquired, expenditures for clearing, draining, filling, and grading should be charged to the ______________ account. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
267. The cost of demolishing an old building on land that has been acquired so that a new building can be constructed should be charged to the ______________ account. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
268. The cost of paving, fencing, and lighting a new company parking lot is charged to a ______________ account. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
269
Equipment with an invoice price of $20,000 was purchased and freight costs were $900. The cost of the equipment would be $______________.
Ans: N/A, LO: 1, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
270. ______________ is the process of allocating the cost of a plant asset to expense over its service life in a rational and systematic manner. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
271. The book value of a plant asset is obtained by subtracting ______________ from the ______________ of the plant asset. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
272. Three factors that affect the computation of periodic depreciation expense are (1) _______________, (2) _______________, and (3) _________________. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
273. The ________________ method of computing depreciation expense results in an equal amount of periodic depreciation throughout the useful life of the plant asset. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
274. The declining-balance method of computing depreciation is known as an _____________ depreciation method. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
.
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275. Ordinary repairs that maintain operating efficiency and expected productive life are called _______________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
276. Additions and improvements are costs incurred to increase the operating efficiency, productive capacity, or expected useful life and are referred to as _________________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
277. A _____________ decline in the market value of an asset is referred to as an impairment. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
278. If disposal of a plant asset occurs at any time during the year, ___________________ for the fraction of the year to the date of disposal must be recorded. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
279. If the proceeds from the sale of a plant asset exceed its ______________, a gain on disposal will occur. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
280. A plant asset originally cost $64,000 and was estimated to have a $4,000 salvage value at the end of its 5-year useful life. If at the end of three years, the asset was sold for $12,000, and had accumulated depreciation recorded of $36,000, the company should recognize a ______________ on disposal in the amount of $____________. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
281. The cost of a patent should be amortized over its __________________ life or its _______________ life, whichever is shorter. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
282. In recording the purchase of a business, goodwill should be recorded for the excess of ________________ over the _________________ of the net assets acquired. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
283. The process of allocating to expense the cost of an asset over its useful life is called __________________ for tangible plant assets and __________________ for intangible assets. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
284. An overall measure of profitability is the ______________________ ratio. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
285. The _______________ ratio is calculated by dividing net sales by average total assets. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
.
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*286. The declining-balance method of computing depreciation expense involves multiplying a _______________ book value by a _______________ percentage. Ans: N/A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Answers to Completion Statements 264. 265. 266. 267. 268. 269. 270. 271. 272. 273. 274. 275.
cash equivalent decline Land Land Land Improvement $20,900. Depreciation accumulated depreciation, cost cost, salvage value, useful life straight-line accelerated revenue expenditures
.
276. 277. 278. 279. 280. 281. 282. 283. 284. 285. *286.
capital expenditures permanent depreciation expense book value loss, 16,000 legal, useful (or useful, legal) cost, fair market value depreciation, amortization return on assets asset turnover declining, constant
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MATCHING Set 1 287. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Plant assets Depreciation Book value Salvage value Straight-line method
F. G. H. I. J.
Units-of-activity method Double-declining-balance method MACRS Revenue expenditures Capital expenditures
____
1. Small expenditures which primarily benefit the current period.
____
2. Cost less accumulated depreciation.
____
3. An accelerated depreciation method used for financial statement purposes.
____
4. Tangible resources that are used in operations and are not intended for resale.
____
5. Equal amount of depreciation each period.
____
6. Expected cash value of the asset at the end of its useful life.
____
7. Process of allocating the cost of equipment over its service life.
____
8. Material expenditures that increase an asset's operating efficiency, productive capacity, or useful life.
____
9. An accelerated depreciation method used for tax purposes.
____ 10. Useful life is expressed in terms of units of production or expected use. Ans: N/A, LO: 1, 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Answers to Matching Set 1 1. 2. 3. 4. 5.
I C G A E
6. 7. 8. 9. 10.
D B J H F
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Set 2 288. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Gain on disposal Loss on disposal Trademark Capital lease Asset turnover
F. G. H. I. J.
Return on assets Goodwill Amortization Intangible asset Research and development costs
____
1. Process of allocating the cost of an intangible asset to expense over its useful life.
____
2. Is recorded if the proceeds from the sale exceed the book value of the plant asset.
____
3. Examples are franchises and licenses.
____
4. A long-term agreement allowing the lessee to use the lessor’s asset where the arrangement is accounted for as a purchase.
____
5. Can be identified only with a business as a whole.
____
6. A symbol that identifies a particular enterprise or product.
____
7. When book value of asset is greater than the proceeds received from its sale.
____
8. Must be expensed when incurred.
____
9. Computed by dividing net income by average assets.
____ 10. Indicates how efficiently a company is able to generate sales with a given amount of assets. Ans: N/A, LO: 3, 4 Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Answers to Matching Set 2 1. 2. 3. 4. 5.
H A I D G
6. 7. 8. 9. 10.
C B J F E
.
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SHORT-ANSWER ESSAY QUESTIONS S-A E 289 In general, how does one determine whether or not an expenditure should be included in the acquisition cost of property, plant, and equipment? Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Solution 289 The acquisition cost of property, plant, and equipment would include all expenditures deemed reasonable and necessary to prepare the asset for its intended purpose (use) and place. This includes getting an asset to its proper place, acquiring legal title, and getting the asset ready for its intended use. S-A E 290 How is the cost for a plant asset measured in a cash transaction? In a noncash transaction? Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
Solution 290 In a cash transaction, cost is equal to the cash paid. In a noncash transaction, cost is equal to the cash equivalent price paid, which is the fair value of the asset given up or the fair value of the asset received, whichever is more clearly determinable. S-A E 291 Comment on the validity of the following statements: “As an asset loses its ability to provide services, cash needs to be set aside to replace it. Depreciation accomplishes this goal.” Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics
Solution 291 Depreciation is the process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner. Recognizing depreciation for an asset does not result in the accumulation of cash for replacement of the asset. The balance in Accumulated Depreciation represents the total amount of the asset’s cost that has been charged to expense to date; it is not a cash fund. S-A E 292 The declining-balance method is an accelerated method of depreciation. Briefly explain what is meant by an accelerated method of depreciation and justify the choosing of an accelerated method. Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics
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Solution 292 An accelerated depreciation method is a method that produces higher depreciation expense in the early years than in the later years. The choice of an accelerated method can be justified if the asset being depreciated contributes more to the revenue-earning process in the earlier years and less in the later years. An accelerated method can also be justified if the asset’s value is expected to decline very quickly. In such situations, an accelerated method would properly match expense to revenue. S-A E 293 Identify the factors that are considered in classifying an expenditure as a capital or a revenue expenditure. Are there instances where it may be difficult to classify an expenditure as one or the other (e.g., the purchase of a wastebasket that has a useful life of 5 years and cost $10)? What basis would be used in a decision? Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics
Solution 293 An expenditure is classified as a revenue expenditure if it maintains the operating efficiency and expected productive life of the asset and primarily benefits the current accounting period. Revenue expenditures are usually small amounts that occur frequently throughout the life of the asset and are often called ordinary repairs. An expenditure is classified as a capital expenditure if it increases (rather than maintains) operating efficiency, productive capacity, or expected useful life, and therefore benefits more than one accounting period. Capital expenditures are usually large amounts that occur infrequently during the life of the asset. Capital expenditures can be further classified as either additions or improvements. The distinction between a capital expenditure and a revenue expenditure is not always clear-cut. The purchase of an asset with a relatively insignificant cost (for example, the purchase of a $10 wastebasket with a 5-year useful life) may meet the criteria for classification as a capital expenditure, even though it is similar in many ways to a revenue expenditure (small amount, more frequent occurrence). The accounting concept of materiality would indicate that this item could be recorded as an expense (more expedient) since it is not material enough to influence the decision of a reasonably prudent creditor or investor. S-A E 294 How is a gain or a loss on the sale of a plant asset computed? Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
Solution 294 In a sale of plant assets, the book value of the asset is compared to the proceeds received from the sale. If the proceeds of the sale exceed the book value of the plant asset, a gain on disposal occurs. If the proceeds of the sale are less than the book value of the plant asset sold, a loss on disposal occurs.
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S-A E 295 You are comparing two companies in the same industry. You have determined that Nenn Corp. depreciates its plant assets over a 40-year life, whereas Henderson Corp. depreciates its plant assets over a 20-year life. Discuss the implications this has for comparing the results of the two companies. Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Solution 295 By selecting a higher estimated useful life, Nenn Corp. is spreading the plant asset's cost over a longer period of time. The depreciation expense reported in each period is lower and net income is higher. Henderson's choice of a shorter estimated useful life will result in higher depreciation expense reported in each period and lower net income. S-A E 296 Goodwill is an unusual asset in that it cannot be sold individually apart from a business as a whole. If goodwill is an intangible asset, why can't it be sold like other intangible assets such as copyrights and patents? Briefly explain what makes goodwill different. Ans: N/A, LO: 4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: Communication, IMA: Business Economics
Solution 296 Goodwill is the value of all favorable attributes that relate to a business enterprise. As goodwill is the product of these attributes, and would not exist apart from them, goodwill cannot be separated from the company and then sold. This is different from a copyright or patent that can exist independent of a company, and can be sold apart from any other assets. S-A E 297
(Ethics)
Physician Reference Service (PRS) provides services to physicians including research assistance, diagnosis coding, and medical practice software including an advanced medical record cross-referencing system. PRS is aggressive in monitoring other firms' offerings and ensuring that its services are comparable to all others. Because of its need to stay abreast of new product offerings, PRS spends a lot of money sending professionals to trade shows. In addition, PRS has agreements with several clients whereby the client requests a presentation of a competitor's services. A PRS employee poses as an employee of the client's office and attends the presentation, obtaining as much data and sample information as possible. The cost of the travel and attending presentations is charged to Product Development and expensed during the current year. In April of this year, PRS began selling a software product substitute before the competitor's software was released. The competitor, Compu-Med, sued for copyright infringement and won. PRS had to withdraw its product from the market and pay $1.5 million in damages. PRS immediately negotiated an agreement with Compu-Med to sell Compu-Med's product (since it was prohibited from offering its own version for five years). This agreement cost an additional $1.3 million, but it allowed PRS to continue to offer a full line of services.
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S-A E 297
(Cont.)
PRS' accountant, Kelly Hall, initially recorded the cash payments as "Loss from Lawsuit" and "Product Development," respectively. However, Gilbert Brown, the controller, instructed Kelly to create an intangible asset, named "Goodwill," and charge both costs to this account. "We're protected from another lawsuit as long as this agreement is in effect," he says. "It's about as close to goodwill as we'll ever get from our competitors. We might as well amortize the cost rather than take the full hit to income, anyway." Required: 1. What are the ethical issues? 2. What should Kelly do? Ans: N/A, LO: 4, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
Solution 297 1. The following are some of the ethical issues: a. Whether PRS should continue to obtain its information by deception b. Whether PRS makes a practice of pirating software c. Whether the attempt to hide the losses from the lawsuit and software agreement is indicative of the state of the accounting system at PRS. 2. Kelly should explain to her boss that goodwill arises only when a business is purchased. It is not allowed to write off lawsuit losses or product development costs (which these clearly are) over more than one year. She cannot allow her integrity to be compromised by misrecording these economic events. She could also point out that Mr. Brown's attempt to delay recognition of the losses will undoubtedly be discovered by the auditors. All the records will then likely be subjected to much more scrutiny than would otherwise be the case. S-A E 298
(Communication)
The Old Fix-It is a company specializing in the restoration of old homes. To showcase its work, the company purchased an old Victorian home in downtown Pittsburg, Kansas on January 2, 2013. The original home was purchased for $125,000. A new heating and air-conditioning system was added for $30,000. The house was completely rewired and re-plumbed at a cost of $50,000. Custom cabinets were added, and the floors and trim were refurbished to their original condition, at a cost of $75,000. The project was such a success, that Old Fix-It decided on January 2, 2017, to purchase another very large home, this time in nearby Joplin, Missouri. On January 3, 2017, a realtor offered to purchase the home in Pittsburg for $175,000. He plans to lease it as luxury short-term apartments for visiting dignitaries. Mark Gibson, the president of Old Fix-It, decided that the $50,000 gain over purchase price was appropriate, and so he agreed to sell the showcase house. Only afterward did he learn that Old Fix-It had a loss of almost $30,000 on the sale. Mark does not believe that a loss is possible. "We sold that house for more than we paid for it," he said. "I know we put some money in it, but we had depreciated it for four years. How in the world can we have a loss?" Due to the commercial aspects of the property and its expected traffic flow, the life of the showcase house was established as 15 years. Old Fix-It utilized straight-line depreciation with no salvage or residual value. Old Fix-It took full years’ of depreciation in 2013 through 2016 and none in 2017 due to the sale date of January 3, 2017. .
Reporting and Analyzing Long-Lived Assets
S-A E 298
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(Cont.)
Required: Write a short memo to Mr. Gibson explaining how it would be possible to have a loss. Address cost and depreciation as general numbers rather than specific values. Ans: N/A, LO: 1, 2, 3, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: FSA
Solution 298
MEMO TO:
Mark Gibson, President
FROM:
Martha King, Accountant
RE:
Loss on Pittsburg showcase
I understand that you are concerned about the loss on the Pittsburg showcase house. You have said that a loss is not possible since we sold the house for more than we paid for it. Ordinarily, it would not be possible for any fixed asset to generate a loss if sold for more than the original purchase price. However, the cost basis of the showcase house was acquisition cost of $125,000 plus the many improvements totaling $155,000 resulting in a total cost of $280,000. The total cost of the showcase house after improvements were depreciated 27%, representing the four years of operations. This resulted in a book value of approximately $204,000. The publicity and lessons learned were substantial and very beneficial to Old Fix-It. When the possibility of a second, better, showcase house in Joplin, MO., arose, cash flow and funding were issues. The sale of the Pittsburg showcase house allowed us to “capitalize” on our lessons learned, withdraw a large portion of our cash, attain additional exposure to our product in Pittsburg as a commercial venture as luxury apartments, and open a second, better, showcase house in Joplin. All in all, I think that the Pittsburg house was still an excellent investment—we got far more benefit from the $30,000 "loss" than we would have had spending ten times that much in advertising. To prevent this situation in the future, however, you could have the Accounting Department calculate the book value before you negotiate a sales contract. That way, you'll know the effect of the transaction on our income. Remember that accounting’s book value may not represent market value; we'll still have to rely on real estate agents for that. Let me know if you have further questions.
(signature)
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IFRS QUESTIONS 1.
As a recent graduate of State University you're aware that IFRS requires component depreciation for plant assets. A friend has asked you to succinctly explain what component depreciation means. Which of the following correctly describes component depreciation? a. The method used to ensure that the depreciation rate remains constant from year to year. b. The method that requires that significant parts of a plant asset with different useful lives be depreciated separately. c. The method used to prorate annual depreciation on a time basis. d. The method of depreciation recommended for an asset that is expected to be significantly more productive in the first half of its useful life.
Ans: B, LO: 7, Bloom: K, Difficulty: Hard, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
2.
Salem Company hired Kirk Construction to construct an office building for ₤8,000,000 on land costing ₤2,000,000, which Salem Company owned. The building was complete and ready to be used on January 1, 2017 and it has a useful life of 40 years. The price of the building included land improvements costing ₤600,000 and equipment costing ₤750,000. The useful lives of the land improvements and the equipment are 10 years and 5 years, respectively. Salem Company uses component depreciation, and the company uses straight-line depreciation for other similar assets. What total amount of depreciation expense would Salem Company report on its income statement for the year ended December 31, 2017? a. ₤335,000 b. ₤200,000 c. ₤426,250 d. ₤376,250
Ans: D, LO: 7, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (₤8,000,000 − ₤600,000 − ₤750,000) 40 = ₤166,250; (600,000 10) + (₤750,000 5) + ₤166,250 = ₤376,250
3.
Salem Company hired Kirk Construction to construct an office building for ₤8,000,000 on land costing ₤2,000,000, which Salem Company owned. The building was complete and ready to be used on January 1, 2017 and it has a useful life of 40 years. The price of the building included land improvements costing ₤600,000 and equipment costing ₤750,000. The useful lives of the land improvements and the equipment are 10 years and 5 years, respectively. Salem Company uses component depreciation, and the company uses straight-line depreciation for other similar assets. What is the net amount reported for the building on Salem Company's December 31, 2017 statement of financial position? a. ₤7,665,000 b. ₤7,573,750 c. ₤6,483,750 d. ₤7,800,000
Ans: C, LO: 7, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (₤8,000,000 − ₤600,000 − ₤750,000) 40 = ₤166,250; ₤6,650,000 − ₤166,250 = ₤6,483,750
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Reporting and Analyzing Long-Lived Assets
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Nicholson Company purchased equipment on January 1, 2015, for €28,000 with an estimated residual value of €7,000 and estimated useful life of 8 years. On January 1, 2017, Nicholson decided the equipment will last 12 years from the date of purchase. The residual value is still estimated at €7,000. Using the straight-line method the new annual depreciation will be: a. €1,575. b. €1,750. c. €2,100. d. €2,333.
Ans: A, LO: 7, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: €28,000 − €7,000) 28 = €5,250; (€28,000 − €5,250 − €7,000) 10 = €1,575
5.
An asset was purchased for ¥200,000. It had an estimated residual value of ¥40,000 and an estimated useful life of 10 years. After 5 years of use, the estimated residual value is revised to ¥32,000 but the estimated useful life is unchanged. Assuming straight-line depreciation, depreciation expense in year 6 would be a. ¥24,000. b. ¥17,600. c. ¥12,000. d. ¥16,800.
Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (¥200,000 − ¥40,000) × 5/10 = ¥80,000; (¥200,000 − ¥80,000 − ¥32,000) ÷ 5 = ¥17,600
6.
Under U.S. GAAP a. property, plant, and equipment may not be revalued. b. component depreciation is not required. c. research and development costs are expensed as incurred. d. All of these answer choices are correct.
Ans: D, LO: 7, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Feedback: U.S. GAAP does not permit asset revaluation, component depreciation is not required, and research and development costs are expensed as incurred.
7.
Which of the following statements concerning IFRS and U.S. GAAP is correct? a. IFRS permits revaluation of all intangible assets, whereas U.S. GAAP prohibits revaluation of intangible assets. b. Gains on exchange of assets when the exchange has commercial substance are recognized under both IFRS and U.S. GAAP. c. Changes in depreciation method under IFRS are reported in current and future periods, under U.S. GAAP such changes are treated as prior period adjustments. d. All of these answer choices are correct.
Ans: B, LO: 7, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
CHAPTER 10 REPORTING AND ANALYZING LIABILITIES SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY Item
LO
BT
Item
LO
BT
Item LO BT Item True-False Statements
LO
BT
Item
LO
BT
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.
1 1 1 1 1 1 1 1 1 1 1 1 1 1
K K K K K K K K K K K K K K
15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28.
1 1 1 1 1 1 1 2 2 2 2 2 2 2
3 3 3 3 3 3 3 3 4 4 4 5 5 5
C C C C K AP K AP K K K K K C
*57. *58. *59. *60. *61. *62. *63. *64. *65. *66.
5 5 6 6 6 6 7 7 7 7
C C K C K K C C C C
67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98.
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
K K K K C C K K K K AP AP AP AP AP AP C AP AP AP AP AP AP AP C C K K AP AP AN AN
99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130.
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2
K 29. 2 K 43. K 30. 2 K 44. C 31. 2 C 45. AN 32. 2 C 46. K 33. 2 C 47. K 34. 2 K 48. C 35. 3 C 49. K 36. 3 C 50. K 37. 3 C 51. K 38. 3 C 52. K 39. 3 K 53. K 40. 3 C *54. K 41. 3 C *55. K 42. 3 K *56. Multiple Choice Questions K 131. 2 AP 163. C 132. 2 K 164. C 133. 2 K 165. K 134. 2 C 166. K 135. 2 K 167. K 136. 2 K 168. AP 137. 2 K 169. AP 138. 2 K 170. AP 139. 2 K 171. AP 140. 2 K 172. AN 141. 2 K 173. AN 142. 2 K 174. AN 143. 2 K 175. AN 144. 2 K 176. AP 145. 2 AP 177. AP 146. 2 AP 178. AP 147. 2 AP 179. AP 148. 2 AP 180. AP 149. 2 K 181. AP 150. 2 K *182. AP 151. 2 K *183. AP 152. 2 K *184. AP 153. 3 K 185. AP 154. 3 C 186. AP *155. 5 AP *187. AP *156. 5 AP *188. AP 157. 3 C 189. AP *158. 5 AP 190. AP *159. 5 AP 191. AP 160. 3 K 192. AP 161. 3 K 193. K 162. 3 K 194.
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 5 5 5 3 3 5 5 3 3 3 3 3 3
K AP AP AP K K C C C C C K K K K AP AP AP C AP AP AP AP AP AP AP AP AP AP AP AP AP
195. 196. 197. 198. 199. 200. 201. 202. 203. 204. 205. 206. 207. 208. 209. 210. *211. *212. *213. *214. *215. *216. *217. *218. *219. *220. *221. *222. *223. *224. *225. *226.
3 3 3 3 3 4 4 4 4 4 4 4 4 4 4 4 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5
K AP AP AP C C K K K AP K K AP AN AP AP AP AP AP AP AP AP AP AN C C AP AP K AP AP AP
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*227. *228. *229. *230. *231.
5 5 6 6 6
AP AP K AP AP
*232. *233. *234. *235. *236.
251. 252.
1 1
AP AP
253. 254.
261. 262. 263. 264.
1,4 1 1 1
AP AP AP AP
265. 266. 267. 268.
279. 280. 281. 282.
1 1 1 1
K K K K
283. 284. 285. 286.
295.
2, 3 4, 5
K
Multiple Choice Questions (Cont.) AP *237. 6 C *242. 7 AP *238. 6 C *243. 7 AP *239. 7 K *244. 7 AP *240. 7 AP *245. 7 C *241. 7 AP *246. 7 Brief Exercises 1 AP 255. 1 AP 257. 3 1 AN 256. 2 AP 258. 3 Exercises 1 AP 269. 4 AP *273. 3,5 1 AP 270. 4 AN *274. 3,5 3 AP *271. 3,5 AP *275. 3,5 4 AP *272. 3,5 AP *276. 3,6 Completion Statements 1 K 287. 2 K 291. 3 1 K 288. 3 K 292. 4 2 K 289. 3 K 293. 4 2 K 290. 3 AP *294. 5 Matching 6 6 6 6 6
Short Answer Essay 296. 1 K 299. 3 K 302. 4 K 305. 297. 2 K 300. 3 C *303. 6 C 298. 3 K 301. 3 C 304. 1 E *This topic is dealt with in an Appendix to the chapter.
3
AP AP AP AP AP
*247. *248. *249. *250.
7 7 7 7
AP AP AP AP
AP AP
*259. *260.
5 6
AP AP
AP AP AP AP
*277. *278.
3,6 7
AP AP
K K K K
C
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Learning Objective 1 Item Type 1. TF 2. TF 3. TF 4. TF 5. TF 7. TF 8. TF 9. TF 10. TF 11. TF 12. TF 13. TF 14. TF 15. TF 16. TF 17. TF 18. TF 19. TF
Item 20. 21. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82.
Type TF TF MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC
Item 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. .
Type MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC
Item 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118.
Type MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC
Item 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 251. 252. 253. 254. 255. 261. 262.
Type MC MC MC MC MC MC MC MC MC MC MC Be Be Be Be Be Ex Ex
Item 263. 264. 265. 266. 279. 280. 281. 282. 283. 284. 296. 304.
Type Ex Ex Ex Ex C C C C C C SA SA
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Learning Objective 2 Item 22. 23. 24. 25. 26. 27. 28. 29.
Type Item Type TF 30. TF TF 31. TF TF 22. TF TF 33. TF TF 34. TF TF 130. MC TF 131. MC TF 132. MC
35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47.
TF TF TF TF TF TF TF TF TF TF TF TF TF
48. 49. 50. 153. 154. 157. 160. 161. 162. 163. 164. 165. 166.
TF TF TF MC MC MC MC MC MC MC MC MC MC
51. 52. 53. 200.
TF TF TF MC
201. 202. 203. 204.
MC MC MC MC
Item 54. 55. 56. 57. 58. 155. 156.
Type Item Type TF 158. MC TF 159. MC TF 182. MC TF 183. MC TF 184. MC MC 187. MC MC 188. MC
Item Type Item Type 133. MC 141. MC 134. MC 142. MC 135. MC 143. MC 136. MC 144. MC 137. MC 145. MC 138. MC 146. MC 139. MC 147. MC 140. MC 148. MC Learning Objective 3 167. MC 180. MC 168. MC 181. MC 169. MC 185. MC 170. MC 186. MC 171. MC 189. MC 172. MC 190. MC 173. MC 191. MC 174. MC 192. MC 175. MC 193. MC 176. MC 194. MC 177. MC 195. MC 178. MC 196. MC 179. MC 197. MC Learning Objective 4 205. MC 209. MC 206. MC 210. MC 207. MC 261. Ex 208. MC 268. Ex Learning Objective 5
Item 149. 150. 151. 152. 256. 285. 286. 287.
Type MC MC MC MC Be C C C
Item 295. 297.
Type Ma SA
198. 199. 257. 258. 267. 271. 272. 273. 274. 275. 276. 277. 288.
MC MC Be Be Ex Ex Ex Ex Ex Ex Ex Ex C
289. 290. 291. 295. 298. 299. 300. 301. 305.
C C C Ma SA SA SA SA SA
269. 270. 292. 293.
Ex Ex C C
295. 302.
Ma SA
Item 211. 212. 213. 214. 215. 216. 217.
Item 225. 226. 227. 228. 259. 271. 272.
Type MC MC MC MC Be Ex Ex
Item 273. 274. 275. 294. 295.
Type Ex Ex Ex C Ma
.
Type MC MC MC MC MC MC MC
Item 218. 219. 220. 221. 222. 223. 224.
Type MC MC MC MC MC MC MC
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59. 60. 61.
TF TF TF
62. 229. 230.
TF MC MC
63. 64. 65.
TF TF TF
66. 239. 240.
TF MC MC
Learning Objective 6 231. MC 234. MC 232. MC 235. MC 233. MC 236. MC Learning Objective 7 241. MC 244. MC 242. MC 245. MC 243. MC 246. MC
Note: TF = True-False MC = Multiple Choice Ma = Matching Be = Brief Exercise
237. 238. 260.
MC MC Be
276. 277. 303.
Ex Ex SA
247. 248. 249.
MC MC MC
250. 278.
MC Ex
C = Completion Ex = Exercise SA = Short Answer Essay
CHAPTER LERANING OBJECTIVES 1. Explain how to account for current liabilities. A current liability is a debt that a company can reasonably expect to pay (a) from existing current assets or through the creation of other current liabilities, and (b) within one year or the operating cycle, whichever is longer. The major types of current liabilities are notes payable, accounts payable, sales taxes payable, unearned revenues, and accrued liabilities such as taxes, salaries and wages, and interest payable. When a promissory note is interest–bearing, the amount of assets received upon the issuance of the note is generally equal to the face value of the note, and interest expense is accrued over the life of the note. At maturity, the amount paid is equal to the face value of the note plus accrued interest. Companies record sales taxes payable at the time the related sales occur. The company serves as a collection agent for the taxing authority. Sales taxes are not an expense to the company. Companies hold employee withholding taxes, and credit them to appropriate liability accounts, until they remit these taxes to the governmental taxing authorities. Unearned revenues are initially recorded in an unearned revenue account. As the company recognizes revenue, a transfer from unearned revenue to revenue occurs. Companies report the current maturities of long-term debt as a current liability in the balance sheet. 2. Describe the major characteristics of bonds. The following different types of bonds may be issued: secured and unsecured bonds, and convertible and callable bonds. 3. Explain how to account for bond transactions. When companies issue bonds, they debit Cash for the cash proceeds and credit Bonds Payable for the face value of the bonds. In addition, they use the accounts Premium on Bonds Payable and Discount on Bonds Payable to show the bond premium and bond discount, respectively. Bond discount and bond premium are amortized over the life of the bond, which increases or decreases interest expense, respectively. When companies redeem bonds at maturity, they credit Cash and debit Bonds Payable for the face value of the bonds. When companies redeem bonds before maturity, they (a) eliminate the carrying value of the bonds at the redemption date, (b) record the cash paid, .
Reporting and Analyzing Liabilities
and (c) recognize the gain or loss on redemption.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
4. Discuss how liabilities are reported and analyzed. Current liabilities appear first on the balance sheet, followed by long-term liabilities. Companies should report the nature and amount of each liability in the balance sheet or in schedules in the notes accompanying the statements. They report inflows and outflows of cash related to the principal portion of longterm debt in the financing section of the statement of cash flows. The liquidity of a company may be analyzed by computing the current ratio. The long-run solvency of a company may be analyzed by computing the debt to assets ratio and the times interest earned ratio. Other factors to consider are contingent liabilities and lease obligations. *5. Apply the straight-line method of amortizing bond discount and bond premium. The straight-line method of amortization results in a constant amount of amortization and interest expense per period. *6. Apply the effective-interest method of amortizing bond discount and bond premium. The effective-interest method results in varying amounts of amortization and interest expense per period but a constant percentage rate of interest. When the difference between the straight-line and effective-interest method is material, GAAP requires use of the effectiveinterest method. *7. Describe the accounting for long-term notes payable. Each payment consists of (1) interest on the unpaid balance of the loan, and (2) a reduction of loan principal. The interest decreases each period, while the portion applied to the loan principal increases each period.
TRUE-FALSE STATEMENTS 1. A current liability must be paid out of current earnings. Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
2. If any portion of a long-term debt is to be paid in the next year, the entire debt should be classified as a current liability. Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
3. Current liabilities are expected to be paid within one year or the operating cycle, whichever is longer. Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
4. A company whose current liabilities exceed its current assets may have a liquidity problem. Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
5. Interest expense is reported under Other Expenses and Losses in the income statement. Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
6. Notes payable usually require the borrower to pay interest. Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
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Reporting and Analyzing Liabilities
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7. Notes payable are often used instead of accounts payable. Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
8. A note payable must always be paid before an account payable. Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
9. A $20,000, 8%, 9-month note payable requires an interest payment of $1,200 at maturity. Ans: T, LO: 1, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
10. Most notes are not interest bearing. Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
11. With an interest-bearing note, the amount of cash received upon issuance of the note generally exceeds the note's face value. Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
12. Interest expense on a note payable is only recorded at maturity. Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
13. Current maturities of long-term debt refers to the amount of interest on a note payable that must be paid in the current year. Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
14. Unearned revenues should be classified as Other Revenues and Gains on the income statement. Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
15. The higher the sales tax rate, the more profit a retailer can earn. Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
16. When a business sells an item and collects a state sales tax on it, a current liability arises. Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
17. If a retailer sells goods for a total price of $200, which includes a 5% sales tax, the amount of the sales tax is $9.52. Ans: T, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
18. During the month, a company sells goods for a total of $106,000, which includes sales taxes of $6,000; therefore, the company should recognize $100,000 in Sales Revenue and $6,000 in Sales Tax Expense. Ans: F, LO: 1, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
19. Payroll taxes include the employer’s share of Social Security taxes as well as state and federal unemployment taxes. Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
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Reporting and Analyzing Liabilities
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20. Unearned revenues are received before goods are delivered or services are rendered. Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
21. Metropolitan Symphony sells 200 season tickets for $40,000 that includes a five-concert season. The amount of Unearned Ticket Revenue after the third concert is $24,000. Ans: F, LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
22. The contractual interest rate is always equal to the market rate of interest on the date that bonds are issued. Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
23. Each bondholder may vote for the board of directors in proportion to the number of bonds held. Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: None, IMA: Business Economics
24. Bond interest paid by a corporation is an expense, whereas dividends paid are not an expense of the corporation. Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
25. Generally, convertible bonds do not pay interest. Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
26. An unsecured bond is one that is issued against the general credit of the borrower. Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
27. Bonds are a form of interest-bearing notes payable. Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
28. Neither corporate bond interest nor dividends are deductible for tax purposes. Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
29. The face value is the amount of principal and interest due at the maturity date. Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
30. Convertible bonds are often called callable bonds. Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
31. A $150,000 bond with a quoted priced of 102 ¼ is sold for $153,375. Ans: T, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
32. If a bond has a stated value of $1,000 and a contractual interest rate of 6 percent, then the interest paid annually will be $60. Ans: T, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
33. The current market value of a bond is equal to the present value of all future cash payments promised by the bond. Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
34. The board of directors may authorize more bonds than are issued. Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
35. The carrying value of bonds is calculated by adding the balance of the Discount on Bonds Payable account to the balance in the Bonds Payable account. Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
36. The carrying value of a bond is equal to the market price on the date of sale. Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
37. Total interest cost for a bond issued at a premium equals the total of the periodic interest payments added to the premium. Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
38. Total interest cost for a bond issued at a premium equals the total of the periodic interest payments minus the premium. Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
39. The calculation of interest to be paid each interest period in connection with a bond payable is not influenced by any premium or discount upon issuance. Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
40. If $150,000 face value bonds are issued at 102, the proceeds received will be $102,000. Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
41. If bonds sell at a premium, the interest expense recognized each year will be greater than the bond interest paid. Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
42. If the market rate of interest at the date of issuance of a bond is greater than the stated interest rate, the bond will be issued at a premium. Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
43. If a corporation issued bonds at an amount less than face value, it indicates that the corporation has a weak credit rating. Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
44. A corporation that issues bonds at a discount will recognize interest expense at a rate which is greater than the market rate of interest. Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
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45. If bonds are issued at a discount, the issuing corporation will pay a principal amount less than the face amount of the bonds on the maturity date. Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
46. If bonds are issued at a premium, the carrying value of the bonds will be greater than the face value of the bonds for all periods prior to the bond maturity date. Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
47. If the market rate of interest is greater than the contractual rate of interest, bonds will sell at a discount. Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
48. If $180,000, 6%, bonds are issued on January 1, and pay interest annually, the amount of interest paid will be $10,800. Ans: T, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
49. Material gains or losses on bond redemption are reported as an extraordinary item on the income statement. Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
50. If $500,000 par value bonds with a carrying value of $476,000 are redeemed at 97, a loss on redemption will be recorded. Ans: T, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
51. The classification of a liability as current or noncurrent is important because it may affect the evaluation of a company’s liquidity. Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
52. The debt to assets ratio measures the percentage of the total assets provided by creditors. Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
53. The times interest earned is computed by dividing net income by interest expense. Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
*54. Premium on bonds payable may be amortized by the straight-line method if the results obtained by its use do not materially differ from the results obtained by use of the effective-interest method. Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
*55. Discount on bonds payable may be amortized by the straight-line method if the results obtained by its use do not materially differ from the results obtained by use of the effective-interest method. Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
*56. If the straight-line method of amortization is used, the amount of unamortized premium on bonds payable will increase as the bonds approach maturity. Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
*57. If the straight-line method of amortization is used, the amount of unamortized premium on bonds payable will decrease as the bonds approach maturity. Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
*58. If the straight-line method of amortization is used, the amount of yearly interest expense will increase as the bonds approach maturity. Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
*59. When the effective-interest method of amortization is used, the amount of interest expense for a given period is calculated by multiplying the face rate of interest by the bond’s carrying value at the beginning of the given period. Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
*60. Regardless of whether the straight-line method or the effective-interest method is used, the carrying value of a bond issued at a discount will decrease continually over the bond’s life. Ans: F, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
*61. The effective-interest method produces a constant dollar amount of interest expense to be reported each interest period. Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
*62. When there are material differences between the results of using the straight-line method and using the effective-interest method of amortization, the effective-interest method should be used. Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
*63. In a monthly mortgage payment, the same amount is recorded as interest expense as in the previous month’s payment. Ans: F, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
*64. When a monthly mortgage payment is made and recorded, the debit to Mortgage Payable represents the reduction in the principal balance. Ans: T, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
*65. An installment note calling for equal total payments each period will result in an interest portion that decreases in each successive period. Ans: T, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
*66. An installment note calling for equal total payments each period will result in a principal portion that decreases in each successive period. Ans: F, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
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Reporting and Analyzing Liabilities
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Answers to True-False Statements 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
F F T T T T T F T F F
12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.
F F F F T T F T T F F
23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33.
F T F T T F F F T T T
34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44.
T F T F T T F F F F F
45. 46. 47. 48. 49. 50. 51. 52. 53. *54. *55.
F T T T F T T T F T T
*56. *57. *58. *59. *60. *61. *62. *63. *64. *65. *66.
F T F F F F T F T T F
MULTIPLE CHOICE QUESTIONS 67.
Liabilities are classified on the balance sheet as current or a. deferred. b. unearned. c. long-term. d. accrued.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
68.
Most companies pay current liabilities a. out of current assets. b. by issuing interest-bearing notes payable. c. by issuing stock. d. by creating long-term liabilities.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
69.
A current liability is a debt that can reasonably be expected to be paid a. within one year, or the operating cycle, whichever is longer. b. between 6 months and 18 months. c. out of currently recognized revenues. d. out of cash currently on hand.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
70.
Which of the following most likely would be classified as a current liability? a. Dividends payable b. Bonds payable in 5 years c. Three-year notes payable d. Mortgage payable as a single payment in 10 years
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
71.
Failure to record a liability will probably a. result in an overstated net income. b. result in overstated total liabilities and owner’s equity. c. have no effect on net income. d. result in understated total assets.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Very often, failure to record a liability means failure to record a(n) a. revenue. b. asset conversion. c. footnote. d. expense.
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
73.
Current liabilities are due a. but not receivable for more than one year. b. but not payable for more than one year. c. and receivable within one year. d. and payable within one year.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
74.
Liabilities are classified as current or long-term based on their a. description. b. payment terms. c. due date. d. amount.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
75.
Which of the following is not a current liability on December 31, 2017? a. A Note Payable due December 31, 2018 b. An Accounts Payable due January 31, 2018 c. A lawsuit judgment to be decided on January 10, 2018 d. Accrued salaries payable from 2017
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
76.
With an interest-bearing note, the amount of assets received upon issuance of the note is generally a. equal to the note's face value. b. greater than the note's face value. c. less than the note's face value. d. equal to the note's maturity value.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
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77.
10-15
Moss County Bank agrees to lend the Sadowski Brick Company $500,000 on January 1. Sadowski Brick Company signs a $500,000, 6%, 9-month note. The entry made by Sadowski Brick Company on January 1 to record the proceeds and issuance of the note is a. Interest Expense............................................................ 22,500 Cash. ......................................................................... 477,500 Notes Payable............................................................... 500,000 b. Cash ......................................................................... 500,000 Notes Payable............................................................... 500,000 c. Cash ......................................................................... 500,000 Interest Expense ........................................................... 22,500 522,500 Notes Payable .............................................................. d. Cash ......................................................................... 500,000 Interest Expense............................................................ 22,500 500,000 Notes Payable............................................................... Interest Payable ............................................................ 22,500
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $500,000 face value
78.
Moss County Bank agrees to lend the Sadowski Brick Company $500,000 on January 1. Sadowski Brick Company signs a $500,000, 6%, 9-month note. What is the adjusting entry required if Sadowski Brick Company prepares financial statements on June 30? a. Interest Expense............................................................ 15,000 Interest Payable ............................................................ 15,000 b. Interest Expense............................................................ 15,000 15,000 Cash ............................................................................. c. Interest Payable............................................................. 15,000 Cash ............................................................................. 15,000 d. Interest Payable............................................................. 15,000 Interest Expense ........................................................... 15,000
Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $500,000 .06 6/12 = $15,000 (Face val. 6% 6/12)
79.
Moss County Bank agrees to lend the Sadowski Brick Company $500,000 on January 1. Sadowski Brick Company signs a $500,000, 6%, 9-month note. What entry will Sadowski Brick Company make to pay off the note and interest at maturity assuming that interest has been accrued to September 30? a. Notes Payable ............................................................. 522,500 Cash ............................................................................. 522,500 b. Notes Payable ............................................................. 500,000 Interest Payable............................................................. 22,500 Cash ............................................................................. 522,500 c. Interest Expense............................................................ 22,500 Notes Payable ............................................................. 500,000 Cash ............................................................................. 522,500 d. Interest Payable............................................................. 15,000 Notes Payable ............................................................. 500,000 Interest Expense.............................................................. 7,500 Cash ............................................................................. 522,500
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $500,000 .06 9/12 = $22,500 (Face val. 6% 9/12)
.
10-16 80.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
West County Bank agrees to lend Drake Builders Company $400,000 on January 1. Drake Builders Company signs a $400,000, 6%, 6-month note. The entry made by Drake Builders Company on January 1 to record the proceeds and issuance of the note is a. Interest Expense .............................................................. 6,000 Cash. ......................................................................... 194,000 Notes Payable ............................................................... 400,000 b. Cash ......................................................................... 400,000 Notes Payable ............................................................... 400,000 c. Cash ......................................................................... 400,000 Interest Expense ............................................................ 12,000 Notes Payable ............................................................... 412,000 d. Cash ......................................................................... 400,000 Interest Expense ............................................................ 12,000 400,000 Notes Payable ............................................................... Interest Payable ............................................................ 12,000
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $400,000 face value
81.
West County Bank agrees to lend Drake Builders Company $400,000 on January 1. Drake Builders Company signs a $400,000, 6%, 6-month note. What is the adjusting entry required if Drake Builders Company prepares financial statements on March 30? a. Interest Expense ............................................................ 12,000 Interest Payable ............................................................ 12,000 b. Interest Expense ............................................................ 12,000 Cash.............................................................................. 12,000 c. Interest Expense .............................................................. 6,000 Interest Payable ............................................................ 6,000 d. Interest Payable ............................................................... 6,000 6,000 Interest Expense ...........................................................
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $400,000 .06 3/12 = $6,000 (Face val. 6% 3/12)
82.
West County Bank agrees to lend Drake Builders Company $400,000 on January 1. Drake Builders Company signs a $400,000, 6%, 6-month note. What entry will Drake Builders Company make to pay off the note and interest at maturity assuming that interest has been accrued to June 30? a. Notes Payable.............................................................. 412,000 Cash.............................................................................. 412,000 b. Notes Payable.............................................................. 400,000 Interest Payable ............................................................. 12,000 Cash.............................................................................. 412,000 c. Interest Expense ............................................................ 12,000 Notes Payable.............................................................. 400,000 Cash.............................................................................. 412,000 d. Interest Payable ............................................................... 6,000 Notes Payable.............................................................. 400,000 Interest Expense .............................................................. 6,000 412,000 Cash..............................................................................
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $400,000 .06 6/12 = $12,000 (Face val. 6% 6/12)
.
Reporting and Analyzing Liabilities
83.
10-17
As interest is recorded on an interest-bearing note, the Interest Expense account is a. increased; the Notes Payable account is increased. b. increased; the Notes Payable account is decreased. c. increased; the Interest Payable account is increased. d. decreased; the Interest Payable account is increased.
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
84.
On October 1, Sam's Painting Service borrows $150,000 from National Bank on a 3month, $150,000, 4% note. What entry must Sam's Painting Service make on December 31 before financial statements are prepared? a. Interest Payable ............................................................... 1,500 Interest Expense .................................................. 1,500 b. Interest Expense .............................................................. 6,000 Interest Payable ................................................... 6,000 c. Interest Expense .............................................................. 1,500 Interest Payable ................................................... 1,500 d. Interest Expense .............................................................. 1,500 Notes Payable ...................................................... 1,500
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $150,000 .04 3/12 = $1,500 (Amount bor. 4% 3/12)
85.
On October 1, Sam's Painting Service borrows $150,000 from National Bank on a 3month, $150,000, 4% note. The entry by Sam's Painting Service to record payment of the note and accrued interest on January 1 is a. Notes Payable ............................................................. 151,500 Cash ................................................................ 151,500 b. Notes Payable ............................................................. 150,000 Interest Payable ............................................................... 1,500 Cash ................................................................ 151,500 c. Notes Payable ............................................................. 150,000 Interest Payable ............................................................... 6,000 Cash ................................................................ 156,000 d. Notes Payable ............................................................. 150,000 Interest Expense .............................................................. 1,500 Cash ................................................................ 151,500
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $150,000 .04 3/12 = $1,500 (Amount bor. 4% 3/12)
86.
The interest charged on a $300,000 note payable, at the rate of 6%, on a 90-day note would be a. $18,000. b. $9,000. c. $4,500. d. $1,500.
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $300,000 .06 90/360 = $4,500 (Face val. 6% 90/360)
.
10-18 87.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The interest charged on a $350,000 note payable, at the rate of 6%, on a 60-day note would be a. $21,000. b. $10,500. c. $5,250. d. $3,500.
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $350,000 .06 60/360 = $3,500 (Face val. 6% 60/360)
88.
The interest charged on a $350,000 note payable, at the rate of 6%, for a year would be a. $21,000. b. $10,500. c. $5,250. d. $1,750.
Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $350,000 .06 = $21,000 (Face val. 6%)
89.
The interest charged on a $90,000 note payable, at the rate of 6%, on a 90-day note would be a. $5,400. b. $2,700. c. $1,350. d. $900.
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $90,000 .06 90/360 = $1,350 (Face val. 6% 90/360)
90.
The interest charged on a $90,000 note payable, at the rate of 6%, on a 60-day note would be a. $5,400. b. $2,700. c. $1,350. d. $900.
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $90,000 .06 60/360 = $900 (Face val. 6% 90/360)
91.
Interest expense on an interest-bearing note is a. always equal to zero. b. accrued over the life of the note. c. only recorded at the time the note is issued. d. only recorded at maturity when the note is paid.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
.
Reporting and Analyzing Liabilities
92.
10-19
Sales taxes collected by a retailer are recorded by a. crediting Sales Tax Revenue. b. debiting Sales Tax Expense. c. crediting Sales Taxes Payable. d. debiting Sales Taxes Payable.
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
93.
Unearned Rent Revenue is a. a contra account to Rent Revenue. b. a revenue account. c. reported as a current liability. d. debited when rent is received in advance.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
94.
The amount of sales tax collected by a retail store when making sales is a. a miscellaneous revenue for the store. b. a current liability. c. not recorded because it is a tax paid by the customer. d. recorded as an operating expense.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
95.
A company receives $264, of which $24 is for sales tax. The journal entry to record the sale would include a a. debit to Sales Taxes Expense for $24. b. credit to Sales Taxes Payable for $24. c. debit to Sales Revenue for $264. d. debit to Cash for $240.
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
96.
A company receives $348, of which $28 is for sales tax. The journal entry to record the sale would include a a debit to Sales Taxes Expense for $28. b. debit to Sales Taxes Payable for $28. c. debit to Sales Revenue for $348. d. debit to Cash for $348.
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
97.
A retail store credited the Sales Revenue account for the sales price and the amount of sales tax on sales. If the sales tax rate is 5% and the balance in the Sales Revenue account amounted to $294,000, what is the amount of the sales taxes owed to the taxing agency? a. $280,000 b. $294,000 c. $14,700 d. $14,000
Ans: D, LO: 1, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($294,000 1.05) .05 = $14,000 (Sal. Rev. 1.05) 5%
.
10-20 98.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
A retail store credited the Sales Revenue account for the sales price and the amount of sales tax on sales. If the sales tax rate is 5% and the balance in the Sales Revenue account amounted to $630,000, what is the amount of the sales taxes owed to the taxing agency? a. $600,000 b. $630,000 c. $31,500 d. $30,000
Ans: D, LO: 1, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($630,000 1.05) .05 = $30,000 (Sal. Rev. 1.05) 5%
99.
The current portion of long-term debt should a. be paid immediately. b. be reclassified as a current liability. c. be classified as a long-term liability. d. not be separated from the long-term portion of debt.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
100.
On January 1, 2017, Ermler Company, a calendar-year company, issued $2,000,000 of notes payable, of which $500,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2017, is a. Current liabilities, $2,000,000. b. Long-term debt , $2,000,000. c. Current liabilities, $500,000; Long-term Debt, $1,000,000. d. Current liabilities, $500,000; Long-term Debt, $1,500,000.
Ans: D, LO: 1, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $2,000,000 − $500,000 = $1500,000 (Tot. Note Pay − ann. Pay.)
101.
On January 1, 2017, Keisler Company, a calendar-year company, issued $900,000 of notes payable, of which $225,000 is due on January 1 for each of the next four years. The proper balance sheet presentation on December 31, 2017, is a. Current liabilities, $900,000. b. Long-term debt, $900,000. c. Current liabilities, $225,000; Long-term Debt, $675,000. d. Current liabilities, $675,000; Long-term Debt, $225,000.
Ans: C, LO: 1, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $900,000 − $225,000 = $675,000
102.
Sales taxes collected by a retailer from a customer are expenses a. of the retailer. b. of the customers. c. of the government. d. that are not recognized by the retailer until they are submitted to the government.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Reporting and Analyzing Liabilities
103.
10-21
A retailer that collects sales taxes is acting as an agent for the a. wholesaler. b. customer. c. taxing authority. d. chamber of commerce.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
104.
Sales taxes collected by a retailer are reported as a. contingent liabilities. b. revenues. c. expenses. d. current liabilities.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
105.
A cash register tape shows cash sales of $8,000 and sales taxes of $400. The journal entry to record this information is a. Cash ............................................................................. 8,000 Sales Revenue .............................................................. 8,000 b. Cash ............................................................................. 8,400 Sales Tax Revenue ....................................................... 400 Sales Revenue .............................................................. 8,000 c. Cash ............................................................................. 8,000 Sales Tax Expense ............................................................. 400 Sales Revenue .............................................................. 8,400 d. Cash ............................................................................. 8,400 Sales Revenue .............................................................. 8,000 Sales Taxes Payable .................................................... 400
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
106.
Don's Pharmacy has collected $900 in sales taxes during March. If sales taxes must be remitted to the state government monthly, what entry will Don's Pharmacy make to show the March remittance? a. Sales Tax Expense ............................................................. 900 Cash ............................................................................. 900 b. Sales Taxes Payable .......................................................... 900 Cash ............................................................................. 900 c. Sales Tax Expense ............................................................. 900 Sales Taxes Payable .................................................... 900 d. No entry required.
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
10-22 107.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
A cash register tape shows cash sales of $3,000 and sales taxes of $200. The journal entry to record this information is a. Cash ............................................................................. 3,200 Sales Revenue .............................................................. 3,200 b. Cash ............................................................................. 3,200 Sales Tax Payable......................................................... 200 Sales Revenue .............................................................. 3,000 c. Cash ............................................................................. 3,000 Sales Tax Expense ............................................................. 200 Sales Revenue .............................................................. 3,200 d. Cash ............................................................................. 3,200 Sales Revenue .............................................................. 3,000 Sales Tax Revenue ....................................................... 200
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
108.
Al’s Bookstore has collected $950 in sales taxes during April. If sales taxes must be remitted to the state government monthly, what entry will Al's Bookstore make to show the April remittance? a. Sales Tax Expense ............................................................. 950 Cash .............................................................................. 950 b. Sales Taxes Payable .......................................................... 950 Cash .............................................................................. 950 c. Sales Tax Expense ............................................................. 950 Sales Taxes Payable ..................................................... 950 d. No entry required.
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
109.
Morgan Company does not ring up sales taxes separately on the cash register. Total receipts for February amounted to $38,160. If the sales tax rate is 6%, what amount must be remitted to the state for February's sales taxes? a. $2,290 b. $2,160 c. $2,152 d. It cannot be determined.
Ans: B, LO: 1, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($38,160 1.06) .06 = $2,160 (Tot. rec. – 1.06) × .06
110.
Norlan Company does not ring up sales taxes separately on the cash register. Total receipts for October amounted to $36,750. If the sales tax rate is 5%, what amount must be remitted to the state for October's sales taxes? a. $1,750 b. $1,838 c. $88 d. It cannot be determined.
Ans: A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($36,750 1.05) .05 = $1,750 (Tot. rec. ÷ 1.05) × .05
.
Reporting and Analyzing Liabilities
111.
10-23
Tina's Boutique has total receipts for the month of $32,340 including sales taxes. If the sales tax rate is 5%, what are Tina's sales for the month? a. $30,724 b. $30,800 c. $32,340 d. It cannot be determined.
Ans: B, LO: 1, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $32,340 1.05 = $30,800 (Tot. rec. ÷ 105%)
112.
Dominic's Salon has total receipts for the month of $40,280 including sales taxes. If the sales tax rate is 6%, what are Dominic's sales for the month? a. $37,864.40 b. $42,697.60 c. $38,000.00 d. It cannot be determined.
Ans: C, LO: 1, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $40,280 1.06 = $38,000 (Tot. rec. ÷ 106%)
113.
The following totals for the month of April were taken from the payroll records of Noll Company. Salaries $120,000 FICA taxes withheld 9,180 Income taxes withheld 25,000 Medical insurance deductions 4,500 Federal unemployment taxes 320 State unemployment taxes 2,160 The journal entry to record the monthly payroll on April 30 would include a a. debit to Salaries and Wages Expense for $120,000. b. credit to Salaries and Wages Payable for $120,000. c. debit to Salaries and Wages Payable for $120,000. d. debit to Salaries and Wages Expense for $81,320.
Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
114.
The following totals for the month of April were taken from the payroll records of Noll Company. Salaries $120,000 FICA taxes withheld 9,180 Income taxes withheld 25,000 Medical insurance deductions 4,500 Federal unemployment taxes 320 State unemployment taxes 2,160 The entry to record the payment of net payroll would include a a. debit to Salaries and Wages Payable for $79,160. b. debit to Salaries and Wages Payable for $81,320. c. debit to Salaries and Wages Payable for $72,140. d. credit to Cash for $90,500.
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $120,000 − $9,180 − $25,000 − $4,500 = $81,320 (Salar. – FICA tax. – inc. tax. – ins. ded.)
.
10-24 115.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The following totals for the month of April were taken from the payroll records of Noll Company. Salaries $120,000 FICA taxes withheld 9,180 Income taxes withheld 25,000 Medical insurance deductions 4,500 Federal unemployment taxes 320 State unemployment taxes 2,160 The entry to record accrual of employer’s payroll taxes would include a a. debit to Payroll Tax Expense for $2,480. b. debit to Payroll Tax Expense for $11,660. c. credit to FICA Taxes Payable for $18,360. d. credit to Payroll Tax Expense for $2,480.
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $9,180 + $320 + $2,160 = $11,660 (FICA tax. + fed. unemp. tax. + st. unemp. tax.)
116.
The following totals for the month of April were taken from the payroll records of Noll Company. Salaries $120,000 FICA taxes withheld 9,180 Income taxes withheld 25,000 Medical insurance deductions 4,500 Federal unemployment taxes 320 State unemployment taxes 2,160 The entry to record the accrual of federal unemployment tax would include a a. credit to Federal Unemployment Taxes Payable for $320. b. debit to Federal Unemployment Taxes Expense for $320. c. credit to Payroll Tax Expense for $320. d. debit to Federal Unemployment Taxes Payable for $320.
Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
117.
Keller Company issued a five-year interest-bearing note payable for $300,000 on January 1, 2016. Each January the company is required to pay $60,000 on the note. How will this note be reported on the December 31, 2017, balance sheet? a. Long-term debt, $300,000 b. Long-term debt, $240,000 c. Long-term debt, $180,000; Long-term Debt due within one year, $60,000 d. Long-term debt of $240,000; Long-term Debt due within one year, $60,000
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $300,000 − $60,000 − $60,000 = $180,000 (Note face val. – (ann. Pay. × 2))
.
Reporting and Analyzing Liabilities
118.
10-25
The following totals for the month of April were taken from the payroll records of Metz Company. Salaries $90,000 FICA taxes withheld 6,885 Income taxes withheld 19,800 Medical insurance deductions 3,600 Federal unemployment taxes 720 State unemployment taxes 4,500 The journal entry to record the monthly payroll on April 30 would include a a. debit to Salaries and Wages Expense for $90,000. b. credit to Salaries and Wages Payable for $90,000. c. debit to Salaries and Wages Payable for $90,000. d. debit to Salaries and Wages Expense for $59,715.
Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
119.
The following totals for the month of April were taken from the payroll records of Metz Company. Salaries $90,000 FICA taxes withheld 6,885 Income taxes withheld 19,800 Medical insurance deductions 3,600 Federal unemployment taxes 720 State unemployment taxes 4,500 The entry to record the payment of net payroll would include a a. debit to Salaries and Wages Payable for $54,495. b. debit to Salaries and Wages Payable for $59,715. c. debit to Salaries and Wages Payable for $55,215. d. credit to Cash for $55,215.
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $90,000 − $6,885 − $19,800 − $3,600 = $59,715 (Salar. – FICA tax. – inc. tax. – ins. ded.)
120.
The following totals for the month of April were taken from the payroll records of Metz Company. Salaries $90,000 FICA taxes withheld 6,885 Income taxes withheld 19,800 Medical insurance deductions 3,600 Federal unemployment taxes 720 State unemployment taxes 4,500 The entry to record accrual of employer’s payroll taxes would include a a. debit to Payroll Tax Expense for $12,105. b. credit to Payroll Tax Expense for $12,105. c. credit to FICA Taxes Payable for $5,220. d. credit to Payroll Tax Expense for $5,220.
Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $6,885 + $720 + $4,500 = $12,105 (FICA tax. + fed. unemp. tax. + st. unemp. tax)
.
10-26 121.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The following totals for the month of April were taken from the payroll records of Metz Company. Salaries $90,000 FICA taxes withheld 6,885 Income taxes withheld 19,800 Medical insurance deductions 3,600 Federal unemployment taxes 720 State unemployment taxes 4,500 The entry to record the accrual of federal unemployment tax would include a a. credit to Federal Unemployment Taxes Payable for $720. b. credit to Federal Unemployment Taxes Expense for $720. c. credit to Payroll Tax Expense for $720. d. debit to Federal Unemployment Taxes Payable for $720.
Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
122.
The following totals for the month of March were taken from the payroll records of Kern Company. Salaries $270,000 FICA taxes withheld 20,655 Income taxes withheld 59,400 Medical insurance deductions 3,915 Federal unemployment taxes 2,160 State unemployment taxes 13,500 The journal entry to record the monthly payroll on March 30 would include a a. debit to Salaries and Wages Payable for $170,370. b. debit to Salaries and Wages Payable for $186,030. c. debit to Salaries and Wages Expense for $270,000. d. debit to Salaries and Wages Expense for $170,370.
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
123.
The following totals for the month of March were taken from the payroll records of Kern Company. Salaries $270,000 FICA taxes withheld 20,655 Income taxes withheld 59,400 Medical insurance deductions 3,915 Federal unemployment taxes 2,160 State unemployment taxes 13,500 The entry to record the payment of net payroll would include a a. debit to Salaries and Wages Expense for $170,370. b. debit to Salaries and Wages Payable for $186,030. c. debit to Salaries and Wages Payable for $170,370. d. credit to Cash for $170,370.
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $270,000 − $20,655 − $59,400 − $3,915 = $186,030 (Salar. – FICA tax. – inc. tax. – ins. ded.)
.
Reporting and Analyzing Liabilities
124.
10-27
The following totals for the month of March were taken from the payroll records of Kern Company. Salaries $270,000 FICA taxes withheld 20,655 Income taxes withheld 59,400 Medical insurance deductions 3,915 Federal unemployment taxes 2,160 State unemployment taxes 13,500 The entry to record accrual of employer’s payroll taxes would include a a. debit to Payroll Tax Expense for $36,315 b. debit to Payroll Tax Expense for $95,715 c. debit to FICA Taxes Payable for $20,655. d. credit to Payroll Tax Expense for $36,315.
Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $20,655 + $2,160 + $13,500 = $36,315 (FICA tax. + fed. unemp. tax. + st. unemp. tax.)
125.
The following totals for the month of March were taken from the payroll records of Kern Company. Salaries $270,000 FICA taxes withheld 20,655 Income taxes withheld 59,400 Medical insurance deductions 3,915 Federal unemployment taxes 2,160 State unemployment taxes 13,500 The entry to record the accrual of federal unemployment tax would include a a. credit to Federal Unemployment Taxes Payable for $2,160. b. debit to Federal Unemployment Taxes Expense for $2,160. c. credit to Payroll Tax Expense for $2,160. d. debit to Federal Unemployment Taxes Payable for $2,160.
Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
126.
Two sisters operate a bed and breakfast on the coast of Maine. As customers make reservations they are required to pay cash in advance equal to one-half of the rate for their stay. How should the sisters account for the cash received as reservations are made? a. Cash Unearned Service Revenue b. Cash Service Revenue c. Unearned Service Revenue Service Revenue d. Cash Sales Revenue
Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
10-28 127.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Julie Lambert has a large consulting practice. New clients are required to pay one-half of the consulting fees up front. The balance is paid at the conclusion of the consultation. How does Lambert account for the cash received at the end of the engagement? a. Cash Unearned Service Revenue b. Cash Unearned Service Revenue Service Revenue c. Prepaid Service Revenue Service Revenue d. No entry is required when the engagement is concluded.
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
128.
Madson Company typically sells subscriptions on an annual basis, and publishes six times a year. The magazine sells 90,000 subscriptions in January at $10 each. What entry is made in January to record the sale of the subscriptions? a. Subscriptions Receivable ............................................. 900,000 Subscription Revenue ................................................... 900,000 b. Cash ......................................................................... 900,000 Unearned Subscription Revenue ................................... 900,000 c. Subscriptions Receivable ............................................. 150,000 Unearned Subscription Revenue ................................... 150,000 d. Prepaid Subscriptions .................................................. 900,000 Cash .............................................................................. 900,000
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $90,000 $10 = $900,000
129.
Mohling Company typically sells subscriptions on an annual basis, and publishes eight times a year. The magazine sells 60,000 subscriptions in January at $10 each. What entry is made in January to record the sale of the subscriptions? a. Subscriptions Receivable ............................................. 600,000 Subscription Revenue ................................................... 600,000 b. Cash ......................................................................... 600,000 Unearned Subscription Revenue ................................... 600,000 c. Subscriptions Receivable .............................................. 75,000 Unearned Subscription Revenue ................................... 75,000 d. Prepaid Subscriptions .................................................. 600,000 Cash .............................................................................. 600,000
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $60,000 $10 = $600,000 (Tot. subscr. × subscr. price)
130.
From the standpoint of the issuing company, a disadvantage of using bonds as a means of long-term financing is that a. bond interest is deductible for tax purposes. b. interest must be paid on a periodic basis regardless of earnings. c. income to stockholders may increase as a result of trading on the equity. d. the bondholders do not have voting rights.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
Reporting and Analyzing Liabilities
131.
10-29
If a corporation issued $9,000,000 in bonds which pay 5% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%? a. $4,500,000 b. $135,000 c. $450,000 d. $315,000
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($9,000,000 .05) (1 − .30)= $315,000 (Bond face val. × 5%) × (1 – .30)
132.
Secured bonds are bonds that a. are in the possession of a bank. b. can be converted into common stock. c. have specific assets of the issuer pledged as collateral. d. mature in installments.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
133.
A legal document that indicates the name of the issuer, the face value of the bond and such other data is called a. a bond certificate. b. a bond debenture. c. trading on the equity. d. a convertible bond.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
134.
Stockholders of a company may be reluctant to finance expansion through issuing more equity because a. leveraging with debt is always a better idea. b. their earnings per share may decrease. c. the price of the stock will automatically decrease. d. dividends must be paid on a periodic basis.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
135.
Which of the following is not an advantage of issuing bonds instead of common stock? a. Stockholder control is not affected b. Earnings per share on common stock may be lower c. Tax savings result d. Each of these answer choices is an advantage.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
136.
Bonds that are secured by real estate are termed a. mortgage bonds. b. serial bonds. c. debentures. d. convertible bonds.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
10-30 137.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Bonds that may be exchanged for common stock at the option of the bondholders are called a. options. b. stock bonds. c. convertible bonds. d. callable bonds.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
138.
Bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer are called a. callable bonds. b. early retirement bonds. c. options. d. debentures.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
139.
Bonds that are issued against the general credit of the borrower are called a. callable bonds. b. debenture bonds. c. secured bonds. d. term bonds.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
140.
Corporations are granted the power to issue bonds through a. tax laws. b. state laws. c. federal security laws. d. bond debentures.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
141.
Bonds are not always categorized as a. callable or convertible. b. term or serial. c. secured or unsecured. d. secured or debenture.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
142.
Which of the following statements concerning bonds is not a true statement? a. Bonds are generally sold through an investment company. b. The bond indenture is prepared after the bonds are printed. c. The bond indenture and bond certificate are separate documents. d. The trustee keeps records of each bondholder.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
143.
The contractual rate of interest is usually stated as a(n) a. monthly rate. b. daily rate. c. semiannual rate. d. annual rate.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
Reporting and Analyzing Liabilities
144.
10-31
When authorizing bonds to be issued, the board of directors does not specify the a. total number of bonds authorized to be sold. b. contractual interest rate. c. selling price. d. total face value of the bonds.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
145.
Bonds with a face value of $500,000 and a quoted price of 102¼ have a selling price of a. $601,125. b. $510,125. c. $510,013. d. $511,250.
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $500,000 $1.0225 = $511,250 (Face val. × 102.25%)
146.
Bonds with a face value of $500,000 and a quoted price of 97¼ have a selling price of a. $486,250. b. $485,125. c. $485,013. d. $487,500.
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $500,000 .9725 = $486,250 (Face val. × 97.25%)
147.
Bonds with a face value of $600,000 and a quoted price of 104¼ have a selling price of a. $625,500. b. $624,150. c. $602,550. d. $624,000.
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $600,000 $1.0425 = $625,500 (Face val. × 104.25%)
148.
Bonds with a face value of $600,000 and a quoted price of 98½ have a selling price of a. $589,500. b. $588,300. c. $588,030. d. $591,000.
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $600,000 .985 = $591,000 (Face val. × 98.5%)
149.
The present value of a bond is also known as its a. face value. b. market price. c. future value. d. deferred value.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
10-32 150.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
All of the following statements regarding convertible bonds are true except a. if the market price of common stock increases substantially, bondholders with convertible bonds benefit. b. convertible bonds can be converted into common stock at the option of the issuing company. c. bondholders with convertible bonds receive interest on the bonds until conversion. d. convertible bonds sell at a higher price and pay a lower rate of interest than those without the conversion option.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
151.
The contractual interest rate on a bond is often referred to as the a. callable rate. b. the maturity rate. c. market rate. d. stated rate.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
152.
If the market interest rate for a bond is higher than the stated interest rate, the bond will sell at a. a premium. b. a discount. c. par. d. either a discount or premium.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
153.
If the market rate of interest is greater than the contractual rate of interest, bonds will sell a. at a premium. b. at face value. c. at a discount. d. only after the stated rate of interest is increased.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
154.
The interest expense recorded on an interest payment date is increased a. by the amortization of premium on bonds payable. b. by the amortization of discount on bonds payable. c. only if the bonds were sold at face value. d. only if the market rate of interest is less than the stated rate of interest on that date.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
*155. On January 1, 2017, $3,000,000, 10-year, 10% bonds, were issued for $2,910,000. Interest is paid annually on January 1. If the issuing corporation uses the straight-line method to amortize discount on bonds payable, the monthly amortization amount is a. $29,100. b. $9,000. c. $2,424. d. $750. Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($3,000,000 − $2,910,000) 10] 12 = $750 [(Bond face val. – sell. Pr.)÷10]÷12
.
Reporting and Analyzing Liabilities
10-33
*156. A corporation issues $300,000, 10%, 5-year bonds on January 1, 2017, for $287,400. Interest is paid annually on January 1. If the corporation uses the straight-line method of amortization of bond discount, the amount of bond interest expense to be recognized in December 31, 2017’s adjusting entry is a. $32,520. b. $30,000. c. $27,480. d. $2,520. Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($300,000 − $287,400) 5] + ($300,000 .10) = $32,520 [(Face val. – iss. pr.) ÷ 5] + (Face val. ×10%)
157.
If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest annually would sell at an amount a. less than face value. b. equal to face value. c. greater than face value. d. that cannot be determined.
Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
*158. On January 1, 2017, $4,000,000, 5-year, 10% bonds, were issued for $4,240,000. Interest is paid annually on January 1. If the issuing corporation uses the straight-line method to amortize premium on bonds payable, the monthly amortization amount is a. $35,332. b. $48,000. c. $4,800. d. $4,000. Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [($4,240,000 − $4,000,000) 5] 12 = $4,000 [(Iss. Pr. – Face val.) ÷ 5] ÷12
*159. A corporation issues $300,000, 8%, 5-year bonds on January 1, 2017, for $312,600. Interest is paid annually on January 1. If the corporation uses the straight-line method of amortization of bond premium, the amount of bond interest expense to be recognized in December 31, 2017’s adjusting entry is a. $21,480. b. $24,000. c. $26,520. d. $2,520. Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($300,000 .08) − [($312,600 − $300,000) 5] = $21,480 (Face val × 8%) – [(iss. pr. – face val.) ÷ 5]
160.
If the market rate of interest is lower than the contractual interest rate, the bonds will sell at a. face value. b. a premium. c. a discount. d. an unknown amount.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
.
10-34 161.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
If bonds are issued at a premium, the stated interest rate is a. higher than the market rate of interest. b. lower than the market rate of interest. c. too low to attract investors. d. adjusted to a higher rate of interest.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
162.
The present value of a $10,000, 5-year bond, will be less than $10,000 if the a. contractual rate of interest is less than the market rate of interest. b. contractual rate of interest is greater than the market rate of interest. c. bond is convertible. d. contractual rate of interest is equal to the market rate of interest.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
163.
The market value (present value) of a bond is a function of all of the following except the a. dollar amounts to be received. b. maturity date. c. market interest rate. d. type of bonds.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
164.
Gomez Corporation issues 900, 10-year, 8%, $1,000 bonds dated January 1, 2017, at 96. The journal entry to record the issuance will show a a. debit to Cash of $900,000. b. credit to Discount on Bonds Payable for $36,000. c. credit to Bonds Payable for $864,000. d. debit to Cash for $864,000.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (900 $1,000) .96 = $864,000 (Num. of bonds × $1,000) × 96%
165.
Yanik Corporation issues 5,000, 10-year, 8%, $1,000 bonds dated January 1, 2017, at 97. The journal entry to record the issuance will show a a. debit to Cash of $5,000,000. b. debit to Discount on Bonds Payable for $150,000. c. credit to Bonds Payable for $4,850,000. d. credit to Cash for $4,850,000.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (5,000 $1,000) (1 − .97) = $150,000 (Num. of bonds × $1,000) × (1 – .97)
.
Reporting and Analyzing Liabilities
166.
10-35
Molina Corporation issues 5,000, 10-year, 8%, $1,000 bonds dated January 1, 2017, at 103. The journal entry to record the issuance will show a a. debit to Cash of $5,000,000. b. debit to Premium on Bonds Payable for $150,000. c. credit to Bonds Payable for $5,000,000. d. credit to Cash for $5,150,000.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 5,000 $1,000 = $5,000,000 (Num. of bonds × $1,000)
167.
The market rate of interest is often called the a. stated rate. b. effective rate. c. coupon rate. d. contractual rate.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
168.
If bonds are issued at a discount, it means that the a. financial strength of the issuer is suspect. b. market interest rate is higher than the contractual interest rate. c. market interest rate is lower than the contractual interest rate. d. bondholder will receive effectively less interest than the contractual rate of interest.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
169.
Selling the bonds at a premium has the effect of a. causing the total cost of borrowing to be higher than the bond interest paid. b. causing the total cost of borrowing to be lower than the bond interest paid. c. raising the effective interest rate above the state interest rate. d. increasing the amount of cash paid for interest each 6 months.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
170.
When bonds are issued at a premium, the total interest cost of the bonds over the life of the bonds is equal to the amount of a. interest paid over the life of the bond. b. interest paid over the life of the bond plus the amount of premium at sale point. c. interest paid over the life of the bond minus the amount of premium at sale point. d. premium at sale point.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
171.
The statement "Bond prices vary inversely with changes in the market rate of interest" means that if the a. market rate of interest increases, the contractual interest rate will decrease. b. contractual interest rate increases, then bond prices will go down. c. market rate of interest decreases, then bond prices will go up. d. contractual interest rate increases, the market rate of interest will decrease.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
.
10-36 172.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The carrying value of bonds will equal the market price a. at the close of every trading day. b. at the end of the fiscal period. c. on the date of issuance. d. every six months on the date interest is paid.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
173.
Over the term of the bonds, the balance in the Discount on Bonds Payable account will a. fluctuate up and down if the market is volatile. b. decrease. c. increase. d. be unaffected until the bonds mature.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
174.
The sale of bonds above face value a. is a rare occurrence. b. will cause the total cost of borrowing to be less than the bond interest paid. c. will cause the total cost of borrowing to be more than the bond interest paid. d. will have no net effect on interest expense by the time the bonds mature.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
175.
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 stockholders' equity account. d. classified as a revenue account.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
176.
In the balance sheet, the account Discount on Bonds Payable is a. added to bonds payable. b. deducted from bonds payable. c. classified as a stockholders' equity account. d. classified as a revenue account.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
177.
Bond discount should be amortized to comply with a. the historical cost principle. b. the expense recognition principle. c. the revenue recognition principle. d. conservatism.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Reporting and Analyzing Liabilities
178.
10-37
Five thousand bonds with a face value of $1,000 each, are sold at 102. The entry to record the issuance is a. Cash ...................................................................... 5,100,000 Bonds Payable .............................................................. 5,100,000 b. Cash ...................................................................... 5,000,000 Premium on Bonds Payable ........................................ 100,000 Bonds Payable .............................................................. 5,100,000 c. Cash ...................................................................... 5,100,000 Premium on Bonds Payable .......................................... 100,000 Bonds Payable .............................................................. 5,000,000 d. Cash ...................................................................... 5,100,000 Discount on Bonds Payable .......................................... 100,000 Bonds Payable .............................................................. 5,000,000
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (5,000 $1,000) 1.02 = $5,100,000 (Num. of bonds × $1,000) ×1.02
179.
Five thousand bonds with a face value of $1,000 each, are sold at 97. The entry to record the issuance is a. Cash ...................................................................... 4,850,000 Bonds Payable .............................................................. 4,850,000 b. Cash ...................................................................... 4,850,000 Discount on Bonds Payable ......................................... 150,000 Bonds Payable .............................................................. 5,000,000 c. Cash ...................................................................... 4,850,000 Premium on Bonds Payable .......................................... 150,000 Bonds Payable .............................................................. 5,000,000 d. Cash ...................................................................... 5,000,000 Discount on Bonds Payable .......................................... 150,000 Bonds Payable .............................................................. 4,850,000
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (5,000 $1,000) .97 = $4,850,000 (Num. of bonds × $1,000) × 97%
180.
The journal entry to record the issuance of bonds at a discount will include a a. debit to Cash for the face amount of the bonds. b. debit to Cash for the face amount of the bonds plus the amount of the discount. c. debit to Cash for the face amount of the bonds minus the amount of the discount. d. credit to Cash for the face amount of the bonds.
Ans: C, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
181.
If bonds have been issued at a discount, then over the life of the bonds the a. carrying value of the bonds will decrease. b. carrying value of the bonds will increase. c. interest expense will increase, if the discount is being amortized on a straight-line basis. d. unamortized discount will increase.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
10-38
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
*182. Winrow Company received proceeds of $754,000 on 10-year, 8% bonds issued on January 1, 2016. The bonds had a face value of $800,000, pay interest annually on December 31st, and have a call price of 101. Winrow uses the straight-line method of amortization. What is the amount of interest Winrow must pay the bondholders in 2016? a. $60,320 b. $64,000 c. $68,600 d. $59,400 Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $800,000 .08 = $64,000 (Bonds face val. × 8%)
*183. Winrow Company received proceeds of $754,000 on 10-year, 8% bonds issued on January 1, 2016. The bonds had a face value of $800,000, pay interest annually on December 31st, and have a call price of 101. Winrow uses the straight-line method of amortization. What is the amount of interest expense Winrow will show with relation to these bonds for the year ended December 31, 2017? a. $64,000 b. $60,320 c. $68,600 d. $59,400 Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($800,000 − $754,000) 10 = $4,600; ($800,000 .08) + $4,600 = $68,600 (Face val. – proc.) ÷ 10 = ann. amort.; (Face val. × 8%) + ann. amort.
*184. Winrow Company received proceeds of $754,000 on 10-year, 8% bonds issued on January 1, 2016. The bonds had a face value of $800,000, pay interest annually on December 31st, and have a call price of 101. Winrow uses the straight-line method of amortization. What is the carrying value of the bonds on January 1, 2018? a. $800,000 b. $763,200 c. $790,800 d. $758,600 Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($800,000 − $754,500) 10] 2 = $9,200; $754,000 + $9,200 = $763,200 [(Face val. – proc.) ÷ 10] × 2 = dis. amort.; (proc. + dis. amort.)
185.
Winrow Company received proceeds of $754,000 on 10-year, 8% bonds issued on January 1, 2016. The bonds had a face value of $800,000, pay interest annually on December 31st, and have a call price of 101. Winrow uses the straight-line method of amortization. Winrow Company decided to redeem the bonds on January 1, 2018. What amount of gain or loss would Winrow report on its 2018 income statement? a. $36,800 gain b. $44,800 gain c. $44,800 loss d. $36,800 loss
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($800,000 − $754,000) 10 = $4,600; ($800,000 1.01) − [$754,000 + ($4,600 2)] = $44,800 (Face val. – proc.) ÷10 = ann. amort.; (Face val. × 101%) – [proc. + (ann. amort. ×2)]
.
Reporting and Analyzing Liabilities
186.
10-39
Sparks Company received proceeds of $634,500 on 10-year, 8% bonds issued on January 1, 2016. The bonds had a face value of $600,000, pay interest annually on December 31st, and have a call price of 102. Sparks uses the straight-line method of amortization. What is the amount of interest Sparks must pay the bondholders in 2016? a. $50,760 b. $48,000 c. $48,960 d. $5,076
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $600,000 .08 = $48,000 (Face val. × 8%)
*187. Sparks Company received proceeds of $634,500 on 10-year, 8% bonds issued on January 1, 2016. The bonds had a face value of $600,000, pay interest annually on December 31st, and have a call price of 102. Sparks uses the straight-line method of amortization. What is the amount of interest expense Sparks will show with relation to these bonds for the year ended December 31, 2017? a. $48,000 b. $50,760 c. $44,550 d. $37,650 Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($634,500 − $600,000) 10 = $3,450; ($600,000 .08) − $3,450 = $44,550 (Proc. – face val.) ÷ 10 = ann. amort.; (Face val. × 8%) – ann. amort.)
*188. Sparks Company received proceeds of $634,500 on 10-year, 8% bonds issued on January 1, 2016. The bonds had a face value of $600,000, pay interest annually on December 31st, and have a call price of 102. Sparks uses the straight-line method of amortization. What is the carrying value of the bonds on January 1, 2018? a. $600,000 b. $627,600 c. $572,400 d. $631,050 Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($634,500 − $600,000) 10 = $3,450; $634,500 – (3,450 × 2) = $627,600 (Proc. – face val.) ÷ 10 = ann. amort.; proc. – (ann. amort. × 2)
189.
Sparks Company received proceeds of $634,500 on 10-year, 8% bonds issued on January 1, 2016. The bonds had a face value of $600,000, pay interest annually on December 31st, and have a call price of 102. Sparks uses the straight-line method of amortization. Sparks Company decided to redeem the bonds on January 1, 2018. What amount of gain or loss would Sparks report on their 2018 income statement? a. $27,600 gain b. $15,600 gain c. $15,600 loss d. $27,600 loss
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($634,500 − $600,000) 10 = $3,450; ($600,000 1.02) − [$634,500 − ($3,450 2)] = $15,600 (Proc. – Face val.) ÷ 10 = ann. amort.; (Face val. × 102%) – [(Proc. – (ann. amort. × 2)]
.
10-40 190.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Hogan Company has $2,000,000 of bonds outstanding. The unamortized premium is $28,800. If the company redeemed the bonds at 101, what would be the gain or loss on the redemption? a. $8,800 gain b. $8,800 loss c. $20,000 gain d. $20,000 loss
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($2,000,000 + $28,800) − ($2,000,000 1.01) = $8,800 (Face val. + unamor. prem.) – (face val. × 101%)
191.
The current carrying value of Kennett’s $800,000 face value bonds is $797,000. If the bonds are retired at 102, what would be the amount Kennett would pay its bondholders? a. $797,000 b. $800,000 c. $804,000 d. $816,000
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $800,000 1.02 = $816,000 (Carry. Val. × 102%)
192.
Ervay Company has $3,500,000 of bonds outstanding. The unamortized premium is $50,400. If the company redeemed the bonds at 101, what would be the gain or loss on the redemption? a. $15,400 gain b. $15,400 loss c. $35,000 gain d. $35,000 loss
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($3,500,000 1.01) − ($3,500,000 + 50,400) = $15,400 (Face val. × 101%) – (Face val. + unamor. prem.)
193.
The current carrying value of Pierce’s $1,800,000 face value bonds is $1,793,200. If the bonds are retired at 102, what would be the amount Pierce would pay its bondholders? a. $1,793,200 b. $1,800,000 c. $1,804,000 d. $1,836,000
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,800,000 1.02 = $1,836,000 (Carry. val. × 102%)
194.
Hulse Corporation retires its $800,000 face value bonds at 105 on January 1, following the payment of annual interest. The carrying value of the bonds at the redemption date is $829,960. The entry to record the redemption will include a a. credit of $29,960 to Loss on Bond Redemption. b. debit of $29,960 to Premium on Bonds Payable. c. credit of $10,040 to Gain on Bond Redemption. d. debit of $40,000 to Premium on Bonds Payable.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC:
.
Reporting and Analyzing Liabilities
10-41
Problem Solving, IMA: FSA Solution: $829,960 − $800,000 = $29,960 (Carry. Val. – Face val.)
195.
When bonds are retired before maturity, a. only a loss on redemption can be recorded. b. only a gain on redemption can be recorded. c. either a gain or a loss on redemption can be recorded. d. neither a gain nor a loss on redemption can be recorded.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
196.
A $1,000,000 bond was retired at 98 when the carrying value of the bond was $985,000. The entry to record the retirement would include a a. gain on bond redemption of $15,000. b. loss on bond redemption of $5,000. c. loss on bond redemption of $15,000. d. gain on bond redemption of $5,000.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $985,000 − ($1,000,000 .98) = $5,000 (Carry. Val. – (face val. × 98%))
197.
A $900,000 bond was retired at 103 when the carrying value of the bond was $933,000. The entry to record the retirement would include a a. gain on bond redemption of $27,000. b. loss on bond redemption of $6,000. c. loss on bond redemption of $27,000. d. gain on bond redemption of $6,000.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $933,000 − ($900,000 1.03) = $6,000 (Carry. Val. – (Face val. × 103%))
198.
A $800,000 bond was retired at 98 when the carrying value of the bond was $824,000. The entry to record the retirement would include a a. gain on bond redemption of $24,000. b. loss on bond redemption of $24,000. c. loss on bond redemption of $40,000. d. gain on bond redemption of $40,000.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $824,000 − ($800,000 .98) = $40,000 (carry. Val. – (Face val. × 98%))
199.
Restoration Company issued bonds that had the following data associated with them: Interest to be paid is $40,000. Interest expense to be recorded is $45,000. Which of the following characteristics is true? a. The bonds are sold at a premium. b. When recording the interest expense, the amortization will decrease the bond carrying value. c. The difference between the interest expense and the interest to be paid is the bond's par value. d. When recording the interest expense, the amortization will increase the bond carrying value.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
10-42 200.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
All of the following are true regarding financial statement analysis ratios associated with liabilities except a. a high times interest earned ratio indicates that a company is more likely to meet interest payments as scheduled. b. high liquidity ratios mean that lines of credit should be high to compensate. c. if a company's current ratio is lower than the industry average, then it may lack liquidity. d. unrecorded obligations causing sizeable differences between liquidity and solvency ratios can be ignored.
Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
201.
From an accounting standpoint, all of the following are contingencies that must be evaluated for off-balance sheet purposes except a. product warranties. b. general business risks. c. money-back guarantees for products. d. environmental cleanup obligations.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
202.
A measure of a company’s solvency is the a. acid-test ratio. b. current ratio. c. times interest earned. d. asset turnover ratio.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
203.
The times interest earned is computed by dividing a. net income by interest expense. b. income before income taxes by interest expense. c. income before interest expense by interest expense. d. income before interest expense and income taxes by interest expense.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
204.
In a recent year Garvey Corporation had net income of $120,000, interest expense of $20,000, and income tax expense of $30,000. What was Garvey Corporation’s times interest earned for the year? a. 6.00 b. 7.00 c. 7.50 d. 8.50
Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($120,000 + $20,000 + $30,000) $20,000 = 8.50 (Net inc. + int. exp. + inc. tax exp.) ÷ int. exp.
205.
Liquidity ratios measure a company's a. operating cycle. b. revenue-producing ability. c. short-term debt paying ability. d. long-range solvency.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
Reporting and Analyzing Liabilities
206.
10-43
The relationship between current assets and current liabilities is a. useful in determining income. b. useful in evaluating a company's liquidity. c. called the matching principle. d. useful in determining the amount of a company's long-term debt.
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
207.
In a recent year Hart Corporation had net income of $155,000, interest expense of $30,000, and income tax expense of $40,000. What was Hart Corporation’s times interest earned for the year? a. 7.50 b. 5.17 c. 6.17 d. 6.50
Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($155,000 + $30,000 + $40,000) $30,000 = 7.50 (Net inc. + int. exp. + inc. tax exp) ÷ int. exp.
208.
In a recent year Ley Corporation had net income of $150,000, interest expense of $30,000, and a times interest earned ratio of 7. What was Ley Corporation’s income before taxes for the year? a. $240,000 b. $210,000 c. $180,000 d. None of these answer choices are correct.
Ans: C, LO: 4, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (x + $30,000) $30,000 = 7; x + $30,000 = $210,000; x = $180,000 (IBT + int. exp) ÷ int. exp = tim. Int. earn; (IBT + int. exp) = (int. exp. × tim. int. earn.)
209.
The adjusted trial balance for Hamilton Corp. at the end of the current year, 2017, contained the following accounts. 5-year Bonds Payable 8% $1,600,000 Bond Interest Payable 50,000 Premium on Bonds Payable 100,000 Notes Payable (3 mo.) 40,000 Notes Payable (5 yr.) 165,000 Mortgage Payable ($15,000 due currently) 200,000 Salaries and Wages Payable 18,000 Taxes Payable (due 3/15 of next yr) 25,000 The total long-term liabilities reported on the balance sheet are a. $1,965,000 b. $1,950,000 c. $2,065,000 d. $2,050,000
Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,600,000 + $100,000 + $165,000 + ($200,000 − $15,000) = $2,050,000 (B/P + prem on B/P + Notes pay (5 yr.) + (Mort. pay – cur. por.))
.
10-44 210.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The 2017 financial statements of Harper Co. contain the following selected data (in millions). Current assets $ 90 Total assets 160 Current liabilities 45 Total liabilities 72 Cash 8 Interest expense 5 Income taxes 10 Net income 16 The debt to assets ratio is a. 45.0%. b. 50.0%. c. 2.22%. d. 6.2 times.
Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $72 $160 = 45.0% (Tot. liab. ÷ tot. assets)
*211. Oliver Company issued $2,000,000 of 6%, 5-year bonds at 98. Assuming straight-line amortization and annual interest payments, how much bond interest expense is recorded on the next interest date? a. $120,000 b. $60,000 c. $124,000 d. $128,000 Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($2,000,000 .06) + [($2,000,000 .02) 5] = $128,000 (Face val × 6%) + [(Face val. × (1 – .98)] ÷ 5
*212. Foley Company issued $2,000,000 of 6%, 5-year bonds at 98, which pay interest annually. Assuming straight-line amortization, what is the total interest cost of the bonds? a. $600,000 b. $640,000 c. $560,000 d. $580,000 Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($2,000,000 .06 5) + ($2,000,000 .02) = $640,000 (Face val. × 6% × 5) + (Face val. × (1 – .98))
*213. Neufeld Company issued $2,000,000 of 6%, 5-year bonds at 98, which pay interest annually. Assuming straight-line amortization, what is the carrying value of the bonds after one year? a. $1,960,000 b. $1,964,000 c. $1,968,000 d. $1,976,000 Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($2,000,000 .98) + [($2,000,000 .02) 5] = $1,968,000 (Face val. × 98%) + [(face val. × (1 – .98)) ÷5
.
Reporting and Analyzing Liabilities
10-45
*214. Scribner Company issued $800,000 of 8%, 5-year bonds at 106. Assuming straight-line amortization and annual interest payments, how much bond interest expense is recorded on the next interest date? a. $64,000 b. $73,600 c. $54,400 d. $9,600 Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($800,000 .08) − [($800,000 .06) 5] = $54,400 (Face val. × 8%) – [(Face val. × (1.06 – 1) ÷ 5]
*215. Downs Company issued $800,000 of 8%, 5-year bonds at 106, which pay interest annually. Assuming straight-line amortization, what is the total interest cost of the bonds? a. $368,000 b. $272,000 c. $224,000 d. $320,000 Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($800,000 .08 5) − ($800,000 .06) = $272,000 (Face val. × 8% × 5) – [(Face val. × (1.06 – 1)]
*216. Morales Company issued $800,000 of 8%, 5-year bonds at 106, which pay interest annually. Assuming straight-line amortization, what is the carrying value of the bonds after one year? a. $848,000 b. $843,200 c. $838,400 d. $852,800 Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($8,000 1.06) − [($800,000 .06) 5] = $838,400 (Face val. × 106%) – [(Face val. × (1.06 –1) ÷5]
*217. Larson Company issued $1,000,000 of 8%, 5-year bonds at 106. Assuming straight-line amortization and annual interest payments, what is the amount of the amortization at each interest payment point? a. $6,000 b. $12,000 c. $80,000 d. $68,000 Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [$1,000,000 (1.06 − 1.00)] 5 = $12,000 [(Face val. × (1.06 – 1)] ÷5
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
*218. Parker Company issued ten-year, 9%, bonds payable in 2017 at a premium. During 2017, the company’s accountant failed to amortize any of the bond premium. The omission of the premium amortization will a. not affect net income for 2017. b. cause retained earnings at the end of 2017 to be overstated. c. cause net income for 2017 to be overstated. d. cause net income for 2017 to be understated. Ans: D, LO: 5, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
*219. When the straight-line method of amortization is used for a bond premium, the amount of interest expense for an interest period is calculated by a. adding the amount of premium amortized for that period to the amount of cash paid for interest during the period. b. subtracting the amount of premium amortized for that period from the amount of cash paid for interest during the period. c. multiplying the face value of the bonds by the stated interest rate. d. multiplying the face value of the bonds by the market interest rate. Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
*220. When the straight-line method of amortization is used for a bond discount, the amount of interest expense for an interest period is calculated by a. adding the amount of discount amortized for that period to the amount of cash paid for interest during the period. b. subtracting the amount of discount amortized for that period from the amount of cash paid for interest during the period. c. multiplying the face value of the bonds by the stated interest rate. d. multiplying the face value of the bonds by the market interest rate. Ans: A, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
*221. On January 1, Sewell Corporation issues $3,000,000, 5-year, 12% bonds at 96 with interest payable on January 1. The entry on December 31 to record accrued bond interest and the amortization of bond discount using the straight-line method will include a a. debit to Interest Expense, $180,000. b. debit to Interest Expense, $360,000. c. credit to Discount on Bonds Payable, $24,000. d. credit to Discount on Bonds Payable, $12,000. Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: [$3,000,000 (1.00 − .96)] 5 = $24,000 [(Bond face val. × (1 –.96)] ÷5
*222. On January 1, Sewell Corporation issues $3,000,000, 5-year, 12% bonds at 96 with interest payable on January 1. What is the carrying value of the bonds at the end of the third interest period? a. $2,952,000 b. $2,928,000 c. $2,832,000 d. $2,784,000 Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($3,000,000 .96) + [($3,000,000 .04) 3/5] = 2,952,000 (Bond face val. × 96%) + [face val. × (1 – .96) × 3/5]
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Reporting and Analyzing Liabilities
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*223. If bonds are originally sold at a discount using the straight-line amortization method a. interest expense in the earlier years of the bond's life will be less that the interest to be paid. b. interest expense in the earlier years of the bond's life will be the same as interest to be paid. c. unamortized discount is subtracted from the face value of the bond to determine its carrying value. d. unamortized discount is added to the face value of the bond to determine its carrying value. Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
*224. The following partial amortization schedule is available for Courtney Company who sold $750,000, five-year, 10% bonds on January 1, 2017 for $780,000 and uses annual straight-line amortization. BOND AMORTIZATION SCHEDULE Interest Interest Premium Unamortized Bond Carrying Interest Periods to be paid expense Amortization Premium Value January 1, 2017 $30,000 $780,000 January 1, 2018 (i) (ii) (iii) (iv) (v) Which of the following amounts should be shown in cell (i)? a. $78,000 b. $81,000 c. $75,000 d. $15,000 Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $750,000 .10 = $75,000 (Face val. × 10%)
*225. The following partial amortization schedule is available for Courtney Company who sold $750,000, five-year, 10% bonds on January 1, 2017 for $780,000 and uses annual straight-line amortization. BOND AMORTIZATION SCHEDULE Interest Interest Premium Unamortized Bond Carrying Interest Periods to be paid expense Amortization Premium Value January 1, 2017 $30,000 $780,000 January 1, 2018 (i) (ii) (iii) (iv) (v) Which of the following amounts should be shown in cell (ii)? a. $81,000 b. $69,000 c. $78,000 d. $60,000 Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($750,000 .10) − ($30,000 5) = $69,000 (Face val. × 10%) – (Unamor. Prem. ÷5)
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
*226. The following partial amortization schedule is available for Courtney Company who sold $750,000, five-year, 10% bonds on January 1, 2017 for $780,000 and uses annual straight-line amortization. BOND AMORTIZATION SCHEDULE Interest Interest Premium Unamortized Bond Carrying Interest Periods to be paid expense Amortization Premium Value January 1, 2017 $30,000 $780,000 January 1, 2018 (i) (ii) (iii) (iv) (v) Which of the following amounts should be shown in cell (iii)? a. $15,000 b. $30,000 c. $6,000 d. $3,000 Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $30,000 5 = $6,000 (Unamort. Prem. ÷ 5)
*227. The following partial amortization schedule is available for Courtney Company who sold $750,000, five-year, 10% bonds on January 1, 2017 for $780,000 and uses annual straight-line amortization. BOND AMORTIZATION SCHEDULE Interest Interest Premium Unamortized Bond Carrying Interest Periods to be paid expense Amortization Premium Value January 1, 2017 $30,000 $780,000 January 1, 2018 (i) (ii) (iii) (iv) (v) Which of the following amounts should be shown in cell (iv)? a. $33,000 b. $27,000 c. $36,000 d. $24,000 Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $30,000 − ($30,000 5) = $24,000 (Unamor. Prem. – (Unamor. Prem. ÷5))
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Reporting and Analyzing Liabilities
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*228. The following partial amortization schedule is available for Courtney Company who sold $750,000, five-year, 10% bonds on January 1, 2017 for $780,000 and uses annual straight-line amortization. BOND AMORTIZATION SCHEDULE Interest Interest Premium Unamortized Bond Carrying Interest Periods to be paid expense Amortization Premium Value January 1, 2017 $30,000 $780,000 January 1, 2018 (i) (ii) (iii) (iv) (v) Which of the following amounts should be shown in cell (v)? a. $786,000 b. $783,000 c. $774,000 d. $777,000 Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $780,000 − ($30,000 5) = $774,000 (Sell. Price – (Unamor. Prem. ÷ 5))
*229. Which of the following statements regarding the effective interest method of accounting for bonds is false? a. GAAP requires use of the effective interest method. b. The amount of periodic interest expense decreases over the life of a discounted bond issue when the effective interest method is used. c. Over the life of the bond, the carrying value increases for discounted bonds when using the effective interest method. d. The effective interest method applies a constant percentage to the bond carrying value to compute interest expense. Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
*230. On January 1, Weatherholt Inc. issued $5,000,000, 9% bonds for $4,695,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Jean Weatherholt uses the effective-interest method of amortizing bond discount. At the end of the first year, Weatherholt should report unamortized bond discount of a. $274,500. b. $285,500. c. $258,050. d. $255,000. Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($4,695,000 .10) − ($5,000,000 .09) = $19,500; [($5,000,000 − $4,695,000) − $19,500] = $285,500 (Sell. Price × 10%) – (Face val. × 9%) = dis. amort; (Face val. – sell. price) – dis. amort.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
*231. On January 1, Thompson Corporation issued $4,000,000, 14%, 5-year bonds with interest payable on December 31. The bonds sold for $4,288,384. The market rate of interest for these bonds was 12%. On the first interest date, using the effective-interest method, the debit entry to Interest Expense is for a. $480,000. b. $502,324. c. $514,606. d. $560,000. Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $4,288,384 .12 = $514,606 (sell. Price × 12%)
*232. Warner Company issued $5,000,000 of 6%, 10-year bonds on one of its interest dates for $4,318,500 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used. What amount of discount (to the nearest dollar) should be amortized for the first interest period? a. $140,888 b. $68,150 c. $90,960 d. $45,480 Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($4,318,500 .08) − ($5,000,000 .06) = $45,480 (Sell. Price × 8%) – (face val. × 6%)
*233. Warner Company issued $5,000,000 of 6%, 10-year bonds on one of its interest dates for $4,318,500 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used. The journal entry on the first interest payment date, to record the payment of interest and amortization of discount will include a a. debit to Bond Interest Expense for $300,000. b. credit to Cash for $345,481. c. credit to Discount on Bonds Payable for $45,480. d. debit to Bond Interest Expense for $400,000. Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($4,318,500 .08) − ($5,000,000 .06) = $45,480 (sell. Price × 8%) – (face val. × 6%)
*234. Warner Company issued $5,000,000 of 6%, 10-year bonds on one of its interest dates for $4,318,500 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used. How much bond interest expense (to the nearest dollar) should be reported on the income statement for the end of the first year? a. $346,388 b. $345,480 c. $344,569 d. $300,000 Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $4,318,500 .08 = $345,480 (Bond iss. pr. × 8%)
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Reporting and Analyzing Liabilities
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*235. Warner Company issued $5,000,000 of 6%, 10-year bonds on one of its interest dates for $4,318,500 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used. The journal entry to be recorded at the end of the second year for the payment of interest and the amortization of discount will include a a. debit to Bond Interest Expense for $300,000. b. credit to Cash for $349,118. c. credit to Discount on Bonds Payable for $45,480. d. credit to Discount on Bonds Payable for $49,118. Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($4,318,500 .08) − ($5,000,000 .06) = $45,480; [($4,318,500 $45,480) .08] − $300,000 = $49,118 (Bond iss. pr. × 8%) – (Face val. × 6%) = dis. amort; [(Bond. iss. pr. + dis. amort.) × 8%] – (Face val. ×6%)
*236. When the effective-interest method of amortization is used for a bond premium, the amount of interest expense for an interest period is calculated multiplying the a. face value of the bonds at the beginning of the period by the contractual interest rate. b. face value of the bonds at the beginning of the period by the effective interest rate. c. carrying value of the bonds at the beginning of the period by the contractual interest rate. d. carrying value of the bonds at the beginning of the period by the effective interest rate. Ans: D, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
*237. The amortization of a bond premium will result in reporting an amount of interest expense for an interest period that a. is less than the amount of cash to be paid for interest for the period. b. exceeds the amount of cash to be paid for interest for the period. c. equals the amount of cash to be paid for interest for the period. d. has no predictable relationship with the amount of cash to be paid for interest for the period. Ans: A, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
*238. The effective-interest method of amortization of bond premiums and discounts is considered superior to the straight-line method because it results in a(n) a. interest rate that is close to the market interest rate. b. uniform rate of interest. c. more variable interest rate. d. interest rate that increases or decreases slightly over time. Ans: B, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
*239. Which of the following statements best describes the behavior over time of the components of equal mortgage payments? a. The proportion of interest expense to payment of principal remains the same. b. Interest expense increases and payment of principal decreases. c. Payment of principal increases and interest expense decreases. d. Both payment of principal and interest expense decrease. Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
*240. Thayer Company purchased a building on January 2 by signing a long-term $3,360,000 mortgage with monthly payments of $30,800. The mortgage carries an interest rate of 10 percent. The entry to record the mortgage will include a a. debit to the Cash account for $3,360,000. b. credit to the Cash account for $3,360,000. c. debit to the Mortgage Payable account for $3,360,000. d. credit to the Mortgage Payable account for $3,360,000. Ans: D, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $3,360,000 face value
*241. Thayer Company purchased a building on January 2 by signing a long-term $3,360,000 mortgage with monthly payments of $30,800. The mortgage carries an interest rate of 10 percent. The entry to record the first monthly payment will include a a. debit to the Cash account for $30,800. b. credit to the Cash account for $28,000. c. debit to the Interest Expense account for $28,000. d. credit to the Mortgage Payable account for $30,800. Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $30,800 − [($3,360,000 .10) 12] = $28,000 (Mon. pay. – [(mort. bal. × 10%) ÷12]
*242. Thayer Company purchased a building on January 2 by signing a long-term $3,360,000 mortgage with monthly payments of $30,800. The mortgage carries an interest rate of 10 percent. The amount owed on the mortgage after the first payment will be a. $3,360,000. b. $3,357,200. c. $3,332,000. d. $3,329,200. Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $3,360,000 − [$30,800 − ($3,360,000 .10 1/12)] = $3,357,200 Mort. Bal. – [mon pay. – (mort. bal. × 10% × 1/12)]
*243. Collins Company borrowed $1,250,000 from BankTwo on January 1, 2016 in order to expand its mining capabilities. The five-year note required annual payments of $325,545 and carried an annual interest rate of 9.5%. What is the amount of expense Collins must recognize on its 2017 income statement? a. $118,750. b. $99,105. c. $87,821. d. $77,591. Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,250,000 .095 = $118,750; [$1,250,000 − ($325,545 − $118,750)] .095 = $99,105 Amount bor. × 9.5% = int; pd.; [Amount bor. – (ann. Pay. – int. pd.)] ×9.5%
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Reporting and Analyzing Liabilities
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*244. Collins Company borrowed $1,250,000 from BankTwo on January 1, 2016 in order to expand its mining capabilities. The five-year note required annual payments of $325,545 and carried an annual interest rate of 9.5%. What is the balance in the notes payable account at December 31, 2017 after the annual payment? a. $1,250,000 b. $816,765 c. $1,043,205 d. $1,012,500 Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,250,000 .095 = $118,750; $1,250,000 − ($325,545 − $118,750) = $1,043,205; $1,043,205 − (325,545 − $99,105) = $816,765 (Amount bor. × 9.5%) = int; exp.; [Amount bor. – 800 (ann. pay. – int. exp.)] – (ann. Pay. – int. exp.)
*245. Fornelli Corporation borrowed $800,000 from Central Bank on May 31, 2016. The threeyear, 7% note required annual payments of $304,840 beginning May 31, 2017. Interest expense for the year ended December 31, 2016 was a. $32,667. b. $37,333. c. $56,000. d. $0. Ans: A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $800,000 .07 7/12 = $32,667 (Amount bor. × 7% × 7/12)
*246. Fornelli Corporation borrowed $800,000 from Central Bank on May 31, 2016. The threeyear, 7% note required annual payments of $304,840 beginning May 31, 2017. The total amount of interest to be paid over the life of the loan is a. $56,000. b. $114,520. c. $223,470. d. $168,000. Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($304,840 3) − $800,000 = $114,520 (Ann. Pay × 3) – amount bor.
*247. Wolford Company borrowed $2,000,000 from U.S. Bank on January 1, 2016 in order to expand its mining capabilities. The five-year note required annual payments of $520,872 and carried an annual interest rate of 9.5%. What is the amount of expense Wolford must recognize on its 2017 income statement? a. $190,000 b. $158,568 c. $140,518 d. $124,146 Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $2,000,000 .095 = $190,000; [$2,000,000 − ($520,872 − $190,000)] .095 = $158,568 (Amount box. × 9.5% = int. pd.; [Amount box. [(ann.pay. – int. pd.)] ×9.5%
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
*248. Wolford Company borrowed $2,000,000 from U.S. Bank on January 1, 2016 in order to expand its mining capabilities. The five-year note required annual payments of $520,872 and carried an annual interest rate of 9.5%. What is the balance in the notes payable account at December 31, 2017 after the annual payment? a. $2,000,000 b. $1,306,824 c. $1,669,128 d. $1,620,000 Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $2,000,000 .095 = $190,000; $2,000,000 − ($520,872 − $190,000) − ($520,872 − $158,658) = $1,306,824 (Amount box. × 9.5%); (Amount + box. – (ann. Pay. – int.))
*249. Sielert Corporation borrowed $1,500,000 from National Bank on May 31, 2016. The threeyear, 7% note required annual payments of $571,575 beginning May 31, 2017. Interest expense for the year ended December 31, 2016 was a. $61,250. b. $70,000. c. $105,000. d. $0. Ans: A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,500,000 .07 7/12 = $61,250 (Amount box. × 7% × 7/12)
*250. Sielert Corporation borrowed $1,500,000 from National Bank on May 31, 2016. The threeyear, 7% note required annual payments of $571,575 beginning May 31, 2017. The total amount of interest to be paid over the life of the loan is a. $105,000. b. $214,725. c. $419,005. d. $315,000. Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($571,575 3) − $1,500,000 = $214,725 ((Ann. Pay. × 3) – amount box.)
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Reporting and Analyzing Liabilities
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Answers to Multiple Choice Questions 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93.
c a a a a d d c c a b a b b c b c c b c d a c d b c c
94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120.
b b d d d b d c b c d d b b b b a b c a b b a c a b a
121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138 139 140. 141. 142. 143. 144. 145. 146. 147.
a c b a a a b b b b d c a b b a c a b b a b d c d a a
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148. 149. 150. 151. 152. 153. 154. *155. *156. 157. *158. *159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174.
d b b d b c b d a c d a b a a d d b c b b b c c c b b
175. 176. 177. 178. 179. 180. 181. *182. *183. *184. 185. 186. *187. *188. 189. 190. 191. 192. 193. 194. 195. 196. 197. 198. 199. 200. 201.
a b b c b c b b c b c b c b b a d a d b c d d d d b b
202. 203. 204. 205. 206. 207. 208. 209. 210. *211. *212. *213. *214. *215. *216. *217. *218. *219. *220. *221. *222. *223. *224. *225. *226. *227. *228.
c d d c b a c d a d b c c b c b d b a c a c c b c d c
*229. *230. *231. *232. *233. *234. *235. *236. *237. *238. *239. *240. *241. *242. *243. *244. *245. *246. *247. *248. *249. *250.
b b c d c b d d a b c d c b b b a b b b a b
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
BRIEF EXERCISES Be. 251 Steiner Sales Company has the following selected accounts after posting adjusting entries: Accounts Payable $ 65,000 Notes Payable, 3-month 50,000 Accumulated Depreciation—Equipment 14,000 Notes Payable, 5-year, 6% 80,000 Payroll Tax Expense 4,000 Interest Payable 3,000 Mortgage Payable 120,000 Sales Taxes Payable 38,000 Instructions Prepare the current liability section of Steiner Sales Company's balance sheet, assuming $15,000 of the mortgage is payable next year. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 251
(5-8 min.) STEINER SALES COMPANY
Current Liabilities Current portion of long-term debt $ 15,000 Notes payable, 3-month 50,000 Accounts payable 65,000 Sales taxes payable 38,000 Interest payable 3,000 Total current liabilities $171,000 Mort. Pay(cur. Par.) + N/P + A/P + sal. tax. Pay. + int. pay.) Be. 252 On April 1, Holton Company borrows $100,000 from West Bank by signing a 6-month, 6%, interest-bearing note. Instructions Prepare the necessary entries below associated with the note payable on the books of Holton Company. (a) Prepare the entry on April 1 when the note was issued. (b) Prepare any adjusting entries necessary on June 30 in order to prepare the semiannual financial statements. Assume no other interest accrual entries have been made. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Reporting and Analyzing Liabilities
Solution 252
(5-8 min.)
(a)
Cash .......................................................................... Notes Payable ...................................................
100,000
Interest Expense ........................................................ Interest Payable ................................................ ($100,000 × 6% × 3 ÷ 12) (Face val. × 6% × 3/12
1,500
(b)
April
1
June 30
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100,000
1,500
Be. 253 Peterson Company billed its customers a total of $840,000 for the month of November. The total includes a 5% state sales tax. Instructions (a) Determine the proper amount of revenue to report for the month. (b) Prepare the general journal entry to record the revenue and related liabilities for the month. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 253
(5 min.)
(a)
$840,000 ÷ 1.05 = $800,000 is the total sales revenue.
(b)
$800,000 .05 = $40,000 is the state sales tax liability. (Tot. billed ÷ 1.05) × 5% Journal Entry: Accounts Receivable ................................................................... Sales Revenue ................................................................... Sales Taxes Payable ..........................................................
840,000 800,000 40,000
Be. 254 Manuel Company had cash sales of $86,800 (including taxes) for the month of June. Sales are subject to 8.5% sales tax. Prepare the entry to record the sale. Ans: N/A, LO: 1, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 254
(3 min.)
Cash ........................................................................................... Sales Revenue ................................................................... Sales Taxes Payable .......................................................... *(Cash sales ÷ 1.085) × 8.5%
86,800 80,000 6,800
Be. 255 Mantle Publications publishes a golf magazine for women. The magazine sells for $4.00 a copy on the newsstand. Yearly subscriptions to the magazine cost $36 per year (12 issues). During December 2016, Mantle Publications sells 4,000 copies of the golf magazine at newsstands and receives payment for 6,000 subscriptions for 2017. Financial statements are prepared monthly.
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Instructions (a) Prepare the December 2016 journal entries to record the newsstand sales and subscriptions received. (b)
Prepare the necessary adjusting entry on January 31, 2017. The January 2017 issue has been mailed to subscribers.
Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 255 (a)
(b)
(5 min.)
Cash (4,000 × $4) ....................................................................... Sales Revenue....................................................................
16,000
Cash (6,000 $36) ...................................................................... Unearned Subscription Revenue ........................................
216,000
16,000 216,000
$216,000 ÷ 12 months = $18,000 Unearned Subscription Revenue ................................................. Subscription Revenue ......................................................... (*Num. of subscr. × subscr. Pr./rr) ÷12
18,000 18,000
Be. 256 The board of directors of Lauber Corporation are considering two plans for financing the purchase of new plant equipment. Plan #1 would require the issuance of $5,000,000, 6%, 20-year bonds at face value. Plan #2 would require the issuance of 200,000 shares of $5 par value common stock that is selling for $25 per share on the open market. Lauber Corporation currently has 100,000 shares of common stock outstanding and the income tax rate is expected to be 30%. Assume that income before interest and income taxes is expected to be $500,000 if the new factory equipment is purchased. Instructions Prepare a schedule that shows the expected net income after taxes and the earnings per share on common stock under each of the plans that the board of directors is considering. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 256
(10 min.)
Income before interest and taxes Interest expense ($5,000,000 × 6%) Income before taxes Income taxes (30%) Net income
Plan #1 Issue Bonds $500,000 300,000 200,000 60,000 $140,000
Plan #2 Issue Stock $500,000 — 500,000 150,000 $350,000
100,000
300,000
$1.40
$1.17
Outstanding shares Earnings per share *(Inc. bef. Int. + tax. – (Face val. × 6%) = IBT; (IBT × (1 – 30))
.
Reporting and Analyzing Liabilities
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Be. 257 On January 1, 2017, Hannigan Company issued bonds with a face value of $600,000. The bonds carry a stated interest of 7% payable each January 1. a. Prepare the journal entry for the issuance assuming the bonds are issued at 97. b. Prepare the journal entry for the issuance assuming the bonds are issued at 102. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 257 (a)
(5 min.)
Cash ........................................................................................... Discount on Bonds Payable ........................................................ Bonds Payable ...................................................................
582,000 18,000* 600,000
*(Face val. – (Face val. × 97%)) (b)
Cash ........................................................................................... Bonds Payable ................................................................... Premium on Bonds Payable. .............................................. *(Face val. × 102%) – Face val.
612,000 600,000 12,000*
Be. 258 On January 1, 2017, Hauke Corporation issued $900,000, 6%, 10-year bonds at face value. Interest is payable annually on January 1. Hauke Corporation has a calendar year end. Instructions Prepare all entries related to the bond issue for 2017. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 258 2017 Jan. 1
Dec. 31
(6-10 min.)
Cash .................................................................................. Bonds Payable ...........................................................
900,000
Interest Expense ................................................................. Interest Payable ......................................................... *(face val. × 6%)
54,000*
900,000
54,000
*Be. 259 Mintz Company issued $400,000, 10%, 10-year bonds on January 1, 2017, at 105. Interest is payable annually. Mintz uses the straight-line method of amortization and has a calendar year end. Instructions Prepare all journal entries made in 2017 related to the bond issue. Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
*Solution 259 2017 Jan. 1
Dec. 31
(5-8 min.)
Cash ................................................................................... Bonds Payable ........................................................... Premium on Bonds Payable ....................................... *(Face val. × 105%) – face val. Interest Expense ................................................................. Premium on Bonds Payable ................................................ Cash........................................................................... ($400,000 × 10% = $40,000) ($20,000 × 1/10 = $2,000) *(Face val. × 10%) – (bond prem. ÷ 10)
420,000 400,000 20,000* 38,000* 2,000 40,000
*Be. 260 Frye Company issued $700,000, 10%, 10-year bonds on January 1, 2017, at 105. Interest is payable annually on December 31. Frye uses the effective-interest method of amortization and has a calendar year end and the bonds were issued for an effective interest rate of 8%. Instructions Prepare all journal entries made in 2017 related to the bond issue. Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
*Solution 260 2017 Jan. 1
(5-8 min.)
Cash ................................................................................... Bonds Payable ........................................................... Premium on Bonds Payable .......................................
735,000 700,000 35,000*
*(Face val. × 105%) – face val.
Dec. 31
Interest Expense ................................................................. Premium on Bonds Payable ................................................ Cash........................................................................... ($735,000 × 8% = $58,800) ($700,000 × 10% = $70,000) ($70,000 – $58,800 = $11,200) *(Face val. × 105%) × 8%
.
58,800* 11,200 70,000
Reporting and Analyzing Liabilities
10-61
EXERCISES Ex. 261 Brewer Company has the following selected accounts after posting adjusting entries: Accounts Payable $ 55,000 Notes Payable, 3-month 90,000 Accumulated Depreciation—Equipment 14,000 Notes Payable, 5-year, 8% 75,000 Payroll Taxes Expense 6,000 Interest Payable 5,000 Mortgage Payable 180,000 Sales Taxes Payable 23,000 Instructions (a) Prepare the current liability section of Brewer Company's balance sheet, assuming $12,000 of the mortgage is payable next year. (b) Comment on Brewer’s liquidity, assuming total current assets are $450,000. Ans: N/A, LO: 1, 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 261 (a)
(10 min.) BREWER COMPANY
Current Liabilities Current portion of long-term debt Notes payable, 3-month Accounts payable Sales taxes payable Interest payable Total current liabilities
$ 12,000 90,000 55,000 23,000 5,000 $185,000
(Mort. Pay. (cur.) + N/P (3 mon.) + A/P + sal. tax. pay. + int.pay.
(b)
The liquidity position looks favorable. If all current liabilities are paid out of current assets, there would still be $265,000 of current assets (working capital). The current ratio is 2.43 : 1 and it appears as though Brewer Company has sufficient current resources to meet current obligations when due.
Ex. 262 On March 1, Cooper Company borrows $80,000 from New National Bank by signing a 6-month, 6%, interest-bearing note. Instructions Prepare the necessary entries below associated with the note payable on the books of Cooper Company. (a)
Prepare the entry on March 1 when the note was issued.
(b)
Prepare any adjusting entries necessary on June 30 in order to prepare the semiannual financial statements. Assume no other interest accrual entries have been made.
(c)
Prepare the entry to record payment of the note at maturity.
Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 262
(10 min.)
a)
Cash .......................................................................... Notes Payable ...................................................
80,000
Interest Expense ........................................................ Interest Payable ................................................. ($80,000 × 6% × 4 ÷ 12)
1,600
(b)
March 1
June 30
80,000
1,600
(Amount bor. × 6% × 4/12)
(c)
Sept. 1
Notes Payable ............................................................ Interest Payable ......................................................... Interest Expense ........................................................ Cash ..................................................................
80,000 1,600 800 82,400*
*(Amount bor. + (amount bor. × 6% × 6/12))
Ex. 263 On June 1, Huntley Company borrows $50,000 from the bank by signing a 60-day, 6%, interestbearing note. Instructions Prepare the necessary entries below associated with the note payable on the books of Huntley Company. (a)
Prepare the entry on June 1 when the note was issued.
(b)
Prepare any adjusting entries necessary on June 30 in order to prepare the monthly financial statements. Assume no other interest accrual entries have been made.
(c)
Prepare the entry to record payment of the note at maturity.
Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 263
(10 min.)
(a)
Cash .......................................................................... Notes Payable ...................................................
50,000
Interest Expense ........................................................ Interest Payable ................................................. ($50,000 × 6% ÷ 12)
250
(b)
June 1
June 30
50,000
250
(Amount bor. × 6% ÷ 12)
(c)
July 31
Notes Payable ............................................................ Interest Payable ......................................................... Interest Expense ........................................................ Cash .................................................................. *(Amount bor. + (amount bor. × 6% × 60/360))
.
50,000 250 250 50,500*
Reporting and Analyzing Liabilities
10-63
Ex. 264 On May 15, Holt's Clothiers borrowed some money on a 4-month note to provide cash during the slow season of the year. The interest rate on the note was 8%. At the time the note was due, the amount of interest owed was $1,200. Instructions (a) Determine the amount borrowed by Holt's. (b) Assume the amount borrowed was $54,000. What was the interest rate if the amount of interest owed was $900? (c) Prepare the entry for the initial borrowing and the repayment for the facts in part (a). Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 264
(8 min.)
(a)
Principal .08 4/12 = $1,200 Principal = $1,200 (.08 4/12) Principal = $45,000 (Int. owed ÷ (8% × 4/12))
(b)
$54,000 Interest rate 4/12 = $900 Interest Rate = $900 ($54,000 4/12) Interest Rate = 5 percent (Int. owed ÷ (amount box. × 4/12))
(c)
Initial Borrowing: May 15 Cash ………………………………… 45,000 Notes Payable…………..
Repayment: Sept. 15
Notes Payable …………………..… Interest Expense (45,000 × .08 × 4/12)…….. Cash …………………….
45,000
45,000 1,200 46,200
Ex. 265 In providing accounting services to small business, you encounter the following situations pertaining to cash sales. (1) Kushner Company rings up sales and sales taxes separately on its cash register. On April 10 the register totals are sales $40,000 and sales taxes $2,800. (2) Grant Company does not segregate sales and sales taxes. Its register total for April 15 is $22,260, which includes a 6% sales tax. Instructions Prepare the entries to record the sales transactions and related taxes for (a) Kushner Company and (b) Grant Company. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
10-64
Solution 265 Apr. 10
15
(5 min.) KUSHNER COMPANY Cash ...................................................... 42,800 Sales Revenue ................................ Sales Taxes Payable ....................... GRANT COMPANY Cash ...................................................... Sales Revenue ($22,260 1.06) ..... Sales Taxes Payable ....................... ($22,260 – $21,000) .....................
40,000 2,800
22,260 21,000 1,260*
*(Regis. tot. ÷ 1.06) × 6%
Ex. 266 During the month of March, Preston Company's employees earned wages of $90,000. Withholdings related to these wages were $6,885 for Social Security (FICA), $14,200 for federal income tax, $6,200 for state income tax, and $600 for union dues. The company incurred no cost related to these earnings for federal unemployment tax, but incurred $1,300 for state unemployment tax. Instructions (a) Prepare the necessary March 31 journal entry to record wages expense and wages payable. Assume that wages earned during March will be paid during April. (b) Prepare the entry to record the company's payroll tax expense. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 266 (a)
Mar. 31
(5 min.) Salaries and Wages Expense ............................... FICA Taxes Payable ....................................... Federal Income Taxes Payable .................... State Income Taxes Payable .......................... Union Dues Payable ....................................... Salaries and Wages Payable ..........................
90,000 6,885 14,200 6,200 600 62,115*
*(Wages – FICA tax. – fed. inc. tax. – st. inc. tax – un.dues)
(b)
Mar. 31
Payroll Tax Expense............................................. FICA Taxes Payable ....................................... State Unemployment Taxes Payable ............ *(FICA tax. + st. unemp. tax.)
.
8,185* 6,885 1,300
Reporting and Analyzing Liabilities
10-65
Ex. 267 Presented below are two independent situations: (a)
Morten Corporation purchased $480,000 of its bonds on June 30, 2017, at 102 and immediately retired them. The carrying value of the bonds on the retirement date was $431,100. The bonds pay annual interest and the interest payment due on June 30, 2017, has been made and recorded.
(b)
McEvoy, Inc., purchased $330,000 of its bonds at 96 on June 30, 2017, and immediately retired them. The carrying value of the bonds on the retirement date was $321,000. The bonds pay annual interest and the interest payment due on June 30, 2017, has been made and recorded.
Instructions For each of the independent situations, prepare the journal entry to record the retirement or conversion of the bonds. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 267
(10-13 min.)
(a) June 30
Bonds Payable ........................................................... Loss on Bond Redemption ......................................... Discount on Bonds Payable .............................. Cash ................................................................. ($480,000 – $431,100 = $48,900) ($480,000 × 1.02 = $489,600)
480,000 58,500* 48,900 489,600
(*Carry. val. – (face val. × 102%))
(b) June 30
Bonds Payable ........................................................... Discount on Bonds Payable .............................. Gain on Bond Redemption ............................... Cash ................................................................. ($330,000 – $321,000 = $9,000) ($330,000 × 96% = $316,800)
330,000 9,000 4,200* 316,800
*(Carry. val. – (face val. × 96%))
Ex. 268 The adjusted trial balance for Helton Corporation at the end of 2017 contained the following accounts: Bonds payable, 10%........................................................... $500,000 Interest payable .................................................................. 20,000 Discount on bonds payable ................................................ 30,000 Notes payable, 9%, due 2019 ............................................. 70,000 Accounts payable ............................................................... 120,000 Instructions (a)
Prepare the long-term liabilities section of the balance sheet.
(b)
Indicate the proper balance sheet classification for the accounts listed above that do not belong in the long-term liabilities section.
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
10-66
Solution 268 (a)
(4-7 min.)
Long-term liabilities Bonds payable 10% Less: Unamortized bond discount Notes payable, 9% Total long-term liabilities
$500,000 30,000
$470,000 70,000 $540,000
(B/P – bond disc. + N/P)
(b)
Interest payable and accounts payable should be classified as current liabilities.
Ex. 269 Hensley, Inc. reports the following liabilities (in thousands) on its January 31, 2017, balance sheet and notes to the financial statements. Accounts payable Accrued pension liability Property taxes payable Bonds payable Current portion of long-term debt Income taxes payable Notes payable—long-term Operating leases Mortgage payable Federal income taxes payable Salaries and wages payable Unused operating line of credit Warranty liability— current
$3,463.9 1,215.2 1,158.1 1,961.2 1,992.2 235.2 9,246.7 1,641.7 435.6 558.1 2,563.6 3,337.6 1,617.3
Instructions Prepare the liabilities section of Hensley's balance sheet as at January 31, 2017. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 269
(8 min.) HENSLEY INC. (Partial) Balance Sheet January 31, 2017 (in thousands)
Current liabilities Accounts payable .............................................. Salaries and wages payable .............................. Current portion of long-term debt ....................... Warranty liability ................................................ Property taxes payable ...................................... Federal income taxes payable ........................... Income taxes payable ........................................ Total current liabilities .................................
$3,463.9 2,563.6 1,992.2 1,617.3 1,158.1 558.1 235.2
A/P + sal/wag pay. + LT debt(cur.) + war. pay. + pr. tax. pay. + fed. tax. Pay. + inc. tax. pay.)
.
$11,588.4
Reporting and Analyzing Liabilities
Solution 269
10-67
(Cont.)
Long-term liabilities Notes payable, long-term.................................... Bonds payable.................................................... Accrued pension liability ..................................... Mortgage payable ............................................... Total long-term liabilities ............................. Total liabilities ................................................................
$9,246.7 1,961.2 1,215.2 435.6 12,858.7 $24,447.1
Ex. 270 McDonald's financial statements contain the following selected data (in millions). Current assets Total assets Current liabilities Total liabilities
$ 3,881.9 29,391.7 4,498.5 13,611.9
Interest expense Income taxes Net income
$
410.1 1,237.1 2,395.1
Instructions (a) Compute the following values and provide a brief interpretation of each. (1) Working capital. (3) Debt to assets ratio. (2) Current ratio. (4) Times interest earned. (b) The notes to McDonald's financial statements show that subsequent to this year the company will have future minimum lease payments under operating leases of $10,513.8 million. If these assets had been purchased with debt, assets and liabilities would rise by approximately $9,400 million. Recompute the debt to assets ratio after adjusting for this. Discuss your result. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 270 (a) (1) (2) (3) (3)
(10 min.)
Working capital = $3,881.9 – $4,498.5 = - $616.6 (cur. assets – cur. Liab) Current ratio = $3,881.9 $4,498.5 = .86:1 (cur. assets/cur. liab) Debt to assets ratio = $13,611.9 $29,391.7 = 46% (Tot. liab./tot. assets) Times interest earned = ($2,395.1 + $1,237.1 + $410.1) $410.1 = 9.86 times (Net inc. + inc. tax. + int. exp.) ÷ int. exp.
A current ratio that is less than 1.00 indicates lower liquidity. The debt to assets ratio indicates that $.46 of each dollar of asset have been financed by creditors. The times interest earned of almost 10 times indicated that McDonald's income is large enough to make required interest payments as they come due. (b) Debt to assets ratio, adjusted for off-balance-sheet lease obligations. $13,611.9 + $9,400 = 59% $29,391.7 + $9,400 By including these off-balance-sheet obligations the debt to assets ratio increases from 46% to 59%, suggesting that McDonald's is not as solvent as it first appears. .
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
*Ex. 271 Renfro Company issued $300,000 of 8%, 10-year bonds at 102. Interest is paid annually, and the straight-line method is used for amortization. Assume that the market rate for similar investments is 7%. The bonds are issued on the date of the bonds. a. b. c. d. e.
What amount was received for the bonds? How much interest is paid each interest period? What is the premium amortization for the first interest period? How much interest expense is recorded on the first interest date? What is the carrying value of the bonds after the first interest date?
Ans: N/A, LO: 3, 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
*Solution 271
(10-12 min.)
a. b. c. d. e.
($300,000 × 1.02) (Face val. × 102%) ($300,000 × .08) [($306,000 – $300,000)/10] [(Face val. × 102%) – face val.] ÷10 ($24,000 – $600) ($306,000 – $600) (Face val. × 102%) – [(face val. × 102%) – face val.) ÷ 10]
$306,000 $24,000 $600 $23,400 $305,400
*Ex. 272 On January 1, 2017, Powell Corporation issued $600,000, 5%, 5-year bonds dated January 1, 2017, at 95. The bonds pay annual interest on January 1. The company uses the straight-line method of amortization and has a calendar year end. Instructions Prepare all the journal entries that Powell Corporation would make related to this bond issue through January 1, 2018. Be sure to indicate the date on which the entries would be made. Ans: N/A, LO: 3, 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
*Solution 272
(5 min.)
January 1, 2017 Cash ($600,000 × 95) .................................................................. Discount on Bonds Payable ......................................................... Bonds Payable .................................................................... (To record sale of bonds at a discount)
570,000 30,000* 600,000
*(Face val. – (Face val. × 95%))
December 31, 2017 Interest Expense ($600,000 × .05) + ($30,000 ÷ 5) ...................... 36,000* Discount on Bonds Payable ................................................ Interest Payable .................................................................. (To record annual accrued bond interest and amortization of bond discount)
6,000 30,000
*(Face val. × 5%) + [(Face val. × (1 – .95)) ÷ 5]
January 1, 2018 Interest Payable .......................................................................... Cash .................................................................................. (To record payment of bond interest liability)
.
30,000 30,000
Reporting and Analyzing Liabilities
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*Ex. 273 Grand Company issued $800,000, 10%, 20-year bonds on January 1, 2017, at 104. Interest is payable annually on January 1. Grand uses the straight-line method of amortization and has a calendar year end. Instructions Prepare all journal entries made in 2017 related to the bond issue. Ans: N/A, LO: 3, 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
*Solution 273 2017 Jan. 1
(5 min.)
Cash .................................................................................. Bonds Payable ........................................................... Premium on Bonds Payable .......................................
832,000 800,000 32,000*
*(Face val. × 104%) – face val.
Dec. 31
Interest Expense ................................................................. Premium on Bonds Payable ............................................... Interest Payable ......................................................... ($800,000 × 10% = $80,000) ($32,000 × 1/20 = $1,600)
78,400* 1,600 80,000
*(Face val. × 10%) – [(Face val. × 104%) – face val.) ÷ 20]
*Ex. 274 Garrison Company issued $2,000,000, 7%, 20-year bonds on January 1, 2017, at 105. Interest is payable annually on January 1. Garrison uses straight-line amortization for bond premium or discount. Instructions Prepare the journal entries to record the following events. (a) The issuance of the bonds. (b) The accrual of interest and the premium amortization on December 31, 2017. (c) The payment of interest on January 1, 2018. (d) The redemption of the bonds at maturity, assuming interest for the last interest period has been paid and recorded. Ans: N/A, LO: 3, 5, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
*Solution 274 (a)
2017 Jan.
(7 min.) 1
Cash ($2,000,000 105%) ........................ Bonds Payable .................................. Premium on Bonds Payable ...............
2,100,000 2,000,000 100,000*
*(Face val. × 105%) – face val.
(b)
Dec. 31
Interest Expense ........................................ Premium on Bonds Payable ($100,000 1/20) ...................................... Interest Payable ($2,000,000 7%) ........................... *(Face val. × 7%) – [(Face val. × 105%) – face val.) ÷ 20]
.
135,000* 5,000 140,000
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
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*Solution 274 (c)
(d)
2018 Jan.
2037 Jan.
(Cont.) 1
1
Interest Payable ............................................ Cash ....................................................
140,000
Bonds Payable ............................................. Cash ....................................................
2,000,000
140,000
2,000,000
*Ex. 275 Shannon Company issued $1,000,000, 8%, 10-year bonds on December 31, 2016, for $960,000. Interest is payable annually on December 31. Shannon uses the straight-line method to amortize bond premium or discount. Instructions Prepare the journal entries to record the following events. (a) The issuance of the bonds. (b) The payment of interest and the discount amortization on December 31, 2017. (c) The redemption of the bonds at maturity, assuming interest for the last interest period has been paid and recorded. Ans: N/A, LO: 3, 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
*Solution 275 (a)
(b)
2016 Dec. 31
2017 Dec. 31
(5 min.) Cash ............................................................. Discounts of Bonds Payable .......................... Bonds Payable..................................
960,000 40,000
Interest Expense......................................... Discount on Bonds Payable ($40,000 1/10)................................ Cash ($1,000,000 8%) .......................
84,000*
1,000,000
4,000 80,000
*(Face val. × 8%) + [(face val. – sell. price) ÷ 10]
(c)
2026 Dec. 31
Bond Payable .............................................. Cash ...................................................
1,000,000 1,000,000
*Ex. 276 Wynne Company issued $900,000 of 10%, 5-year bonds at 108. Interest is paid annually, and the effective interest method is used for amortization. Assume that the market rate for similar investments is 8%. The bonds are issued on the date of the bonds. a. b. c. d. e.
What amount was received for the bonds? How much interest is paid each interest period? What is the premium amortization for the first interest period? How much interest expense is recorded on the first interest date? What is the carrying value of the bonds after the first interest date?
Ans: N/A, LO: 3, 6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Reporting and Analyzing Liabilities
*Solution 276 a. b. c. d. e.
$972,000 $90,000 $12,240 $77,760 $959,760
10-71
(10-12 min.) ($900,000 × 1.08) (Face val. × 108%) ($900,000 ×.10) [$90,000 – ($972,000 × .08)] (Face val. × 10%) – [(face val. × 108% × 8%)] ($972,000 × .08) ($972,000 – $12,240) (Face val. × 108%) – [(face val. × 10%) – (face val. × 108% × 8%)]
*Ex. 277 Moon Company issued $500,000, 10%, 5-year bonds on January 1, 2017, at 106. Interest is payable annually on January 1. Moon uses the effective-interest method of amortization and has a calendar year end and the bonds were issued for an effective interest rate of 8%. Instructions Prepare all journal entries made in 2017 related to the bond issue. Ans: N/A, LO: 3, 6, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
*Solution 277 2017 Jan. 1
(12-17 min.)
Cash (500,000 × 1.06) ........................................................ Bonds Payable........................................................... Premium on Bonds Payable.......................................
530,000 500,000 30,000*
*(Face val. × 106%) – face val.
Dec. 31
Interest Expense................................................................. 42,400 Premium on Bonds Payable ............................................... 7,600 Interest Payable ......................................................... ($530,000 × 8% = $42,400) (face val. × 106% × 8%) ($500,000 × 10% = $50,000) ($50,000 – $42,400 = $7,600) (face val. × 10%) – (face val. × 1.06 × 8%)
50,000
*Ex. 278 Perez Co. receives $2,200,000 when it issues a $2,200,000, 8%, mortgage note payable to finance the construction of a building at December 31, 2016. The terms provide for annual installment payments of $257,000 on December 31. Instructions Prepare the journal entries to record the mortgage loan and the first two installment payments. Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
*Solution 278 2016
2017
Dec.
Dec.
(7 min.) 31
30
Issuance of Note Cash.................................................. Mortgage Payable ........................ First Installment Payment Interest Expense ($2,200,000 8%) ........................... Mortgage Payable ................................. Cash............................................... *(Ann. Pay. – (Mort. loan × 8%))
.
2,200,000 2,200,000
176,000 81,000* 257,000
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
*Solution 278 2018
Dec.
(Cont.) 31
Second Installment Payment Interest Expense [($2,200,000 – $81,000) 8%]......... Mortgage Payable.................................. Cash ..............................................
169,520* 87,480 257,000
*(Mort. loan – [ann. pay. – (mort. loan × 8%)]
COMPLETION STATEMENTS 279. A current liability is a debt that can be expected to be paid within ____________ year(s) or the ______________, whichever is longer. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
280. Liabilities are classified on the balance sheet as being _______________ liabilities or ______________ liabilities. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
281. Obligations in written form are called ______________ and usually require the borrower to pay interest. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
282. With an interest-bearing note, a borrower must pay the ________________ of the note plus _________________ at maturity. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
283. Sales taxes collected from customers are a ______________ of the business until they are remitted to the taxing agency. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
284. Payroll taxes include the employer’s share of ________________ taxes and both state and federal ________________ taxes. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
285. Bonds that mature at a single specified future date are called _________________ bonds, whereas bonds that mature in installments are called __________________ bonds. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
286. The terms of a bond issue are set forth in a formal legal document called a bond ________________. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
287. Unsecured bonds that are issued against the general credit of the borrower are called ________________ bonds. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
Reporting and Analyzing Liabilities
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288. The market price of bonds is obtained by computing the present value of the ________________ paid at maturity, and all ________________ payments to be made over the term of the bond. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
289. If bonds are issued at face value (par), it indicates that the ________________ rate of interest must be equal to the ________________ rate of interest. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
290. If a $1 million, 10%, 10-year bond issue was sold at 97, the cash proceeds from the issuance of the bonds amounted to $________________. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
291. If bonds were issued at a premium, then the contractual rate of interest was _______________ than the market rate of interest. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
292. Discount on Bonds Payable is ________________ (“deducted from” or “added to”) bonds payable on the balance sheet. Premium on Bonds Payable is ________________ (“deducted from” or “added to”) bonds payable on the balance sheet. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
293. The ________________ provides an indication of a company’s ability to meet interest payments as they come due. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
*294. A method of amortizing bond discount or premium that allocates an equal amount each period is the ________________ method. Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
Answers to Completion Statements 279. 280. 281. 282. 283. 284. 285. 286.
one, operating cycle current, long-term notes payable face value, interest current liability FICA, unemployment term, serial indenture
287. 288. 289. 290. 291. 292. 293. *294.
.
debenture principal, interest stated (contractual), market (effective) 970,000 greater deducted from, added to times interest earned straight-line
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
10-74
MATCHING 295. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Serial bonds Debenture bonds Bond indenture Market interest rate Discount on bonds payable
F. G. H. I. J.
Current ratio Straight-line method of amortization Times interest earned Callable bonds Maturity date
____
1. Bonds subject to retirement at a stated dollar amount prior to maturity.
____
2. A legal document that sets forth the terms of a bond issue.
____
3. Bonds that mature in installments.
____
4. A measure of a company’s short-term liquidity.
____
5. The time that the final payment on a bond is due from the bond issuer.
____
6. A measure of a company’s solvency.
____
7. The rate investors demand for loaning funds to a corporation.
____
8. Unsecured bonds issued against the general credit of the borrower.
____
9. Occurs when the contractual rate of interest is less than the market rate of interest.
____ 10. Produces a periodic interest expense that is the same amount each interest period. Ans: N/A, LO: 2,3,4,5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
Answers to Matching 1. 2. 3. 4. 5.
I C A F J
6. 7. 8. 9. 10.
H D B E G
SHORT-ANSWER ESSAY QUESTIONS S-A E 296 (a) (b)
Identify three taxes commonly paid by employers on employees' salaries and wages. Where in the financial statements does the employer report taxes withheld from employees' pay?
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Communications, IMA: Business Economics
.
Reporting and Analyzing Liabilities
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Solution 296 (a) (b)
Three taxes commonly paid by employers on employees' salaries and wages are (1) Social Security (FICA) taxes, (2) state unemployment taxes, and (3) federal unemployment taxes. Taxes withheld from employees' gross pay and not yet remitted to the appropriate government agency are reported in the balance sheet as current liabilities.
S-A E 297 (a) (b)
What is a convertible bond? Discuss the advantages of a convertible bond from the standpoint of the bondholders and of the issuing corporation.
Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 297 (a) (b)
A convertible bond permits bondholders to convert it into common stock at the option of the bondholders. For bondholders, the conversion option gives an opportunity to benefit if the market price of the common stock increases substantially. For the issuer, convertible bonds usually have: (1) a lower rate of interest than other debt securities, (2) a higher selling price.
S-A E 298 When determining the value of a bond using present value, what are the two components used in the calculation? Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 298 One component is the periodic interest payments over the life of the bonds discounted using the market interest rate to calculate its present value. The other component is the present value of the single payment at maturity also based on the market interest rate. S-A E 299 When a bond sells at a discount, what is probably true about the market interest rate versus the stated interest rate? Discuss. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 299 For someone to purchase a bond at a discount, the stated interest rate normally must be below the market interest rate for similar bonds. Investors will need to make up the difference by paying less than the face value for the bonds. S-A E 300 Bonds are frequently issued at amounts greater or less than face value. Describe how the market rate of interest, relative to the contractual rate of interest, affects the selling price of bonds. Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Communications, IMA: Business Economics
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 300 The market rate of interest often is different from the contractual rate of interest and therefore bonds are frequently issued at amounts greater or less than face value. When the market rate of interest is higher than the contractual rate, investors can find better investments elsewhere and consequently there is less demand for the bonds. So, to make the bonds more attractive, the issue price will be lowered and the bonds will be issued at a discount. Conversely, if the market rate of interest is less than the contractual rate, there will be greater demand for the bonds because of the higher rate of interest. Thus, the issue price will be greater than face value and the bonds will be issued at a premium. S-A E 301 Bonds may be redeemed (retired) before maturity by the issuing corporation. Explain why a company would decide to retire bonds before maturity and the necessary steps to record the redemption. Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 301 A company may decide to retire bonds before maturity to reduce interest cost and remove debt from its balance sheet. A company will retire debt early only if it has sufficient cash resources. When bonds are retired before maturity, it is necessary to eliminate the carrying value of the bonds at the redemption date and recognize a gain or loss on redemption. The gain or loss is the difference between the cash paid and the carrying value of the bonds. S-A E 302 (a) (b)
In general, what are the requirements for the financial statement presentation of long-term liabilities? What ratios may be computed to evaluate a company's liquidity and solvency?
Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 302 (a)
(b)
The nature and the amount of each long-term liability should be presented in the balance sheet or in schedules in the accompanying notes to the financial statements. The notes should also indicate the interest rates, maturity dates, conversion privileges, and assets pledged as collateral. To evaluate liquidity a company may compute the current ratio. To evaluate long-run solvency a company may compute a debt to total assets ratio, and a times interest earned ratio.
S-A E 303 Maria Gomez is discussing the advantages of the effective-interest method of bond amortization with her accounting staff. What do you think Maria is saying? Ans: N/A, LO: 6, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Communications, IMA: Business Economics
.
Reporting and Analyzing Liabilities
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Solution 303 Maria is probably indicating that since the borrower has the use of the bond proceeds over the term of the bonds, the borrowing rate in each period should be the same. The effective-interest method results in a varying amount of interest expense but a constant rate of interest on the balance outstanding. Accordingly, it results in a better matching of expenses with revenues than the straight-line method. S-A E 304
(Ethics)
Wishbone Company maintains two separate accounts payable computer systems. One is known to all the users, and is used to process payments to vendors. Employees enter the vendor code, or the name and address of new vendors, the amount, the account, and so on. The other system is a secret one. It is used to cross-check the vendors against an approved vendor list. If a vendor is not listed as approved, the payment process is halted. Internal audit employees seek to verify the existence of a bona fide claim by the vendor. All inquiries are made at the top management level, and very discreetly. No one but top management, the internal audit staff, and the Board of Directors of the company is even aware of the second system. Required: Is it ethical for a company to have a secret system like the one described? Explain. Ans: N/A, LO: 1, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: Communications, IMA: Internal Controls
Solution 304 Secret systems that seek to verify the integrity of the non-secret primary system are certainly ethical. In fact, nearly all fraud and theft detection systems are secret. It is only the misuse of these systems, such as to obtain unauthorized information, or to commit some other crime, that is unethical. S-A E 305
(Communication)
Susan Jones works for Trend Press, a fairly large book publishing firm. Her best friend and rival, Diane Nilson, works for Lifeline Books, a smaller publisher. Both companies issue $100,000 in bonds on July 1. Trend's bonds were issued at a discount, while Lifeline's were issued at a premium. Diane sent Susan a fax the next day. She told Susan that it was obvious who the better publisher was and the market had shown its preference! She reminded Susan again of her recent increase in salary as further proof of the superiority of Lifeline Books. Required: Draft a short note for Susan to send to Diane. Explain how such a result could occur. Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Communications, IMA: Business Economics
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 305 Many answers are possible. The format should be fairly informal, and the point that a discount or premium is not necessarily a judgment on the strength or weakness of a company should be addressed. A suggested note follows:
Diane — I can't believe that Lifeline can survive with people like you handling their money! I also can't believe their lack of judgment in giving you a raise! Just kidding! Seriously, though, you can't prove that Trend is a bad company just by the bond price. Our bonds were issued at a discount, not because of the market's evaluation of our company, but because we underestimated interest rates. Lifeline got a premium because it overestimated interest rates. You'll have to find some other evidence to prove your company is better, (which you can't, because it isn't.) Seriously (again), congratulations on your raise. Shall we still meet for lunch on Wednesday? Your treat. How about trying our luck with chopsticks at the Chinese Panda? Let me know if your plans change. (signed)
.
Reporting and Analyzing Liabilities
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IFRS QUESTIONS 1.
Wittebury Corporation retires its £3,000,000 face value bonds at 105 on January 1, following the payment of annual interest. The carrying value of the bonds at the redemption date is $3,112,350. The entry to record the redemption will include a. a credit of £37,650 to Gain on Bond Redemption. b. a debit of £37,650 to Loss on Bond Redemption. c. a credit of £15,000 to Bonds Payable. d. a credit of £37,650 to Bonds Payable.
Ans: b, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
2.
Chang Company retired bonds with a face amount of ¥60,000,000 at 98 when the carrying value of the bond was ¥59,780,000. The entry to record the retirement would include a a. gain on bond redemption of ¥980,000. b. loss on bond redemption of ¥980,000. c. loss on bond redemption of ¥1,200,000. d. gain on bond redemption of ¥1,420,000.
Ans: a, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
3.
Herman Company received proceeds of ₤471,250 on 10-year, 8% bonds issued on January 1, 2015. The bonds had a face value of ₤500,000, pay interest semi-annually on June 30 and December 31, and have a call price of 101. Herman uses the straight-line method of amortization. Herman Company decided to redeem the bonds on January 1, 2017. What amount of gain or loss would Herman report on its 2017 income statement? a. ₤23,000 gain b. ₤28,000 gain c. ₤28,000 loss d. ₤23,000 loss
Ans: c, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
4.
Finney Company borrowed €1,600,000 from BankTwo on January 1, 2016 in order to expand its mining capabilities. The five-year note required annual payments of €416,698 and carried an annual interest rate of 9.5%. What is the balance in the notes payable account at December 31, 2017 after the annual payment? a. €1,600,000 b. €1,045,458 c. €1,335,302 d. €1,296,000
Ans: b, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
5.
On January 1, 2017, Michelin Company, a calendar-year company, issued €9,000,000 of mortgage notes payable, of which €3,000,000 is due on January 1 for each of the next three years. The proper statement of financial position presentation on December 31, 2017, is a. Current liabilities, €9,000,000. b. Long-term Debt, €9,000,000. c. Current liabilities, €4,500,000; Long-term Debt, €4,500,000. d. Current liabilities, €3,000,000; Long-term Debt, €6,000,000.
Ans: d, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
10-80 6.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Whitmore Corporation Issues a £1,800,000, 10%, 10-year mortgage on December 31, 2017. The terms call for semi-annual installment payments of £144,435.The entry to record the first installment payment will include a. a debit to Interest Payment of £144,435. b. a debit to Mortgage Notes Payable of £54,435. c. a debit to Interest Expense of £180,000. d. a credit to cash of £144,435.
Ans: b, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
7.
The adjusted trial balance for Beneteau Corporation at the end of the 2017 included the following accounts: 5-year Bonds Payable 8% €6,620,000 Bond Interest Payable 240,000 Notes Payable (3 mo.) 50,000 Notes Payable (5 yr.) 1,650,000 Mortgage Payable (€150,000 due currently) 2,000,000 Salaries and Wages Payable 68,000 Taxes Payable (due 3/15 of next year) 85,000 The total non-current liabilities reported on the statement of financial position at December 31, 2017 are a. €9,880,000 b. €10,030,000 c. €10,120,000 d. €10,360,000
Ans: c, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
8.
Selected data from 2017 financial statements of Xi Corporation include the following (amount in millions): Current assets Total assets Current liabilities Total liabilities Cash Interest expense income taxes Net income
¥ 759 1,200 400 750 80 50 100 160
The debt to assets ratio is a. 62.5%. b. 52.7%. c. 1.60%. d. 6.2 times. Ans: a, LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Reporting and Analyzing Liabilities a
9.
10-81
¥2 billion, 8%, 10-year bonds are issued at face value. Interest will be paid semi-annually. When calculating the market price of the bond, the present value of a. ¥160,000,000 received for 10 periods must be calculated. b. ¥2 billion received in 10 periods must be calculated. c. ¥2 billion received in 20 periods must be calculated. d. ¥80,000,000 received for 10 periods must be calculated.
Ans: c, LO: 8, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA a
10.
On January 1, 2017, Asianic Inc. issued 10-year bonds with a face amount of ¥25,000,000 and a contract rate of 8% payable annually on January 1. The effective-interest rate on the bonds is 10%. Present value factors are as follows: At 8% At 10% PV of 1 for 10 periods 0.463 0.386 PV of an ordinary annuity if 1 for 10 periods 6.710 6.145 Total issue price of the bonds was a. ¥25,000,000. b. ¥24,500,000. c. ¥23,000,000. d. ¥21,940,000.
Ans: d, LO: 8, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
CHAPTER 11 REPORTING AND ANALYZING STOCKHOLDERS’ EQUITY SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY Item
LO
BT
Ite m
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
1 1 1 1 1 1 1 1 1 2
K K K K K K K K K K
11. 12. 13. 14. 15. 16. 17. 18. 19. 20.
LO
BT
2 2 2 2 2 2 2 2 2 2
K K K K K K K K K K
Item
LO
BT
Item
LO
BT
Item
LO
BT
3 3 3 4 4 4 4 4 4 4
K K K K K K K K K K
41. 42. 43. *44. *45. *46.
4 4 4 5 5 5
K K K K K C
149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 176. 177. 178. 179. 180. 181. 182.
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4 4 4 4 4 4 4 4 3 4 4 4 3
AP AP AP AP AP K K K K K K K C C C K K C K K K K AP AP K AP AP AP AP AP AP AP AP AP
183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. 194. 195. 196. 197. 198. 199. 200. 201. 202. *203. *204. *205. *206. *207. *208. 209. 210. *211. *212.
4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 5 5 5 5 5 5 3 4 5 5
AP AP K K K K K K K K AP AP AP AP AP AP AP AP AP C C AP AP AP AP AP K K K K
222. 223.
3 4
AP AP
True-False Statements 21. 22. 23. 24. 25. 26. 27. 28. 29. 30.
2 2 2 3 3 3 3 3 3 3
K C K K K K K K K C
31. 32. 33. 34. 35. 36. 37. 38. 39. 40.
Multiple Choice Questions 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80.
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 1 1 2 1 2 2 2 2 2 2 2 2 2
K K K K K K K K K C K K K K K K K K K K K K K K K K K K C K K AP AP AP
81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114.
2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3
AP AP K C K AP AP AP K AP C AP AP AP K AP AP AP AP K C C C K K K K K K AP C AP K K
115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148.
213. 214.
1,2 1
K K
216. 217.
2 2
AP AP
219. 220.
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
K AP AP K AP C AP AP K K K K C AP AP AP C AP AP K K C K K K K K K K C K AP AP K
Brief Exercises
.
3 4
AP AP
11-2
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
215.
2
K
218.
2,3
AP
221.
225. 226. 227. 228.
2 2 2,3 2,3
AP AP AP AP
229. 230. 231. 232.
2,4 2-4 2,3 2,3
AP AP AP AN
233. 234. 235. 236.
245. 246. 247.
1 1 1
K K K
248. 249. 250.
1 1 2
K K K
258.
1-4
K
259. 260.
1 1,3
K K
3
AP
224.
4
AP
237. 238. 239. 240.
3,4,5 4 4 4
AP AP AP AP
241. 242. 243. *244.
4 4 4 3,5
AP AN AN AP
3 3 4
K K K
257.
4
K
3 4
C C
267. 268.
2,3 4
E C
Exercises 2,4,5 3 3 3
AP AP AP AP
Completion Statements 251. 252. 253.
2 3 3
K K K
254. 255. 256.
Matching Short Answer Essay 261. 262.
2 3
C C
263. 264.
3 3
C C
265. 266.
*This topic is dealt with in an Appendix to the chapter.
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Learning Objective 1 Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
1. 2. 3. 4. 5. 6. 7. 8. 9.
TF TF TF TF TF TF TF TF TF
47. 48. 49. 50. 51. 52. 53. 54. 55.
MC MC MC MC MC MC MC MC MC
56. 57. 58. 59. 60. 61. 62. 63. 64.
MC MC MC MC MC MC MC MC MC
65. 66. 68. 69. 71. 213. 214. 245. 246.
MC MC MC MC MC Be Be C C
247. 248. 249. 258. 259. 260.
C C C Ma SA SA
Item
Type
Learning Objective 2 10.
TF
22.
TF
80.
MC
92.
MC
104.
MC
227.
Ex
11.
TF
23.
TF
81.
MC
93.
MC
105.
MC
228.
Ex
12.
TF
67.
MC
82.
MC
94.
MC
106.
MC
229.
Ex
13.
TF
70.
MC
83.
MC
95.
MC
107.
MC
230.
Ex
14.
TF
72.
MC
84.
MC
96.
MC
108.
MC
231.
Ex
15.
TF
73.
MC
85.
MC
97.
MC
213.
Be
232.
Ex
16.
TF
74.
MC
86.
MC
98.
MC
215.
Be
233.
Ex
17.
TF
75.
MC
87.
MC
99.
MC
216.
Be
250.
C
18.
TF
76.
MC
88.
MC
100.
MC
217.
Be
251.
C
19.
TF
77.
MC
89.
MC
101.
MC
218.
Be
258.
Ma
20.
TF
78.
MC
90.
MC
102.
MC
225.
Ex
261.
SA
21.
TF
79.
MC
91.
MC
103.
MC
226.
Ex
267.
SA
.
Reporting and Analyzing Stockholders’ Equity
11-3
Learning Objective 3 24.
TF
115.
MC
131.
MC
147.
MC
163.
MC
235.
Ex
25.
TF
116.
MC
132.
MC
148.
MC
164.
MC
236.
Ex
26.
TF
117.
MC
133.
MC
149.
MC
165.
MC
237.
Ex
27.
TF
118.
MC
134.
MC
150.
MC
178.
MC
244.
Ex
28.
TF
119.
MC
135.
MC
151.
MC
182.
MC
252.
C
29.
TF
120.
MC
136.
MC
152.
MC
209.
MC
253.
C
30.
TF
121.
MC
137.
MC
153.
MC
218.
Be
254.
C
31.
TF
122.
MC
138.
MC
154.
MC
219.
Be
255.
C
32.
TF
123.
MC
139.
MC
155.
MC
221.
Be
258.
Ma
33.
TF
124.
MC
140.
MC
156.
MC
222.
Be
260.
SA
109.
MC
125.
MC
141.
MC
157.
MC
227.
Ex
MC
126.
MC
142.
MC
158.
MC
228.
Ex
262 263.
SA
110. 111.
MC
127.
MC
143.
MC
159.
MC
230.
Ex
264.
SA
112.
MC
128.
MC
144.
MC
160.
MC
231.
Ex
265.
SA
113.
MC
129.
MC
145.
MC
161.
MC
232.
Ex
267.
SA
114.
MC
130.
MC
146.
MC
162.
MC
234.
Ex
SA
Learning Objective 4 34.
TF
167.
MC
179.
MC
191.
MC
202.
MC
240.
Ex
35.
TF
168.
MC
180.
MC
192.
MC
210.
MC
241.
Ex
36.
TF
169.
MC
181.
MC
193.
MC
220.
Be
242.
Ex
37.
TF
170.
MC
183.
MC
194.
MC
223.
Be
243.
Ex
38.
TF
171.
MC
184.
MC
195.
MC
224.
Be
256.
C
39.
TF
172.
MC
185.
MC
196.
MC
229.
Ex
257.
C
40.
TF
173.
MC
186.
MC
197.
MC
230.
Ex
258.
Ma
41.
TF
174.
MC
187.
MC
198.
MC
233.
Ex
266.
SA
42.
TF
175.
MC
188.
MC
199.
MC
237.
Ex
268.
SA
43.
TF
176.
MC
189.
MC
200.
MC
238.
Ex
166.
MC
177.
MC
190.
MC
201.
MC
239.
Ex
Learning Objective 5 Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
44.
TF
204.
MC
207.
MC
212.
MC
244.
Ex
45.
TF
205.
MC
208.
MC
233.
Ex
46.
TF
206.
MC
211.
MC
237.
Ex
Note: TF = True-False MC = Multiple Choice Ma = Matching
C = Completion Ex = Exercise SA = Short Answer Essay
.
Item
Type
11-4
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
CHAPTER LEARNING OBJECTIVES 1. Discuss the major characteristics of a corporation. The major characteristics of a corporation are separate legal existence, limited liability of stockholders, transferable ownership rights, ability to acquire capital, continuous life, corporation management, government regulations, and additional taxes. 2. Explain how to account for the issuance of common and preferred stock, and the purchase of treasury stock. When a company records issuance of common stock for cash, it credits the par value of the shares to Common Stock. It records in a separate paid-in capital account the portion of the proceeds that is above par value. When no-par common stock has a stated value, the entries are similar to those for par value stock. When no-par common stock does not have a stated value, the entire proceeds from the issue are credited to Common Stock. Companies generally use the cost method in accounting for treasury stock. Under this approach, a company debits Treasury Stock at the price paid to reacquire the shares. 3. Explain how to account for cash dividends and describe the effect of stock dividends and stock splits. Companies make entries for dividends at the declaration date and the payment date. At the declaration date, the entries for a cash dividend are debit Cash Dividends and credit Dividends Payable. Preferred stock has contractual provisions that give it priority over common stock in certain areas. Typically, preferred stockholders have a preference as to (1) dividends and (2) assets in the event of liquidation. However, they sometimes do not have voting rights. The effects of stock dividends and splits are as follows. Small stock dividends transfer an amount equal to the fair value of the shares issued from retained earnings to the paid-in capital accounts. Stock splits reduce the par value per share of the common stock while increasing the number of shares so that the balance in the Common Stock account remains the same. 4. Discuss how stockholders’ equity is reported and analyzed. Additions to retained earnings consist of net income. Deductions consist of net loss and cash and stock dividends. In some instances, portions of retained earnings are restricted, making that portion unavailable for the payment of dividends. In the stockholders’ equity section of the balance sheet, companies report paid-in capital and retained earnings and identify specific sources of paid-in capital. Within paid-in capital, companies show two classifications: capital stock and additional paid-in capital. If a corporation has treasury stock, it deducts the cost of treasury stock from total paid-in capital and retained earnings to determine total stockholders’ equity. A company’s dividend record can be evaluated by looking at what percentage of net income it chooses to pay out in dividends, as measured by the dividend payout ratio (dividends divided by net income). Earnings performance is measured with the return on common stockholders’ equity (income available to common stockholders divided by average common stockholders’ equity.) *5. Prepare entries for stock dividends. To record the declaration of a small stock dividend (less than 20%), debit Stock Dividends for an amount equal to the fair value of the shares issued. Record a credit to a temporary stockholders’ equity account—Common Stock Dividends Distributable—for the par value of the shares, and credit the balance to Paid-in Capital in Excess of Par Value. When the shares are issued, debit Common Stock Dividends Distributable and credit Common Stock.
.
Reporting and Analyzing Stockholders’ Equity
11-5
TRUE-FALSE STATEMENTS 1.
A corporation is not an entity that is separate and distinct from its owners.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
2.
The liability of a stockholder is usually limited to the stockholder’s investment in the corporation.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
3.
The sale of shares in a corporation by one stockholder to another affects the total capital of the corporation.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
4.
The tax laws can be a significant disadvantage of the corporate form of business.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
5.
A corporation can be organized for the purpose of making a profit or it may be nonprofit.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
6.
A corporation acts under its own name rather than in the name of its stockholders.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
7.
If a corporation pays taxes on its income, then stockholders will not have to pay taxes on the dividends received from that corporation.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
8.
A corporation must be incorporated in each state in which it does business.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
9.
A stockholder has the right to vote in the election of the board of directors.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: None, IMA: Business Economics
10.
When no-par value stock does not have a stated value, the entire proceeds from the issuance of the stock become legal capital.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
11.
When no-par common stock with a stated value is issued for cash, the common stock account is credited for an amount equal to the cash proceeds.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
12.
As soon as a corporation is authorized to sell stock, an accounting journal entry should be made recording the total value of the shares authorized.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA AICPA FC:AICPA FC:AICPA FC:
.
11-6 13.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The par value of common stock must always be equal to its market value on the date the stock is issued.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
14.
For accounting purposes, stated value is treated the same way as par value.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
15.
Paid-in capital is the amount paid in to the corporation by stockholders in exchange for shares of ownership.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
16.
The issuance of common stock affects both paid-in capital and retained earnings.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
17.
The acquisition of treasury stock by a corporation increases total assets and total stockholders’ equity.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
18.
Treasury stock should not be classified as a current asset.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
19.
Treasury stock is reported as an asset on the balance sheet because treasury stock may later be resold.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
20.
Treasury stock is a contra stockholders’ equity account.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
21.
The cost of treasury stock is deducted from total paid-in capital and retained earnings in determining total stockholders’ equity.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
22.
The journal entry to record the purchase of treasury stock will cause total stockholders’ equity to decrease by the amount of the cost of the treasury stock.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
23.
The number of common shares outstanding can never be greater than the number of shares issued.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
24.
Preferred stock has contractual preference over common stock in certain areas.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
25.
Preferred stockholders generally do not have the right to vote for the board of directors.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: None, IMA: Business Economics
.
Reporting and Analyzing Stockholders’ Equity
26.
11-7
When preferred stock is cumulative, preferred dividends not declared in a given period are called dividends in arrears.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
27.
Dividends may be declared and paid in cash or stock.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
28.
Cash dividends are not a liability of the corporation until they are declared by the board of directors.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
29.
The amount of a cash dividend liability is recorded on the date of record because it is on that date that the persons or entities who will receive the dividend are identified.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
30.
A 10% stock dividend will increase the number of shares outstanding but the book value per share will decrease.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
31.
A stock dividend does not affect the total amount of stockholders’ equity.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
32.
A stock split results in a transfer at market value from retained earnings to paid-in capital.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
33.
A 3-for-1 common stock split will increase total stockholders’ equity but reduce the par or stated value per share of common stock.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
34.
Retained earnings represents the amount of cash available for dividends.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
35.
Dividends in arrears are liabilities of the corporation.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
36.
Net income of a corporation should be closed to retained earnings and net losses should be closed to paid-in capital accounts.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
37.
A debit balance in the Retained Earnings account is identified as a deficit.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
38.
Retained earnings that are restricted are unavailable for dividends.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
11-8 39.
Restricted retained earnings are available for preferred stock dividends but unavailable for common stock dividends.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
A detailed stockholders’ equity section in the balance sheet will list the names of individuals who are eligible to receive dividends on the date of record.
40.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
41.
The Common Stock Distributable account is classified as a current liability.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Return on common stockholders’ equity is computed by dividing net income by ending stockholders’ equity.
42.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
43.
The payout ratio is computed by dividing total cash dividends paid on common stock by retained earnings.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
*44.
A liability arises when the board of directors declares a stock dividend.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
A stock dividend is a pro rata distribution of cash to a corporation’s stockholders.
*45.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
*46.
A stock dividend will cause an increase in total contributed capital at the date the dividend is declared.
Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Answers to True-False Statements 1. 2. 3. 4. 5. 6. 7.
F T F T T T F
8. 9. 10. 11. 12. 13. 14.
F T T F F F T
15. 16. 17. 18. 19. 20. 21.
T F F T F T T
22. 23. 24. 25. 26. 27. 28.
.
T T T T T T T
29. 30. 31. 32. 33. 34. 35.
F T T F F F F
36. 37. 38. 39. 40. 41. 42.
F T T F F F F
43. *44. *45. *46.
F F F T
Reporting and Analyzing Stockholders’ Equity
11-9
MULTIPLE CHOICE QUESTIONS 47.
Under the corporate form of business organization a. a stockholder is personally liable for the debts of the corporation. b. stockholders’ acts can bind the corporation even though the stockholders have not been appointed as agents of the corporation. c. the corporation’s life is stipulated in its charter. d. stockholders wishing to sell their corporation shares must get the approval of other stockholders.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
48.
Stockholders of a corporation directly elect a. the president of the corporation. b. the board of directors. c. the treasurer of the corporation. d. all of the employees of the corporation.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: None, IMA: Business Economics
49.
Those most responsible for the major policy decisions of a corporation are the a. stockholders. b. board of directors. c. management. d. employees.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: None, IMA: Business Economics
50.
The chief accounting officer in a company is known as the a. controller. b. treasurer. c. vice-president. d. president.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: None, AICPA PC: None, IMA: Business Economics
51.
Which one of the following would not be considered an advantage of the corporate form of organization? a. Limited liability of stockholders. b. Separate legal existence. c. Continuous life. d. Government regulation.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
52.
The two ways that a corporation can be classified by purpose are a. general and limited. b. profit and not-for-profit. c. state and federal. d. publicly held and privately held.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
11-10
53.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The two ways that a corporation can be classified by ownership are a. publicly held and privately held. b. stock and non-stock. c. inside and outside. d. majority and minority.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
54.
Which of the following would not be true of a privately held corporation? a. It is sometimes called a closely held corporation. b. Its shares are regularly traded on the New York Stock Exchange. c. It does not offer its shares for sale to the general public. d. It is usually smaller than a publicly held company.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
55.
Which of the following is not true of a corporation? a. It may buy, own, and sell property. b. It may sue and be sued. c. The acts of its owners bind the corporation. d. It may enter into binding legal contracts in its own name.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
56.
Jason Hansen has invested $600,000 in a privately held family corporation. The corporation does not do well and must declare bankruptcy. What amount does Hansen stand to lose? a. Up to his total investment of $600,000. b. Zero. c. The $600,000 plus any personal assets the creditors demand. d. $400,000.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
57.
Which of the following statements reflects the transferability of ownership rights in a corporation? a. If a stockholder decides to transfer ownership, he must transfer all of his shares. b. A stockholder may dispose of part or all of his shares. c. A stockholder must obtain permission of the board of directors before selling shares. d. A stockholder must obtain permission from at least three other stockholders before selling shares.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: None, IMA: Business Economics
58.
A corporate board of directors does not generally a. select officers. b. formulate operating policies. c. declare dividends. d. execute policy.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: None, IMA: Business Economics
.
Reporting and Analyzing Stockholders’ Equity
59.
11-11
The officer that is generally responsible for maintaining the cash position of the corporation is the a. controller. b. treasurer. c. cashier. d. internal auditor.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
60.
The ability of a corporation to obtain capital is a. enhanced because of limited liability and ease of share transferability. b. less than a partnership. c. restricted because of the limited life of the corporation. d. about the same as a partnership.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
61.
Which of the following statements concerning taxation is accurate? a. Partnerships pay state income taxes but not federal income taxes. b. Corporations pay federal income taxes but not state income taxes. c. Corporations pay federal and state income taxes. d. Only the owners must pay taxes on corporate income.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
62.
Which of the following statements is not considered a disadvantage of the corporate form of organization? a. Additional taxes. b. Government regulations. c. Limited liability of stockholders. d. Separation of ownership and management.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
63.
A disadvantage of the corporate form of organization is a. professional management. b. tax treatment. c. ease of transfer of ownership. d. lack of mutual agency.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
64.
A disadvantage of the corporate form of business is a. its status as a separate legal entity. b. continuous existence. c. government regulation. d. ease of transfer of ownership.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
11-12
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
65.
Which of the following phrases is not descriptive of the corporate form of business? a. Professional management. b. Double taxation on distributed earnings. c. Unlimited liability. d. Continuous existence.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
66.
Which one of the following is not an ownership right of a stockholder in a corporation? a. To vote in the election of directors. b. To declare dividends on the common stock. c. To share in assets upon liquidation. d. To share in corporate earnings.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
67.
If no-par stock is issued without a stated value, then a. the par value is automatically $1 per share. b. the entire proceeds are considered to be legal capital. c. there is no legal capital. d. the corporation is automatically in violation of its state charter.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
68.
If a stockholder cannot attend a stockholders’ meeting, he may delegate his voting rights by means of a(n) a. absentee ballot. b. proxy. c. certified letter. d. telegram.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: None, IMA: Business Economics
69.
The term residual claim refers to a stockholders’ right to a. receive dividends. b. share in assets upon liquidation. c. acquire additional shares when offered. d. exercise a proxy vote.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
70.
Which of the following factors does not affect the initial market price of a stock? a. The company’s anticipated future earnings. b. The par value of the stock. c. The current state of the economy. d. The expected dividend rate per share.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
71.
If an investment firm underwrites a stock issue, the a. risk of being unable to sell the shares stays with the issuing corporation. b. corporation obtains cash immediately from the investment firm. c. investment firm has guaranteed profits on the sale of the stock. d. issuance of stock is likely to be directly to creditors.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: None, IMA: Business Economics
.
Reporting and Analyzing Stockholders’ Equity
72.
11-13
The par value of a stock a. is legally significant. b. reflects the most recent market price. c. is selected by the SEC. d. is indicative of the worth of the stock.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: FSA
73.
Par value a. represents what a share of stock is worth. b. represents the original selling price for a share of stock. c. is established for a share of stock after it is issued. d. is the value assigned per share in the corporate charter.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: FSA
74.
The term legal capital is a descriptive term for a. stockholders’ equity. b. par value. c. residual equity. d. market value.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: FSA
75.
A corporation has the following account balances: Common Stock, $1 par value, $80,000; Paid-in Capital in Excess of Par Value, $2,700,000. Based on this information, the a. legal capital is $2,780,000. b. number of shares issued is 80,000. c. number of shares outstanding is 2,780,000. d. average price per share issued is $3.48.
Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $80,000 $1 = 80,000
76.
The authorized stock of a corporation a. only reflects the initial capital needs of the company. b. is indicated in its by-laws. c. is indicated in its charter. d. must be recorded in a formal accounting entry.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: None, IMA: Business Economics
77.
The amount of stock that may be issued according to the corporation’s charter is referred to as the a. authorized stock. b. issued stock. c. unissued stock. d. outstanding stock.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: None, IMA: Business Economics
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
11-14 78.
If Norben Company issues 6,000 shares of $5 par value common stock for $210,000, the account a. Common Stock will be credited for $210,000. b. Paid-in Capital in Excess of Par Value will be credited for $30,000. c. Paid-in Capital in Excess of Par Value will be credited for $180,000. d. Cash will be debited for $180,000.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $210,000 − (6,000 $5) = $180,000 (Iss. Pr. – (sh. iss. × PV/sh)
79.
Alt Corp. issues 5,000 shares of $10 par value common stock at $14 per share. When the transaction is recorded, credits are made to: a. Common Stock $50,000 and Paid-in Capital in Excess of Stated Value $20,000. b. Common Stock $70,000. c. Common Stock $50,000 and Paid-in Capital in Excess of Par Value $20,000. d. Common Stock $50,000 and Retained Earnings $20,000.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 5,000 $10 = $50,000; ($14 − $10) 5,000 = 20,000 (Sh. iss. × PV/sh); (Iss. pr. – pV/sh) × sh. iss.
80.
If Lantz Company issues 10,000 shares of $5 par value common stock for $210,000, the account a. Common Stock will be credited for $50,000. b. Paid-in Capital in Excess of Par Value will be credited for $50,000. c. Paid-in Capital in Excess of Par Value will be credited for $210,000. d. Cash will be debited for $160,000.
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 10,000 $5 = $50,000 (Sh. iss. × PV/sh.)
81.
If Pratt Company issues 5,000 shares of $5 par value common stock for $210,000, the account a. Common Stock will be credited for $185,000. b. Paid-in Capital in Excess of Par Value will be credited for $210,000. c. Paid-in Capital in Excess of Par Value will be credited for $235,000. d. Cash will be debited for $210,000.
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $210,000 selling price
82.
If common stock is issued for an amount greater than par value, the excess should be credited to a. Cash. b. Retained Earnings. c. Paid-in Capital in Excess of Par Value. d. Legal Capital.
Ans: C, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
Reporting and Analyzing Stockholders’ Equity
83.
11-15
Paid-in Capital in Excess of Par Value a. is credited when no-par stock does not have a stated value. b. is reported as part of paid-in capital on the balance sheet. c. represents the amount of legal capital. d. normally has a debit balance.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
84.
The Paid-in Capital in Excess of Par Value is increased in the accounting records when a. the number of shares issued exceeds par value. b. the stated value of capital stock is greater than the par value. c. the market value of the stock rises above par value. d. capital stock is issued at an amount greater than par value.
Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
85.
Which of the following represents the largest number of common shares? a. Treasury shares. b. Issued shares. c. Outstanding shares. d. Authorized shares.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
86.
Tomlinson Packaging Corporation began business in 2017 by issuing 50,000 shares of $5 par common stock for $8 per share and 5,000 shares of 6%, $10 par preferred stock for par. At year end, the common stock had a market value of $10. On its December 31, 2017 balance sheet, Tomlinson Packaging would report a. Common Stock of $500,000. b. Common Stock of $250,000. c. Common Stock of $400,000. d. Paid-in Capital of $330,000.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 50,000 $5 = $250,000 (Sh. iss. × PV/sh.)
87.
Holden Packaging Corporation began business in 2017 by issuing 90,000 shares of $5 par common stock for $8 per share and 20,000 shares of 6%, $10 par preferred stock for par. At year end, the common stock had a market value of $10. On its December 31, 2017 balance sheet, Holden Packaging would report a. Common Stock of $900,000. b. Common Stock of $450,000. c. Common Stock of $720,000. d. Paid-In Capital of $675,000.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 90,000 $5 = $450,000 (Sh. iss. × PV/sh.)
.
11-16 88.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Cey, Inc. issued 10,000 shares of stock at a stated value of $10/share. The total issue of stock sold for $15/share. The journal entry to record this transaction would include a a. debit to Cash for $100,000. b. credit to Common Stock for $100,000. c. credit to Paid-in Capital in Excess of Par Value for $50,000. d. credit to Common Stock for $150,000.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 10,000 $10 = $100,000 (Sh. iss. × SV/sh.)
89.
When stock is issued in exchange for a noncash asset, the value recorded for the shares issued is best determined by a. the book value of the noncash asset. b. the market value of the shares. c. the par value of the shares. d. the contributed capital of the shares.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
90.
S. Lawyer performed legal services for E. Corp. Due to a cash shortage, an agreement was reached whereby E. Corp. would pay S. Lawyer a legal fee of approximately $20,000 by issuing 8,000 shares of its common stock (par $1). The stock trades on a daily basis and the market price of the stock on the day the debt was settled is $2.40 per share. Given this information, the best journal entry for E. Corp. to record for this transaction is a. Legal Expense 19,200 Common Stock 19,200 b. Legal Expense 20,000 Common Stock 20,000 c. Legal Expense 20,000 Common Stock 8,000 Paid-in Capital in Excess of Par - Common 13,000 d. Legal Expense 19,200 Common Stock 8,000 Paid-in Capital in Excess of Par - Common 11,200
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 8,000 ($2.40 − $1.00) = $11,200 (Sh. iss. × (MP/sh − PV/sh)
91.
If the market value of the assets received and the market value of the stock issued are both available, then what amount should be used to value the assets? a. Market value of the stock. b. Market value of the assets. c. Par value of the stock. d. The more clearly determinable market value.
Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
Reporting and Analyzing Stockholders’ Equity
92.
11-17
Johnson Company issued 900 shares of no-par common stock for $17,100. Which of the following journal entries would be made if the stock has no stated value? a. Cash 17,100 Common Stock – No-Par Value 17,100 b. Cash 17,100 Common Stock – No-Par Value 900 Paid-in Capital in Excess of Par 16,200 c. Cash 17,100 Common Stock – No-Par Value 900 Paid-in Capital in Excess of Stated Value 16,200 d. Common Stock – No-Par Value 17,100 Cash 17,100
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $17,100 (No−par stock) (Iss. price)
93.
Dawson Company issued 800 shares of no-par common stock for $7,200. Which of the following journal entries would be made if the stock has stated value of $2 per share? a. Cash 7,200 Common Stock 7,200 b. Cash 7,200 Common Stock 1,600 Paid-in Capital in Excess of Par 5,600 c. Cash 7,200 Common Stock 1,600 Paid-in Capital in Excess of Stated Value 5,600 d. Common Stock 7,200 Cash 7,200
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 800 $2 = $1,600; $7,200 − (800 $2) = $5,600 (Sh. iss. SV/sh.); [Iss. pr. − (sh. iss. SV/sh)]
94.
Retro Company is authorized to issue 10,000 shares of 8%, $100 par value preferred stock and 500,000 shares of no-par common stock with a stated value of $1 per share. If Retro issues 10,000 shares of common stock to pay its recent attorney's bill of $50,000 for legal services on a land access dispute, which of the following would be the best journal entry for Retro to record? a. Legal Expense 10,000 Common Stock 10,000 b. Legal Expense 50,000 Common Stock 50,000 c. Legal Expense 50,000 Common Stock 10,000 Paid-in Capital in Excess of Stated Value - Common 40,000 d. Legal Expense 50,000 Common Stock 10,000 Paid-in Capital in Excess of Par value - Common 40,000
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $50,000 − (10,000 $1) = $40,000 (Attor. bill − (sh. iss. SV/sh.))
.
11-18
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
95.
Which of the following statements about treasury stock is true? a. Few corporations have treasury stock. b. Purchasing treasury stock is done to eliminate hostile shareholder buyouts. c. Companies acquire treasury stock to increase the number of shares outstanding. d. Companies acquire treasury stock to decrease earnings per share.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
96.
The following data is available for BOX Corporation at December 31, 2017: Common stock, par $10 (authorized 30,000 shares) $270,000 Treasury stock (at cost $15 per share) $ 1,200 Based on the data, how many shares of common stock are outstanding? a. 30,000. b. 27,000. c. 29,920. d. 26,920.
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($270,000 10) − ($1,200 $15) = 26,920 (Com. st. PV/sh) − (Trea. st. cost/sh.)
97.
The following data is available for BOX Corporation at December 31, 2017: Common stock, par $10 (authorized 30,000 shares) $270,000 Treasury stock (at cost $15 per share) $ 1,200 Based on the data, how many shares of common stock are issued? a. 30,000. b. 27,000. c. 29,920. d. 26,920.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $270,000 $10 = 27,000 (Com. st. PV/sh.)
98.
Kaplan Manufacturing Corporation purchased 2,500 shares of its own previously issued $10 par common stock for $62,500. As a result of this event, a. Kaplan’s Common Stock account decreased $25,000. b. Kaplan’s total stockholders’ equity decreased $62,500. c. Kaplan’s Paid-in Capital in Excess of Par Value account decreased $37,500. d. All of these answer choices are correct.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $62,500 cost of stock
99.
Leary Manufacturing Corporation purchased 5,000 shares of its own previously issued $10 par common stock for $125,000. As a result of this event, a. Leary’s Common Stock account decreased $50,000. b. Leary’s total stockholders’ equity decreased $125,000. c. Leary’s Paid-in Capital in Excess of Par Value account decreased $75,000. d. All of these answer choices are correct.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $125,000 cost of stock
.
Reporting and Analyzing Stockholders’ Equity
100.
11-19
Treasury stock is a. stock issued by the U.S. Treasury Department. b. stock purchased by a corporation and held as an investment in its treasury. c. corporate stock issued by the treasurer of a company. d. a corporation’s own stock, which has been reacquired and held for future use.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
101.
The acquisition of treasury stock by a corporation a. increases its total assets and total stockholders’ equity. b. decreases its total assets and total stockholders’ equity. c. has no effect on total assets and total stockholders’ equity. d. requires that a gain or loss be recognized on the income statement.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
102.
A corporation purchases 20,000 shares of its own $20 par common stock for $35 per share, recording it at cost. What will be the effect on total stockholders’ equity? a. Increase by $700,000. b. Decrease by $400,000. c. Decrease by $700,000. d. Decrease by $300,000.
Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: 20,000 $35 = $700,000 (sh. purch. cost/sh.)
103.
A corporation purchases 30,000 shares of its own $10 par common stock for $25 per share, recording it at cost. What will be the effect on total stockholders’ equity? a. Increase by $300,000. b. Decrease by $750,000. c. Increase by $750,000. d. Decrease by $300,000.
Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: 30,000 $25 = $750,000 (sh. purch. cost/sh.)
104.
Treasury stock should be reported in the financial statements of a corporation as a(n) a. investment. b. liability. c. deduction from total paid-in capital. d. deduction from total paid-in capital and retained earnings.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
105.
A company would not acquire treasury stock a. in order to reissue shares to officers. b. as an asset investment. c. in order to increase trading of the company’s stock. d. to have additional shares available to use in acquisitions of other companies.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: None, IMA: Business Economics
.
11-20 106.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Treasury Stock is a(n) a. contra asset account. b. retained earnings account. c. asset account. d. contra stockholders’ equity account.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
107.
The number of shares of issued stock equals a. unissued shares minus outstanding shares. b. outstanding shares plus treasury shares. c. authorized shares minus treasury shares. d. outstanding shares plus authorized shares.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
108.
Treasury shares plus outstanding shares equal a. authorized stock. b. issued stock. c. unissued stock. d. distributable stock.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
109.
Which of the following is not a right or preference associated with preferred stock? a. The right to vote. b. First claim to dividends. c. Preference to corporate assets in case of liquidation. d. To receive dividends in arrears before common stockholders receive dividends.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: None, IMA: Business Economics
110.
Logan Corporation issues 70,000 shares of $50 par value preferred stock for cash at $60 per share. The entry to record the transaction will consist of a debit to Cash for $4,200,000 and a credit or credits to a. Preferred Stock for $4,200,000. b. Preferred Stock for $3,500,000 and Paid-in Capital in Excess of Par Value—Preferred Stock for $700,000. c. Preferred Stock for $3,500,000 and Retained Earnings for $700,000. d. Paid-in Capital from Preferred Stock for $4,200,000.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA Solution: 70,000 $50 = $3,500,000; ($60 − $50) 70,000 = $700,000 (Sh. iss. PV/sh.); (Iss. pr. − PV/sh) sh. iss.
111.
Logan Corporation issues 40,000 shares of $50 par value preferred stock for cash at $60 per share. In the stockholders’ equity section, the effects of the transaction above will be reported a. entirely within the capital stock section. b. entirely within the additional paid-in capital section. c. under both the capital stock and additional paid-in capital sections. d. entirely under the retained earnings section.
Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Reporting and Analyzing Stockholders’ Equity
112.
11-21
Nice Corporation issues 40,000 shares of $100 par value preferred stock for cash at $110 per share. The entry to record the transaction will consist of a debit to Cash for $4,400,000 and a credit or credits to a. Preferred Stock for $4,400,000. b. Preferred Stock for $4,000,000 and Paid-in Capital in Excess of Par Value—Preferred Stock for $400,000. c. Preferred Stock for $4,000,000 and Retained Earnings for $300,000. d. Paid-in Capital from Preferred Stock for $4,400,000.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 40,000 $100 = $4,000,000; ($110 − $100) 40,000 = $400,000 (sh. iss. PV/sh); (Iss. pr − PV/sh) sh. iss.
113.
Dividends in arrears on cumulative preferred stock a. never have to be paid, even if common dividends are paid. b. must be paid before common stockholders can receive a dividend. c. should be recorded as a current liability until they are paid. d. enable the preferred stockholders to share equally in corporate earnings with the common stockholders.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
114.
Dividends in arrears on cumulative preferred stock a. are considered to be a non-current liability. b. are considered to be a current liability. c. only occur when preferred dividends have been declared. d. should be disclosed in the notes to the financial statements.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
115.
Dividends in arrears are dividends on a. cumulative preferred stock that have been declared but have not been paid. b. non-cumulative preferred stock that have not been declared for a given period of time. c. cumulative preferred stock that have not been declared for a given period of time. d. common dividends that have been declared but have not yet been paid.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
116.
Outstanding stock of the West Corporation included 40,000 shares of $5 par common stock and 10,000 shares of 5%, $10 par non-cumulative preferred stock. In 2016, West declared and paid dividends of $4,000. In 2017, West declared and paid dividends of $20,000. How much of the 2017 dividend was distributed to preferred shareholders? a. $9,000. b. $15,000. c. $5,000. d. None of these answer choices are correct.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (10,000 $10) .05 = $5,000 (Pref. sh. Pref. PV) div. rate
.
11-22 117.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Outstanding stock of the Hall Corporation included 40,000 shares of $5 par common stock and 20,000 shares of 5%, $10 par non-cumulative preferred stock. In 2016, Hall declared and paid dividends of $8,000. In 2017, Hall declared and paid dividends of $24,000. How much of the 2017 dividend was distributed to preferred shareholders? a. $14,000. b. $18,000. c. $10,000. d. None of these answer choices are correct.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (20,000 $10) .05 = $10,000 (Pref. Sh. Pref. PV/sh) div. rate
118.
All of the following statements about preferred stock are true except a. preferred stock will have a paid-in capital account that is separate from other stock. b. preferred stock is presented first on the stockholder's equity section. c. preferred stock can be either par value or no-par value. d. there can be only one class of preferred stock.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
119.
Retro Company is authorized to issue 10,000 shares of 8%, $100 par value preferred stock and 500,000 shares of no-par common stock with a stated value of $1 per share. If Retro issues 7,000 shares of preferred stock for land with an asking price of $875,000 and a market value of $770,000, which of the following would be the best journal entry for Retro to record? a. Land 700,000 Preferred Stock 700,000 b. Land 770,000 Preferred Stock 770,000 c. Land 875,000 Preferred Stock 700,000 Paid-in Capital in Excess of Par - Preferred 175,000 d. Land 770,000 Preferred Stock 700,000 Paid-in Capital in Excess of Par - Preferred 70,000
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 7,000 $100 = $700,000; $770,000 − $700,000 = $70,000 (Sh. iss. PV/sh.); (Mar. Val. − (Sh. iss. PV/sh.))
120.
XYZ Company has $20,000 of dividends in arrears. Based on this information, which of the following statements is false? a. Dividends in arrears are not considered to be liabilities. b. An obligation for dividends in arrears exists only after the board of directors declares payment. c. The investment community looks favorably on companies with dividends in arrears, since the money is redirected toward more important growth opportunities. d. The amount of dividends in arrears should be disclosed in the notes to the financial statements.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Reporting and Analyzing Stockholders’ Equity
121.
11-23
On January 1, McCarver Corporation had 800,000 shares of $10 par value common stock outstanding. On March 31 the company declared a 10% stock dividend. Market value of the stock was $15/share. As a result of this event, a. McCarver’s Paid-in Capital in Excess of Par Value account increased $400,000. b. McCarver’s total stockholders’ equity was unaffected. c. McCarver’s Stock Dividends account increased $1,200,000. d. All of these answer choices are correct.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
122.
On January 1, Edmiston Corporation had 2,000,000 shares of $10 par value common stock outstanding. On March 31 the company declared a 10% stock dividend. Market value of the stock was $15/share. As a result of this event, a. Edmiston’s Paid-in Capital in Excess of Par Value account increased $1,000,000. b. Edmiston’s total stockholders’ equity was unaffected. c. Edmiston’s Stock Dividends account increased $3,000,000. d. All of these answer choices are correct.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (2,000,000 .10) $15 = $3,000,000; 200,000 ($15 − $10) = $1,000,000 (Sh. out. div. % MV/sh); (Sh. out. div. %) × (MV/sh. − PV/sh.)
123.
Which one of the following is not necessary in order for a corporation to pay a cash dividend? a. Adequate cash. b. Approval of stockholders. c. Declared dividends. d. Retained earnings.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: None, IMA: Business Economics
124.
The date on which a cash dividend becomes a binding legal obligation is on the a. declaration date. b. date of record. c. payment date. d. last day of the fiscal year end.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
125.
The cumulative effect of the declaration and payment of a cash dividend on a company’s financial statements is to a. decrease total liabilities and stockholders’ equity. b. increase total expenses and total liabilities. c. increase total assets and stockholders’ equity. d. decrease total assets and stockholders’ equity.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
11-24 126.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The board of directors of Bosco Company declared a cash dividend on November 15, 2017, to be paid on December 15, 2017, to stockholders owning the stock on November 30, 2017. Given these facts, the date of November 30, 2017, is referred to as the a. declaration date. b. record date. c. payment date. d. ex-dividend date.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
127.
The effect of the declaration of a cash dividend by the board of directors is to Increase Decrease a. Stockholders’ equity Assets b. Assets Liabilities c. Liabilities Stockholders’ equity d. Liabilities Assets
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
128.
Which of the following is the appropriate general journal entry to record the declaration of cash dividends? a. Cash Dividends Cash b. Dividends Payable Cash c. Paid-in Capital Dividends Payable d. Cash Dividends Dividends Payable
Ans: D, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
129.
The board of directors of Yancey Company declared a cash dividend of $1.50 per share on 42,000 shares of common stock on July 15, 2017. The dividend is to be paid on August 15, 2017, to stockholders of record on July 31, 2017. The correct entry to be recorded on July 15, 2017, will include a a. debit to Dividends Payable. b. debit to Cash Dividends. c. credit to Cash. d. credit to Cash Dividends.
Ans: B, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
130.
The board of directors of Yancey Company declared a cash dividend of $1.50 per share on 42,000 shares of common stock on July 15, 2017. The dividend is to be paid on August 15, 2017, to stockholders of record on July 31, 2017. The effects of the journal entry to record the declaration of the dividend on July 15, 2017, are to a. decrease stockholders’ equity and increase liabilities. b. decrease stockholders’ equity and decrease assets. c. increase stockholders’ equity and increase liabilities. d. increase stockholders’ equity and decrease assets.
Ans: A, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Reporting and Analyzing Stockholders’ Equity
131.
11-25
The net effects on the corporation of the declaration and payment of a cash dividend are to a. decrease liabilities and decrease stockholders’ equity. b. increase stockholders’ equity and decrease liabilities. c. decrease assets and decrease stockholders’ equity. d. increase assets and increase stockholders’ equity.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
132.
The board of directors of Benson Company declared a cash dividend of $1.50 per share on 42,000 shares of common stock on July 15, 2017. The dividend is to be paid on August 15, 2017, to stockholders of record on July 31, 2017. The correct entry to be recorded on August 15, 2017, will include a a. debit to Cash Dividends. b. credit to Cash Dividends. c. credit to Dividends Payable. d. debit to Dividends Payable.
Ans: D, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
133.
The board of directors of Benson Company declared a cash dividend of $1.50 per share on 42,000 shares of common stock on July 15, 2017. The dividend is to be paid on August 15, 2017, to stockholders of record on July 31, 2017. The effects of the journal entry to record the payment of the dividend on August 15, 2017, are to a. decrease stockholders’ equity and decrease liabilities. b. decrease liabilities and decrease assets. c. increase stockholders’ equity and increase liabilities. d. increase stockholders’ equity and decrease assets.
Ans: B, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
134.A
corporation records a dividend-related liability a. on the record date. b. on the payment date. c. when dividends are in arrears. d. on the declaration date.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
135.
Common Stock Dividends Distributable is classified as a(n) a. asset account. b. stockholders’ equity account. c. expense account. d. liability account.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
136.
The effect of a stock dividend is to a. decrease total assets and stockholders’ equity. b. change the composition of stockholders’ equity. c. decrease total assets and total liabilities. d. increase the book value per share of common stock.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
11-26
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
137.
Stock dividends and stock splits have the following effects on retained earnings: Stock Splits Stock Dividends a. Increase No change b. No change Decrease c. Decrease Decrease d. No change No change
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
138.
Dividends are predominantly paid in a. scrip. b. property. c. cash. d. stock.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
139.
Of the four dividends types, the two most common types in practice are a. cash and scrip. b. cash and property. c. cash and stock. d. property and stock.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: None, IMA: Business Economics
140.
Regular dividends are declared out of a. paid-in capital in excess of par value. b. treasury stock. c. common stock. d. retained earnings.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
141.
Which of the following is not a significant date with respect to dividends? a. The declaration date. b. The incorporation date. c. The record date. d. The payment date.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
142.
On the dividend record date a. a dividend becomes a current obligation. b. no entry is required. c. an entry may be required if it is a stock dividend. d. Dividends Payable is debited.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
143.
Which of the following statements regarding the date of a cash dividend declaration is not accurate? a. The dividend can be rescinded once it has been declared. b. The corporation is committed to a legal, binding obligation. c. The board of directors formally authorizes the cash dividend. d. A liability account must be increased. .
Reporting and Analyzing Stockholders’ Equity
11-27
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
144.
Indicate the respective effects of the declaration of a cash dividend on the following balance sheet sections: Total Assets Total Liabilities Total Stockholders’ Equity a. Increase Decrease No change b. No change Increase Decrease c. Decrease Increase Decrease d. Decrease No change Increase
Ans: B, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
145.
Which of the following statements about dividends is not accurate? a. Dividends are generally reported quarterly as a dollar amount per share. b. Low dividends may mean high stock returns. c. The board of directors is obligated to declare dividends. d. Payment of dividends from legal capital is illegal in many states.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
146.
Ace Inc. has 10,000 shares of 4%, $100 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2017. What is the annual dividend on the preferred stock? a. $40 per share b. $40,000 in total c. $4,000 in total d. $0.40 per share
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: 10,000 $100 .04 = $40,000 (Pref. sh. PV/sh div. %)
147.
CAB Inc. has 1,000 shares of 5%, $100 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2017. What is the annual dividend on the preferred stock? a. $50 per share. b. $5,000 in total. c. $500 in total. d. $0.50 per share.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 1,000 $100 .05 = $5,000 (Pref. sh. PV/sh div. %)
148.
Which of the following statements is not true about a 2-for-1 split? a. Par value per share is reduced to half of what it was before the split. b. Total contributed capital increases. c. The market price probably will decrease. d. A stockholder with ten shares before the split owns twenty shares after the split.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
11-28 149.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Sizemore, Inc. has 10,000 shares of 4%, $100 par value, cumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2017. If the board of directors declares a $25,000 dividend, the a. preferred stockholders will receive 1/10th of what the common stockholders will receive. b. preferred stockholders will receive the entire $25,000. c. $25,000 will be held as restricted retained earnings and paid out at some future date. d. preferred stockholders will receive $12,500 and the common stockholders will receive $12,500.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 10,000 $100 .04 = $40,000; $40,000 > $25,000 (Pref. sh. PV/sh div. %) > div. dec.
150.
Denson, Inc. has 10,000 shares of 5%, $100 par value, non-cumulative preferred stock and 40,000 shares of $1 par value common stock outstanding at December 31, 2017. There were no dividends declared in 2016. The board of directors declares and pays a $120,000 dividend in 2017. What is the amount of dividends received by the common stockholders in 2017? a. $0. b. $50,000. c. $120,000. d. $70,000.
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $120,000 − (10,000 $100 .05) = $70,000 Div. dec. − (Pref. sh. PV/sh. div. rate)
151.
Brewer Inc. has 5,000 shares of 6%, $50 par value, cumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2017, and December 31, 2016. The board of directors declared and paid a $12,000 dividend in 2016. In 2017, $60,000 of dividends are declared and paid. What are the dividends received by the preferred stockholders in 2017? a. $42,000. b. $30,000. c. $18,000. d. $15,000.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 5,000 $50 .06 = $15,000; $15,000 + ($15,000 − $12,000) = $18,000 (Pref. Sh. PV/sh div. rate = ann. div.; ann. div + div. in arr.)
.
Reporting and Analyzing Stockholders’ Equity
152.
11-29
Watson, Inc. has 10,000 shares of 5%, $100 par value, cumulative preferred stock and 20,000 shares of $1 par value common stock outstanding at December 31, 2017. There were no dividends declared in 2015. The board of directors declares and pays a $90,000 dividend in 2016 and in 2017. What is the amount of dividends received by the common stockholders in 2017? a. $30,000. b. $40,000. c. $50,000. d. $0.
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $90,000 − (10,000 $100 .05) − [($50,000 2) − $90,000] = $30,000 Div. decl. − (Pref. sh. PV/sh. div. rate) − [(ann. div. 2) − div. dec.]
153.
Berman Inc. has 6,000 shares of 6%, $50 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2016, and December 31, 2017. The board of directors declared and paid an $12,000 dividend in 2016. In 2017, $72,000 of dividends are declared and paid. What are the dividends received by the common stockholders in 2017? a. $48,000. b. $42,000. c. $54,000. d. $18,000.
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 6,000 $50 .06 = $18,000; $72,000 − ($18,000 − $12,000) − $18,000 = $48,000 (Pref. sh. PV/sh. div. rate = ann. div.; Div. dec. − div. inarr. − ann. div.
154.
The board of directors must assign a per share value to a stock dividend declared that is a. greater than the par or stated value. b. less than the par or stated value. c. equal to the par or stated value. d. at least equal to the par or stated value.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
155.
Corporations generally issue stock dividends in order to a. increase the market price per share. b. exceed stockholders’ dividend expectations. c. increase the marketability of the stock. d. decrease the amount of capital in the corporation.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
156.
A stockholder who receives a stock dividend would a. expect the market price per share to increase. b. own more shares of stock. c. expect retained earnings to increase. d. expect the par value of the stock to change.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
11-30
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
157.
When stock dividends are distributed, a. Common Stock Dividends Distributable is decreased. b. Retained earnings is decreased. c. Paid-in Capital in Excess of Par Value is debited if it is a small stock dividend. d. No entry is necessary if it is a large stock dividend.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
158.
A small stock dividend is defined as a. less than 30% but greater than 25% of the corporation’s issued stock. b. between 50% and 100% of the corporation’s issued stock. c. more than 30% of the corporation’s issued stock. d. less than 20-25% of the corporation’s issued stock.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
159.
The per share amount normally assigned by the board of directors to a large stock dividend is a. the market value of the stock on the date of declaration. b. the average price paid by stockholders on outstanding shares. c. the par or stated value of the stock. d. zero.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
160.
The per share amount normally assigned by the board of directors to a small stock dividend is a. the market value of the stock on the date of declaration. b. the average price paid by stockholders on outstanding shares. c. the par or stated value of the stock. d. zero.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
161.
Identify the effect the declaration of a stock dividend has on the par value per share and book value per share. Par Value per Share Book Value per Share a. Increase Decrease b. No effect Increase c. Decrease Decrease d. No effect Decrease
Ans: D, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
162.
Which of the following show the proper effect of a stock split and a stock dividend? Item Stock Split Stock Dividend a. Total paid-in capital Increase Increase b. Total retained earnings Decrease Decrease c. Total par value (common) Decrease Increase d. Par value per share Decrease No change
Ans: D, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
Reporting and Analyzing Stockholders’ Equity
163.
11-31
A stock split will a. have no effect on retained earnings. b. increase total paid-in capital. c. increase the total par value of the stock. d. have no effect on the par value per share of stock.
Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
164.
Which of the following statements is not true about a 2-for-1 stock split? a. The market value of the stock will probably decrease. b. A stockholder with 5 shares before the split owns 10 shares after the split. c. Par value per share is reduced to half of what it was before the split. d. Total paid-in capital increases.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
165.
Green, Inc. had 200,000 shares of common stock outstanding before a stock split occurred and 600,000 shares outstanding after the stock split. The stock split was a. 2-for-6. b. 6-for-1. c. 1-for-6. d. 3-for-1.
Ans: D, LO: 3, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 600,000 200,000 = 3:1 (Sh. out. aft. sh. out. bef.)
166.
If the board of directors authorizes a $100,000 restriction of retained earnings for a future plant expansion, the effect of this action is to a. decrease total assets and total stockholders’ equity. b. increase stockholders’ equity and to decrease total liabilities. c. decrease total retained earnings and increase total liabilities. d. reduce the amount of retained earnings available for dividend declarations.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
167.
A net loss a. occurs if operating expenses exceed cost of goods sold. b. is not closed to Retained Earnings if it would result in a debit balance. c. is closed to Retained Earnings even if it would result in a debit balance. d. is closed to the Paid-in Capital account of the stockholders’ equity section of the balance sheet.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
168.
Retained earnings are occasionally restricted a. to set aside cash for dividends. b. to keep the legal capital associated with paid-in capital intact. c. due to contractual loan restrictions. d. if preferred dividends are in arrears.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
11-32 169.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
When retained earnings are restricted, total retained earnings a. are unaffected. b. increase. c. decrease. d. may increase or decrease.
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
170.
Placing a restriction on retained earnings will a. assure that a company has sufficient cash for a specific purpose. b. increase total stockholders’ equity. c. communicate to readers a portion of retained earnings is unavailable for dividends. d. decrease total stockholders’ equity.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
171.
The following selected amounts are available for Thomas Company. Retained earnings (beginning) $3,500 Net loss 200 Cash dividends declared 200 Stock dividends declared 200 What is its ending Retained Earnings balance? a. $3,200. b. $3,300. c. $2,900. d. $3,100.
Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $3,500 − $200 − ($200 + $200) = $2,900 (Beg. R/E − Net Loss − Cash div. − st. div.)
172.
Hutchinson Company had retained earnings of $18,000 on the balance sheet but disclosed in the footnotes that $2,000 of retained earnings was restricted for plant expansion and $1,000 was restricted for bond repayments. Cash of $2,000 had been set aside for the plant expansion. How much of retained earnings is available for dividends? a. $15,000. b. $16,000. c. $18,000. d. $13,000.
Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $18,000 − $2000 − $1,000 = $15,000 (Tot. RIE − RIE rest. − pl. exp. of bond repay.)
173.
All of the following statements regarding retained earnings are true except a. retained earnings represents a claim on cash. b. a debit balance in Retained Earnings indicates a deficit. c. some companies may restrict availability of retained earnings for dividends. d. retained earnings is net income that a company retains in a business.
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Reporting and Analyzing Stockholders’ Equity
174.
11-33
What is the total stockholders’ equity based on the following account balances? Common Stock $2,300,000 Paid-In Capital in Excess of Par 120,000 Retained Earnings 570,000 Treasury Stock 60,000 a. $2,690,000. b. $2,930,000. c. $3,050,000. d. $2,180,000.
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $2,300,000 + $120,000 + $570,000 − $60,000 = $2,930,000 (Com. st. + PIC + R/E − Treas. st.)
175.
What is the total stockholders’ equity based on the following account balances? Common Stock $950,000 Paid-In Capital in Excess of Par 50,000 Retained Earnings 175,000 Treasury Stock 25,000 a. $1,000,000. b. $975,000. c. $1,150,000. d. $800,000.
Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $950,000 + $50,000 + $175,000 − $25,000 = $1,150,000 (Com. st. + PIC + R/E − Treas. st.)
176.
What is the total stockholders’ equity based on the following account balances? Common Stock $1,800,000 Paid-In Capital in Excess of Par 100,000 Retained Earnings 360,000 Treasury Stock 60,000 a. $1,900,000. b. $2,320,000. c. $2,260,000. d. $2,200,000.
Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,800,000 + $100,000 + $360,000 − $60,000 = $2,200,000 (Com. st. + PIC + R/E − Treas. st.)
.
11-34
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
177.
Nance Corporation’s December 31, 2017 balance sheet showed the following: 6% preferred stock, $20 par value, cumulative, 30,000 shares authorized; 20,000 shares issued $ 400,000 Common stock, $10 par value, 3,000,000 shares authorized; 1,950,000 shares issued, 1,920,000 shares outstanding 19,500,000 Paid-in capital in excess of par value – preferred stock 60,000 Paid-in capital in excess of par value – common stock 28,000,000 Retained earnings 9,650,000 Treasury stock (30,000 shares) 630,000 Nance’s total paid-in capital was a. $47,960,000. b. $48,590,000. c. $47,330,000. d. $28,060,000.
Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $400,000 + $19,500,000 + $60,000 + $28,000,000 = $47,960,000 (Pref. st. + com. st. + Pref PIC + Com PIC
178.
Nance Corporation’s December 31, 2017 balance sheet showed the following: 6% preferred stock, $20 par value, cumulative, 30,000 shares authorized; 20,000 shares issued $ 400,000 Common stock, $10 par value, 3,000,000 shares authorized; 1,950,000 shares issued, 1,920,000 shares outstanding 19,500,000 Paid-in capital in excess of par value – preferred stock 60,000 Paid-in capital in excess of par value – common stock 28,000,000 Retained earnings 9,650,000 Treasury stock (30,000 shares) 630,000 Nance declared and paid a $85,000 cash dividend on December 15, 2017. If the company’s dividends in arrears prior to that date were $24,000, Nance’s common stockholders received a. $61,000. b. $48,000. c. $37,000. d. no dividend.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $85,000 − $24,000 − ($400,000 .06) = $37,000 (Div. dec. − div. in arr. − (Pref. PV × div. rate))
.
Reporting and Analyzing Stockholders’ Equity
179.
11-35
Nance Corporation’s December 31, 2017 balance sheet showed the following: 6% preferred stock, $20 par value, cumulative, 30,000 shares authorized; 20,000 shares issued $ 400,000 Common stock, $10 par value, 3,000,000 shares authorized; 1,950,000 shares issued, 1,920,000 shares outstanding 19,500,000 Paid-in capital in excess of par value – preferred stock 60,000 Paid-in capital in excess of par value – common stock 28,000,000 Retained earnings 9,650,000 Treasury stock (30,000 shares) 630,000 Nance’s total stockholders’ equity was a. $58,240,000. b. $47,330,000. c. $57,610. d. $56,980,000.
Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $400,000 + $19,500,000 + $60,000 + $28,000,000 + $9,650,000 − $630,000 = $56,980,000 (Pref. PV + Com. PV + Pref. PIC + com PIC + R/E − Treas. st.)
180.
Danley Corporation began business by issuing 200,000 shares of $5 par value common stock for $24 per share. During its first year, the corporation sustained a net loss of $40,000. The year-end balance sheet would show a. Common Stock of $1,000,000. b. Common Stock of $4,800,000. c. total paid-in capital of $4,760,000. d. total paid-in capital of $3,800,000.
Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: 200,000 $5 = $1,000,000 (Sh. iss. PV/sh)
181.
Racer Corporation’s December 31, 2017 balance sheet showed the following: 6% preferred stock, $20 par value, cumulative, 40,000 shares authorized; 25,000 shares issued $ 500,000 Common stock, $10 par value, 4,000,000 shares authorized; 2,600,000 shares issued, 2,560,000 shares outstanding 26,000,000 Paid-in capital in excess of par value – preferred stock 80,000 Paid-in capital in excess of par value – common stock 37,000,000 Retained earnings 12,200,000 Treasury stock (40,000 shares) 840,000 Racer’s total paid-in capital was a. $63,580,000. b. $64,420,000. c. $62,740,000. d. $36,080,000.
Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $500,000 + $26,000,000 + $80,000 + $37,000,000 = $63,580,000 (Pref. PV + Com. PV + Pref. PIC + com PIC)
.
11-36 182.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Racer Corporation’s December 31, 2017 balance sheet showed the following: 6% preferred stock, $20 par value, cumulative, 40,000 shares authorized; 25,000 shares issued $ 500,000 Common stock, $10 par value, 4,000,000 shares authorized; 2,600,000 shares issued, 2,560,000 shares outstanding 26,000,000 Paid-in capital in excess of par value – preferred stock 80,000 Paid-in capital in excess of par value – common stock 37,000,000 Retained earnings 12,200,000 Treasury stock (30,000 shares) 840,000 Racer declared and paid a $100,000 cash dividend on December 15, 2017. If the company’s dividends in arrears prior to that date were $30,000, Racer’s common stockholders received a. $70,000. b. $60,000. c. $40,000. d. no dividend.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $100,000 − $30,000 − ($500,000 .06) = $40,000 Div. dec. div. in arr. − (Pref. PV div. rate)
183.
Racer Corporation’s December 31, 2017 balance sheet showed the following: 6% preferred stock, $20 par value, cumulative, 40,000 shares authorized; 25,000 shares issued $ 500,000 Common stock, $10 par value, 4,000,000 shares authorized; 2,600,000 shares issued, 2,560,000 shares outstanding 26,000,000 Paid-in capital in excess of par value – preferred stock 80,000 Paid-in capital in excess of par value – common stock 37,000,000 Retained earnings 12,200,000 Treasury stock (30,000 shares) 840,000 Racer’s total stockholders’ equity was a. $76,620,000. b. $63,580,000. c. $75,780,000. d. $74,940,000.
Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $500,000 + $26,000,000 + $80,000 + $37,000,000 + $12,200,000 − $840,000 = $74,940,000
184.
Cerner Corporation began business by issuing 300,000 shares of $5 par value common stock for $24 per share. During its first year, the corporation sustained a net loss of $50,000. The year-end balance sheet would show a. Common Stock of $1,500,000. b. Common Stock of $7,200,000. c. total paid-in capital of $7,140,000. d. total paid-in capital of $5,700,000.
Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: 300,000 $5 = $1,500,000 (Sh. iss. PV/sh)
.
Reporting and Analyzing Stockholders’ Equity
185.
11-37
In the stockholders’ equity section of the balance sheet a. Common Stock Dividends Distributable will be classified as part of additional paid-in capital. b. Common Stock Dividends Distributable will appear in its own subsection of the stockholders’ equity. c. Additional Paid-in Capital appears under the sub-section paid-in capital. d. Dividends in Arrears will appear as a restriction of retained earnings.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
186.
Paid-in capital in excess of stated value would appear on a balance sheet under the category a. capital stock. b. retained earnings. c. additional paid-in capital. d. contra to stockholders’ equity.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
187.
Two classifications appearing in the paid-in capital section of the balance sheet are a. preferred stock and common stock. b. paid-in capital and retained earnings. c. capital stock and additional paid-in capital. d. capital stock and treasury stock.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
188.
All of the following are normally found in a corporation’s stockholders’ equity section except a. dividends in arrears. b. common stock. c. paid-in capital. d. retained earnings.
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
189.
Information that is not generally reported for each class of stock on the balance sheet is a. the market value. b. the par value. c. shares authorized. d. shares issued.
Ans: A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
190.
In published annual reports a. subclassifications within the stockholders’ equity section are routinely reported in detail. b. capital surplus is used in place of retained earnings. c. the individual sources of additional paid-in capital are often combined. d. retained earnings is often not shown separately.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
11-38 191.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The payout ratio is computed by dividing a. total cash dividends paid to common stockholders by retained earnings. b. dividends paid per share by net income. c. total cash dividends paid to common stockholders by net income. d. dividends paid per share by year-end stock price.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
192.
The return on common stockholders’ equity is computed by dividing net income a. by ending common stockholders’ equity. b. by average common stockholders’ equity. c. less preferred dividends by ending common stockholders’ equity. d. less preferred dividends by average common stockholders’ equity.
Ans: D, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
193.
Ferman Corporation had net income of $140,000 and paid dividends of $40,000 to common stockholders and $20,000 to preferred stockholders in 2017. Ferman Corporation’s common stockholders’ equity at the beginning and end of 2017 was $870,000 and $1,130,000, respectively. Ferman Corporation’s return on common stockholders’ equity was a. 14%. b. 12%. c. 9%. d. 8%.
Ans: B, LO: 4, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($140,000 − $20,000) [($870,000 + $1,130,000) 2] = 12% (Net inc. − Pref. div.) [(beg. st. eq. + end. st. eq) 2]
194.
Ferman Corporation had net income of $140,000 and paid dividends of $40,000 to common stockholders and $20,000 to preferred stockholders in 2017. Ferman Corporation’s common stockholders’ equity at the beginning and end of 2017 was $870,000 and $1,130,000, respectively. Ferman Corporation’s payout ratio for 2017 was a. 4.0%. b. 42.9%. c. 28.6%. d. 14.3%.
Ans: C, LO: 4, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $40,000 $140,000 = 28.6% (Com. div. Net inc.)
195.
Herman Corporation had net income of $100,000 and paid dividends of $25,000 to common stockholders and $20,000 to preferred stockholders in 2017. Herman Corporation’s common stockholders’ equity at the beginning and end of 2017s was $450,000 and $550,000, respectively. Herman Corporation’s return on common stockholders’ equity is a. 20.0%. b. 16.0%. c. 15.0%. d. 11.0%.
Ans: B, LO: 4, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($100,000 − $20,000) [($450,000 + $550,000) 2] = 16.0% (Net inc. − Pref. div.) [(beg. st. eq. + end. st. eq) 2]
.
Reporting and Analyzing Stockholders’ Equity
196.
11-39
Herman Corporation had net income of $100,000 and paid dividends of $25,000 to common stockholders and $20,000 to preferred stockholders in 2017. Herman Corporation’s common stockholders’ equity at the beginning and end of 2017 was $450,000 and $550,000, respectively. Herman Corporation’s payout ratio for 2017 is a. 45%. b. 25%. c. 20%. d. 5%.
Ans: B, LO: 4, Bloom: AP, Difficulty: Hard, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $25,000 $100,000 = 25% (Com. div. Net inc.)
197.
From the information below, compute the payout ratio for Kevin’s Trailers. Net Income $250 Cash Dividends (common) 40 Retained Earnings 500 Stock Dividends (common) 10 a. 20%. b. 16%. c. 8%. d. 4%.
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $40 $250 = 16% (Com. div. Net inc.)
198.
The following information pertains to Benedict Company. Assume that all balance sheet amounts represent average balance figures. Total assets $300,000 Stockholders’ equity—common 150,000 Total stockholders’ equity 200,000 Sales revenue 100,000 Net income 25,000 Number of shares of common stock 6,000 Common dividends 5,000 Preferred dividends 7,000 What is the payout ratio for Benedict? a. 48% b. 20% c. 28% d. 5%
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $5,000 $25,000 = 20% (Com. div. Net inc.)
.
11-40 199.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The following information pertains to Benedict Company. Assume that all balance sheet amounts represent average balance figures. Total assets $300,000 Stockholders’ equity—common 150,000 Total stockholders’ equity 200,000 Sales revenue 100,000 Net income 25,000 Number of shares of common stock 6,000 Common dividends 5,000 Preferred dividends 7,000 What is the return on common stockholders’ equity ratio for Benedict? a. 16.7% b. 12.0% c. 13.3% d. 9.0%
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($25,000 − $7,000) $150,000 = 12% (Net inc. − Pref. div.) com. st. eq.
200.
The following information pertains to Marsh Company. Assume that all balance sheet amounts represent average balance figures. Total asset $400,000 Stockholders’ equity—common 200,000 Total stockholders’ equity 280,000 Sales revenue 120,000 Net income 30,000 Number of shares of common stock 8,000 Common dividends 6,000 Preferred dividends 4,000 What is Marsh’s payout ratio? a. 33.3%. b. 20.0%. c. 13.3%. d. 5.0%.
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $6,000 $30,000 = 20% (Com. div. Net inc.)
.
Reporting and Analyzing Stockholders’ Equity
201.
11-41
The following information pertains to Marsh Company. Assume that all balance sheet amounts represent average balance figures. Total asset $400,000 Stockholders’ equity—common 200,000 Total stockholders’ equity 280,000 Sales 120,000 Net income 30,000 Number of shares of common stock 8,000 Common dividends 6,000 Preferred dividends 4,000 What is Marsh’s return on common stockholders’ equity? a. 15%. b. 13.0%. c. 10.0%. d. 9.3%.
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($30,000 − $4,000) $200,000 = 13% (Net inc. − Pref. div.) com. st. eq.
202.
Which of the following statements is true regarding corporate performance ratios? a. A high payout ratio may indicate that a company is retaining earnings for future growth investments. b. As a company grows larger, it is easy to sustain a high return on common stockholder's equity. c. Return on common stockholder's equity is often higher under bond financing rather than common stock financing. d. Low growth rates are characterized by low payout ratios.
Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
*203. John Jones Company has 20,000 shares of $100 par value common stock. Assuming that the proper journal entry was made to record a 5% common stock dividend on the declaration date when the market value of the stock was $135, which of the following accounts would be debited when the stock dividend is distributed? a. Retained Earnings. b. Dividends Payable. c. Common Stock Dividends Distributable. d. Paid-in Capital in Excess of Par Value. Ans: C, LO: 5, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
*204. On January 1, Hamblin Corporation had 120,000 shares of $10 par value common stock outstanding. On March 17 the company declared a 10% stock dividend to stockholders of record on March 20. Market value of the stock was $13 on March 17. The entry to record the transaction of March 17 would include a a. credit to Stock Dividends for $36,000. b. credit to Cash for $156,000. c. credit to Common Stock Dividends Distributable for $120,000. d. debit to Common Stock Dividends Distributable for $120,000. Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (120,000 .10) $10 = $120,000 (Sh. out. div.% PV/sh.)
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
*205. On January 1, Hamblin Corporation had 120,000 shares of $10 par value common stock outstanding. On March 17 the company declared a 10% stock dividend to stockholders of record on March 20. Market value of the stock was $13 on March 17. The stock was distributed on March 30. The entry to record the transaction of March 30 would include a a. credit to Cash for $120,000. b. debit to Common Stock Dividends Distributable for $120,000. c. credit to Paid-in Capital in Excess of Par Value for $36,000. d. debit to Stock Dividends for $36,000. Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 120,000 .10 $10 = $120,000 (Sh. out. div.% PV/sh.)
*206. On January 1, Ripken Corporation had 80,000 shares of $10 par value common stock outstanding. On March 17 the company declared a 10% stock dividend to stockholders of record on March 20. Market value of the stock was $13 on March 17. The entry to record the transaction of March 17 would include a a. debit to Stock Dividends for $104,000. b. credit to Cash for $104,000. c. credit to Common Stock Dividends Distributable for $104,000. d. credit to Common Stock Dividends Distributable for $24,000. Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 80,000 .10 $13 = $104,000 (Sh. out. div.% MV/sh.)
*207. On January 1, Ripken Corporation had 80,000 shares of $10 par value common stock outstanding. On March 17 the company declared a 10% stock dividend to stockholders of record on March 20. Market value of the stock was $13 on March 17. The stock was distributed on March 30. The entry to record the transaction of March 30 would include a a. credit to Common Stock for $80,000. b. debit to Common Stock Dividends Distributable for $104,000. c. credit to Paid-in Capital in Excess of Par Value for $24,000. d. debit to Stock Dividends for $24,000. Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 80,000 .10 $10 = $80,000 (Sh. out. div.% PV/sh.)
*208. If a corporation declares a 10% stock dividend on its common stock, the account to be debited on the date of declaration is a. Common Stock Dividends Distributable. b. Common Stock. c. Paid-in Capital in Excess of Par. d. Stock Dividends. Ans: D, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
209.
Which one of the following events would not require a journal entry on a corporation’s books? a. 2-for-1 stock split. b. 100% stock dividend. c. 2% stock dividend. d. $1 per share cash dividend.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
.
Reporting and Analyzing Stockholders’ Equity
210.
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Which of the following would not affect the balance of the Retained Earnings account? a. Net income. b. Stock dividend. c. Stock split. d. Gains and losses of a company.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
*211. The declaration and distribution of a stock dividend will a. increase total stockholders’ equity. b. increase total assets. c. decrease total assets. d. have no effect on total assets. Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
*212. The declaration of a small stock dividend will a. increase paid-in capital. b. change the total of stockholders’ equity. c. increase total liabilities. d. increase total assets. Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Answers to Multiple Choice Questions 47. c 48. b 49. b 50. a 51. d 52. b 53. a 54. b 55. c 56. a 57. b 58. d 59. b 60. a 61. c 62. c 63. b 64. c 65. c 66. b 67. b 68. b 69. b 70. b 71. b
72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96.
a d b b c a c c a d c b d d b b b b d d a c c b d
97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121.
b b b d b c b d b d b b a b c b b d c c c d d c d
122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146.
.
d b a d b c d b a c d b d b b b c c d b b a b c b
147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171.
b b b d c a a d c b a d c a d d a d d d c c a c c
172. 173. 174. 175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. 194. 195. 196.
a a b c d a c d a a c d a c c c a a c c d b c b b
197. 198. 199. 200. 201. 202. *203. *204. *205. *206. *207. *208. 209. 210. *211. *212.
b b b b b c c c b a a d a c d a
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
BRIEF EXERCISES Be. 213 1. Name at least three advantages of a corporation. 2. Corporations acquire treasury stock for a variety of purposes. Name three reasons why a corporation may acquire treasury stock. Ans: N/A, LO: 1,2, Bloom: K, Difficulty: Easy, Min: 9, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: Communications, IMA: Business Economics
Solution 213
(9–12 min.)
1. Advantages of a corporation: (a) Separate legal existence (b) Limited liability of stockholders (c) Transferable ownership rights (d) Continuous life (e) Ability to acquire capital 2. Reasons why a company may acquire treasury stock: (a) To reissue the shares to officers and employees under bonus and stock compensation plans (b) To increase trading of the company’s stock in the securities market in the hopes of enhancing its market value (c) To have additional shares available for use in the acquisition of other companies (d) To reduce the number of shares outstanding and, thereby, increase earnings per share (e) To prevent a hostile takeover.
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Reporting and Analyzing Stockholders’ Equity
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Be. 214 Identify (by letter) each of the following characteristics as being an advantage or a disadvantage of the corporate form of business or not applicable to the corporate form of business organization. A = Advantage D = Disadvantage N = Not Applicable Characteristics _____ 1. Separate legal entity _____ 2. Taxable entity resulting in additional taxes _____ 3. Continuous life _____ 4. Unlimited liability of owners _____ 5. Government regulation _____ 6. Separation of ownership and management _____ 7. Ability to acquire capital _____ 8. Ease of transfer of ownership Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: None, IMA: Business Economics
Solution 214 1. 2. 3. 4.
A D A N
(3–5 min.) 5. 6. 7. 8.
D A and D A A
Be. 215 Patrick Corporation is authorized to issue 1,000,000 shares of $1 par value common stock. During 2016, the company has the following stock transactions. Jan. 15
Issued 700,000 shares of stock at $7 per share.
Sept. 5
Purchased 20,000 shares of common stock for the treasury at $8 per share.
Dec.
Declared a $0.50 per share dividend to stockholders of record on December 20, payable January 3, 2017.
6
Instructions Journalize the transactions for Patrick Corporation. Ans: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
11-46
Solution 215 Jan. 15
(5–7 min.)
Cash ................................................................................... 4,900,000 Common Stock........................................................... Paid-in Capital in Excess of Par Value—Common Stock
700,000 4,200,000*
*(Sell. pr./sh. – par val.) × 700,000 sh.
Sept. 5 Dec.
6
Treasury Stock.................................................................... Cash...........................................................................
160,000
Cash Dividends................................................................... Dividends Payable...................................................... (700,000 – 20,000) × $.50 (sh. iss. – trea. sh.) × div./sh.
340,000
160,000 340,000
Be. 216 An inexperienced accountant for Teahan Corporation made the following entries. July 1
Sept. 1
Cash ................................................................................... Common Stock........................................................... (Issued 20,000 shares of no-par common stock, stated value $5 per share)
170,000
Common Stock ................................................................... Retained Earnings .............................................................. Cash........................................................................... (Purchased 4,000 shares issued on July 1 for the treasury at $15 per share)
36,000 24,000
170,000
60,000
Instructions On the basis of the explanation for each entry, prepare the entry that should have been made for the transactions. (Omit explanations.) Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 216 July 1
(5–7 min.)
Cash ................................................................................... 170,000 Common Stock........................................................... Paid-in Capital in Excess of Stated Value—Common Stock
100,000 70,000*
*[Sell. pr. – (20,000 × par val./ sh.)]
Sept. 1
Treasury Stock ..................................................................... Cash...........................................................................
60,000 60,000
Be. 217 On January 1, 2017, Wooden Company issued 16,000 shares of $2 par value common stock for $120,000. On March 1, 2017, the company purchased 2,000 shares of its common stock for $15 per share for the treasury. Instructions Journalize the stock transactions of Wooden Company in 2017. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Reporting and Analyzing Stockholders’ Equity
Solution 217 Jan.
1
11-47
(5 min.)
Cash .................................................................................. 120,000 Common Stock .......................................................... Paid-in Capital in Excess of Par Value—Common Stock
32,000 88,000*
*[Sell. pr. – (16,000 × par val./ sh.)]
March 1
Treasury Stock ................................................................... Cash ..........................................................................
30,000 30,000
Be. 218 Samson Company had the following transactions. 1. Issued 5,000 shares of $100 par preferred stock at $107 for cash. 2. Issued 8,000 share of common stock with a par value of $10 for $120,000. 3. Purchased 500 shares of treasury common stock for $12,000. Instructions Prepare the journal entries to record the above stock transactions. Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 218
(5 min.)
1. Cash .............................................................................................. Preferred Stock...................................................................... Paid-in Capital in Excess of Par Value—Preferred Stock.......
535,000 500,000 35,000*
*(Sell. pr./sh. – par val./ sh.) × 5,000
2. Cash .............................................................................................. Common Stock ...................................................................... Paid-in Capital in Excess of Par Value—Common Stock .......
120,000 80,000 40,000*
*[Sell. pr. – (8,000 × par val./ sh.)]
3. Treasury Stock ............................................................................... Cash ......................................................................................
12,000 12,000
Be. 219 In its first year of operations, Martinez Corporation had the following transactions pertaining to its $10 par value preferred stock. Feb. 1 July 1
Issued 8,000 shares for cash at $24 per share. Issued 6,000 shares for cash at $25 per share.
Instructions (a)
Journalize the transactions.
(b)
Indicate the amount to be reported for (1) preferred stock, and (2) paid-in capital in excess of par value—preferred stock at the end of the year.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
11-48
Solution 219 (a) Feb. 1
(6–10 min.) Cash ............................................................................. Preferred Stock .................................................... Paid-in Capital in Excess of Par Value—Preferred Stock ................................................................ (Issued 8,000 shares at $24 per share)
192,000 80,000 112,000*
*(Sell. pr./sh. – par val./ sh.) × 8,000
July 1
Cash ............................................................................. Preferred Stock .................................................... Paid-in Capital in Excess of Par Value—Preferred Stock ................................................................ (Issued 6,000 shares at $25 per share)
150,000 60,000 90,000*
*(Sell. pr./sh. – par val./ sh.) × 6,000
(b) (1) (2)
Preferred stock—$80,000 + $60,000 = $140,000. Paid-in Capital in Excess of Par Value—Preferred Stock—$112,000 + $90,000 = $202,000.
Be. 220 The Huntsman Corporation has the following stockholders’ equity accounts: Preferred Stock Paid-in Capital in Excess of Par Value—Preferred Stock Common Stock Paid-in Capital in Excess of Stated Value—Common Stock Retained Earnings Treasury Stock—Common Instructions Classify each account using the following tabular alignment. Paid-in Capital Capital Stock Additional
Account
Retained Earnings
Other
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 220
(5–9 min.) Paid-in Capital Capital Stock Additional X
Account Preferred Stock Paid-in Capital in Excess of Par Value—Preferred Stock
Retained Earnings
Other
X
Common Stock
X
Paid-in Capital in Excess of Stated Value—Common Stock
X
Retained Earnings
X
Treasury Stock—Common
X
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Reporting and Analyzing Stockholders’ Equity
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Be. 221 Lindy Corporation has 1,000,000 authorized shares of $20 par value common stock. As of June 30, 2017, there were 600,000 shares issued and outstanding. On June 30, 2017, the board of directors declared a $0.50 per share cash dividend to be paid on August 1, 2017. Instructions Prepare the necessary journal entries to be recorded on (a) the date of declaration, (b) the date of record, and (c) the date of payment. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 221 (a)
(7–10 min.)
Cash Dividends ........................................................................... Dividends Payable .............................................................. 600,000 × $.50 = $300,000 (sh. out. × div./sh.)
(b)
No entry
(c)
Dividends Payable....................................................................... Cash ...................................................................................
300,000 300,000
300,000 300,000
Be. 222 On November 1, 2017, Kalen Corporation’s stockholders’ equity section is as follows: Common stock, $10 par value $600,000 Paid-in capital in excess of par value—Common Stock 180,000 Retained earnings 200,000 Total stockholders’ equity $980,000 On November 1, Kalen declares and distributes a 15% stock dividend when the fair value of the stock is $16 per share. Instructions Indicate the balances in the stockholders’ equity accounts after the stock dividend has been distributed. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 222
(5 min.)
Common Stock Paid-in Capital in Excess of Par Value—Common Stock Retained Earnings Total Stockholders’ Equity
$690,000* 234,000** 56,000*** $980,000
*$600,000 + (60,000 × .15 × $10) [Tot. PV + ((Tot. PV ÷ PV/sh) × div.% × PV/sh.)] **$180,000 + (60,000 × .15 × $6) ***$200,000 – (60,000 × .15 × $16) [Beg. R/E + ((Tot. PV ÷ PV/sh) × div.% × FV/sh.)]
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Be. 223 Listed below are items typically found in the stockholders' equity section of the balance sheet. Common stock, $10 stated value Retained earnings 8% Preferred stock, $100 par value Paid-in capital in excess of par value—preferred Stock Paid-in capital in excess of stated value—common Stock Treasury stock—common Stockholders’ equity Paid-in capital Capital stock Additional paid-in capital Total additional paid-in capital Total paid-in capital Retained earnings Total paid-in capital and retained earnings Total stockholders’ equity Instructions Place each of the items listed below in the appropriate subdivision of the stockholders’ equity section of a balance sheet. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 223
(6–9 min.)
Stockholders’ equity Paid-in capital Capital stock 8% Preferred stock, $100 par value Common stock, $10 stated value Additional paid-in capital Paid-in capital in excess of par value—preferred stock Paid-in capital in excess of stated value—common stock Total additional paid-in capital Total paid-in capital Retained earnings Total paid-in capital and retained earnings Less: Treasury stock—common Total stockholders’ equity
.
Reporting and Analyzing Stockholders’ Equity
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Be. 224 The following information is available for Epstein Corporation Average common stockholders’ equity Average total stockholders’ equity Common dividends declared and paid Preferred dividends declared and paid Net income
2017 $1,500,000 2,000,000 72,000 30,000 180,000
2016 $1,000,000 1,500,000 50,000 30,000 150,000
Instructions Compute the payout ratio and return on common stockholders’ equity for both years. Briefly comment on your findings. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
Solution 224
(10–14 min.)
Payout ratio: (Com. div./Net inc.)
Return on common stockholders’ equity : (Net inc. – Pref. div.)
Ave. com. st. eq.
2016
2017
$50,000 ———— = 33% $150,000
$72,000 ———— = 40% $180,000
$150,000 – $30,000 ————————— = 12% $1,000,000
$180,000 – $30,000 ————————— = 10% $1,500,000
Epstein’s payout ratio increased 21% (40 – 33)/33 during 2017 while its return on common stockholders’ equity decreased approximately 17%. Epstein’s earnings performance declined during 2017 which should have resulted in less dividends being paid out to common stockholders instead of 20% more being paid to them.
EXERCISES Ex. 225 The corporate charter of Torres Corporation allows the issuance of a maximum of 4,000,000 shares of $1 par value common stock. During its first three years of operation, Torres issued 2,080,000 shares at $15 per share. It later acquired 80,000 of these shares as treasury stock for $25 per share. Instructions Based on the above information, answer the following questions: (a) How many shares were authorized? (b) How many shares were issued? (c) How many shares are outstanding? (d) What is the balance of the Common Stock account? (e) What is the balance of the Treasury Stock account? Ans: N/A, LO: 1,2, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
11-52
Solution 225
(8–11 min.)
(a) 4,000,000 shares were authorized. (b) 2,080,000 shares were issued. (c) 2,000,000 shares are outstanding (2,080,000 issued less 80,000 in treasury). (d) The balance of the Common Stock account is $2,080,000; ($1 × 2,080,000 shares = $2,080,000). (sh. iss. × par val./sh.) (e) The balance of the Treasury Stock account is $2,000,000; ($25 × 80,000 shares = $2,000,000). (Trea. sh. × cost/sh.) Ex. 226 The following items were shown on the balance sheet of Martin Corporation on December 31, 2017: Stockholders’ Equity Paid-In Capital Capital Stock Common stock, $5 par value, 750,000 shares authorized; ______ shares issued and ______ outstanding ....................... $3,000,000 Additional paid-in capital In excess of par value ........................................................................... Total paid-in capital .........................................................................
180,000 3,180,000
Retained Earnings ............................................................................................ 500,000 Total paid-in capital and retained earnings ............................................ 3,680,000 Less: Treasury stock (20,000 shares) .............................................................. 280,000 Total stockholders’ equity ...................................................................... $3,400,000 Instructions Complete the following statements and show your computations. (a) The number of shares of common stock issued was _______________. (b) The number of shares of common stock outstanding was ____________. (c) The total sales price of the common stock when issued was $____________. (d) How much did the treasury stock cost per share? $_______________ (e) What was the average issue price of the common stock? $______________ Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Reporting and Analyzing Stockholders’ Equity
Solution 226
11-53
(10–15 min.)
(a)
The number of shares of common stock issued was 600,000. (Com. st. amount/PV/sh.) $3,000,000 ÷ $5 par value = 600,000 shares issued.
(b)
The number of shares of common stock outstanding was 580,000. (Sh. iss. – Trea. sh.) 600,000 issued less 20,000 in treasury = 580,000 shares outstanding
(c)
The total sales price of the common stock when issued was $3,180,000. Common stock $3,000,000 Plus: In excess of par value 180,000 Total $3,180,000 (Tot. paid-in cap.)
(d)
How much did the treasury stock cost per share? $14 $280,000 ÷ 20,000 = $14 per share. (Trea. st. amount/Trea. sh.)
(e)
What was the average issue price of the common stock? $5.30 (Tot. paid-in cap ÷ sh. iss.) $3,180,000 ÷ 600,000 shares = $5.30 per share.
Ex. 227 Miles Co. had these transactions during the current period. June July Nov.
12 11 28
Issued 50,000 shares of $3 stated value common stock for cash of $250,000. Issued 2,000 shares of $100 par value preferred stock for cash at $108 per share. Purchased 2,000 shares of treasury stock for $10,000.
Instructions Prepare the journal entries for the preceding transactions. Ans: N/A, LO: 2, 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 227 June 12
July
11
Nov. 28
(5 min.) Cash ............................................................................. Common Stock (50,000 $3) ............................... Paid-in Capital in Excess of Stated Value—Common Stock ..................................... *(Sell. pr. – (sh. iss. SV/sh.))
250,000
Cash (2,000 $108) ..................................................... Preferred Stock (2,000 $100) ............................ Paid-in Capital in Excess of Par Value—Preferred Stock ..................................... (2,000 $8) *(Sell. pr./sh. – PV/sh.) sh. iss.
216,000
Treasury Stock .............................................................. Cash ....................................................................
10,000
.
150,000 100,000*
200,000 16,000*
10,000
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
11-54 Ex. 228
On January 1, 2017, Browning Corporation had 75,000 shares of $1 par value common stock issued and outstanding. During the year, the following transactions occurred: Mar.
1
Issued 90,000 shares of common stock for $675,000
June
1
Declared a cash dividend of $2.00 per share to stockholders of record on June 15
June 30
Paid the $2.00 cash dividend
Dec.
Purchased 5,000 shares of common stock for the treasury for $18 per share
1
Dec. 15
Declared a cash dividend on outstanding shares of $2.50 per share to stockholders of record on December 31
Net income for 2017 amounted to $951,000. Instructions Prepare journal entries to record the above transactions. Ans: N/A, LO: 2, 3, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 228 Mar.
June
1
1
June 30 Dec.
1
Dec. 15
(12–17 min.) Cash .......................................................................... 675,000 Common Stock .................................................. Paid-in Capital in Excess of Par Value—Common Stock *(Sell. pr. – (sh. iss. PV/sh.)) Cash Dividends .......................................................... Dividends Payable ............................................. (165,000 × $2 = $330,000) *((Beg. com. sh. + sh. iss.) div./sh.)
330,000*
Dividends Payable ..................................................... Cash .................................................................
330,000
Treasury Stock .......................................................... Cash .................................................................
90,000
Cash Dividends (160,000 × $2.50) ............................ Dividends Payable ............................................ *((Beg. com. sh. + sh. iss. – trea. sh.) div./sh.)
400,000*
90,000 585,000*
330,000
330,000 90,000 400,000
Ex. 229 The stockholders’ equity section of Piper Corporation’s balance sheet at December 31, 2016, appears below: Stockholders’ equity Paid-in capital Common stock, $10 par value, 400,000 shares authorized; 300,000 issued and outstanding Paid-in capital in excess of par Total paid-in capital Retained earnings Total stockholders’ equity
.
$3,000,000 1,200,000 4,200,000 900,000 $5,100,000
Reporting and Analyzing Stockholders’ Equity
Ex. 229
11-55
(Cont.)
During 2017, the following stock transactions occurred: Jan. 18 Issued 80,000 shares of common stock at $23 per share. Aug. 20 Purchased 20,000 shares of Piper Corporation’s common stock at $25 per share to be held in the treasury. Instructions (a) Prepare the journal entries to record the above stock transactions. (b) Prepare the stockholders’ equity section of the balance sheet for Piper Corporation at December 31, 2017. Assume that net income for the year was $150,000 and that no dividends were declared. Ans: N/A, LO: 2,4, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 229 (a) Jan. 18
Aug. 20
(12–18 min.) Cash ............................................................................. 1,840,000 Common Stock..................................................... Paid-in Capital in Excess of Par Value—Common Stock (To record issuance of 80,000 shares of common stock) *((Sell. pr./sh. – PV/sh.) sh. iss.) Treasury Stock .............................................................. Cash .................................................................... (To record purchase of 20,000 shares of treasury stock at cost)
(b) Stockholders’ equity Paid-in capital Capital stock Common stock, $10 par value, 400,000 shares authorized, 380,000 shares issued, and 360,000 shares outstanding Additional paid-in capital In excess of par value Total paid-in capital Retained earnings Total paid-in capital and retained earnings Less: Treasury stock (20,000 shares) Total stockholders’ equity
800,000 1,040,000*
500,000 500,000
$3,800,000 2,240,000 6,040,000* 1,050,000 7,090,000** 500,000 $6,590,000
*[Beg. com. st. + (sh. iss. PV/sh.)] + [Beg. PIC in exc. + ((Sell. pr./sh. – PV/sh.) sh. iss.)] **Tot. paid-in cap. + (beg. R/E + Net inc.)
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
11-56 Ex. 230
The stockholders' equity section of Patrick Corporation's balance sheet at December 31 is presented here: PATRICK CORPORATION Balance Sheet (partial) Stockholders' equity Paid-in capital Preferred stock, cumulative, 10,000 shares authorized, 6,000 shares issued and outstanding $ 600,000 Common stock, no par, 750,000 shares authorized, 600,000 shares issued 6,000,000 Total paid-in capital 6,600,000 Retained earnings 1,358,000 Total paid-in capital and retained earnings 7,958,000 Less: Treasury stock (4,000 common shares) 32,000 Total stockholders' equity $7,926,000 Instructions From a review of the stockholders' equity section, answer the following questions. (a) How many shares of common stock are outstanding? (b) Assuming there is a stated value, what is the stated value of the common stock? (c) What is the par value of the preferred stock? (d) If the annual dividend on preferred stock is $30,000, what is the dividend rate on preferred stock? (e) If dividends of $60,000 were in arrears on preferred stock, what would be the balance reported for retained earnings? Ans: N/A, LO: 2-4, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 230
(7 min.)
(a) Common stock outstanding is 596,000 shares. (Issued shares 600,000 less treasury shares 4,000) (Com. sh. iss. – treas. sh) (b) The stated value of the common stock is $10 per share. (Common stock issued $6,000,000 600,000 shares.) (Com. st. amount com. sh. iss.) (c)
The par value of the preferred stock is $100 per share. (Preferred stock $600,000 6,000 shares.) (Pref. st. amount Pref. sh. iss.)
(d) The dividend rate is 5% ($30,000 $600,000). (Ann. div. pref. st. amount) (e) The Retained Earnings balance is still $1,358,000. Cumulative dividends in arrears are only disclosed in the notes to the financial statements.
.
Reporting and Analyzing Stockholders’ Equity
11-57
Ex. 231 Ritchey Corporation has the following capital stock outstanding at December 31, 2017: 9% Preferred stock, $100 par value, cumulative 12,000 shares issued and outstanding ...................................................
$1,200,000
Common stock, no par, $10 stated value, 500,000 shares authorized, 300,000 shares issued and outstanding .................................................
3,000,000
The preferred stock was issued at $125 per share. The common stock was issued at an average per share price of $14. Instructions Prepare the paid-in capital section of the balance sheet at December 31, 2017. Ans: N/A, LO: 2, 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 231
(10–15 min.)
Stockholders’ equity Paid-in capital Capital stock 9% Preferred stock, $100 par value, cumulative 12,000 shares issued and outstanding Common stock, no par, $10 stated value, 500,000 shares authorized, 300,000 shares issued and outstanding Total capital stock Additional paid-in capital Paid-in capital in excess of par value—preferred stock Paid-in capital in excess of stated value—common stock Total additional paid-in capital Total paid-in capital *12,000 shares × $25 = $300,000. (Pref. sh. iss. × (iss. pr. – PV/sh.)) **300,000 shares × $4 = $1,200,000. (Com. sh. iss. × (iss. pr. – SV/sh.))
.
$1,200,000
3,000,000 4,200,000 $
300,000* 1,200,000** 1,500,000 $5,700,000
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
11-58 Ex. 232
During 2017 Kenton Corporation had the following transactions and events: 1. Issued par value preferred stock for cash at par value 2. Issued par value common stock for cash at an amount greater than par value 3. Completed a 2 for 1 stock split in which the $10 par value common stock was changed to $5 par value stock *4. Declared a small stock dividend when the market value was higher than the par value 5. Declared a cash dividend *6. Issued the shares of common stock required by the stock dividend declaration in 4. above 7. Issued par value common stock for cash at par value 8. Paid the cash dividend Instructions Indicate the effect(s) of each of the foregoing items on the subdivisions of stockholders’ equity. Present your answers in tabular form with the following columns. Use (I) for increase, (D) for decrease, and (NE) for no effect.
Item
Capital Stock
Paid-in Capital Additional Paid-in Capital
Retained Earnings
Ans: N/A, LO: 2, 3, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 232
(8–12 min.) Paid-in Capital Additional Paid-in Capital
Item
Capital Stock
1.
I
NE
NE
2.
I
I
NE
3.
NE
NE
NE
*4. 5.
I NE
I NE
D D
*6.
NE
NE
NE
7.
I
NE
NE
8.
NE
NE
NE
.
Retained Earnings
Reporting and Analyzing Stockholders’ Equity
11-59
*Ex. 233 On January 1, 2017, the Black Corporation had $2,000,000 of $10 par value common stock outstanding that was issued at par and Retained Earnings of $1,000,000. The company issued 140,000 shares of common stock at $15 per share on July 1. On December 15, the board of directors declared a 10% stock dividend to stockholders of record on December 31, 2017, payable on January 15, 2018. The market value of Black Corporation stock was $17 per share on December 15 and $16 per share on December 31. Net income for 2017 was $500,000. Instructions (1)
Journalize the issuance of stock on July 1 and the declaration of the stock dividend on December 15.
(2)
Prepare the stockholders’ equity section of the balance sheet for Black Corporation at December 31, 2017.
Ans: N/A, LO: 2, 4, 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 233 (1) July
(10–15 min.)
1 Cash ............................................................................. 2,100,000 Common Stock ................................................. Paid-in Capital in Excess of Par Value—Common Stock *((Iss. pr./sh. – PV/sh.) sh. iss.)
Dec. 15 Stock Dividends (34,000 × $17/sh) .............................. Common Stock Dividends Distributable ............. Paid-in Capital in Excess of Par Value ..............
1,400,000 700,000*
578,000* 340,000 238,000
($2,000,000 ÷ $10 = 200,000 + 140,000 = 340,000 shares × .10 = 34,000 shares) *[(Tot. PV ÷ PV/sh) + sh. iss.] × div.% × MV/sh. (2) Stockholders’ equity Paid-in capital Capital stock Common stock, $10 par value, 340,000 shares issued and outstanding Common stock dividends distributable Total capital stock Additional paid-in capital in excess of par value Total paid-in capital Retained earnings Total stockholders’ equity *[((Iss. pr./sh. – PV/sh.) sh. iss.] + [(beg. sh. + sh. iss.) div.%) (MV/sh – PV/sh)] **(Beg. R/E + Net inc.) – [(beg. sh. + sh. iss.) div.% MV/sh]
.
$3,400,000 340,000 3,740,000 938,000 4,678,000 922,000 $5,600,000
11-60
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 234 The stockholders’ equity section of Fleming Corporation at December 31, 2016, included the following: 4% preferred stock, $100 par value, cumulative, 15,000 shares authorized, 10,000 shares issued and outstanding .....
$1,000,000
Common stock, $10 par value, 250,000 shares authorized, 200,000 shares issued and outstanding ............................................
$2,000,000
Dividends were not declared on the preferred stock in 2016 and are in arrears. On September 15, 2017, the board of directors of Fleming Corporation declared dividends on the preferred stock to stockholders of record on October 1, 2017, payable on October 15, 2017. On November 1, 2017, the board of directors declared a $1 per share dividend on the common stock, payable November 30, 2017, to stockholders of record on November 15, 2017. Instructions Prepare the journal entries that should be made by Fleming Corporation on the dates indicated below: September 15, 2017 November 1, 2017 October 1, 2017 November 15, 2017 October 15, 2017 November 30, 2017 Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 234 9/15/17
(12–15 min.)
Cash Dividends .................................................................. Dividends Payable...................................................... (To record declaration of dividends in arrears and the current year’s preferred dividend)
80,000* 80,000
(*Pref. par val. div. % 2 yrs.)
10/1/17
(No entry required)
10/15/17 Dividends Payable .............................................................. Cash .......................................................................... (To record payment of cash preferred dividend)
80,000
11/1/17
200,000*
Cash Dividends ................................................................... Dividends Payable...................................................... (To record declaration of cash dividend on common stock) *(Com. sh. out. div./sh.)
80,000
200,000
11/15/17 (No entry required) 11/30/17 Dividends Payable .............................................................. Cash .......................................................................... (To record payment of common cash dividends)
.
200,000 200,000
Reporting and Analyzing Stockholders’ Equity
11-61
Ex. 235 On January 1 Weiss Corporation had 60,000 shares of no-par common stock issued and outstanding. The stock has a stated value of $5 per share. During the year, the following transactions occurred: Apr.
1
Issued 10,000 additional shares of common stock for $10 per share.
June 15
Declared a cash dividend of $1.00 per share to stockholders of record on June 30.
July
10
Paid the $1.00 cash dividend.
Dec.
1
Issued 4,000 additional shares of common stock for $12 per share.
15
Declared a cash dividend on outstanding shares of $1.00 per share to stockholders of record on December 31.
Instructions (a) Prepare the entries, if any, on each of the three dates that involved dividends. (b) How are dividends and dividends payable reported in the financial statements prepared at December 31? Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 235 (a) June 15
(7 min.) Cash Dividends ............................................................. (70,000* $1.00) Dividends Payable................................................ *60,000 shares + 10,000 shares
70,000a 70,000
a(Beg. sh. out. + sh. iss.) div./sh.
July 10
Dec. 15
Dividends Payable ........................................................ Cash ....................................................................
70,000
Cash Dividends ............................................................. (74,000** $1.00) Dividends Payable................................................ **70,000 shares + 4,000 shares b (Beg. sh. + Apr. sh. iss. + Dec. sh. iss.) div./sh.
74,000b
70,000
74,000
(b) In the retained earnings statement, dividends of $144,000 will be deducted. In the balance sheet, Dividends Payable of $74,000 will be reported as a current liability.
.
11-62
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 236 On October 31 the stockholders' equity section of Eaton Company's balance sheet consists of common stock $600,000 and retained earnings $400,000. Eaton is considering the following two courses of action: (1) declaring a 10% stock dividend on the 60,000 $10 par value shares outstanding or (2) affecting a 2-for-1 stock split that will reduce par value to $5 per share. The current market price is $15 per share. Instructions Prepare a tabular summary of the effects of the alternative actions on the company's stockholders' equity and outstanding shares. Use these column headings: Before Action, After Stock Dividend, and After Stock Split. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 236
(10 min.) Before Action
After Stock Dividend
After Stock Split
$600,000 0 600,000 400,000
$660,000 30,000 690,000 310,000
$600,000 0 600,000 400,000
$1,000,000
$1,000,000
$1,000,000
Outstanding shares
60,000
66,000
120,000
Book value per share
$16.67
$15.15*
$8.33
Stockholders' equity Paid-in capital Common stock In excess of par value Total paid-in capital Retained earnings Total stockholders' equity
*((Beg. com. st × 1.10) + [(beg. sh. × .10 × ($15 − $10)] + [beg. R/E − (beg. sh. × .10 × $15)])/(beg. sh. × 1.10)
Ex. 237 Giraldi Corporation’s stockholders’ equity section at December 31, 2016, appears below: Stockholders’ equity Paid-in capital Common stock, $10 par, 60,000 outstanding Paid-in capital in excess of par Total paid-in capital Retained earnings Total stockholders’ equity
$600,000 162,500 $762,500 150,000 $912,500
On June 30, 2017, the board of directors of Giraldi Corporation declared a 15% stock dividend, payable on July 31, 2017, to stockholders of record on July 15, 2017. The fair value of Giraldi Corporation’s stock on June 30, 2017, was $16. On December 1, 2017, the board of directors declared a 2 for 1 stock split effective December 15, 2017. Giraldi Corporation’s stock was selling for $18 on December 1, 2017, before the stock split was declared. Par value of the stock was adjusted. Net income for 2017 was $230,000 and there were no cash dividends declared. .
Reporting and Analyzing Stockholders’ Equity
Ex. 237
11-63
(Cont.)
Instructions (a) Prepare the journal entries on the appropriate dates to record the stock dividend and the stock split. (b) Fill in the amount that would appear in the stockholders’ equity section for Giraldi Corporation at December 31, 2017, for the following items: 1. Common stock
$____________
2. Number of shares outstanding
_____________
3. Par value per share
$____________
4. Paid-in capital in excess of par
$____________
5. Retained earnings
$____________
6. Total stockholders’ equity
$____________
Ans: N/A, LO: 3 ,4, 5, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
*Solution 237 (a) 6/30/17
(12–16 min.) Stock Dividends ........................................................... Common Stock Dividends Distributable ............... Paid-in Capital in Excess of Par Common Stock . (To record declaration of 15% stock dividend, 60,000 × 15% = 9,000 × $16 = $144,000)
144,000 90,000 54,000
*(Beg. sh. × div.% × (FV/sh. − PV/sh.)
7/15/17
(No entry required)
7/31/17
Common Stock Dividends Distributable ....................... Common Stock .................................................... (To record issuance of 9,000 shares in a stock dividend)
12/1/17
90,000 90,000
(No entry required)
12/15/17 Memo: 138,000 common shares outstanding $5 par value (b)
1. 2. 3. 4. 5. 6.
Common stock [Beg. com. st. × (1 + div.%)] Number of shares outstanding Par value per share (PV/sh ÷ 2) Paid-in capital in excess of par value—Common Stock Retained earnings (Beg. R/E + Net inc. − [(Beg. sh. × div.% × FV/sh)] Total stockholders’ equity
*(Beg. st. eq. + Net inc.)
.
$ 690,000 138,000 $ 5 $ 216,500 $ 236,000 $1,142,500*
11-64
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 238 On January 1, 2017, Mather Corporation had Retained Earnings of $625,000. During the year, Mather had the following selected transactions: 1. Declared stock dividends of $40,000 2. Declared cash dividends of $50,000 3. A 2 for 1 stock split involving the issue of 200,000 shares of $5 par value common stock for 100,000 shares of $10 par value common stock 4. Suffered a net loss of $80,000 Instructions Prepare a Retained Earnings Statement for the year. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 238
(15 min.) MATHER CORPORATION Retained Earnings Statement For the Year Ended December 31, 2017
Balance, January 1............................................................................. Less: Net loss .................................................................................. Cash dividends ....................................................................... Stock dividends....................................................................... Balance, December 31 .......................................................................
$625,000 $80,000 50,000 40,000
(170,000) $455,000*
*(Beg R/E − Net loss − cash div. − st. div.)
Ex. 239 The following accounts appear in the ledger of Bradley, Inc., after the books are closed at December 31, 2017. Common Stock, $1 par value, 800,000 shares authorized, 550,000 shares issued Common Stock Dividends Distributable Paid-in Capital in Excess of Par Value—Common Stock Preferred Stock, $100 par value, 8%, 10,000 shares authorized; 4,000 shares issued Retained Earnings Treasury Stock (10,000 common shares) Paid-in Capital in Excess of Par Value—Preferred Stock
$550,000 80,000 950,000 400,000 680,000 40,000 75,000
Instructions Prepare the stockholders’ equity section at December 31, 2017, assuming that part of retained earnings is restricted for plant expansion in the amount of $200,000. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Reporting and Analyzing Stockholders’ Equity
Solution 239
11-65
(15–20 min.) BRADLEY, INC. Balance Sheet (Partial) December 31, 2017
Stockholders’ equity Paid-in capital Capital stock 8% preferred stock, $100 par value, 10,000 shares authorized, 4,000 shares issued Common stock, $1 par value, 800,000 shares authorized, 550,000 shares issued, 540,000 shares outstanding Common stock dividends distributable Total capital stock Additional paid-in capital In excess of par value—preferred In excess of par value—common Total additional paid-in capital Total paid-in capital Retained earnings (See note) Total paid-in capital and retained earnings Less: Treasury stock Total stockholders’ equity
$ 400,000
$550,000 80,000
630,000 1,030,000
75,000 950,000 1,025,000 2,055,000 680,000 2,735,000 40,000 $2,695,000*
*(Pref. tot. PV + Com. tot. PV + Pref. PIC + Com. PIC + R/E – Treas. st.)
Note: Retained earnings is restricted in the amount of $200,000 for plant expansion. Ex. 240 The following are selected accounts and balances from the records of Doran Corporation on June 30, 2017. Common Stock, $10 par value, 75,000 shares authorized, 54,000 shares issued Paid-in Capital in Excess of Par Value—Common Stock Preferred Stock, $100 par value, 8%, 3,000 shares authorized and issued Retained Earnings Treasury Stock (10,000 common shares) Paid-in Capital in Excess of Par Value—Preferred Stock
$540,000 150,000 300,000 280,000 150,000 30,000
Instructions Prepare in proper form the stockholders’ equity section of the balance sheet. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
11-66
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 240
(8 min.) DORAN CORPORATION Balance Sheet (Partial) June 30, 2017
Stockholders’ equity Paid-in capital Capital stock 8% preferred stock, $100 par value, 3,000 shares authorized and issued Common stock, $10 par value, 75,000 shares authorized, 54,000 shares issued, 44,000 shares outstanding Total capital stock Additional paid-in capital In excess of par value—preferred $ 30,000 In excess of par value—common 150,000 Total additional paid-in capital Total paid-in capital Retained earnings Total paid-in capital and retained earnings Less: Treasury stock (10,000 shares) Total stockholders’ equity
$
300,000 540,000 840,000
180,000 1,020,000 280,000 1,300,000 150,000 $1,150,000*
*(Tot. Pref. PV + tot. Com. PV + Pref. PIC + Com. PIC + R/E – Treas. st.)
Ex. 241 The following stockholders' equity accounts, arranged alphabetically, are in the ledger of Marvel Corporation at December 31, 2017. Common Stock ($5 stated value) Paid-in Capital in Excess of Par Value—Preferred Stock Paid-in Capital in Excess of Stated Value—Common Stock Preferred Stock (8%, $100 par, noncumulative) Retained Earnings Treasury Stock (10,000 shares)
$2,800,000 45,000 1,050,000 1,000,000 1,684,000 98,000
Instructions Prepare the stockholders’ equity section of the balance sheet at December 31, 2017. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Reporting and Analyzing Stockholders’ Equity
Solution 241
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(8 min.) MARVEL CORPORATION Partial Balance Sheet December 31, 2017
Stockholders’ equity Paid-in capital Capital stock 8% Preferred stock, $100 par value, noncumulative, 10,000 shares issued ....................................................... $ 1,000,000 Common stock, no par, $5 stated value, 560,000 shares issued, and 550,000 shares outstanding ............................................................... 2,800,000 Total capital stock.......................................... Additional paid-in capital In excess of par value— preferred stock ..................................................... $ 45,000 In excess of stated value— common stock ...................................................... 1,050,000 Total additional paid-in capital ...................... Total paid-in capital ....................................... Retained earnings........................................................... Total paid-in capital and retained earnings......................................... Less: Treasury stock (10,000 common shares) ...................................... Total stockholders’ equity ..............................
$3,800,000
1,095,000 4,895,000 1,684,000 6,579,000 98,000 $6,481,000*
*(Tot. Pref. PV + tot. Com. SV + Pref. PIC + Com. PIC + R/E – Treas. st.)
Ex. 242 Mann Corporation decided to issue common stock and used the $120,000 proceeds to retire all of its outstanding bonds on January 1, 2017. The following information is available for the company for 2016 and 2017.
Net income Average stockholders' equity Total assets Current liabilities Total liabilities
2017 $ 120,000 1,000,000 1,200,000 100,000 360,000
2016 $ 100,000 800,000 1,200,000 100,000 480,000
Instructions (a) Compute the return on common stockholders' equity for both years. (b) Explain how it is possible that net income increased, but the return on common stockholders' equity decreased. (c) Compute the debt to assets ratio for both years, and comment on the implications of this change in the company's solvency. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 242 (a) 2017:
2016:
(10 min.) $120,000 Net inc. = 12.0% $1,000,000 Ave. st. eq. $100,000 = 12.5% $800,000
(b) Mann Corporation's net income increased in part because it retired bonds and eliminated the interest expense associated with the bonds. Such an increase in income would produce an increase in return on equity if equity had remained constant. In this example, equity increased by 25% [($1,000,000 – $800,000) $800,000] while income increased by only 20%. (c)
2017:
$360,000 = 30% $1,200,000
2016:
$480,000 = 40% $1,200,000
Net inc. Ave. st. eq.
Mann Corporation retired all its long term debt on January 1, 2017. This decreased its debt to assets ratio from .40 to .30. Mann Corporation would be considered to be very solvent. Ex. 243 In 2016 Manning Company has $1,000,000 in assets and $1,000,000 in stockholders' equity, with 50,000 shares outstanding the entire year. In the past year it had net income of $75,000. On January 1, 2017, it issued $300,000 in debt at 5% and immediately repurchased 25,000 shares for $300,000. Management expected that, had it not issued the debt, it would have again had net income of $75,000. Instructions (a) Determine the Company's net income and earnings per share for 2016 and 2017. (Ignore taxes in your computations.) (b) Compute the Company's return on common stockholders' equity for 2016 and 2017. (c) Compute the company's debt to assets ratio for 2016 and 2017. Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 243
(10 min.)
(a) Pre-debt net income ...................................... Adjustment for interest expense ($300,000 .05) ............................................ Net income .................................................... Outstanding shares ....................................... Earnings per share ........................................
2016 $75,000
2017 $75,000
0 $75,000 50,000 $1.50
15,000 60,000 25,000 $2.40*
*[(Net inc. − (debt iss. int. rate)] ÷ (beg. sh. − sh. repurch.)
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Reporting and Analyzing Stockholders’ Equity
Solution 243
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(Cont.)
(b) Net income Average common stockholder's equity
2016 $ 75,000 = 7.5% $1,000,000
2017 $ 60,000 = 7.1% $850,000
(c) Total liabilities Total assets
0 $1,000,000
=0
$300,000 $1,000,000
= 30%
Ex. 244 On January 1, 2017, Holt Corporation had $1,000,000 of common stock outstanding that was issued at par and retained earnings of $750,000. The company issued 60,000 shares of common stock at par on July 1 and earned net income of $400,000 for the year. Instructions Journalize the declaration of a 15% stock dividend on December 10, 2017, for the following two independent assumptions. (a) Par value is $10 and market value is $16. (b) Par value is $5 and market value is $8. Ans: N/A, LO: 3, 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 244
(5 min.)
(a) Stock Dividends (24,000* $16)........................................ Common Stock Dividends Distributable (24,000 $10) .......................................................... Paid-in Capital in Excess of Par Value—Common Stock (24,000 $6) ............................................................
384,000 240,000 144,000a
*[($1,000,000 $10) + 60,000] 15% a[((Beg. com. st. ÷ PV/sh) + sh. iss.) div.%] (MV/sh − PV/sh)
(b) Stock Dividends (39,000* $8).......................................... Common Stock Dividends Distributable (39,000 $5) ............................................................ Paid-in Capital in Excess of Par Value—Common Stock (39,000 $3) ............................................................ *[($1,000,000 $5) + 60,000] 15% b[((Beg. com. st. ÷ PV/sh) + sh. iss.) div.%] (MV/sh − PV/sh)
.
312,000 195,000 117,000b
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
COMPLETION STATEMENTS 245. A corporation has a separate __________________________ distinct from its owners. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
246. The major advantages of the corporate form of organization include (1) limited _________________ of stockholders, (2) continuous ____________________ and (3) ease of transferring ___________________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
247. The _______________ is the chief executive officer with direct responsibility for managing the business. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: None, IMA: Business Economics
248. Most publicly held corporations are required to make extensive disclosure of their financial affairs to the _______________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
249. Stockholders generally have the right to share in corporate _______________ and in ______________ upon liquidation. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
250. Par value of stock represents the __________________ per share that must be retained in the business for the protection of corporate ___________________. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
251. A corporation’s own stock that has been reacquired by the corporation and held for future use is called __________________ and is deducted from total _____________________ on the balance sheet. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
252. The _______________ feature of preferred stock gives the preferred stockholders the right to receive current-year dividends and unpaid prior-year dividends before common stockholders receive any dividends. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
253. Three important dates associated with dividends are the: (1)___________________, (2)__________________, and (3)__________________. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
254. The entry to record the declaration of a stock dividend increases _________________, and decreases ________________. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
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Reporting and Analyzing Stockholders’ Equity
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255. Both a stock split and a stock dividend will _________________ the number of shares outstanding and have _________________ on total stockholders’ equity. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
256. A debit balance in retained earnings is identified as a ________________. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
257. The paid-in capital section of the balance sheet consists of two classifications: ______________________ and ______________________. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Answers to Completion Statements 245. legal existence 246. liability, life, ownership rights 247. president 248. Securities and Exchange Commission 249. earnings, assets 250. legal capital, creditors 251. treasury stock, paid-in capital and retained earnings
.
252. cumulative 253. declaration date, record date, payment date 254. Paid-in Capital, Retained Earnings 255. increase, no effect 256. deficit 257. capital stock, additional paid-in capital
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
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MATCHING 258. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.
Controller Deficit Payout ratio Stock dividend Declaration date
F. G. H. I. J.
Preemptive right Par value Legal capital Treasury stock Cumulative feature
____ 1. The date the board of directors formally declares a dividend. ____ 2. The amount that must be retained in the business for the protection of creditors. ____ 3. Preferred stockholders have a right to receive current and unpaid prior-year dividends before common stockholders receive any dividends. ____ 4. The chief accounting officer. ____ 5. Measures the percentage of earnings distributed in the form of dividends to common stockholders. ____ 6. The amount assigned to each share of stock in the corporate charter. ____ 7. A debit balance in retained earnings. ____ 8. Enables stockholders to maintain their same percentage ownership when new shares are issued. ____ 9. Corporation’s own stock that has been reacquired by the corporation but not retired. ____ 10. A pro rata distribution of the corporation’s own stock to stockholders. Ans: N/A, LO: 1-4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
Answers to Matching 1. 2. 3. 4. 5.
E H J A C
6. 7. 8. 9. 10.
G B F I D
SHORT-ANSWER ESSAY QUESTIONS S-A E 259 Define par value, and discuss its significance in accounting. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
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Solution 259 Par value is an arbitrary amount established for a share of stock and printed on each stock certificate. It represents the legal capital of the corporation and constitutes a minimum cushion that must remain for the protection of the corporate creditors. Par value is also used for the calculation of preferred dividends. S-A E 260 Companies frequently issue both preferred stock and common stock. What are the major differences in the rights of stockholders between these two classes of stock? Ans: N/A, LO: 1, 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Business Economics
Solution 260 Common stockholders have the right to vote on corporate actions that require stockholders’ approval while preferred stockholders generally do not have voting rights. However, preferred stockholders will receive (1) dividends and (2) assets in the event of liquidation prior to common stockholders. Preferred stockholders may also have a cumulative dividend feature that increases the amount of dividends paid to the preferred stockholders. S-A E 261 For what reasons might a company like IBM repurchase some of its stock (treasury stock)? Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: Communications, IMA: Business Economics
Solution 261 A corporation may acquire treasury stock (1) to reissue the shares to officers and employees under bonus and stock compensation plans, (2) to increase trading of the company's stock in the securities market in the hopes of enhancing its market value, (3) to have additional shares available for use in the acquisition of other companies, (4) to reduce the number of shares outstanding and, thereby, increase earnings per share, or (5) to avoid a takeover of the company by investors that are hostile to management. S-A E 262 (a) (b)
Preferred stock may be cumulative. Discuss this feature. How are dividends in arrears presented in the financial statements?
Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 262 (a) Some preferred stocks possess the additional features of being either cumulative or participating, or both. Cumulative preferred stock means that preferred stockholders must be paid both current year dividends and unpaid prior year dividends before common stockholders receive any dividends. (b) Dividends in arrears are disclosed in the notes to the financial statements.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
S-A E 263 A large stock dividend and stock split can frequently have the same effect on the market price of a corporation’s stock. Explain how stock dividends and stock splits affect the market price of a corporation’s stock. Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 263 Stock dividends and stock splits both involve the issuance of additional shares of stock to the stockholders. The market price of a corporation’s stock is affected because of an increase in the supply of the stock which tends to lower the market price of the stock. The reduced price then makes the stock more marketable. A small stock dividend does not result in a large increase in the number of shares outstanding and therefore will not increase the stock’s marketability. Thus, a small stock dividend will have little effect on the market price per share. However, both a large stock dividend and a stock split will cause a large increase in the number of shares outstanding. This increase in the number of shares outstanding makes the stock marketable to a larger number of individuals. Consequently, the market price per share will decrease. S-A E 264 Why must a corporation have sufficient retained earnings before it may declare cash dividends? Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 264 By definition, a dividend is the distribution of profits to the corporate owners. Accordingly, to pay a dividend that exceeds existing retained earnings is, in substance, to return a portion of the stockholders’ investment and in many states illegal. In addition, companies are frequently constrained by agreements with their lenders to pay dividends only from retained earnings. S-A E 265 Linda Merton asks, "Since stock dividends don't change anything, why declare them?" What is your answer to Linda? Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 265 A corporation generally issues stock dividends for one of the following reasons: (1) To satisfy stockholders' dividend expectations without spending cash. (2) To increase the marketability of its stock by increasing the number of shares outstanding and thereby decreasing the market price per share. Decreasing the market price of the stock makes it easier for small investors to purchase shares. (3) To emphasize that a portion of stockholders' equity that had been reported as retained earnings has been permanently reinvested in the business and therefore is unavailable for cash dividends. S-A E 266 What is the formula for the payout ratio? What does it indicate? Ans: N/A, LO: 4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Communications, IMA: Business Economics
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Solution 266 The payout ratio is computed by dividing cash dividends declared on common stock by net income. The payout ratio indicates the percentage of earnings distributed as cash dividends to common stockholders. S-A E 267
(Ethics)
Mark Remington, the president and CEO of Earth Systems, Inc., a waste management firm, was recently hospitalized, suffering from exhaustion and a heart ailment. Immediately prior to his hospitalization, Earth Systems had experienced a sharp decline in its stock price, and trading activity became almost nonexistent. The primary reason for this was concern expressed in the media over a new untested waste management system implemented by the company. Mr. Remington had been unwilling to submit the procedure to testing before implementation, but he reluctantly agreed to limited tests after the system was operational. No problems have been identified by the tests to date. The other members of management called a meeting to determine what they should do. Terry Jackson, the marketing manager, suggested that the company purchase a large number of shares of treasury stock. In that way, investors might notice that activity had picked up, and might decide to buy some more shares. This plan would use up most of the company’s available cash, so that there will be no money available for a cash dividend. Earth Systems has paid cash dividends every quarter for over ten years. Required: 1. Is Mr. Jackson’s suggestion ethical? Explain. 2. Is it ethical to discontinue the cash dividend? Explain. Ans: N/A, LO: 2, 3, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 267 1. There is no definite answer as to whether Mr. Jackson’s suggestion is ethical. There are several points that might be made, supporting either premise. First, it is a large transaction being made in the absence of the CEO, and made entirely to boost stock price. It is not clear what the long-term benefit to the company will be, even if it is successful. Thus, a student might argue that the large purchase of treasury stock, using up most of the available cash, might be unethical because of the potential damage done to the company, without a large enough potential reward. On the other hand, the company might benefit by keeping its stock price high (assuming that this purchase will enhance the stock price) by being able to issue additional shares of stock to finance future expansion. It is to be hoped that the students can articulate the concept that legality of an action is not the only determinate of whether an action is ethical. 2. A company may discontinue its dividend at will. Common stockholders should know that they are not entitled to a dividend, even when one has been declared and paid every year. There is no express or implied contract to pay a dividend to common stockholders, and so the discontinuance of the dividend is ethical. However, the company may lose more in share price by discontinuing a long-standing dividend than it gains by its large purchase of treasury stock.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
S-A E 268
(Communication)
As part of a Careers in Accounting program sponsored by accounting organizations and supported by your company, you will be taking a group of high-school students through the accounting department in your company. You will also provide them with various materials to explain the work of an accountant. One of the materials you will provide is the Stockholders’ Equity section of a recent balance sheet. Required: Prepare a short response explaining each major section: Common Stock, Additional Paid-in Capital, and Retained Earnings. You should try to be brief but clear. Ans: N/A, LO: 4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 268 Common Stock: When investors invest in our company, they purchase common stock. Part of the purchase price is shown in this section, and is called "par" value. Par value is a legal term, denoting the amount of money that the company must retain in order to satisfy creditors’ claims, if the company should become insolvent. Additional Paid-in Capital: The remainder of the amount paid by investors who purchase shares of stock in our company is shown in this section. Thus, the Common Stock section and the Additional Paid-in Capital section together show the amount paid by investors to purchase shares of our stock. Retained Earnings: This shows the earnings that have been retained in the firm to finance future growth. The other earnings were paid to our stockholders as dividends.
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Reporting and Analyzing Stockholders’ Equity
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IFRS QUESTIONS 1.
Jahnke Corporation issued 8,000 shares of €2 par value ordinary shares for €11 per share. The journal entry to record the sale will include a. a debit to Cash for €16,000. b. a credit to Share Premium–Ordinary for €72,000. c. a credit to Share Capital–Ordinary for €88,000. d. a debit to Retained Earnings for €72,000.
Ans: b, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: (€11 − €2) 8,000 = €72,000
2.
La Vida Corporation issued 24,000 shares of no-par value ordinary shares for €29.50 per share. Which of the following statements is true? a. Share Premium–Ordinary account will increase by €276,000. b. The Cash account will increase by €24,000. c. Retained Earnings account will increase by €684,000. d. Share Capital–Ordinary account will increase by €708,000.
Ans: d, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: 24,000 €29.50 = €708,000
3.
Freidrichs Company has issued and outstanding 11,000 shares of cumulative, 6%, €50 par value preference shares which it sold for €54 per share at the beginning of 2015. The company has never paid preference dividends. As of December 31, 2017, dividends in arrears are a. €66,000. b. €99,000. c. €121,500. d. €106,920.
Ans: b, LO: 3, Bloom: C, Difficulty: Easy, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting Solution: (11,000 €50 .06) 3 = €99,000
4.
Looper, Inc. has 30,000 shares of 6%, ₤100 par value, noncumulative preference shares and 50,000 ordinary shares with a ₤1 par value outstanding at December 31, 2017. There were no dividends declared in 2016. The board of directors declares and pays a ₤250,000 dividend in 2017. What is the amount of dividends received by the common shareholders in 2017? a. ₤0 b. ₤180,000 c. ₤250,000 d. ₤70,000
Ans: d, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ₤250,000 − (30,000 ₤100 .06) = ₤70,000
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Manner, Inc. has 10,000 shares of 5%, ₤100 par value, noncumulative preference shares and 20,000 ordinary shares with a ₤1 par value outstanding at December 31, 2017. There were no dividends declared in 2016. The board of directors declares and pays a ₤90,000 dividend in 2017. What is the amount of dividends received by the ordinary shareholders in 2017? a. ₤0 b. ₤50,000 c. ₤90,000 d. ₤40,000
Ans: d, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ₤90,000 − (10,000 ₤100 .05) = ₤40,000
6.
Anders, Inc has 10,000 shares of 5%, €100 par value, cumulative preference shares and 20,000 ordinary shares with a $1 par value outstanding at December 31, 2017. There were no dividends declared in 2015. The board of directors declares and pays a €90,000 dividend in 2016 and in 2017. What is the amount of dividends received by the ordinary shareholders in 2017? a. €30,000 b. €50,000 c. €90,000 d. €0
Ans: a, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: 10,000 €100 .05 = €50,000; (€90,000 2) − (€50,000 3) = €30,000
7.
On January 1, Swanson Corporation had 80,000 ordinary shares with a €10 par value outstanding. On March 17, the company declared a 15% share dividend to shareholders of record on March 20. Market value of the shares was €13 on March 17. The entry to record the transaction of March 17 would include a a. credit to Cash Dividends for €36,000. b. credit to Cash for €156,000. c. credit to Ordinary Share Dividends Distributable for €120,000. d. debit to Ordinary Share Dividends Distributable for €120,000.
Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: 80,000 €10 .15 = €120,000
8.
On January 1, Swanson Corporation had 80,000 ordinary shares with a €10 par value outstanding. On March 17, the company declared a 15% share dividend to shareholders of record on March 20. Market value of the shares was €13 on March 17. The shares were distributed on March 30. The entry to record the transaction of March 30 would include a a. credit to Cash for €120,000. b. debit to Ordinary Share Dividends Distributable for €120,000. c. credit to Share Premium–Ordinary for €36,000. d. debit to Cash Dividends for €36,000.
Ans: b, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 80,000 €10 .15 = €120,000
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Reporting and Analyzing Stockholders’ Equity
9.
11-79
Oxford Inc. was authorized to issue 100,000 £10 par value ordinary shares. As of December 31, 2017, the company had issued 44,000 shares at an average price of £22 per share. During 2017, the company felt that the shares were undervalued so it purchased 10,000 treasury shares at £18 per share. When the share price rebounded later in the year, the company sold 4,000 of the treasury shares for £25 per share. Retained earnings was £1,658,000 at December 31, 2017. Total equity at December 31, 2017 is a. £2,446,000. b. £2,518,000. c. £2,546,000. d. £2,762,000.
Ans: c, LO: 4, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (44,000 ₤22) − (10,000 ₤18) + (4,000 ₤25) + ₤1,658,000 = ₤2,546,000
.
CHAPTER 12 STATEMENT OF CASH FLOWS SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item
LO
BT
Item
LO
BT
Item LO BT Item True-False Statements
LO
BT
Item
LO
BT
1. 2. 3. 4. 5. 6. 7. 8. 9.
1 1 1 1 1 1 1 1 1
K K K K K K K C K
10. 11. 12. 13. 14. 15. 16. 17. 18.
1 1 1 1 1 1 1 1 1
3 3 3 3 3 3 4 4 4
K K K C K C C AP K
*37. *38. *39. *40. *41.
4 4 4 5 5
C C K K K
42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70.
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2
K K K K K K C K K K K K K K K K K K AP AP AP AP AP K AP AP AP C C
71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99.
2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 3 3
2 2 2 2 2,4 2,4 2,4 2,4 2,4 2,4 2,4 2,4 2,4 2,4 2,4 2,4 2,4 2,4 2 2 2 2 2 2 3 3 3 3 3
AP AP AP K AP AP C K K K K K K AP AP AP AP AP C C AP C C C K AN AN AN K
*158. *159. *160. *161. *162. *163. *164. *165. *166. *167. *168. *169. *170. *171. *172. *173.
4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4
AP AP AP AP AP AP AP C AP K AP AP K K AP AP
174. 175. 176.
1 1 1
AP AP K
177. 178. 179.
2 2 2
C 19. 1 C 28. K 20. 2 C 29. K 21. 2 C 30. K 22. 2 C 31. C 23. 2 C 32. C 24. 2 K 33. C 25. 2 C *34. C 26. 2 C *35. K 27. 3 K *36. Multiple Choice Questions C 100. 2 K 129. C 101. 2 C 130. C 102. 2 AP 131. C 103. 2 AP 132. C 104. 2 AP 133. C 105. 2 C 134. C 106. 2 C 135. C 107. 2 C 136. C 108. 2 C 137. C 109. 2 AP 138. C 110. 2 AP 139. K 111. 2 AP 140. C 112. 2 AP 141. C 113. 2 K 142. C 114. 2 C 143. C 115. 2 K 144. K 116. 2 K 145. K 117. 2 K 146. K 118. 2 K 147. K 119. 2 K 148. K 120. 2 C 149. K 121. 2 C 150. K 122. 2 C 151. K 123. 2 C 152. C 124. 2 C 153. C 125. 2 C 154. K 126. 2 AP 155. K 127. 2 AP 156. AN 128. 2 AP 157. Brief Exercises AP 180. 2 AP *183. 4 K *181. AP *184. 4 K *182. AP *185.
4 4 4
AP AP AP
186. 187. 188.
2 2 2
AP AP AP
190. 191. 192.
2 2 2
AP AP AP
4 4 4
AP AP AP
.
Exercises 194. 2 AP 195. 2 AP 196. 3 AN
*198. *199. *200.
12-2 189.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition 2
AP
193.
2
AN
*197. 4 AP *201. Completion Statements Item SO BT Item SO BT Item SO BT Item 202. 1 K 205. 3 K 208. 2 K 211. 203. 1 K 206. 3 K *209. 2,4 K *212. 204. 1 K 207. 2 K 210. 3 K *213. Matching 216. 1 AP *217. 4 AP Short Answer Essay 218. 1 K 220. 3 K 222. 2 C 224. 219. 1 C 221. 2,3 C 223. 2,4 C *225. *This topic is dealt with in an Appendix to the chapter.
4
AP
SO 3 4 4
BT K K K
Item *214. *215.
SO 4 4
BT K K
2,4 4
C C
226. 227.
2,4 1
E C
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Learning Objective 1 Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
1.
TF
11.
TF
43.
MC
54.
MC
64.
MC
204.
C
2.
TF
12.
TF
44.
MC
55.
MC
65.
MC
216.
Ma
3.
TF
13.
TF
45.
MC
56.
MC
66.
MC
218.
SA
4.
TF
14.
TF
46.
MC
57.
MC
67.
MC
219.
SA
5.
TF
15.
TF
47.
MC
58.
MC
68.
MC
227.
SA
6.
TF
16.
TF
48.
MC
59.
MC
174.
BE
7.
TF
17.
TF
50.
MC
60.
MC
175.
BE
8.
TF
18.
TF
51.
MC
61.
MC
176.
BE
9.
TF
19.
TF
52.
MC
62.
MC
202.
C
10.
TF
42.
MC
53.
MC
63.
MC
203.
C
Learning Objective 2 20.
TF
80.
MC
109.
MC
126.
MC
143.
MC
189.
Ex
21.
TF
81.
MC
110.
MC
127.
MC
144.
MC
190.
Ex
22.
TF
82.
MC
111.
MC
128.
MC
145.
MC
191.
Ex
23.
TF
83.
MC
112.
MC
129.
MC
146.
MC
192.
Ex
24.
TF
84.
MC
113.
MC
130.
MC
147.
MC
193.
Ex
25.
TF
85.
MC
114.
MC
131.
MC
148.
MC
194.
Ex
26.
TF
86.
MC
115.
MC
132.
MC
149.
MC
195.
Ex
69.
MC
87.
MC
116.
MC
133.
MC
150.
MC
207.
C
70.
MC
100.
MC
117.
MC
134.
MC
151.
MC
208.
C
71.
MC
101.
MC
118.
MC
135.
MC
152.
MC
209.
C
73.
MC
102.
MC
119.
MC
136.
MC
177.
BE
221.
SA
74.
MC
103.
MC
120.
MC
137.
MC
178.
BE
222.
SA
75. 76. 77. 78. 79.
MC MC MC MC MC
104. 105. 106. 107. 108.
MC MC MC MC MC
121. 122. 123. 124. 125.
MC MC MC MC MC
138. 139. 140. 141. 142.
MC MC MC MC MC
179. 180. 186. 187. 188.
BE BE Ex Ex Ex
223. 224. 226.
SA SA SA
.
Statement of Cash Flows
12-3
SA
Learning Objective 3 27.
TF
33.
TF
93.
MC
99.
MC
196.
Ex
28.
TF
88.
MC
94.
MC
153.
MC
205.
C
29.
TF
89.
MC
95.
MC
154.
MC
206.
C
30.
TF
90.
MC
96.
MC
155.
MC
210.
C
31.
TF
91.
MC
97.
MC
156.
MC
211.
C
32.
TF
92.
MC
98.
MC
157.
MC
220.
SA
221.
Learning Objective 4 34.
TF
137.
MC
158.
MC
168.
MC
185.
BE
215.
C
35.
TF
138.
MC
159.
MC
169.
MC
197.
Ex
217.
Ma
36.
TF
139.
MC
160.
MC
170.
MC
198.
Ex
223.
SA
37.
TF
140.
MC
161.
MC
171.
MC
199.
Ex
224.
SA
38.
TF
141.
MC
162.
MC
172.
MC
200.
Ex
225.
SA
39.
TF
142.
MC
163.
MC
173.
MC
201.
Ex
226.
SA
133.
MC
143.
MC
164.
MC
181.
BE
209.
C
134.
MC
144.
MC
165.
MC
182.
BE
212.
C
135.
MC
145.
MC
166.
MC
183.
BE
213.
C
136.
MC
146.
MC
167.
MC
184.
BE
214.
C
Learning Objective 5 40. Note:
TF
41.
TF
TF = True-False MC = Multiple Choice Ma = Matching
C = Completion Ex = Exercise SA = Short Answer Essay
.
12-4
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
CHAPTER LEARNING OBJECTIVES 1. Discuss the usefulness and format of the statement of cash flows. The statement of cash flows provides information about the cash receipts, cash payments, and net change in cash resulting from the operating, investing, and financing activities of a company during the period. Operating activities include the cash effects of transactions that enter into the determination of net income. Investing activities involve cash flows resulting from changes in investments and long-term asset items. Financing activities involve cash flows resulting from changes in long-term liability and stockholders' equity items. 2. Prepare a statement of cash flows using the indirect method. The preparation of the statement of cash flows involves three major steps: (1) Determine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis. (2) Analyze changes in noncurrent asset and liability accounts and record as investing and financing activities, or disclose as noncash transactions. (3) Compare the net change in cash on the statement of cash flows with the change in the cash account reported on the balance sheet to make sure the amounts agree. 3. Use the statement of cash flows to evaluate a company. During the introductory stage, cash provided by operating activities and cash from investing are negative, and cash from financing is positive. During the growth stage, cash provided by operating activities becomes positive but is still not sufficient to meet investing needs. During the maturity stage, cash provided by operating activities exceeds investing needs, so the company begins to retire debt. During the decline stage, cash provided by operating activities is reduced, cash from investing becomes positive (from selling off assets), and cash from financing becomes more negative. Free cash flow indicates the amount of cash a company generated during the current year that is available for the payment of dividends or for expansion. *4. Prepare a statement of cash flows using the direct method. The preparation of the statement of cash flows involves three major steps: (1) Determine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis. (2) Analyze changes in noncurrent asset and liability accounts and record as investing and financing activities, or disclose as noncash transactions. (3) Compare the net change in cash on the statement of cash flows with the change in the cash account reported on the balance sheet to make sure the amounts agree. The direct method reports cash receipts less cash payments to arrive at net cash provided by operating activities. *5.Use the T-account approach to prepare a statement of cash flows. To use T-accounts to prepare the statement of cash flows: (1) prepare a large Cash T-account with sections for operating, investing, and financing activities; (2) prepare smaller T-accounts for all other noncash accounts; (3) insert beginning and ending balances for all accounts; and (4) follow the steps in Illustration 12-3 (page 596), enter debit and credit amounts as needed.
.
Statement of Cash Flows
12-5
TRUE-FALSE STATEMENTS 1.
The statement of cash flows is a required statement that must be prepared along with an income statement, balance sheet, and retained earnings statement.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
2.
For external reporting, a company must prepare either an income statement or a statement of cash flows, but not both.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
3.
A primary objective of the statement of cash flows is to show the income or loss on investing and financing transactions.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
4.
The primary purpose of the statement of cash flows is to provide information about a company’s cash receipts and cash payments during an accounting period.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
5.
A statement of cash flows indicates the sources and uses of cash during a period.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
6.
The statement of cash flows shows the effects on net income of a company’s operating, investing, and financing activities for an accounting period.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
7.
Operating activities include the cash effects of transactions that create revenues and expenses.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
8.
The activity from the balance sheet to be presented in the financing activities section of the statement of cash flows is based on an analysis of stockholders’ equity only.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
9.
The statement of cash flows explains the difference between net income, as shown on the income statement, and the net cash flows generated from operations.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
10.
In preparing a statement of cash flows, the issuance of debt should be reported separately from the retirement of debt.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
11.
Noncash investing and financing activities must be reported in the body of a statement of cash flows.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
12-6 12.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Noncash investing and financing transactions, such as the exchange of common stock to purchase assets, represent significant investing and financing activities and are reflected either in a schedule separate from the statement of cash flows or in a separate note to the financial statements.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
13.
The statement of cash flows classifies cash receipts and payments as operating, nonoperating, financial, and extraordinary activities.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
14.
The sale of land for cash would be classified as a cash inflow from an investing activity.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
15.
Cash flow from investing activities is considered the most important category on the statement of cash flows because it is considered the best measure of expected income.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
16.
The receipt of dividends from long-term investments in stock is classified as a cash inflow from investing activities.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
17.
The payment of interest on bonds payable is classified as a cash outflow from operating activities.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
18.
Any item that appears on the income statement would be considered as either a cash inflow or cash outflow from operating activities.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
19.
The acquisition of a building by issuing bonds would be considered an investing and financing activity that did not affect cash.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
20.
Using the indirect method, an increase in accounts payable during a period is deducted from net income in calculating cash provided by operations.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
21.
In preparing a statement of cash flows, an increase in the Common Stock and Treasury Stock accounts during a period would be an investing activity.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
22.
A loss on sale of equipment is added to net income in determining cash provided by operations under the indirect method.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
Statement of Cash Flows
23.
12-7
Under the indirect method, gains and losses from the sale of equipment used in operations would be included in the cash flows from operating activities section on the statement of cash flows.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
24.
Cash provided by operations is generally equal to operating income.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
25.
Using the indirect method, an increase in accounts receivable during a period is deducted from net income in calculating cash provided by operations.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
26.
A major disadvantage of the indirect method of reporting cash flows from operating activities is that the difference between the net amount of cash flows from operating activities and net income is not emphasized.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
27.
The growth phase of the product life cycle occurs when the company is purchasing fixed assets and beginning to produce and sell.
Ans: F, LO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: None, AICPA PC: Project Management, IMA: Business Economics
28.
During the maturity phase, cash from operations and net income are approximately the same.
Ans: T, LO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: None, AICPA PC: Project Management, IMA: Business Economics
29.
Free cash flow is cash from operating activities less dividends.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
30.
Cash used in operations will exceed cash generated by operations in the maturity phase of the product life cycle.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
31.
During the introductory phase, cash from operations and cash from investing activities are expected to be negative.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
32.
During the decline phase, cash from investing activities may be negative while cash from financing activities may be positive as the company issues new stock or debt.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
33.
The measurement of free cash flow provides additional insight regarding a company's cash-generating ability.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
12-8 *34.
During a period, cost of goods sold plus an increase in inventory plus an increase in accounts payable equals cash paid to suppliers.
Ans: F, LO: 4, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
*35.
During the year, Income Tax Expense amounted to $12,500 and Income Taxes Payable increased by $1,500; therefore, the cash paid for income taxes was $11,000.
Ans: T, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
*36.
In computing net cash flow from operating activities using the direct method, each item in the income statement is adjusted from the accrual basis to the cash basis.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
*37.
An increase in inventory would be added to cost of goods sold to determine net purchases for the period.
Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
*38.
As an adjustment to operating expenses per the income statement, an increase in accrued liabilities would be added to operating expenses to determine cash payments for operating expenses.
Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
*39.
Using the direct method, major classes of investing and financing activities are listed in the operating activities section.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
*40.
The change in cash is equal to the change in liabilities less the change in equity plus the change in noncash assets.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
*41.
Analysis of the changes in all of the noncash balance sheet accounts will explain the change in the Cash account.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
Answers to True-False Statements 1. 2. 3. 4. 5. 6. 7.
T F F T T F T
8. 9. 10. 11. 12. 13. 14.
F T T F T F T
15. 16. 17. 18. 19. 20. 21.
F F T F T F F
22. 23. 24. 25. 26. 27. 28.
.
T T F T F F T
29. 30. 31. 32. 33. *34. *35.
F F T F T F T
*36. *37. *38. *39. *40. *41.
T T F F F T
Statement of Cash Flows
12-9
MULTIPLE CHOICE QUESTIONS 42.
The statement of cash flows a. must be prepared on a daily basis. b. summarizes the operating, financing, and investing activities of an entity. c. is another name for the income statement. d. is a special section of the income statement.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
43.
Which one of the following items is not generally used in preparing a statement of cash flows? a. Adjusted trial balance. b. Comparative balance sheets. c. Current income statement. d. Additional information.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
44.
The primary purpose of the statement of cash flows is to a. provide information about the investing and financing activities during a period. b. prove that revenues exceed expenses if there is a net income. c. provide information about the cash receipts and cash payments during a period. d. facilitate banking relationships.
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
45.
If a company reports a net loss, it a. may still have a net increase in cash. b. will not be able to pay cash dividends. c. will not be able to get a loan. d. will not be able to make capital expenditures.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
46.
In addition to the three basic financial statements, which of the following is also a required financial statement? a. The Cash Budget. b. Statement of Cash Flows. c. Statement of Cash Inflows and Outflows. d. The Cash Reconciliation.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
47.
The statement of cash flows will not report the a. amount of checks outstanding at the end of the period. b. sources of cash in the current period. c. uses of cash in the current period. d. change in the cash balance for the current period.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
12-10 48.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
All of the following statements are true regarding cash flow presentations except a. the balance sheet provides only limited information about a company's cash flows. b. the balance sheet provides information about how property, plant, and equipment were financed. c. the income statement does not show how much cash was generated by operating activities. d. if cash from operations is compared to net income, information about the quality of reported net income is revealed.
Ans: b, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
49.
The acquisition of land by issuing common stock is a. a noncash transaction that is not reported in the body of a statement of cash flows. b. a cash transaction and would be reported in the body of a statement of cash flows. c. a noncash transaction and would be reported in the body of a statement of cash flows. d. only reported if the statement of cash flows is prepared using the direct method.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
50.
The order of presentation of activities on the statement of cash flows is a. operating, investing, and financing. b. operating, financing, and investing. c. financing, operating, and investing. d. financing, investing, and operating.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
51.
Financing activities involve a. lending money. b. acquiring investments. c. issuing debt. d. acquiring long-lived assets.
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
52.
Investing activities include a. collecting cash on loans made. b. obtaining cash from creditors. c. obtaining capital from owners. d. repaying money previously borrowed.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
53.
Generally, the most important category on the statement of cash flows is cash flows from a. operating activities. b. investing activities. c. financing activities. d. significant noncash activities.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Statement of Cash Flows
54.
12-11
The category that is generally considered to be the best measure of a company's ability to continue as a going concern is a. cash flows from operating activities. b. cash flows from investing activities. c. cash flows from financing activities. d. usually different from year to year.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
55.
Cash receipts from interest and dividends are classified as a. financing activities. b. investing activities. c. operating activities. d. either financing or investing activities.
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
56.
Cash flows from operating activities, as reported on the statement of cash flows under the indirect method, would include a. receipts from the sale of investments. b. net income. c. payments for dividends. d. receipts from the issuance of capital stock.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
57.
The issuance of debt to purchase assets would be classified as a(n) a. operating activity. b. investing activity. c. financing activity. d. none of these answers are correct.
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
58.
The payment of a cash dividend would be classified as a(n) a. operating activity. b. investing activity. c. financing activity. d. significant noncash activity.
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
59.
Which of the following activities would be classified as an investing activity? a. Cash received from interest revenue. b. Cash paid (loaned) to a borrower as a loan. c. Cash received from dividend revenue. d. Cash paid to reacquire capital stock.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
12-12
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
60.
Zoum Corporation had the following transactions during 2017: 1. Issued $250,000 of par value common stock for cash. 2. Recorded and paid wages expense of $120,000. 3. Acquired land by issuing common stock of par value $100,000. 4. Declared and paid a cash dividend of $20,000. 5. Sold a long-term investment (cost $6,000) for cash of $6,000. 6. Recorded cash sales of $800,000. 7. Bought inventory for cash of $320,000. 8. Acquired an investment in Zynga stock for cash of $42,000. 9. Converted bonds payable to common stock in the amount of $1,000,000. 10. Repaid a 6-year note payable in the amount of $440,000. What is the net cash provided by operating activities? a. $610,000. b. $580,000. c. $480,000. d. $360,000.
Ans: d, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $800,000 − $320,000 − $120,000 = $360,000 (Cash Sal. - inv. pur.- wag. pd.
61.
Zoum Corporation had the following transactions during 2017: 1. Issued $250,000 of par value common stock for cash. 2. Recorded and paid wages expense of $120,000. 3. Acquired land by issuing common stock of par value $100,000. 4. Declared and paid a cash dividend of $20,000. 5. Sold a long-term investment (cost $8,000) for cash of $6,000. 6. Recorded cash sales of $800,000. 7. Bought inventory for cash of $320,000. 8. Acquired an investment in Zynga stock for cash of $42,000. 9. Converted bonds payable to common stock in the amount of $1,000,000. 10. Repaid a 6-year note payable in the amount of $440,000. What is the net cash provided by financing activities? a. $(210,000). b. $790,000. c. $(1,210,000). d. $230,000.
Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $250,000 − $20,000 − $440,000 = ($210,000) (Cash. st. - iss. div. paid. - N/P. paid)
.
Statement of Cash Flows
62.
12-13
Zoum Corporation had the following transactions during 2017: 1. Issued $250,000 of par value common stock for cash. 2. Recorded and paid wages expense of $120,000. 3. Acquired land by issuing common stock of par value $1,000,000. 4. Declared and paid a cash dividend of $20,000. 5. Sold a long-term investment (cost $6,000) for cash of $6,000. 6. Recorded cash sales of $800,000. 7. Bought inventory for cash of $320,000. 8. Acquired an investment in Zynga stock for cash of $42,000. 9. Converted bonds payable to common stock in the amount of $1,000,000. 10. Repaid a 6-year note payable in the amount of $440,000. What is the net cash provided by investing activities? a. $864,000. b. $424,000 c. ($36,000). d. ($136,000).
Ans: c, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $6,000 − $42,000 = ($36,000) (Invest. sale - invest. pur.)
63.
APS Company issued 20,000 shares of $1 par common stock for $40 per share during 2017. The company paid dividends of $48,000 and issued long-term notes payable of $440,000 during the year. What amount of cash flows from financing activities will be reported on the statement of cash flows? a. $12,000 net cash inflow. b. $352,000 net cash inflow. c. $705,000 net cash outflow. d. $1,192,000 net cash inflow.
Ans: d, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (20,000 $40) − $48,000 + $440,000 = $1,192,000 (Com. Sh. × iss. pr.) – div. paid – N/P iss.)
64.
Vangaurd Company purchased treasury stock with a cost of $55,000 during 2017. During the year, the company paid dividends of $20,000 and issued bonds payable for proceeds of $876,000. Cash flows from financing activities for 2017 total a. $856,000 net cash inflow. b. $911,000 net cash inflow. c. $75,000 net cash outflow. d. $801,000 net cash inflow.
Ans: d, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $876,000 − $55,000 − $20,000 = $801,000 (Bond pay. iss. - trea. st. pur. - div. paid)
65.
Which of the following is the first step in preparing the statement of cash flows? a. Determine the net cash provided by operating activities. b. Determine the net income. c. Determine net cash provided by investing and financing activities. d. Determine the net increase (decrease) in cash.
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
12-14 66.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
McLaughlin Company issued common stock for proceeds of $558,000 during 2017. The company paid dividends of $99,000 and issued a long-term note payable for $375,000 in exchange for equipment during the year. The company also purchased treasury stock that had a cost of $81,000. The financing section of the statement of cash flows will report net cash inflows of a. $378,000. b. $834,000. c. $459,000. d. $753,000.
Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $558,000 − $99,000 − $81,000 = $753,000 (Com. st. proc. – div. paid + N/P iss. – trea. st. pur.)
67.
During 2017, Lowes Company sold equipment with a book value of $120,000 for proceeds of $145,000. The company purchased new equipment for $320,000 by signing a long-term note payable. No other transactions impacted long-term asset accounts during 2017. The investing section of the statement of cash flows will report a. net cash outflows of $295,000. b. net cash outflows of $175,000. c. net cash inflows of $145,000. d. net cash inflows of $25,000.
Ans: c, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $145,000 − 0 = $145,000 (Equip. sale proc.)
68.
In Jackson Jones Company, land decreased $270,000 because of a cash sale for $270,000, the equipment account increased $90,000 as a result of a cash purchase, and Bonds Payable increased $300,000 from issuance for cash at face value. The net cash provided by investing activities is a. $270,000. b. $480,000. c. $180,000. d. $210,000.
Ans: c, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $270,000 − $90,000 = $180,000 (Land dec. – equip. inc.)
69.
Assume that the Fitzgerald Corporation uses the indirect method to depict cash flows. Indicate where, if at all, a stock dividend declared and issued would be classified on the statement of cash flows. a. Operating activities section. b. Investing activities section. c. Financing activities section. d. Does not represent a cash flow.
Ans: d, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Statement of Cash Flows
70.
12-15
Assume that the Fitzgerald Corporation uses the indirect method to depict cash flows. Indicate where, if at all, an accounts receivable decrease would be classified on the statement of cash flows. a. Operating activities section. b. Investing activities section. c. Financing activities section. d. Does not represent a cash flow.
Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
71.
Assume that the Fitzgerald Corporation uses the indirect method to depict cash flows. Indicate where, if at all, an inventory increase with cash would be classified on the statement of cash flows. a. Operating activities section. b. Investing activities section. c. Financing activities section. d. Does not represent a cash flow.
Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
72.
Assume that the Fitzgerald Corporation uses the indirect method to depict cash flows. Indicate where, if at all, long-term debt retired with cash would be reported on the statement of cash flows. a. Operating activities section. b. Investing activities section. c. Financing activities section. d. Does not represent a cash flow.
Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
73.
Assume that the Quinn Corporation uses the indirect method to depict cash flows. Indicate where, if at all, interest paid on a note would be reported on the statement of cash flows. a. Operating activities section. b. Investing activities section. c. Financing activities section. d. Does not represent a cash flow.
Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
74.
Assume that the Quinn Corporation uses the indirect method to depict cash flows. Indicate where, if at all, stock issued for equipment would be classified on the statement of cash flows. a. Operating activities section. b. Investing activities section. c. Financing activities section. d. Does not represent a cash flow.
Ans: d, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
12-16 75.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Assume that the Quinn Corporation uses the indirect method to depict cash flows. Indicate where, if at all, dividends received on securities held would be reported on the statement of cash flows. a. Operating activities section. b. Investing activities section. c. Financing activities section. d. Does not represent a cash flow.
Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
76.
Assume that the Quinn Corporation uses the indirect method to depict cash flows. Indicate where, if at all, income taxes paid would be reported on the statement of cash flows. a. Operating activities section. b. Investing activities section. c. Financing activities section. d. Does not represent a cash flow.
Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
77.
Assume that the E-Zip Corporation uses the indirect method to depict cash flows. Indicate where, if at all, common stock issued for cash would be classified. a. Operating activities section. b. Investing activities section. c. Financing activities section. d. Does not represent a cash flow.
Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
78.
Assume that the E-Zip Corporation uses the indirect method to depict cash flows. Indicate where, if at all, land purchased for cash would be classified on the statement of cash flows. a. Operating activities section. b. Investing activities section. c. Financing activities section. d. Does not represent a cash flow.
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
79.
Assume that the E-Zip Corporation uses the indirect method to depict cash flows. Indicate where, if at all, land and building purchased with a mortgage would be classified on the statement of cash flows. a. Operating activities section. b. Investing activities section. c. Financing activities section. d. Does not represent a cash flow.
Ans: d, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Statement of Cash Flows
80.
12-17
Assume that the E-Zip Corporation uses the indirect method to depict cash flows. Indicate where, if at all, treasury stock purchased with cash would be classified on the statement of cash flows. a. Operating activities section. b. Investing activities section. c. Financing activities section. d. Does not represent a cash flow.
Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
81.
If a company has both an inflow and outflow of cash related to property, plant, and equipment, the ______________ in the investing activities section. a. two cash effects must be netted and presented as one item b. cash inflow and cash outflow must be reported separately c. cash outflow is only is presented d. cash inflow and cash outflow can either be reported separately or presented as one item
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
82.
Of the items below, the one that appears first on the statement of cash flows is a. noncash investing and financing activities. b. net increase (decrease) in cash. c. cash at the end of the period. d. cash at the beginning of the period.
Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
83.
Which of the following transactions does not affect cash during a period? a. Write-off of an uncollectible account. b. Collection of an accounts receivable. c. Sale of treasury stock. d. Redeeming bonds before maturity.
Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
84.
Significant noncash transactions would not include a. conversion of bonds into common stock. b. asset acquisition through bond issuance. c. treasury stock acquisition. d. exchange of plant assets.
Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
85.
Preferred stock issued in exchange for land would be reported in the statement of cash flows in a. the cash flows from financing activities section. b. the cash flows from investing activities section. c. a separate schedule or note to the financial statements. d. the cash flows from operating section.
Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
12-18 86.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
In preparing a statement of cash flows, a conversion of bonds into common stock will be reported in a. the financing section. b. the "extraordinary" section. c. a separate schedule or note to the financial statements. d. the stockholders' equity section.
Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
87.
On the statement of cash flows, the cash flows from operating activities section would be affected by a. receipts from the issuance of capital stock. b. receipts from the sale of investments. c. payments for the acquisition of investments. d. cash receipts from sales activities.
Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
88.
In order to determine net cash provided by operating activities, a company must convert net income from an accrual basis to a cash basis under a. the direct method only. b. the indirect method only. c. both the direct method and the indirect method. d. neither the direct nor the indirect method.
Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
89.
Cash from investing becomes less positive and cash from financing becomes more negative during the a. introductory phase. b. growth phase. c. maturity phase. d. decline phase.
Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
90.
Cash generated from operations exceeds investing needs, and the company can begin retiring debt during the a. introductory phase. b. growth phase. c. maturity phase. d. decline phase.
Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
91.
Collections on accounts receivable will lag behind sales, and accrual sales during a period will exceed cash collections during the a. introductory phase. b. growth phase. c. maturity phase. d. decline phase.
Ans: b, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
.
Statement of Cash Flows
92.
12-19
A company would be expected to generate small amounts of cash from operations during the a. introductory phase. b. growth phase. c. maturity phase. d. decline phase.
Ans: b, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
93.
The phase in the product life cycle when a company is purchasing fixed assets and beginning to produce and sell is the a. introductory phase. b. growth phase. c. maturity phase. d. decline phase.
Ans: a, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
94.
Cash from operations and net income are approximately the same during the a. introductory phase. b. growth phase. c. maturity phase. d. decline phase.
Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
95.
Which of the following is not typically a characteristic experienced by a company during the introductory phase of the corporate life cycle? a. Cash used in operations will exceed cash generated by operations. b. Considerable cash will be used to purchase productive assets. c. Cash from investing is positive. d. Cash from financing is positive.
Ans: c, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
96.
Which of the following is not typically a characteristic experienced by a company during the growth phase of the corporate life cycle? a. Cash from operations on the statements of cash flows will be less than net income on the income statement. b. Collections on accounts receivable will lag behind sales. c. Cash from investing is positive. d. Cash from financing is positive.
Ans: c, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
97.
Which of the following would not create a cash flow? a. Sale of equipment at book value. b. Purchase of a delivery truck. c. Payment of a cash dividend. d. The company converts bonds into common stock.
Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
.
12-20 98.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The information to prepare the statement of cash flows comes from all of the following sources except a. comparative balance sheets. b. additional transaction data about cash provided or used during the period. c. adjusted trial balance. d. current income statement.
Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
99.
The information in the following table is from the statement of cash flows for a company at four different points in time (Period 1, Period 2, Period 3, and Period 4). Negative values are presented in parentheses.
Cash provided by operations Cash provided by investing Cash provided by financing Net income
Period 1 $ (180,000) (300,000) 290,000 (120,000)
Period 2 $ 90,000 75,000 (220,000) 30,000
Period 3 $ 360,000 90,000 ($170,000) 300,000
Period 4 $ 50,000 (120,000) $420,000 (15,000)
Based on this information, which of the following answers most likely corresponds with the introductory phase, growth phase, maturity phase, or decline phase? a. Period 2, Period 1, Period 3, Period 4. b. Period 1, Period 4, Period 3, Period 2. c. Period 3, Period 4, Period 1, Period 2. d. Period 4, Period 3, Period 2, Period 1. Ans: b, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
100.
Which one of the following items is not necessary in preparing a statement of cash flows? a. Determine the change in cash. b. Determine the cash provided by operations. c. Determine cash from financing and investing activities. d. Determine the cash in each of the bank accounts.
Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
101.
If accounts receivable have increased during the period a. revenues on an accrual basis are less than revenues on a cash basis. b. revenues on an accrual basis are greater than revenues on a cash basis. c. revenues on an accrual basis are the same as revenues on a cash basis. d. expenses on an accrual basis are greater than expenses on a cash basis.
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Statement of Cash Flows
102.
12-21
Accounts receivable arising from sales to customers amounted to $120,000 and $105,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $457,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is a. $457,000. b. $472,000. c. $562,000. d. $442,000.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $457,000 + ($120,000 − $105,000) = $472,000 (Net inc. + (beg. A/R - end. A/R))
103.
Accounts receivable arising from sales to customers amounted to $35,000 and $40,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $223,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is a. $223,000. b. $228,000. c. $258,000. d. $218,000.
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $223,000 + ($35,000 − $40,000) = $218,000 (Net inc. + (beg. A/R - end. A/R))
104.
Accounts receivable arising from sales to customers amounted to $80,000 and $70,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $252,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is a. $252,000. b. $242,000. c. $262,000. d. $332,000.
Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $252,000 + ($80,000 − $70,000) = $262,000 (Net inc (beg. A/R - end. A/R))
105.
If accounts payable have increased during a period a. revenues on an accrual basis are less than revenues on a cash basis. b. expenses on an accrual basis are less than expenses on a cash basis. c. expenses on an accrual basis are greater than expenses on a cash basis. d. expenses on an accrual basis are the same as expenses on a cash basis.
Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
106.
Which one of the following affects cash during a period? a. Recording depreciation expense. b. Declaration of a cash dividend. c. Write-off of an uncollectible account receivable. d. Payment of an accounts payable.
Ans: d, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
12-22 107.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
In calculating cash flows from operating activities using the indirect method, a gain on the sale of equipment is a. added to net income. b. deducted from net income. c. ignored because it does not affect cash. d. not reported on a statement of cash flows.
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
108.
In calculating cash flows from operating activities using the indirect method, a loss on the sale of equipment is a. added to net income. b. deducted from net income. c. ignored because it does not affect cash. d. not reported on a statement of cash flows.
Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
109.
Peninsula Company reported net income of $290,000 for the year. During the year, accounts receivable increased by $21,000, accounts payable decreased by $9,000 and depreciation expense of $45,000 was recorded. Net cash provided by operating activities for the year is a. $305,000. b. $275,000. c. $257,000. d. $290,000.
Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $290,000 − $21,000 − $9,000 + $45,000 = $305,000 (Net inc - A/R inc. - A/P dec.+ dep. exp.)
110.
LKN Company reported net income of $90,000 for the year. During the year, accounts receivable increased by $6,000, accounts payable decreased by $4,000 and depreciation expense of $10,000 was recorded. Net cash provided by operating activities for the year is a. $100,000. b. $80,000. c. $82,000. d. $90,000.
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $90,000 − $6,000 − $4,000 + $10,000 = $90,000 (Net inc - A/R inc. - A/P dec.+ dep. exp.)
111.
Catalina Company reported a net loss of $15,000 for the year ended December 31, 2017. During the year, accounts receivable decreased $7,500, inventory increased $12,000, accounts payable increased by $15,000, and depreciation expense of $9,000 was recorded. During 2017, operating activities a. used net cash of $4,500. b. used net cash of $10,500. c. provided net cash of $4,500. d. provided net cash of $10,500.
Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($15,000) + $7,500 − $12,000 + $15,000 + $9,000 = $4,500 ((Net loss) + A/R dec. − inv. inc. + A/P inc.+ dep. exp.)
.
Statement of Cash Flows
112.
12-23
Hunter Company reported a net loss of $12,000 for the year ended December 31, 2017. During the year, accounts receivable decreased $28,000, inventory increased $20,000, accounts payable increased by $30,000, and depreciation expense of $24,000 was recorded. During 2017, operating activities a. used net cash of $14,000. b. used net cash of $50,000. c. provided net cash of $50,000. d. provided net cash of $74,000.
Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: <$12,000> + $28,000 − $20,000 + $30,000 + $24,000 = $50,000 ((Net loss) + A/R dec. − inv. inc. - A/P inc.+ dep. exp.)
113.
Starting with net income and adjusting it for items that affected reported net income but which did not affect cash is called the a. direct method. b. indirect method. c. working capital method. d. cost-benefit method.
Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
114.
In calculating net cash provided by operating activities using the indirect method, an increase in prepaid expenses during a period is a. deducted from net income. b. added to net income. c. ignored because it does not affect income. d. ignored because it does not affect expenses.
Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
115.
Using the indirect method, patent amortization expense for the period a. is deducted from net income. b. causes cash to increase. c. causes cash to decrease. d. is added to net income.
Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
116.
In developing the cash flows from operating activities, most companies in the United States a. use the direct method. b. use the indirect method. c. present both the indirect and direct methods in their financial reports. d. prepare the operating activities section on the accrual basis.
Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
117.
Which of the following would be subtracted from net income using the indirect method? a. Depreciation expense. b. An increase in accounts receivable. c. An increase in accounts payable. d. A decrease in prepaid expenses.
Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
12-24
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
118.
Which of the following would be added to net income using the indirect method? a. An increase in accounts receivable. b. An increase in prepaid expenses. c. Depreciation expense. d. A decrease in accounts payable.
Ans: c, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
119.
Which of the following would not be an adjustment to net income using the indirect method? a. Depreciation Expense. b. An increase in Prepaid Insurance. c. Amortization Expense. d. An increase in Land.
Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
120.
In calculating cash flows from operating activities using the indirect method, a loss on the sale of equipment will appear as a(n) a. subtraction from net income. b. addition to net income. c. addition to cash flow from investing activities. d. subtraction from cash flow from investing activities.
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
121.
Using the indirect method, which of the following adjustments to convert net income to net cash provided by operating activities is correct? Add to Net Income Deduct from Net Income a. Accounts Receivable increase decrease b. Prepaid Expenses increase decrease c. Inventory decrease increase d. Taxes Payable decrease increase
Ans: c, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
122.
Using the indirect method, which of the following adjustments to convert net income to net cash provided by operating activities is incorrect? Add to Net Income Deduct from Net Income a. Accounts Receivable decrease increase b. Prepaid Expenses increase decrease c. Inventory decrease increase d. Accounts Payable increase decrease
Ans: b, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
123.
Which of the following adjustments to convert net income to net cash provided by operating activities is not added to net income? a. Gain on Disposal of Equipment. b. Depreciation Expense. c. Patent Amortization Expense. d. Depletion Expense.
Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
124.
Using the indirect method, if equipment is sold at a gain, the .
Statement of Cash Flows
a. b. c. d.
12-25
sale proceeds received are deducted in the operating activities section. sale proceeds received are added in the operating activities section. amount of the gain is added in the operating activities section. amount of the gain is deducted in the operating activities section.
Ans: d, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
125.
On the statement of cash flows using the indirect method, patent amortization expense will a. be added to net income in the operating section. b. be deducted from net income in the operating section. c. appear as an inflow of cash in the investing section. d. appear as an outflow of cash in the investing section.
Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
126.
A company had net income of $890,000. Depreciation expense is $110,000. During the year, accounts receivable and inventory increased $60,000 and $160,000, respectively. Prepaid expenses and accounts payable decreased $8,000 and $16,000, respectively. There was also a loss on the sale of equipment of $12,000. How much cash was provided by operating activities? a. $760,000. b. $784,000. c. $1,080,000. d. $1,128,000.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $890,000 + $110,000 − $60,000 − $160,000 + $8,000 − $16,000 + $12,000 = $784,000 (Net inc. + dep. exp. - A/R inc.+ inv. inc. + prep. exp. dec. - A/P dec. + loss on sale)
127.
A company had net income of $282,000. Depreciation expense is $26,000. During the year, accounts receivable and inventory increased $15,000 and $40,000, respectively. Prepaid expenses and accounts payable decreased $2,000 and $14,000, respectively. There was also a loss on the sale of equipment of $17,000. How much cash was provided by operating activities? a. $258,000. b. $241,000. c. $318,000. d. $339,000.
Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $282,000 + $26,000 − $15,000 − $40,000 + $2,000 − $14,000 + $17,000 = $258,000 (Net inc. + dep. exp. - A/R inc.+ inv. inc. + prep. exp. dec. - A/P dec. + loss on sale)
128.
The net income reported on the income statement for the current year was $1,360,000. Depreciation recorded on plant assets was $257,000. Accounts receivable and inventories increased by $72,000 and $48,000, respectively. Prepaid expenses and accounts payable decreased by $6,000 and $66,000, respectively. How much cash was provided by operating activities? a. $1,380,000. b. $1,500,000. c. $1,437,000. d. $1,797,000.
Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,360,000 + $257,000 − $72,000 − $48,000 + $6,000 − $66,000 = $1,437,000 (Net inc. + dep. - A/R inc.+ inv. inc. + prep. exp. dec. - A/P dec.)
.
12-26 129.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The net income reported on the income statement for the current year was $510,000. Depreciation recorded on plant assets was $76,000. Accounts receivable and inventories increased by $40,000 and $16,000, respectively. Prepaid expenses and accounts payable decreased by $2,000 and $32,000, respectively. How much cash was provided by operating activities? a. $480,000. b. $500,000. c. $464,000. d. $672,000.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $510,000 + $76,000 − $40,000 − $16,000 + $2,000 − $32,000 = $500,000 (Net inc. + dep. exp. - A/R inc.+ inv. inc. + prep. exp. dec. - A/P dec.)
130.
The net income reported on the income statement for the current year was $480,000. Depreciation was $62,000. Accounts receivable and inventories decreased by $20,000 and $32,000, respectively. Prepaid expenses and accounts payable increased, respectively, by $2,000 and $16,000. How much cash was provided by operating activities? a. $536,000. b. $608,000. c. $576,000. d. $476,000.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $480,000 + $62,000 + $20,000 + $32,000 − $2,000 − $16,000 = $608,000 (Net inc. + dep. + A/R inc.+ inv. inc. + prep. exp. dec. - A/P inc.)
131.
The net income reported on the income statement for the current year was $240,000. Depreciation was $52,000. Accounts receivable and inventories decreased by $5,000 and $15,000, respectively. Prepaid expenses and accounts payable increased, respectively, by $500 and $14,000. How much cash was provided by operating activities? a. $307,500. b. $317,500. c. $325,500. d. $258,500.
Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $240,000 + $52,000 + $5,000 + $15,000 − $500 + $14,000 = $325,500 (Net inc. + dep. + A/R dec.+ inv. dec. + prep. exp. inc. + A/P inc.)
132.
The indirect and direct methods of preparing the statement of cash flows are identical except for the a. significant noncash activity section. b. operating activities section. c. investing activities section. d. financing activities section.
Ans: b, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Statement of Cash Flows
133.
12-27
If $2,500,000 of bonds are issued during the year but $4,000,000 of old bonds are retired during the year, the statement of cash flows will show a(n) a. net increase in cash of $1,500,000. b. net decrease in cash of $1,500,000. c. increase in cash of $2,500,000 and a decrease in cash of $4,000,000. d. net loss on retirement of bonds of $1,500,000.
Ans: c, LO: 2, 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
134.
If $1,200,000 of bonds are issued during the year but $2,500,000 of old bonds are retired during the year, the statement of cash flows will show a(n) a. net increase in cash of $1,300,000. b. net decrease in cash of $1,200,000. c. increase in cash of $1,200,000 and a decrease in cash of $2,500,000. d. net loss on retirement of bonds of $1,300,000.
Ans: c, LO: 2, 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
135.
Which of the following changes in retained earnings during a period will be reported in the financing activities section of the statement of cash flows? 1. Declaration and payment of a cash dividend during the period. 2. Net income for the period. a. 1. b. 2. c. Neither 1 nor 2. d. Both 1 and 2.
Ans: a, LO: 2, 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
136.
The statement of cash flows a. is prepared instead of an income statement under generally accepted accounting principles. b. is used to assess an entity's ability to pay dividends and meet obligations. c. is prepared from comparative income statements. d. reflects earnings per share figures on a cash basis and on an accrual basis in the body of the statement.
Ans: b, LO: 2, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
137.
In preparing the statement of cash flows, determining the net increase or decrease in cash requires the use of a. the adjusted trial balance. b. the current period's retained earnings statement. c. a comparative balance sheet. d. a comparative income statement.
Ans: c, LO: 2, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
12-28 138.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
To determine the net cash provided (used) by operating activities, it is necessary to analyze a. the current year's income statement. b. a comparative balance sheet. c. additional information. d. All of these answer choices are correct.
Ans: d, LO: 2, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
139.
Which of the following would not be needed to determine net cash provided by operating activities? a. Depreciation expense. b. Change in accounts receivable. c. Payment of cash dividends. d. Change in prepaid expenses.
Ans: c, LO: 2, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
140.
When equipment is sold for cash, the amount received is reflected as a cash a. inflow in the operating section. b. inflow in the financing section. c. inflow in the investing section. d. outflow in the operating section.
Ans: c, LO: 2, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
141.
The statement of cash flows will not provide insight into a. why dividends were not increased. b. whether cash flow is greater than net income. c. the exact proceeds of a future bond issue. d. how the retirement of debt was accomplished.
Ans: c, LO: 2, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
142.
If a gain of $225,000 is incurred in selling (for cash) a building having a book value of $900,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is a. $675,000. b. $900,000. c. $1,125,000. d. $225,000.
Ans: c, LO: 2, 4 Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $225,000 + $900,000 = $1,125,000 (Gain on sale + blog. book val.)
143.
If a loss of $108,000 is realized when selling (for cash) a building having a book value of $800,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is a. $692,000. b. $800,000. c. $908,000. d. $108,000.
Ans: a, LO: 2, 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $800,000 − $108,000 = $692,000 (Bldg. book val. - loss on sale)
.
Statement of Cash Flows
144.
12-29
If a gain of $81,000 is realized when selling (for cash) a building having a book value of $600,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is a. $519,000. b. $681,000. c. $600,000. d. $81,000.
Ans: b, LO: 2, 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $600,000 + $81,000 = $681,000 (Bldg. book val. + gain)
145.
If a loss of $9,000 is incurred in selling (for cash) office equipment having a book value of $90,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is a. $81,000. b. $90,000. c. $99,000. d. $9,000.
Ans: a, LO: 2, 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $90,000 − $9,000 = $81,000 (Equip. book val. - loss)
146.
Land costing $125,000 was sold for $355,000 cash. The gain on the sale was reported on the income statement as other income. On the statement of cash flows, what amount should be reported as an investing activity from the sale of land? a. $155,000. b. $355,000. c. $310,000. d. $230,000.
Ans: b, LO: 2, 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $355,000 (Land sell. pr.)
147.
When using the indirect method to compute cash provided by operating activities a. income taxes payable may be ignored. b. amortization expense is added to net income. c. decreases in inventory are subtracted from net income. d. increases in accounts receivable are added to net income.
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
148.
A transaction involving a gain on the sale of equipment affects cash provided (used) by a. financing and investing activities. b. operating and financing activities. c. operating and investing activities. d. operating, financing, and investing activities.
Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
12-30 149.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Minette Company reported net income of $200,000 for the year ended December 31, 2017. During the year, inventories decreased by $40,000, accounts payable decreased by $60,000, depreciation expense was $45,000 and a gain on disposal of equipment of $15,000 was recorded. Net cash provided by operating activities in 2017 using the indirect method was a. $280,000. b. $210,000. c. $245,000. d. $240.000.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $200,000 + $40,000 − $60,000 + $45,000 − $15,000 = $210,000 (Net inc. + inv. dec. - A/P dec.+ dep. exp. - gain on disp.)
150.
All of the following adjustments are added to net income in computing net cash provided by operating activities except a. amortization expense. b. a decrease in accounts receivable. c. an increase in accounts payable. d. an increase in prepaid expenses.
Ans: d, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
151.
All of the following adjustments would be deducted in determining net cash provided by operating activities except a(n) a. increase in inventories. b. depreciation expense. c. gain on disposal of plant assets. d. decrease in accrued expenses payable.
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
152.
Each of the following is an adjustment to convert net income to net cash provided by operating activities except a. adding back noncash expenses. b. adding gains and deducting losses. c. analyzing changes to noncash current asset and current liability accounts. d. All of these answer choices are adjustments.
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
153.
Free cash flow provides an indication of a company’s ability to a. generate cash to invest in capital expenditures. b. generate net income. c. generate cash to pay dividends. d. generate cash to invest in capital expenditures and to pay dividends.
Ans: d, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
.
Statement of Cash Flows
154.
12-31
During 2017, Ecuyer Industries reported cash provided by operations of $794,000, cash used in investing of $686,000, and cash used in financing of $190,000. In addition, cash spent for fixed assets during the period was $276,000. Average current liabilities were $650,000 and average total liabilities were $1,716,000. No dividends were paid. Based on this information, what was Ecuyer's free cash flow? a. ($144,000). b. $108,000. c. $518,000. d. ($604,000).
Ans: c, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $794,000 − $276,000 = $518,000 (Cash from oper. fix. asset pur.)
155.
Authentic Exposure Company had the following transactions that took place during the year: I. Recorded credit sales of $2,500 II. Collected $1,500 from customers III. Recorded sales returns of $500 and credited the customer's account. What is the total effect of these transactions on free cash flow? Cash Flow a. Increase b. Decrease c. No Effect d. Cannot be determined
Ans: a, LO: 3, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
156.
Authentic Exposure Company had the following transactions that took place during the year: I. Paid amount owing to suppliers $2,750. II. Purchased new equipment for $5,000 by signing a long-term note payable. III. Purchased a patent and paid $15,000 cash for the asset. How what is the total effect of these transactions on free cash flow? Cash Flow a. Increase b. Decrease c. No Effect d. Cannot be determined
Ans: b, LO: 3, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
12-32 157.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
All of the following statements about free cash flow are false except a. significant free cash flow indicates less potential to finance new investment. b. free cash flow is most commonly calculated by subtracting capital expenditures from cash provided by operations and then adding cash dividends. c. free cash flow is not reported on the statement of cash flows. d. significant free cash flow indicates less potential to pay additional dividends.
Ans: c, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
*158. Brad Ford Company reports a $48,000 increase in inventory and a $12,000 increase in accounts payable during the year. Cost of goods sold for the year was $285,000. Using the direct method of reporting cash flows from operating activities, cash payments made to suppliers were a. $285,000. b. $321,000. c. $249,000. d. $237,000. Ans: b, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $285,000 + ($48,000 − $12,000) = $321,000 (COGS + inv. inc. - A/P inc.)
*159. The cost of goods sold during the year was $305,000. Inventory decreased by $10,000 during the year and accounts payable decreased by $12,000 during the year. Using the direct method of reporting cash flows from operating activities, cash payments for inventory total a. $317,000. b. $307,000. c. $283,000. d. $327,000. Ans: b, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $305,000 − $10,000 + $12,000 = $307,000 (COGS - inv. dec. + A/P dec.)
*160. Tito Company reports a $20,000 increase in inventory and a $5,000 decrease in accounts payable during the year. Cost of Goods Sold for the year was $282,000. Using the direct method of reporting cash flows from operating activities, cash payments made to suppliers were a. $282,000. b. $262,000. c. $307,000. d. $257,000. Ans: c, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $282,000 + $20,000 + $5,000 = $307,000 (COGS + inv. inc. + A/P dec.)
.
Statement of Cash Flows
12-33
*161. The cost of goods sold during the year was $380,000. Inventory increased by $12,000 during the year and accounts payable decreased by $19,000 during the year. Using the direct method of reporting cash flows from operating activities, cash payments for inventory total a. $399,000. b. $361,000. c. $387,000. d. $411,000. Ans: d, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $380,000 + $12,000 + $19,000 = $411,000 (COGS + inv. inc. + A/P dec.)
*162. Anjili Company had credit sales of $1,600,000. The beginning accounts receivable balance was $165,000 and the ending accounts receivable balance was $280,000. Using the direct method of reporting cash flows from operating activities, what were the cash collections from customers during the period? a. $1,815,000. b. $1,600,000. c. $1,485,000. d. $1,765,000. Ans: c, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,600,000 + ($165,000 − $280,000) = $1,485,000 (Cred. sal. + beg. A/R - end. A/R)
*163. During 2017, Bronze Company had $130,000 in cash sales and $1,020,000 in credit sales. The accounts receivable balances were $180,000 and $212,000 at December 31, 2016 and 2017, respectively. Using the direct method of reporting cash flows from operating activities, what was the total cash collected from all customers during 2017? a. $1,418,000. b. $1,642,000. c. $1,182,000. d. $1,118,000. Ans: d, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ₤1,020,000 + $130,000 + ($180,000 − $212,000) = $1,118,000 (Cred. sal. + beg. A/R - end. A/R)
*164. The following information relates to Layline Company: Prepaid Insurance, December 31, 2016 $302,000 Prepaid Insurance, December 31, 2017 280,000 Insurance expense for 2017 1,600,000 Using the direct method of reporting cash flows from operating activities, what was the amount of cash paid for insurance premiums by Layline during 2017? a. $1,578,000. b. $1,622,000. c. $1,880,000. d. $1,622,000. Ans: a, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,600,000 + ($280,000 − $302,000) = $1,578,000 (Ins. exp. + (end. prep. ins. - beg. prep. ins.))
.
12-34
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
*165. Cash receipts from customers are greater than sales revenues when there is a(n) a. increase in accounts receivable. b. decrease in accounts receivable. c. increase in cost of goods sold. d. decrease in cost of goods sold. Ans: b, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
*166. Colie Company had an increase in inventory of $120,000. The cost of goods sold was $560,000. There was a $30,000 decrease in accounts payable from the prior period. Using the direct method of reporting cash flows from operating activities, what were Colie's cash payments to suppliers? a. $710,000. b. $650,000. c. $440,000. d. $380,000. Ans: a, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $560,000 + $120,000 + $30,000 = $710,000 (COGS + inv. inc. + A/P dec.)
*167. Which of the following items does not appear in the statement of cash flows under the direct method? a. Cash payments to suppliers. b. Cash collections from customers. c. Depreciation Expense. d. Cash from the sale of equipment. Ans: c, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
*168. North Company has other operating expenses of $360,000. There has been a decrease in prepaid expenses of $16,000 during the year, and accrued liabilities are $24,000 larger than in the prior period. Using the direct method of reporting cash flows from operating activities, what were North's cash payments for operating expenses? a. $368,000. b. $352,000. c. $320,000. d. $400,000. Ans: c, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $360,000 − $16,000 − $24,000 = $320,000 (oper. exp. - prep. exp. dec. - acc. liab. inc.)
*169. Westwind Corporation shows income tax expense of $270,000. There has been a $30,000 decrease in federal income taxes payable and a $42,000 increase in state income taxes payable during the year. Using the direct method of reporting cash flows from operating activities, what was Westwind 's cash payment for income taxes? a. $270,000. b. $258,000. c. $198,000. d. $342,000. Ans: b, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $270,000 + ($30,000 − $42,000) = $258,000 (Inc. tax exp. + fed. ITP dec. - st. ITP inc.)
.
Statement of Cash Flows
12-35
*170. Which of the following would not appear in the operating activities section of a statement of cash flows prepared under the direct method? a. Cash receipts from customers. b. Cash paid for income taxes. c. Gain on sale of equipment. d. Cash paid to employees. Ans: c, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
*171. Which of the following statements concerning the statement of cash flows is true? a. The statement of cash flows is usually more accurate when using the indirect method. b. If the direct method is used, a supplementary schedule reconciling the net income to net cash from operating activities must still be provided. c. The statement of cash flows reflects both earnings per share and cash per share. d. The statement of cash flows is an optional financial statement for external reporting purposes. Ans: b, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
*172. Seachest Company reports the following: End of Year Beginning of Year Inventory $25,000 $40,000 Accounts Payable 30,000 10,000 If cost of goods sold for the year is $240,000, the amount of cash paid to suppliers using the direct method is a. $245,000. b. $235,000. c. $205,000. d. $280,000. Ans: c, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $240,000 + ($25,000 − $40,000) − ($30,000 − $10,000) = $205,000 (COGS + (end. inv. - beg. inv.) - (end. A/P - beg. AP)
*173. During the year, Salaries Payable decreased by $12,000. Using the direct method of reporting cash flows from operating activities, if Salaries Expense amounted to $450,000 for the year, the cash paid to employees (including deductions from gross pay) is a. $462,000. b. $438,000. c. $450,000. d. $454,000. Ans: a, LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $450,000 + $12,000 = $462,000 (Salar. exp. + sal. pay. dec.)
.
12-36
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Answers to Multiple Choice Questions 42. b 43. a 44. c 45. a 46. b 47. a 48. b 49. a 50. a 51. c 52. a 53. a 54. a 55. c 56. b 57. d 58. c 59. b 60. d 61. a 62. c
63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83.
d d a a c c d a a c a d a a c b d c b b a
84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104.
c c c d c d c b b a c c c d c b d b b d c
105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125.
.
c d b a a d c c b a d b b c d b c b a d a
126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146.
b a c b b c b c c a b c d c c c c a b a b
147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. *158. *159. *160. *161. *162. *163. *164. *165. *166. *167.
b c b d b b d c a b c b b c d c d a b a c
*168. *169. *170. *171. *172. *173.
c b c b c a
Statement of Cash Flows
12-37
BRIEF EXERCISES Be. 174 Selected transactions of the Carolina Company are listed below. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Common stock is sold for cash above par value. Bonds payable are issued for cash at a discount. Interest on a short-term note receivable is collected. Merchandise is sold to customers for cash. Cash is paid to purchase inventory. Equipment is purchased by signing a 3-year, 10% note payable. Cash dividends on common stock are declared and paid. One hundred shares of Amazon.com common stock are purchased for cash. Land is sold for cash at book value. Bonds payable are converted into common stock.
Instructions Classify each transaction as either (a) an operating activity, (b) an investing activity, (c) a financing activity, or (d) a noncash investing and financing activity. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Easy, Min: 8, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Solution 174 1. 2. 3. 4. 5.
(c) (c) (a) (a) (a)
(8-11 min.) Financing activity Financing activity Operating activity Operating activity Operating activity
6. (d) 7. (c) 8. (b) 9. (b) 10. (d)
.
Noncash actitity Financing activity Investing activity Investing activity Noncash actitity
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
12-38 Be. 175
Selected transactions for the Hamiltion Company are listed below. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Collected accounts receivable. Declared and paid dividends on common stock. Sold long-term investments for cash. Issued stock for equipment. Repaid five year note payable. Paid employee wages. Converted bonds payable to common stock. Acquired long-term investment with cash. Sold buildings and equipment for cash. Sold merchandise to customers.
Instructions Classify each transaction as either (a) an operating activity, (b) an investing activity, (c) a financing activity, or (d) a noncash investing and financing activity. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Easy, Min: 8, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Solution 175 1. 2. 3. 4. 5.
(a) (c) (b) (d) (c)
(8-11 min.) Operating activity Financing activity Investing activity Noncash activity Financing activity
6. (a) 7. (d) 8. (b) 9. (b) 10. (a)
Operating activity Noncash activity Investing activity Investing activity Operating activity
Be. 176 (a) (b)
Identify the alternatives for presenting significant noncash activities in financial statements. Give three examples of significant noncash activities.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 8, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Solution 176
(8-12 min.)
(a)
Significant noncash activities may appear at the bottom of the statement of cash flows as a separate schedule under the heading "Noncash investing and financing activities." They may also be presented in a separate note or supplementary schedule to the financial statements.
(b)
1. 2. 3. 4.
Direct issuance of common stock to purchase assets Conversion of bonds into common stock Direct issuance of debt to purchase assets Exchanges of plant assets
.
Statement of Cash Flows
12-39
Be. 177 Lake Norman Company reported net income of $225,000 for the current year. Depreciation recorded on buildings and equipment amounted to $75,000 for the year. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows: End of Year Beginning of Year Cash $20,000 $15,000 Accounts receivable 22,000 32,000 Inventory 50,000 60,000 Accounts payable 12,000 18,000 Instructions Prepare the cash flows from the operating activities section of the statement of cash flows using the indirect method. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 177
(8-12 min.)
Net income ......................................................................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ................................................................................ Decrease in accounts receivable ............................................................... Decrease in inventory ................................................................................. Decrease in accounts payable ................................................................... Net cash provided by operating activities .................................................. *(Net inc. + dep. exp + dec. in A/R + dec. in inven. − dec. in A/P)
$225,000 75,000 10,000 10,000 (6,000) $314,000*
Be. 178 Assume the indirect method is used to compute cash flows from operations. For each item listed below, indicate the effect on net income in arriving at cash flows from operations by choosing one of the following code letters. Code Add to Net Income A Deduct from Net Income D 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Increase in accounts receivable Increase in inventory Decrease in prepaid expenses Decrease in accounts payable Increase in accrued liabilities Increase in income taxes payable Depreciation expense Loss on sale of investment Gain on disposal of equipment Amortization expense
Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
12-40
Solution 178 1. 2. 3. 4. 5.
D D A D A
(10 min.) 6. 7. 8. 9. 10.
A A A D A
Be. 179 Assuming a statement of cash flows is prepared using the indirect method, indicate the reporting of the transactions and events listed below by major categories on the statement. Use the following code letters to indicate the appropriate category under which the item would appear on the statement of cash flows. Code Cash Flows From Operating Activities Add to Net Income A Deduct from Net Income D Cash Flows From Investing Activities Cash Flows From Financing Activities
IA FA Category
1.
Common stock is issued for cash at an amount above par value
_____
2.
Inventory increased during the period
_____
3.
Depreciation expense recorded for the period
_____
4.
Building was purchased for cash
_____
5.
Bonds payable were acquired and retired at their carrying value
_____
6.
Accounts payable decreased during the period
_____
7.
Prepaid expenses decreased during the period
_____
8.
Treasury stock was acquired for cash
_____
9.
Land is sold for cash at an amount equal to book value
_____
10.
Patent amortization expense recorded for a period
_____
Ans: N/A, LO: 2, Bloom: K, Difficulty: Medium, Min: 8, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
Solution 179
(8-12 min.) Category
1.
Common stock is issued for cash at an amount above par value
FA
2.
Inventory increased during the period
D
3.
Depreciation expense recorded for the period
A
4.
Building was purchased for cash
IA
5.
Bonds payable were acquired and retired at their carrying value
FA
6.
Accounts payable decreased during the period
D
7.
Prepaid expenses decreased during the period
A
8.
Treasury stock was acquired for cash
FA
9.
Land is sold for cash at an amount equal to book value
IA
.
Statement of Cash Flows
10. Patent amortization expense recorded for a period Be. 180
12-41
A
Lacey Company prepared the tabulation below at December 31, 2017. Net Income .................................................
$310,000
Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense, $45,000 ....................................................................
______
Increase in accounts receivable, $55,000 .....................................................
______
Decrease in inventory, $12,000 ....................................................................
______
Increase in accounts payable, $6,000 ..........................................................
______
Increase in prepaid expenses, $4,000 ..........................................................
______
Decrease in income taxes payable, $3,500 ..................................................
______
Gain on disposal of land, $7,500 ..................................................................
______
Net cash provided (used) by operating activities ...........................................
______
Instructions Show how each item should be reported in the statement of cash flows. Use parentheses for deductions. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 180
(8-12 min.)
Net Income ...........................................................................................................
$310,000
Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ................................................................................... 45,000 Increase in accounts receivable ................................................................... (55,000) Decrease in inventory ................................................................................... 12,000 Increase in accounts payable ....................................................................... 6,000 Increase in prepaid expenses ....................................................................... (4,000) Decrease in income taxes payable ............................................................... (3,500) Gain on disposal of land ............................................................................... (7,500) Net cash provided (used) by operating activities .................................. $303,000* *(Net inc. + dep. exp. − A/R inc. + inv. dec. + A/P inc. − prep. exp inc. − ITP dec. − gain on.disp.)
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
*Be. 181 O'Conner Company had total operating expenses of $135,000 in 2017, which included depreciation expense of $22,000. Also during 2017, prepaid expenses increased by $9,000 and accrued expenses decreased by $5,500. Instructions Calculate the amount of cash payments for operating expenses in 2017 using the direct method. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
*Solution 181
(5-8 min.)
Operating expenses .......................................................... Less: Noncash depreciation expense ................................ Add: Increase in prepaid expenses .................................... Add: Decrease in accrued liabilities ................................... Cash payments for operating expenses ............................. *(Oper. exp. − dep. exp. + prep. exp. inc. + acc. liab. dec.)
$135,000 (22,000) 9,000 5,500 $127,500*
*Be. 182 a. Sales = $650,500; Accounts receivable increased by $27,500. Calculate cash receipts from sales. b. Cost of goods sold = $430,000; inventory decreased by $75,000; accounts payable decreased by $28,500. Calculate cash payments for purchases. c. The Income statement shows $12,500 in income taxes. The balance sheet shows an increase in taxes payable of $1,500. Calculate the cash paid for income taxes. d. Operating expenses total $75,750; Depreciation expense = $37,200; Prepaid expenses increased by $15,400; Accrued wages decreased by $10,600. Calculate cash payments for operating expenses. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
*Solution 182
(10 min.)
a. $623,000; $650,500 – $27,500 b. $383,500; $430,000 – $75,000 + $28,500 (COGS − inv. dec. + A/P dec.) c. $11,000; $12,500 – $1,500 d. $64,550; $75,750 – $37,200 + $15,400 + $10,600 (oper. exp. − dep. exp. + prep. exp. inc. + acc. way dec.)
.
Statement of Cash Flows
12-43
*Be. 183 a. Sales = $850,000; Accounts receivable decreased by $40,000. Calculate cash receipts from sales. b. Cost of goods sold = $650,000; inventory increased by $22,000; accounts payable increased by $28,000. Calculate cash payments for purchases. c. Income statement shows $25,500 in income taxes. The balance sheet shows an increase in taxes payable of $3,500. Calculate the cash paid for income taxes. d. Operating expenses total $103,000; Depreciation expense = $14,000; Prepaid expenses decreased by $13,000; Accrued liabilities increased by $6,000. Calculate cash payments for operating expenses. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
*Solution 183
(10 min.)
a. $890,000; $850,000 + $40,000 b. $644,000; $650,000 + $22,000 – $28,000 (COGS + inv. inc. − A/P inc.) c. $22,000; $25,500 – $3,500 d. $70,000; $103,000 – $14,000 – $13,000 - $6,000 (oper. exp. − dep. exp. − prep. exp. dec. − acc. liab. dec.) *Be. 184 The general ledger of the Summer Company provides the following information: End of Year $ 64,000 240,000 42,000
Accounts Receivable Inventory Accounts Payable
Beginning of Year $ 84,000 205,000 62,000
The company's net sales for the year was $2,000,000 and cost of goods sold amounted to $1,700,000. Instructions Compute the following: (a)
Cash receipts from customers
(b)
Cash payments to suppliers
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
12-44
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
*Solution 184
(8-12 min.)
(a)
Cash receipts from customers Sales + Decrease in Accounts Receivable $2,000,000 + $20,000 = $2,020,000
(b)
Cash payments to suppliers First calculate the amount of purchases: Beginning inventory Add: Purchases Less: Ending Inventory Cost of goods sold
$ 205,000 ? ? 240,000 $1,700,000
Purchases = Cost of goods sold + increase in inventory = $1,700,000 + $35,000 = $1,735,000 Amount of cash payments to suppliers: Purchases + Decrease in accounts payable $1,735,000 + $20,000 = $1,755,000 *Be. 185 The income statement of Patterson Inc. for the year ended December 31, 2017, reported the following condensed information: Service revenue Operating expenses Income from operations Income tax expense Net income
$600,000 360,000 240,000 24,000 $216,000
Patterson's balance sheet contained the following comparative data at December 31: 2017 $50,000 37,000 4,000
Accounts receivable Accounts payable Income taxes payable
2016 $60,000 46,000 2,000
Patterson has no depreciable assets. Accounts payable pertains to operating expenses. Instructions Prepare the operating activities section of the statement of cash flows using the direct method. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Statement of Cash Flows
*Solution 185
12-45
(9-14 min.) PATTERSON INC. Statement of Cash Flows For the Year Ending December 31, 2017
Cash flows from operating activities Cash receipts from customers ($600,000 + $10,000) Cash payments: For operating expenses ($360,000 + $9,000) For income taxes ($24,000 - $2,000) Net cash provided by operating activities *(cash rec. − oper. exp. cash pay. − inc. tax cash pay.)
$610,000 $369,000 22,000
391,000 $219,000*
EXERCISES Ex. 186 Annapolis Company reported net income of $365,000 for the current year. Depreciation recorded on buildings and equipment amounted to $73,000 for the year. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows: End of Year $22,000 17,000 55,000 7,500 11,000 600
Cash Accounts receivable Inventory Prepaid insurance Accounts payable Income taxes payable
Beginning of Year $15,000 32,000 65,000 5,000 18,000 1,200
Instructions Prepare the cash flows from the operating activities section of the statement of cash flows using the indirect method. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 186
(10-15 min.)
Net income ......................................................................................................... $365,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ................................................................................ 73,000 Decrease in accounts receivable ............................................................... 15,000 Decrease in inventory ................................................................................ 10,000 Increase in prepaid insurance .................................................................... (2,500) Decrease in accounts payable ................................................................... (7,000) Decrease in income taxes payable ............................................................ (600) Net cash provided by operating activities .................................................. $452,900* *(Net inc. + dep. exp. + A/R dec. + inv. dec. − prep. ins. inc. − A/P dec. − ITP dec.)
.
12-46
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 187 Using the indirect method, calculate the amount of cash flows from operating activities from the following data: Net income Beginning accounts receivable Ending accounts receivable Beginning prepaid insurance Ending prepaid insurance Beginning accounts payable Ending accounts payable Depreciation expense Amortization of intangible asset Dividends declared and paid
$199,000 22,000 29,000 5,000 2,000 15,000 14,000 50,000 6,000 11,000
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 187
(15 min.)
Net income $199,000 – Increase accounts receivable (7,000) + Decrease in prepaid insurance 3,000 – Decrease in accounts payable (1,000) + Depreciation 50,000 + Amortization 6,000 Cash flows from Operating Activities $250,000* *(Net inc. − A/R inc. + prep. ins. dec. − A/P dec. + dep. exp. + qnort. exp.) Ex. 188 Use the following information to perform the calculations below (using the indirect method). Clearly label the amount of each answer as positive or negative and show all your calculations. Net income Depreciation expense Beginning accounts receivable Ending accounts receivable Beginning inventory Ending inventory Beginning prepaid insurance Ending prepaid insurance
$401,000 97,000 420,000 439,000 516,000 550,000 42,000 48,000
Beginning accounts payable Ending accounts payable Purchase of long-term assets Issuance of long-term debt Issuance of stock for cash Issuance of stock for long-term assets Purchase of treasury stock Sale of long-term investment at cost
a. Calculate the amount of cash flows from operating activities.
.
$119,000 146,000 612,000 220,000 180,000 110,000 64,000 56,000
_____________
Statement of Cash Flows
Ex. 188
12-47
(Cont.)
b. Calculate the amount of cash flows from investing activities.
_____________
c. Calculate the amount of cash flows from financing activities.
_____________
d. Calculate the net change in cash.
_____________
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 188
(20 –25 minutes)
a. Cash flows from operating activities Net income Depreciation expense Increase in accounts receivable Increase in inventory Increase in prepaid insurance Increase in accounts payable Cash flows from operating activities *(Net inc. + dep. exp. − A/R inc. inv. inc. − prep. ins. inc + A/P inc.) b. Cash flows used in investing activities Purchase of long-term assets Sale of long-term investments Cash flows used in investing activities
$401,000 97,000 (19,000) (34,000) (6,000) 27,000 $466,000*
$(612,000) 56,000 $(556,000)
c. Cash flows from financing activities Issue of long-term debt Issue of stock for cash Purchase of treasury stock Cash flows from financing activities *(Long term debt iss. + st. iss. − trea. st. pur.)
$220,000 180,000 (64,000) $336,000*
d. Net change in cash Increase from operating activities Decrease from investing activities Increase from financing activities Net increase in cash *(oper. act. inc. − invest. act. doc. + fin. act. inc.)
$466,000 (556,000) 336,000 $246,000*
.
12-48
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 189 The following information is available for Mergenthaler Corporation for the year ended December 31, 2017: Collection of principal on long-term loan to a supplier Acquisition of equipment for cash Proceeds from the sale of long-term investment at book value Issuance of common stock for cash Depreciation expense Redemption of bonds payable at carrying (book) value Payment of cash dividends Net income Purchase of land by issuing bonds payable
$16,000 10,000 22,000 20,000 25,000 34,000 6,000 30,000 40,000
In addition, the following information is available from the comparative balance sheet for Mergenthaler at the end of 2017 and 2016: 2017 2016 Cash $148,000 $91,000 Accounts receivable (net) 25,000 15,000 Prepaid insurance 19,000 13,000 Total current assets $192,000 $119,000 Accounts payable Salaries and wages payable Total current liabilities
$ 30,000 6,000 $ 36,000
$19,000 7,000 $26,000
Instructions Prepare Mergenthaler's statement of cash flows for the year ended December 31, 2017, using the indirect method. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 22, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Statement of Cash Flows
Solution 189
12-49
(22-27 min.) MERGENTHALER CORPORATION Statement of Cash Flows For the Year Ended December 31, 2017
Cash flows from operating activities Net income ................................................................................ Adjustments to reconcile net income to net cash provided by operating activities Depreciation ...................................................................... Increase in accounts receivable ......................................... Increase in prepaid insurance ............................................ Increase in accounts payable ............................................ Decrease in salaries and wages payable ........................... Net cash provided by operating activities ........................... Cash flows from investing activities Collection of long-term loan ........................................................ Proceeds from the sale of investments ....................................... Purchase of equipment ............................................................... Net cash provided by investing activities ............................ Cash flows from financing activities Issuance of common stock ......................................................... Redemption of bonds ................................................................. Payment of dividends ................................................................. Net cash used by financing activities ................................. Increase in cash ................................................................................ Cash at beginning of period ................................................................ Cash at end of period ..........................................................................
$30,000
$25,000 (10,000) (6,000) 11,000 (1,000)
16,000 22,000 (10,000) 28,000 20,000 (34,000) (6,000)
Noncash investing and financing activities Purchase of land by issuing bonds ............................................. *(Net inc. + dep. exp. − A/R inc. − prep. ins. inc. + A/P inc. − sal./was. pay. dec.) **(Com. st. iss. − bond redemp. − div. pay.)
.
19,000 49,000*
(20,000)** 57,000 91,000 $148,000
$40,000
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
12-50 Ex. 190
Draper Company prepared the tabulation below at December 31, 2017. Net Income ............................................................
$323,000
Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense, $27,000 ...................................................................
_______
Increase in accounts receivable, $75,000 ....................................................
_______
Decrease in inventory, $18,000 ...................................................................
_______
Amortization of patent, $4,000 .....................................................................
_______
Increase in accounts payable, $7,500 ..........................................................
_______
Decrease in interest receivable, $4,000 .......................................................
_______
Increase in prepaid insurance, $7,000 .........................................................
_______
Decrease in income taxes payable, $2,500 ..................................................
_______
Gain on disposal of plant assets, $11,000 ....................................................
_______
Net cash provided (used) by operating activities ..........................................
_______
Instructions Show how each item should be reported in the statement of cash flows. Use parentheses for deductions. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 190
(10-14 min.)
Net Income ...........................................................................................................
$323,000
Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .................................................................................. 27,000 Increase in accounts receivable ................................................................... (75,000) Decrease in inventory .................................................................................. 18,000 Amortization of patent .................................................................................. 4,000 Increase in accounts payable ....................................................................... 7,500 Decrease in interest receivable .................................................................... 4,000 Increase in prepaid insurance ...................................................................... (7,000) Decrease in income taxes payable .............................................................. (2,500) Gain on disposal of plant assets .................................................................. (11,000) Net cash provided (used) by operating activities ................................. $288,000* *(Net inc. + dep. exp. + int. pay. inc. + inv. dec. − prep. ins. inc. A/P dec. − A/R inc.)
.
Statement of Cash Flows
12-51
Ex. 191 The current sections of Magic Marine Inc.'s balance sheets at December 31, 2016 and 2017, are presented here. Magic Marine 's net income for 2017 was $216,000. Depreciation expense was $34,000. 2017
2016
Current assets Cash Accounts receivable Inventory Prepaid insurance Total current assets
$106,000 91,000 168,000 28,000 $393,000
$ 99,000 89,000 173,000 22,000 $383,000
Current liabilities Interest payable Accounts payable Total current liabilities
$ 13,000 85,000 $ 98,000
$
5,000 92,000 $ 97,000
Instructions Prepare the net cash provided by operating activities section of the company's statement of cash flows for the year ended December 31, 2017, using the indirect method. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 191
(5 min.) Magic Marine INC. Partial Statement of Cash Flows For the Year Ended December 31, 2017
Cash flows from operating activities Net income ................................................................................. $216,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ........................................................ $34,000 Increase in Interest payable ................................................ 8,000 Decrease in inventory ........................................................ 5,000 Increase in prepaid insurance ............................................ (6,000) Decrease in accounts payable ........................................... (7,000) Increase in accounts receivable ......................................... (2,000) 32,000 Net cash provided by operating activities ......................................................... $248,000* *(Net inc. + dep. exp. + int. pay. inc. + inv. dec. - prep. ins. inc. - A/P dec. - A/R inc.)
.
12-52
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 192 The following information is available for Chenard Corporation for the year ended December 31, 2017. Beginning cash balance Accounts payable decrease Depreciation expense Accounts receivable increase Inventory increase Net income Cash received for sale of land at book value Sales revenue Cash dividends paid Income tax payable increase Cash used to purchase building Cash used to purchase treasury stock Cash received from issuing bonds
$ 35,000 3,200 76,000 8,200 13,000 269,100 35,000 747,000 12,000 4,700 144,000 32,000 206,000
Instructions Prepare a statement of cash flows using the indirect method. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 192
(8 min.)
CHENARD CORPORATION Statement of Cash Flows—Indirect Method For the Year Ended December 31, 2017 ___________________________________________________________________________ Cash flows from operating activities $269,100 Net income ................................................................................ Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense ......................................................... $76,000 4,700 Increase in income tax payable .......................................... Decrease in accounts payable ........................................... (3,200) Increase in accounts receivable ......................................... (8,200) Increase in inventory .......................................................... (13,000) 56,300 Net cash provided by operating activities ........................ 325,400* Cash flows from investing activities Sale of land ................................................................................ Purchase of building ................................................................... Net cash used by investing activities ..................................
35,000 (144,000)
Cash flows from financing activities Issuance of bonds ....................................................................... Payment of dividend ................................................................... Purchase of treasury stock .......................................................... Net cash provided by financing activities ............................
206,000 (12,000) (32,000)
Net Increase in cash ............................................................................ Cash at beginning of period ................................................................. Cash at end of period .......................................................................... *(Net inc. + dep. exp. + ITP inc. − A/P dec. − A/R inc. − inv. inc.) .
(109,000)
162,000 378,400 35,000 $413,400
Statement of Cash Flows
12-53
Ex. 193 The three accounts shown below appear in the general ledger of Hale Corp. during 2017 Equipment Date Jan. 1 July 31 Sept. 2 Nov. 10 Date Jan. 1 Nov. 10 Dec. 31 Date Jan. 1 Aug. 23 Dec. 31
Debit Balance Purchase of equipment 70,000 Cost of equipment constructed 53,000 Cost of equipment sold Accumulated Depreciation—Equipment Debit Balance Accumulated depreciation on equipment sold 30,000 Depreciation for year Retained Earnings Debit Balance Dividends (cash) 19,000 Net income
Credit
59,000 Credit
23,000 Credit
54,000
Balance 160,000 230,000 283,000 224,000 Balance 71,000 41,000 64,000 Balance 105,000 86,000 143,000
Instructions From the postings in the accounts, indicate how the information is reported on a statement of cash flows using the indirect method. The loss on sale equipment was $7,000. Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 193
(10 min.)
HALE CORP Partial Statement of Cash Flows For the Year Ended December 31, 2017 ___________________________________________________________________________ Cash flows from operating activities Net income ................................................................................ $54,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense ......................................................... $23,000 Loss on disposal of plant assets ........................................ 7,000 30,000 Net cash provided by operating activities .......................................................................... 84,000 Cash flows from investing activities Sale of equipment ...................................................................... Purchase of equipment ............................................................... Construction of equipment .......................................................... Net cash used by investing activities .................................. Cash flows from financing activities Payment of cash dividends ......................................................... a (sale of equip. − equip purch. − equip. const.)
.
22,000* (70,000) (53,000) (101,000)a (19,000)
12-54
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 193
(Cont.)
*Cost of equipment sold ................................................................ Accumulated depreciation ........................................................... Book value ................................................................................ Loss on disposal of plant assets ................................................. Cash proceeds ............................................................................ ((Equip. cost - acc. dep.) − Loss on disp.)
$59,000 (30,000) 29,000 (7,000) $22,000
Ex. 194 The comparative balance sheets for Russell Company appear below: RUSSELL COMPANY Comparative Balance Sheet Dec. 31, 2017
Dec. 31, 2016
Cash Accounts receivable Inventory Prepaid insurance
$ 38,000 18,000 25,000 7,000
$13,000 14,000 15,000 9,000
Stock investments Equipment Accumulated depreciation—equipment Total assets
-060,000 (18,000) $130,000
18,000 30,000 (14,000) $85,000
Assets
Liabilities and Stockholders' Equity Accounts payable Bonds payable Common stock Retained earnings Total liabilities and stockholders' equity
$ 25,000 37,000 40,000 28,000 $130,000
$ 7,000 45,000 23,000 10,000 $85,000
Additional information: 1. Net income for the year ending December 31, 2017, was $30,000. 2. Cash dividends of $12,000 were declared and paid during the year. 3. Stock investments that had a book value of $18,000 were sold for $13,000. 4. Sales for 2017 are $130,000. Instructions Prepare a statement of cash flows for the year ended December 31, 2017, using the indirect method. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
Statement of Cash Flows
Solution 194
12-55
(25-30 min.) RUSSELL COMPANY Statement of Cash Flows For the Year Ended December 31, 2017
Cash flows from operating activities Net income ................................................................................. Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ........................................................ $ 4,000 Loss on sale of stock investments ...................................... 5,000 Increase in accounts receivable ......................................... (4,000) Decrease in prepaid insurance .......................................... 2,000 Increase in inventory .......................................................... (10,000) Increase in accounts payable ............................................ 18,000 Net cash provided by operating activities ........................... Cash flows from investing activities Sale of stock investments ............................................................ 13,000 Purchase of equipment ............................................................... (30,000) Net cash used by investing activities .................................. Cash flows from financing activities Issuance of common stock ......................................................... 17,000 Retirement of bonds payable ...................................................... (8,000) Payment of cash dividends ......................................................... (12,000) Net cash used by financing activities ................................. Net increase in cash ............................................................................ Cash at beginning of period ................................................................ Cash at end of period .......................................................................... *(Net inc. + dep. exp. + loss on sale − A/R inc. + prep. ins. dec. − inv. inc. + A/P inc.) **(Com st. iss. − bond ret. − div. pay.)
$30,000
15,000 45,000*
(17,000)
(3,000)** 25,000 13,000 $38,000
Ex. 195 A comparative balance sheet for the Beneteau Corporation is presented below: BENETEAU CORPORATION Comparative Balance Sheet 2017
2016
$ 37,000 80,000 22,000 18,000 70,000 (20,000) $207,000
$ 31,000 60,000 17,000 40,000 60,000 (13,000) $195,000
Assets Cash Accounts receivable (net) Prepaid insurance Land Equipment Accumulated depreciation Total Assets
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 195
(Cont.)
Liabilities and Stockholders' Equity Accounts payable $ 12,000 Bonds payable 27,000 Common stock 140,000 Retained earnings 28,000 Total liabilities and stockholders' equity $207,000
$ 6,000 19,000 115,000 55,000 $195,000
Additional information: 1. Net loss for 2017 is $12,000. Net sales for 2017 are $250,000. 2. Cash dividends of $15,000 were declared and paid in 2017. 3. Land was sold for cash at a loss of $2,000. This was the only land transaction during the year. 4. Equipment with a cost of $15,000 and accumulated depreciation of $10,000 was sold for $5,000 cash. 5. $12,000 of bonds were retired during the year at carrying (book) value. 6. Equipment was acquired for common stock. The fair value of the stock at the time of the exchange was $25,000. Instructions Prepare a statement of cash flows for the year ended 2017 using the indirect method. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 22, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 195
(22-27 min.)
1.
BENETEAU CORPORATION Statement of Cash Flows For the Year Ended December 31, 2017 ___________________________________________________________________________ Cash flows from operating activities Net loss ................................................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense (a) .................................................... Loss on disposal of plant assets.......................................... Increase in accounts receivable ......................................... Increase in prepaid insurance ............................................ Increase in accounts payable ............................................. Net cash used by operating activities ................................. Cash flows from investing activities Proceeds from the sale of land (b) ............................................... Proceeds from the sale of equipment .......................................... Net cash provided by investing activities .............................
.
$(12,000)
$17,000 2,000 (20,000) (5,000) 6,000
0 (12,000)*
20,000 5,000 25,000
Statement of Cash Flows
Solution 195
12-57
(Cont.)
Cash flows from financing activities Retirement of bonds payable ...................................................... Issuance of bonds payable (c) ..................................................... Payment of dividends ................................................................. Net cash used by financing activities ................................. Increase in cash .................................................................................. Cash at beginning of period ................................................................ Cash at end of period ..........................................................................
(12,000) 20,000 (15,000)
Noncash investing and financing activities Purchase of equipment through issuance of common stock ....... *(Net inc. + dep. exp. + loss on disp. − A/R inc. − prep. ins. inc. + A/P inc.) **(Bond ret.) + bonds iss. − div. pay.) (a)
Accumulated Depreciation 12/31/16 Accumulated Depreciation 12/31/17 Difference Add: Accumulated depreciation on equipment sold Depreciation expense
$13,000 20,000 7,000 10,000 17,000
(b)
Cost of land sold Less: Loss on disposal of land Proceeds from sale of land
22,000 (2,000) $20,000
(c)
Bonds Payable 12/31/16 Retirement of bonds Difference Add: Bonds issued Bonds Payable 12/31/17
$19,000 (12,000) 7,000 20,000 27,000
(7,000)** 6,000 31,000 $37,000
$25,000
Ex. 196 Information for two companies in the same industry, Tucker Corporation and Wiggins Corporation, is presented here.
Cash provided by operating activities Net earnings Capital expenditures Dividends paid
Tucker Corporation $140,000
Wiggins Corporation $140,000
200,000 60,000 5,000
200,000 90,000 10,000
Instructions Compute the free cash flow for each company. Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Business Economics
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 196
(8 min.)
Free cash flow
Tucker Corporation
Wiggins Corporation
$140,000 – $60,000 – $5,000 = $75,000
$140,000 – $90,000 – $10,000 = $40,000
*Ex. 197 Condensed financial data of Gorni Company appear below: GORNI COMPANY Comparative Balance Sheet December 31 2017
2016
$ 70,000 82,000 120,000 19,000 80,000 310,000 (65,000) $616,000
$ 35,000 53,000 132,000 25,000 65,000 250,000 (60,000) $500,000
$ 85,000 22,000 130,000 245,000 134,000 $616,000
$ 75,000 24,000 150,000 170,000 81,000 $500,000
Assets Cash Accounts receivable Inventories Prepaid expenses Investments Plant assets Accumulated depreciation Total Liabilities and Stockholders' Equity Accounts payable Accrued expenses payable Bonds payable Common stock Retained earnings Total
GORNI COMPANY Income Statement For the Year Ended December 31, 2017 Sales Less: Cost of goods sold Operating expenses (excluding depreciation) Depreciation expense Income taxes Interest expense Loss on disposal of plant assets Net income
$480,000 $290,000 60,000 17,000 15,000 13,000 8,000
403,000 $ 77,000
Additional information: 1. New plant assets costing $85,000 were purchased for cash in 2017. 2. Old plant assets costing $25,000 were sold for $5,000 cash when book value was $13,000. 3. Bonds with a face value of $20,000 were converted into $20,000 of common stock. 4. A cash dividend of $24,000 was declared and paid during the year. 5. Accounts payable pertain to merchandise purchases. Instructions Prepare a statement of cash flows for the year using the direct method. .
Statement of Cash Flows
12-59
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 197 1.
(25-30 min.) GORNI COMPANY Statement of Cash Flows For the Year Ended December 31, 2017
Cash flows from operating activities Cash receipts from customers ($480,000 - $29,000) Cash payments: To suppliers For operating expenses For income taxes For interest Net cash provided by operating activities Cash flows from investing activities Purchase of investments Purchase of plant assets Sale of plant assets Net cash used by investing activities Cash flows from financing activities Issuance of common stock Payment of cash dividends Net cash provided by financing activities Net increase in cash Cash at beginning of period Cash at end of period
$451,000 $268,000 56,000 15,000 13,000
(95,000)** 55,000 (24,000) 31,000 35,000 35,000 $ 70,000
Cost of goods sold Deduct: Decrease in inventory Purchases Deduct: Increase in accounts payable Cash payments to suppliers **((Interest. pur.) – pl. asset pur. + pl. asset sale)
$290,000 (12,000) 278,000 (10,000) $268,000
(b)
$60,000 (6,000) 2,000 $56,000
Operating expenses Deduct: Decrease in prepaid expenses Add: Decrease in accrued expenses payable Cash payments for operating expenses
.
352,000 99,000*
(15,000) (85,000) 5,000
Noncash investing and financing activities Conversion of bonds payable into common stock *(Cash rec. − sup. cash pay. − oper. exp. pay. − inc. tax. pay. − int. pay.) **(Invest. pur.) - pl. asset pur. + pl. asset sale) (a)
(a) (b)
$ 20,000
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
*Ex. 198 The income statement of Gise Company is shown below: GISE COMPANY Income Statement For the Year Ended December 31, 2017 Sales Cost of goods sold Gross profit Operating expenses Selling and administrative expenses Depreciation expense Amortization expense Net income
$8,500,000 5,300,000 3,200,000 $1,210,000 70,000 30,000
1,310,000 $1,890,000
Additional information: 1. Accounts receivable increased $600,000 during the year. 2. Inventory increased $250,000 during the year. 3. Prepaid expenses increased $150,000 during the year. 4. Accounts payable to merchandise suppliers increased $125,000 during the year. 5. Accrued expenses payable increased $180,000 during the year. Instructions Prepare the operating activities section of the statement of cash flows for the year ended December 31, 2017, for Gise Company, using the direct method. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 198
(15-20 min.) GISE COMPANY Statement of Cash Flows For the Year Ended December 31, 2017
Cash flows from operating activities Cash receipts from customers (1) Cash payments: To suppliers (2) For operating expenses (3) Net cash provided by operations (1)
Sales Deduct: Increase in accounts receivable Cash receipts from customers
(2)
Cost of goods sold Add: Increase in inventory Purchases Deduct: Increase in accounts payable Cash payments to suppliers *(COGS + inv. inc. − A/P inc.) .
$7,900,000 $5,425,000 1,180,000 $8,500,000 600,000 $7,900,000 $5,300,000 250,000 5,550,000 125,000 $5,425,000*
6,605,000 $1,295,000
Statement of Cash Flows
Solution 198 (3)
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(Cont.)
Operating expenses exclusive of depreciation and amortization Add: Increase in prepaid expenses Deduct: Increase in accrued expenses payable Cash payments for operating expenses **(Oper. exp. + prep. exp. inc. + acc. exp. pay. inc.)
$1,210,000 150,000 180,000 $1,180,000**
*Ex. 199 The financial statements of Appalachian Mountain Company appear below: APPALACHIAN MOUNTAIN COMPANY Comparative Balance Sheet December 31 2017
2016
$ 47,000 21,000 22,000 50,000 (20,000) $120,000
$ 25,000 34,000 15,000 78,000 (24,000) $128,000
$ 12,000 13,000 10,000 41,000 44,000 $120,000
$ 31,000 10,000 25,000 24,000 38,000 $128,000
Assets Cash Accounts receivable Inventory Property, plant, and equipment Accumulated depreciation Total Liabilities and Stockholders' Equity Accounts payable Income taxes payable Bonds payable Common stock Retained earnings Total
APPALACHIAN MOUNTAIN COMPANY Income Statement For the Year Ended December 31, 2017 Sales Cost of goods sold Gross profit Selling expenses Administrative expenses Income from operations Interest expense Income before income taxes Income tax expense Net income
$350,000 280,000 70,000 $20,000 16,000
.
36,000 34,000 4,000 30,000 8,000 $ 22,000
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
*Ex. 199
(Cont.)
The following additional data were provided: 1. Dividends declared and paid were $16,000. 2. During the year equipment was sold for $12,000 cash. This equipment cost $28,000 originally and had a book value of $12,000 at the time of sale. 3. All depreciation expense is in the selling expense category. 4. All sales and purchases are on account. 5. Accounts payable pertain to merchandise suppliers. 6. All operating expenses except for depreciation were paid in cash. Instructions Prepare a statement of cash flows for Appalachian Mountain Company using the direct method. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 22, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
*Solution 199
(22-28 min.) APPALACHIAN MOUNTAIN COMPANY Statement of Cash Flows For the Year Ended December 31, 2017
Cash flows from operating activities Cash receipts from customers ($350,000 + $13,000) Cash payments: To suppliers For operating expenses For interest expense For income taxes ($8,000 – $3,000) Net cash provided by operating activities Cash flows from investing activities Sale of equipment Cash flows from investing activities Redemption of bonds payable Issuance of common stock Payment of cash dividend Net cash used by financing activities Net increase in cash Cash at beginning of period Cash at end of period a ((Bond redemp.) + com. st. iss. − div. pay.) (a)
Cost of goods sold Add: Increase in inventory Purchases Add: Decrease in accounts payable Cash payments to suppliers *(COGS + inv. inc. + A/P dec.)
(b)
Operating expenses Less: Depreciation expense Cash payments for operating expenses
$363,000 $306,000 (a) 24,000 (b) 4,000 5,000
12,000 (15,000) 17,000 (16,000) (14,000)a 22,000 25,000 $ 47,000 $280,000 7,000 287,000 19,000 $306,000* $36,000 (12,000)* $24,000
*$24,000 - $16,000 = $8,000 balance in accumulated depreciation after sale. Ending balance, $20,000 - $8,000 = $12,000 depreciation expense. .
339,000 24,000
Statement of Cash Flows
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*Ex. 200 Wave Rider Company completed its first year of operations on December 31, 2017. Its initial income statement showed that Wave Rider had revenues of $207,000 and operating expenses of $108,000. Accounts receivable and accounts payable at year-end were $80,000 and $28,000, respectively. Assume that accounts payable related to operating expenses. Ignore income taxes. Instructions Compute net cash provided by operating activities using the direct method. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
*Solution 200
(8 min.)
Revenues.................................................................... Deduct: Increase in accounts receivable ..................... Cash receipts from customers* .............................. Operating expenses .................................................... Deduct: Increase in accounts payable......................... Cash payments for operating expenses** .............. Net cash provided by operating activities .................... a (Rev. − A/R inc.) b (oper. exp. − A/P inc.) *
$207,000 (80,000) $127,000a 108,000 (28,000) 80,000b $ 47,000
Accounts Receivable 0 207,000 Cash receipts for year 80,000
Balance, Beginning of year Revenues for the year Balance, End of year **
Accounts Payable Balance, Beginning of year 80,000 Operating expenses for year Balance, End of year
Payments for the year
127,000
0 108,000 28,000
*Ex. 201 The income statement for McDonald's Corporation shows cost of goods sold $6,175.6 million and operating expenses (including depreciation expense of $1,214.1 million) $18,907.6 million. The comparative balance sheet for the year shows that inventory increased $12.9 million, prepaid expenses increased $102.9 million, accounts payable (merchandise suppliers) decreased $44.6 million, and accrued expenses payable increased $162.4 million. Instructions Using the direct method, compute (a) cash payments to suppliers and (b) cash payments for operating expenses. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
*Solution 201 (a)
(b)
(8 min.)
Cash payments to suppliers Cost of goods sold ............................... Add: Increase in inventory .................... Cost of purchase .................................. Add: Decrease in accounts payable ................................................ Cash payments to suppliers ................. *(COGS + inv. inc. + A/P dec.)
$6,175.6 million 12.9 $6,188.5 million 44.6 $6,233.1* million
Cash payments for operating expenses Operating expenses exclusive of depreciation ($18,907.6 – $1,214.1) ..................... $17,693.5 million Add: Increase in prepaid expenses ..................................... $102.9 Deduct: Increase in accrued expenses payable ........................... (162.4) (59.5) Cash payments for operating expenses ........................................ $17,634.0* million *(oper. exp. - dep. + prep. exp. inc. − acc. exp. pay. inc.)
COMPLETION STATEMENTS 202. A statement of cash flows summarizes the operating, ____________, and ___________ activities of an entity. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
203. The cash effects of selling goods and services appears in the ______________ activities section of a statement of cash flows. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
204. Net cash provided/used by operating activities can be determined using the ____________ method or the ______________ method. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
205. During the _______________, cash from operations and net income are approximately the same. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
206. During the growth phase, a company will start to generate small amounts of cash _______________. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
.
Statement of Cash Flows
12-65
207. Using the indirect approach, noncash charges in the income statement are ___________ to net income and noncash credits are ______________ to compute cash provided by operations. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
208. If accounts receivable increase during a period, revenues on an accrual basis are ______________ than revenues on a cash basis. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
209. The sale of equipment at less than its book value is a(an) ______________ of cash that is reported in the ______________ activities section. Ans: N/A, LO: 2,4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
210. During the _________________ phase, net cash provided by operating activities and net income are approximately the same. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
211. ______________ describes the net cash provided by operating activities after adjustment for capital expenditures and dividends. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
*212. Cost of goods sold for the year amounted to $100,000, and during the year, inventory ______________ by $7,000 and accounts payable ______________ by $3,000 resulting in cash paid to suppliers of $90,000. Ans: N/A, LO: 4, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
*213. In computing cash payments for operating expenses, a decrease in prepaid expenses is ______________ and an increase in accrued expenses payable is ______________ to (from) operating expenses, exclusive of depreciation. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
*214. In computing cash payments for income taxes, a decrease in income taxes payable is ______________ to (from) income tax expense. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
*215. Under the direct method, the two largest classes of items in the operating activities section for a merchandising company are cash ________________________ and cash _________________________. Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Answers to Completion Statements 202. investing, financing (or vice versa) 203. operating 204. indirect, direct (or vice versa) 205. maturity phase 206. from operations 207. added, deducted 208. higher (greater) 209. inflow, investing
.
210. maturity 211. free cash flow *212. decreased, increased *213. deducted, deducted *214. added *215. receipts from customers, payments to suppliers (or vice versa)
Statement of Cash Flows
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MATCHING
Set 1 — Indirect Method 216. For each of the following items, indicate by using the appropriate code letter, how the item should be reported in the statement of cash flows, using the indirect method. A. B. C. D. E. F. G.
Added to net income Deducted from net income Cash outflow—investing activity Cash inflow—investing activity Cash outflow—financing activity Cash inflow—financing activity Significant noncash investing and financing activity
____
1. Decrease in accounts payable during a period
____
2. Declaration and payment of a cash dividend.
____
3. Loss on disposal of land.
____
4. Decrease in accounts receivable during a period.
____
5. Redemption of bonds for cash.
____
6. Proceeds from sale of equipment at book value.
____
7. Issuance of common stock for cash.
____
8. Purchase of a building for cash.
____
9. Acquisition of land in exchange for common stock.
____ 10. Increase in inventory during a period. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
Answers to Matching 1. 2. 3. 4. 5.
B E A A E
6. 7. 8. 9. 10.
D F C G B
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
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Set 2 — Direct Method *217. For each of the following items, indicate by using the appropriate code letter, how the item should be reported in the statement of cash flows, using the direct method. A. B. C. D. E. F. G. H. I. J.
Added in determining cash receipts from customers Deducted in determining cash receipts from customers Added in determining cash payments to suppliers Deducted in determining cash payments to suppliers Cash outflow—investing activity Cash inflow—investing activity Cash outflow—financing activity Cash inflow—financing activity Significant noncash investing and financing activity Is not shown
____ 1. Decrease in accounts payable during a period. ____ 2. Declaration and payment of a cash dividend. ____ 3. Decrease in accounts receivable during a period. ____ 4. Depreciation expense. ____ 5. Conversion of bonds payable into common stock. ____ 6. Decrease in inventory during a period. ____ 7. Sale of equipment for cash at book value. ____ 8. Issuance of preferred stock for cash. ____ 9. Purchase of land for cash. ____ 10. Loss on sale of a plant asset. Ans: N/A, LO: 4, Bloom: AP, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Answers to Matching 1. 2. 3. 4. 5.
C G A J I
6. 7. 8. 9. 10.
D F H E J
.
Statement of Cash Flows
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SHORT-ANSWER ESSAY QUESTIONS S-A E 218 Why is the statement of cash flows useful? Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 218 The statement of cash flows is useful because it provides information to the investors, creditors, and other users about: (1) the company's ability to generate future cash flows, (2) the company's ability to pay dividends and meet obligations, (3) the reasons for the difference between net income and net cash provided by operating activities, and (4) the cash and noncash financing and investing transactions during the period. S-A E 219 Distinguish among the three activities reported in the statement of cash flows. Ans: N/A, LO: 1, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 219 The three activities are: Operating activities include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income. Investing activities include: (a) purchasing and disposing of investments and productive longlived assets and (b) lending money and collecting loans. Financing activities include: (a) obtaining cash from issuing debt and repaying amounts borrowed and (b) obtaining cash from stockholders, repurchasing shares, and paying them dividends. S-A E 220 (a) What are the phases of the corporate life cycle? (b) What effect does each phase have on the numbers reported in a statement of cash flows? Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Communications, IMA: Business Economics
Solution 220 (a)
The phases of the corporate life cycle are the introductory phase, growth phase, maturity phase, and decline phase.
(b)
During the introductory phase, cash from operations and investing would be expected to be negative, and cash from financing would be positive. During the growth phase, a company would be expected to show some small amounts of cash from operations while continuing to show negative cash from investing and positive cash from financing. During the maturity phase, cash from operations, investing, and financing would all be expected to be positive while in the decline phase, cash from operations and investing would continue to be positive while cash from financing would be negative.
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
S-A E 221 The statement of cash flows is the only required financial statement that is not prepared from an adjusted trial balance. What are the sources of information for preparing a statement of cash flows? Explain how the accrual basis of accounting affects the statement of cash flows. Ans: N/A, LO: 2,3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 221 The information used to prepare the statement of cash flows usually comes from three sources. These sources are (1) a comparative balance sheet, (2) current income statement, and (3) additional information. The accrual basis of accounting requires that revenues be recorded when earned and that expenses be recorded when incurred. Thus, net income may include earned revenues for which cash has not yet been collected and include incurred expenses which have not yet been paid for in cash. These noncash revenues and noncash expenses do not affect the cash balance. Therefore, the noncash revenues and noncash expenses must be eliminated to determine the net cash provided by operating activities. S-A E 222 When preparing a statement of cash flows using the indirect method, why is depreciation added back to net income within the operating activities section when using the indirect method? Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 222 The indirect method begins with net income based on accrual accounting. This includes a legitimate deduction for depreciation expense. However, depreciation expense does not represent a cash outflow and thus must be added back to net income to cancel the deduction. *S-A E 223 Cash flows from operating activities can be calculated using the indirect or direct method. Briefly describe how the two methods differ yet arrive at the same dollar amount for net cash provided by operating activities. Ans: N/A, LO: 2,4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
*Solution 223 The indirect method (or reconciliation method) starts with net income and converts it to the net cash provided by operating activities. There are two types of adjustments: (1) changes in current assets and current liabilities and (2) noncash charges and credits. For example, an increase in accounts receivable is deducted from net income and an increase in accounts payable is added to net income. Similarly, a noncash charge for depreciation expense is added to net income. The adjustments are the difference between net income and the net cash provided by operating activities. Under the direct method, net cash provided by operating activities is computed by adjusting each item in the income statement from the accrual to the cash basis. Within the operating activities section, only major classes of operating cash receipts and cash payments are reported. The classes include cash receipts from customers and cash payments to suppliers. The difference between these major classes is the net cash provided by operating activities. .
Statement of Cash Flows
*Solution 223
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(Cont.)
The same adjustments are used in both methods, regardless of whether net income is adjusted or individual revenues and expenses are adjusted. Therefore, both methods arrive at the same result. S-A E 224 How is it possible for a company to suffer a net loss for a given year, yet produce a positive net cash flow from operating activities? Ans: N/A, LO: 2,4, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 224 A net loss means that accrual-based expenses exceeded accrual-based revenues for the period. However, if you eliminate the effect of (add back) such noncash expenses as depreciation and amortization, it is possible to have produced a positive net cash flow from operations. Increasing payables (not paying all expenses incurred this period) and decreasing receivables (collecting more receivables than sales) this period would also cause cash flow to be higher than related net income or loss. *S-A E 225 When preparing a statement of cash flows using the direct method, why must the sales revenue figure be adjusted to arrive at cash receipts from sales? Ans: N/A, LO: 4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
*Solution 225 Sales revenue is an accrual-based figure that includes both cash and credit sales for the period. The statement of cash flows is to report the cash collections for the period, whether or not the sale arose in that period or whether the credit sale had yet to be collected. An adjustment based on the change in accounts receivable accomplishes this conversion. S-A E 226
(Ethics)
Mooresville Hills Trading Company's most recent financial statements showed dismal performance. There was a net loss of $10,000 and the statement of cash flows showed a net cash decrease in all categories. The company president called all the managers together and asked them to do all they could to make sure the next quarter's performance was better. Mindy Ross, manager of the manufacturing division, sold off old manufacturing equipment. He also reclassified several workers to part-time (30 hours per week) and hired additional temporary workers to take up the slack. This saved the company money, since part-time workers do not have the same insurance and other benefits as full-time workers. William Bowden, financial manager, immediately suspended payments on all accounts except those on which interest would accrue. He also instituted aggressive collection procedures. Required: 1. Were Mindy Ross's actions ethical? Explain. 2. Were William Bowden's actions ethical? Explain. 3. Were the company president's actions ethical? Explain. Ans: N/A, LO: 2,4, Bloom: E, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: Communications, IMA: Decision Analysis
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 226 1. There is a valid question as to whether Mindy Ross's actions are ethical or not. Either answer could be considered correct. On the one hand, she was probably within her legal rights to reclassify the workers. She also might be commended for allowing more workers to have a job than was previously the case. On the other hand, she has removed a very real benefit from the former full-time workers, and she has done it fairly arbitrarily. She may have harmed morale, and harmed the company if the workers quit and new workers have to be hired. 2. William Bowden's actions all appear to be ethical. 3. The company president may have placed undue pressure on the employees to show better results. The managers may feel that they need to sacrifice the long-term goals of the firm for short-term benefits. S-A E 227
(Communication)
You are the accountant for a small manufacturing firm. Your company is privately held, so there is no current requirement to issue financial statements using GAAP. You were hired four years ago, and at that time you instituted a cash budgeting system. Presently, you prepare a schedule of predicted cash sources and cash needs at the end of each week for the following week. Isabelle Alix, the company's president, has asked whether a statement of cash flows would also be useful. Required: Prepare a short memorandum to the president indicating whether you believe such an addition to the financial statements to be useful. Include in your memo the benefits that might be expected from a statement of cash flows and whether those are different from the benefits of a cash sources and cash needs listing. Ans: N/A, LO: 1, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 227 TO:
Isabelle Alix
FROM: Martha King RE:
Statement of Cash Flows vs. Cash Sources and Needs
You asked whether a statement of cash flows would be useful, in addition to the cash sources and needs schedule. In my opinion, the statement of cash flows would be extremely useful. It gives different information than the cash sources and needs does. A statement of cash flows would provide historical information about where we got the funds for operating, financing, and investing activities, as well as how we used the funds. It is a summary of our performance. The cash sources and needs statement, on the other hand, is a prediction of the cash we will need and the source from which it will be obtained. One is our plan, the other is our result. Please let me know if you'd like more details about the statement of cash flows. (signed)
.
Statement of Cash Flows
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IFRS QUESTIONS 1. Under IFRS, the cash flow statement can be prepared using a. the direct method only. b. the indirect method only. c. either the direct or indirect method. d. the T-account method only. Ans: c, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
2. Under IFRS, bank overdrafts are classified as a. operating activities. b. investing activities. c. financing activities. d. cash and cash equivalents. Ans: d, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
3. Which of the following activities is excluded from the statement of cash flows under IFRS? a. Financing activities b. Investing activities c. Noncash investing and financing activities d. Operating activities Ans: c, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
4. Each of the following items may be classified as operating or financing activities under IFRS except a. dividends paid. b. dividends received. c. interest paid. d. All of these answer choices may be classified as such. Ans: b, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
5. Under IFRS, some companies present which section of the cash flow statement as a single line item? a. Operating activities b. Investing activities c. Financing activities d. Noncash investing and financing activities Ans: a, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
CHAPTER 13 FINANCIAL ANALYSIS: THE BIG PICTURE SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY Item
LO
BT
Item
LO
1. 2. 3. 4. 5. 6. 7. 8. 9.
1 1 1 1 1 1 1 1 1
K K K K K K K K K
10. 11. 12. 13. 14. 15. 16. 17. 18.
1 1 1 2 2 2 2 2 2
46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76.
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 1 1 2 2
K K K AP K C K K C K K K AP K K K K K AP AP K K AP AP C K K K AP K K
77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107.
2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
BT
Item
LO
BT
Item
True-False Statements K 19. 2 K 28. K 20. 2 K 29. K 21. 2 K 30. K 22. 2 K 31. K 23. 2 K 32. K 24. 2 K 33. AP 25. 2 K 34. C 26. 2 C 35. K 27. 2 K 36. Multiple Choice Questions AP 108. 2 AP 139. K 109. 2 AP 140. K 110. 2 AP 141. K 111. 2 AP 142. K 112. 2 K 143. K 113. 2 K 144. K 114. 3,4 K 145. AP 115. 3,4 K 146. AP 116. 3,4 K 147. AP 117. 3,4 K 148. AP 118. 3,4 K 149. K 119. 3,4 K 150. AP 120. 3,4 C 151. K 121. 3,4 C 152. AP 122. 3,4 K 153. K 123. 3,4 K 154. AP 124. 3,4 K 155. K 125. 3,4 K 156. K 126. 3,4 K 157. K 127. 3,4 K 158. K 128. 3,4 C 159. K 129. 3,4 K 160. K 130. 3,4 AP 161. K 131. 3,4 AP 162. K 132. 3,4 C 163. K 133. 3,4 AP 164. K 134. 3,4 AP 165. K 135. 3,4 AP 166. K 136. 3,4 AP 167. K 137. 3,4 AP 168. AP 138. 3,4 AP 169.
.
LO
BT
Item
LO
BT
2 2 2 3,4 3,4 3,4 3,4 3,4 3,4
K K K K K K K K K
37. 38. 39. 40. 41. 42. 43. 44. 45.
3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4
C K C K K K K K K
3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4
AP AP K K K K AP AP AP AP K AP K AP K AP K K K K K AN K K AN AN AN K K AN C
170. 171. 172. 173. 174. 175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. 194. 195. 196.
3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4 3,4
AN AP AP AP AP AP AP AP AN AP AP AP AP AP AP AP AP AP AP AP AP AP K K K K K
13-2
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
197. 198. 199.
3,4 3,4 3,4
AN AP AP
200. 201. 202.
207. 208. 209. 210. 211
1 1 1 2 2
K AP AP AP AP
212 213. 214. 215. 216.
228. 229. 230.
2 2 2
AN AP AP
231. 232. 233.
241. 242. 243.
1 1 2
K K K
244. 245. 246.
253.
3,4
K
254.
255. 256.
1 1
C K
257. 258.
Multiple Choice Questions (Cont.) 3,4 K 203. 1 C 206. 1 3,4 AN 204. 1 C 3,4 C 205. 1 C Brief Exercises 2 AP 217. 2 AP 222. 3,4 2 AP 218. 2 AP 223. 3,4 2 AN 219. 3,4 AP 224. 3,4 2 C 220. 3,4 AP 225. 3,4 2 AP 221. 3,4 AP 226. 3,4 Exercises 2 AP 234. 2 AP 237. 3,4 2 AP 235. 3,4 AP 238. 3,4 2 AN 236. 3,4 AP 239. 3,4 Completion Statements 2 K 247. 3,4 K 250. 3,4 3,4 K 248. 3,4 K 251. 3,4 3,4 K 249. 3,4 K 252. 3,4 Matching 3,4 K Short Answer Essay 2 C 259. 1 C 3,4 K 260. 3,4 S
C
AP AP AN AP AP
227.
3,4
AP
AN AP AN
240.
3,4
AP
K K K
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Item
Type
Item
Type
Item
1. 2. 3. 4. 5. 6. 7. 8. 9.
TF TF TF TF TF TF TF TF TF
10. 11. 12 46. 47. 48. 49. 50. 51.
TF TF TF MC MC MC MC MC MC
52. 53. 54. 55. 56. 57. 58. 59. 60.
.
Learning Objective 1 Type Item Type
MC MC MC MC MC MC MC MC MC
61. 62. 63. 64. 65. 66. 67. 68. 69.
MC MC MC MC MC MC MC MC MC
Item
Type
Item
Type
70. 73. 74. 203. 204. 205. 206. 207. 208.
MC MC MC MC MC MC MC Be Be
209. 241. 242. 255. 256. 259.
Be C C SA SA SA
Financial Analysis: The Big Picture
13-3
Item
Type
Item
Type
Item
Learning Objective 2 Type Item Type
Item
Type
Item
Type
13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25.
TF TF TF TF TF TF TF TF TF TF TF TF TF
26. 27. 28. 29. 30. 71. 72. 75. 76. 77. 78. 79. 80.
TF TF TF TF TF MC MC MC MC MC MC MC MC
81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93.
MC MC MC MC MC MC MC MC MC MC MC MC MC
108. 109. 110. 111. 112. 113. 210. 211. 212. 213. 214. 215. 216.
MC MC MC MC MC MC Be Be Be Be Be Be Be
217. 218. 228. 229. 230. 231. 232. 233. 234. 243. 244. 257.
Be Be Ex Ex Ex Ex Ex Ex Ex C C SA
31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 114. 115. 116. 117. 118. 119. 120.
TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF MC MC MC MC MC MC MC
121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142.
MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC
143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164.
MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC
187. 188. 189. 190. 191. 192. 193. 194. 195. 196. 197. 198. 199. 200. 201. 202. 219. 220. 221. 222. 223. 224.
MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC Be Be Be Be Be Be
225. 226. 227. 235. 236. 237. 238. 239. 240. 245. 246. 247. 248. 249. 250. 251. 252. 253. 254. 258. 260.
Be Be Be Ex Ex Ex Ex Ex Ex C C C C C C C C Ma Ma SA SA
94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 106. 107.
MC MC MC MC MC MC MC MC MC MC MC MC MC
Learning Objective 3
.
165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186.
MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Learning Objective 4
31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 114. 115. 116. 117. 118. 119. 120.
TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF MC MC MC MC MC MC MC
121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142.
MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC
143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164.
Note: TF = True-False MC = Multiple Choice Ma = Matching
MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC
165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186.
MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC
C = Completion Ex = Exercise SA = Short Answer Essay
.
187. 188. 189. 190. 191. 192. 193. 194. 195. 196. 197. 198. 199. 200. 201. 202. 219. 220. 221. 222. 223. 224.
MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC Be Be Be Be Be Be
225. 226. 227. 235. 236. 237. 238. 239. 240. 245. 246. 247. 248. 249. 250. 251. 252. 253. 254. 258. 260.
Be Be Be Ex Ex Ex Ex Ex Ex C C C C C C C C Ma Ma SA SA
Financial Analysis: The Big Picture
13-5
CHAPTER LEARNING OBJECTIVES 1. Apply the concept of sustainable income and quality of earnings. Sustainable income analysis is useful in evaluating a company’s performance. Sustainable income is the most likely level of income to be obtained by the company in the future. Discontinued operations and other comprehensive income are presented on the statement of comprehensive to highlight their unusual nature. Items below income from continuing operations must be presented net of tax. A high quality of earnings provides full and transparent information that will not confuse or mislead users of the financial statements. Issues related to quality of earnings are (1) alternative accounting methods, (2) pro forma income, and (3) improper recognition. 2. Apply horizontal analysis and vertical analysis. Horizontal analysis is a technique for evaluating a series of data over a period of time to determine the increase or decrease that has taken place, expressed as either an amount or a percentage. Vertical analysis is a technique that expresses each item in a financial statement as a percentage of a relevant total or a base amount. 3. Analyze a compay's performance using ratio analysis. The price-earnings (P-E) ratio reflects investors' assessment of a company's future earnings potential. Financial ratios are provided in Illustration 13-16 (liquidity), Illustration 13-17 (solvency) and Illustration 13-18 (profitability). *4. Evaluate a company comprehensively using ratio analysis. To evaluate a company, ratios (liquidity, solvency, and profitability) provide clues to underlying conditions, but intracompany, intercompany, and industry average comparisons are also needed.
.
13-6
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
TRUE-FALSE STATEMENTS 1.
Analysts are interested in sustainable income, which is equal to the past year’s net income.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
2.
One objective of the income statement is to separate the results of continuing operations from those of discontinued operations.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
3.
When the disposal of a significant segment occurs, the income statement should report both income from continuing operations and income (loss) from discontinued operations.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
4.
Other comprehensive income includes all changes in stockholder's equity during a period including those changes resulting from investments by stockholder's.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
5.
Companies report most changes in accounting principle currently.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
6.
The loss on disposal of a significant component of a business is disclosed in the statement of retained earnings.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
7.
A change in accounting principle occurs when the principle used in the current year is different from the one used by competitors in the current year.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
8.
Comprehensive income includes all changes in stockholders’ equity during a period except those resulting from investments by stockholders and distributions to stockholders.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
9.
Comprehensive income includes all revenues, expenses, gains, losses, and dividends.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
10.
Alternative accounting methods affect the quality of earnings.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
11.
Improper recognition of income is not one of the factors affecting the quality of earnings.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
12.
Because pro forma earnings are based on specific rules, these amounts are highly reliable.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
.
Financial Analysis: The Big Picture
13.
13-7
In horizontal analysis, the base year is the most current year being examined.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
14.
Horizontal analysis is a technique for evaluating a financial statement item in the current year with other items in the current year.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
15.
Another name for horizontal analysis is trend analysis.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
16.
If a company has sales of $130 in 2017 and $182 in 2016, the percentage decrease in sales from 2016 to 2017 is 40%.
Ans: F, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
17.
In horizontal analysis, if an item has a negative amount in the base year, and a positive amount in the following year, no percentage change for that item can be computed.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
18.
A primary purpose of vertical analysis is to observe trends over a three-year period.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
19.
Vertical analysis is a technique for evaluating a series of financial statement data over a period of time to determine the increase (decrease) that has taken place.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
20.
Common size analysis expresses each item in a financial statement as a percent of a base amount.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
21.
In a common size income statement, net sales are represented by 100%.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
22.
In a common size income statement, each item is expressed as a percentage of net income.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
23.
In a common size balance sheet, total assets are represented by 100%.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
.
13-8 24.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
In the vertical analysis of a balance sheet, the base for current liabilities is total liabilities.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
25.
Vertical analysis is useful in making comparisons of companies of different sizes.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
26.
Using vertical analysis of the income statement, a company's net income as a percentage of net sales is 15%; therefore, the cost of goods sold as a percentage of sales must be 85%.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
27.
In the vertical analysis of an income statement, each item is generally stated as a percentage of net income.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
28.
Intracompany comparisons of the same financial statement items are often useful to detect changes in financial relationships and significant trends.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
29.
Comparisons of company data with industry averages provide information about a company's relative position within the industry.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
30.
Horizontal, vertical, and circular analyses are the basic tools of financial statement analysis.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
31.
Accounts receivable turnover is useful in assessing the profitability of receivables.
Ans: F, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
32.
Inventory turnover measures the number of times on average the inventory was sold during the period.
Ans: T, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
33.
Inventory turnover is a measure of liquidity that focuses on efficient use of inventory.
Ans: T, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
34.
Profitability ratios are frequently used as a basis for evaluating management's operating effectiveness.
Ans: T, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
35.
Both profit margin and asset turnover affect a company’s return on assets.
Ans: T, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
.
Financial Analysis: The Big Picture
36.
13-9
Leverage and return on equity are closely related.
Ans: T, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
37.
The return on assets will be greater than the rate of return on common stockholders' equity if the company has been successful in trading on the equity at a gain.
Ans: F, LO: 3, 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
38.
The current ratio is one of the most utilized measures of profitability.
Ans: F, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
39.
From a creditor's point of view, the higher the debt to assets ratio, the lower the risk that the company may be unable to pay its obligations.
Ans: F, LO: 3, 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
40.
A current ratio of 1.2 to 1 indicates that a company's current assets exceed its current liabilities.
Ans: T, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
41.
Using borrowed money to increase the rate of return on common stockholders' equity is called "trading on the equity."
Ans: T, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
42.
Declining profitability and liquidity ratios are indications that a company may not survive.
Ans: T, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
43.
Liquidity ratios measure the ability of the company to survive over a long period of time.
Ans: F, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
44.
A solvency ratio measures the income or operating success of a company for a given period of time.
Ans: F, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
45.
The current ratio is a measure of all the ratios calculated for the current year.
Ans: F, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
Answers to True-False Statements 1. 2. 3. 4. 5. 6. 7.
F T T F F F F
8. 9. 10. 11. 12. 13. 14.
T F T F F F F
15. 16. 17. 18. 19. 20. 21.
T F T F F T T
22. 23. 24. 25. 26. 27. 28.
.
F T F T F F T
29. 30. 31. 32. 33. 34. 35.
T F F T T T T
36. 37. 38. 39. 40. 41. 42.
T F F F T T T
43. F 44. F 45. F
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
MULTIPLE CHOICE QUESTIONS 46.
Which of the following income statement figures would probably be the best indicator of a company’s future performance? a. Total revenues b. Income from operations c. Net income d. Gross profit
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
47.
Which of the following is the best definition of sustainable income? a. Sustainable income is a measure of solvency that does not include capital expenditure. b. Sustainable income is the same as net income. c. Sustainable income is income that is unusual in nature and infrequent in occurrence. d. Sustainable income is the most likely level of income to be obtained in the future.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
48.
When preparing an income statement, which of the following is the proper order for income statement components? a. Comprehensive income, Other comprehensive income items, Net income b. Net income, Comprehensive income, Other comprehensive income items c. Net income, Other comprehensive income items, Comprehensive income d. Other comprehensive income items Net income, Comprehensive income
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
49.
If a company has a discontinued operation gain of $30,000 and a 32% tax rate, what is the effect on net income? a. Increase of $30,000. b. Increase of $20,400. c. Increase of $9,600. d. No effect.
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $30,000 (1 − .32) = $20,400
50.
All of the following are reported on the income statement net of tax except a. loss on operations from a discontinued division. b. other comprehensive income items. c. income from operations. d. loss on disposal of a division.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Financial Analysis: The Big Picture
51.
13-11
All of the following statements regarding changes in accounting principles are true except which of the following? a. Most changes in accounting principles are only reported in current periods when the principle change takes place. b. Changes in accounting principles are allowed when new principles are preferable to old ones. c. Most changes in accounting principles are retroactively reported. d. Consistency is one of the biggest concerns when a change in accounting principle is undertaken.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
52.
An income statement would not include a. other revenue and gains. b. income from operations. c. discontinued operations. d. dividends paid.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
53.
The discontinued operations section of the income statement refers to a. discontinuance of a product line. b. the income or loss on products that have been completed and sold. c. obsolete equipment and discontinued inventory items. d. the disposal of a significant component of a business.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
54.
When a change in depreciation method occurs a. prior years' financial statements should be changed to reflect the newly adopted method. b. the change should be reported in current and future years. c. the cumulative effect of the change should be reflected on the income statement as of the beginning of the next year. d. the cumulative effect of the change in accounting principle should be classified as an discontinued operations on the income statement.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
55.
The order of presentation of items that may appear on the statement income of comprehensive income is a. Other comprehensive income, Discontinued operations, Income before income taxes. b. Discontinued operations, Other comprehensive income, Income before income taxes. c. Income before income taxes, Discontinued operations, Other comprehensive income. d. Income before income taxes, Other comprehensive income, Discontinued operations.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
13-12 56.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Which of the following items appears on the income statement before income before income taxes? a. Other comprehensive income. b. Comprehensive income. c. Other revenues and gains. d. Discontinued operations.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
57.
Which of the following statements is true with respect to financial statement reporting a change in accounting principle? a. Comparability across periods is impaired b. Only a footnote is required to report the change c. Changes in both depreciation methods and inventory methods are reported retroactively. d. Management must show that the new accounting principle is preferable to the old method.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
58.
Dandy Candy Company sold its licorice division resulting in a loss of $80,000. Assuming a tax rate of 25%, the loss on this disposal will be reported on the income statement at what amount? a. $100,000 b. $20,000 c. $80,000 d. $60,000
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $80,000 (1 − .25) = $60,000
59.
Which of the following is not reported net of tax on the statement of comprehensive income ? a. Discontinued operations b. Other comprehensive income c. Other revenues and expenses d. Income from continuing operations
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
60.
Which of the following would not be considered an example of a discontinued operation? a. Shifting production processes within an operation b. Elimination of a major class of customers c. Elimination of an entire activity d. Disposal of a significant component of a business
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Financial Analysis: The Big Picture
61.
13-13
Other comprehensive income is reported on the statement of comprehensive income immediately a. before income from continuing operations. b. after comprehensive income. c. before income before income taxes. d. after discontinued operations.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
62.
In reporting discontinued operations, the income statement should show in a special section 1. gains on the disposal of a discontinued component. 2. losses on the disposal of a discontinued component. a. 1 only. b. 2 only. c. neither 1 nor 2. d. both 1 and 2.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
63.
The disposal of a significant component of a business is called a. a change in accounting principle. b. comprehensive income. c. an other expense. d. discontinued operations.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
64.
Lupton Inc. disposes of an unprofitable segment of its business. The operation of the segment suffered a $200,000 loss in the year of disposal. The loss on disposal of the segment was $100,000. If the tax rate is 30%, and income before income taxes was $1,600,000, a. the income tax expense on the income before discontinued operations is $390,000. b. the income from continuing operations is $1,120,000. c. net income is $1,300,000. d. the losses from discontinued operations are reported net of income taxes at $300,000.
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,600,000 (1 − .3) = $1,120,000
.
13-14 65.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Stellar, Inc. decided on January 1 to discontinue its telescope manufacturing division. On July 1, the division’s assets with a book value of $1,260,000 are sold for $900,000. Operating income from January 1 to June 30 for the division amounted to $195,000. Ignoring income taxes, what total amount should be reported on Stellar’s income statement for the current year under the caption, Discontinued Operations? a. $195,000 b. $165,000 loss c. $360,000 loss d. $555,000
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($900,000 − $1,260,000) + $195,000 = ($165,000)
66.
Comprehensive income would not include a. dividends declared. b. unrealized gains on available-for-sale securities. c. discontinued operations. d. other expenses and losses.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
67.
Which of the following would be considered an “Other Comprehensive Income” item? a. Net income b. Gain on disposal of discontinued operations c. Other revenues and gains d. Unrealized loss on available-for-sale securities
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
68.
Jack's by the Tracks. has the following partial balance sheet: JACK'S BY THE TRACKS. Balance Sheet (partial) Stockholders’ equity: Common stock $6,000,000 Retained earnings 2,000,000 Total paid-in capital and retained earnings 8,000,000 Accumulated other comprehensive income 800,000 Total stockholders’ equity: $8,800,000 What effect will the accumulated other comprehensive income have on comprehensive income? a. No effect on comprehensive income. b. Increase of $800,000 in comprehensive income. c. Increase of $8,800,000 in comprehensive income. d. Decrease of $800,000 in comprehensive income.
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Financial Analysis: The Big Picture
69.
13-15
Reardon Inc. has an investment in trading securities of $140,000. This investment experienced an unrealized loss of $7,000 during the current year. Assuming a 35% tax rate, the effect of this loss on comprehensive income will be a. no effect. b. $140,000 increase. c. $49,000 decrease. d. $91,000 decrease.
Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
70.
Which of the following would be considered an “Other comprehensive income” item? a. Loss on disposal of discontinued operations b. Unrealized loss on available-for-sale securities c. Discontinued operations gain d. Net income
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
71.
Comparisons of financial data made within a company are called a. intracompany comparisons. b. interior comparisons. c. intercompany comparisons. d. industry comparisons.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
72.
Which one of the following is not a tool in financial statement analysis? a. Horizontal analysis b. Circular analysis c. Vertical analysis d. Ratio analysis
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
73.
All of the following statements are true regarding comprehensive income except a. companies are required to report comprehensive income. b. a company would add an unrealized loss on available-for-sale securities to net income to calculate comprehensive income. c. comprehensive income does not include changes resulting from investments by stockholders. d. comprehensive income does not include dividends to stockholders.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
13-16 74.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
On January 1, 2017, Tri-State Industries had cash and common stock of $180,000. At that date the company had no other asset, liability or equity balances. On January 2, 2017, it purchased $160,000 of equity securities for cash that it classified as available-for-sale. It received cash dividends of $12,000 during the year on these securities. In addition, it had an unrealized holding gain on these securities of $32,000 net of tax. Based on this information, what is the amount of comprehensive income in 2017? a. $44,000 b. $20,000 c. $12,000 d. $32,000
Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $32,000 + $12,000 = $44,000
75.
A comparison with other companies that provides insight into a company's competitive position is most commonly known as which of the following types of comparisons? a. Industry average comparison b. Intracompany comparison c. Intercompany comparison d. Comprehensive income comparison
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
76.
When a horizontal analysis is performed and a zero or negative amount is reported in the base year, then a. no percentage change can be computed. b. the percent change will be negative. c. the accountant has made a mistake. d. the percentage change will be 100% of greater.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
77.
Danner Corporation reported net sales of $650,000, $720,000, and $780,000 in the years 2016, 2017, and 2018, respectively. If 2016 is the base year, what percentage do 2018 sales represent of the base? a. 108% b. 120% c. 83% d. 20%
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $780,000 $650,000 = $120%
78.
In analyzing financial statements, horizontal analysis is a a. requirement. b. tool. c. principle. d. theory.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
.
Financial Analysis: The Big Picture
79.
13-17
Horizontal analysis is also known as a. linear analysis. b. vertical analysis. c. trend analysis. d. common size analysis.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
80.
Under which of the following cases may a percentage change be computed? a. The trend of the amounts is decreasing but all amounts are positive. b. There is no amount in the base year. c. There is a negative amount in the base year and a negative amount in the subsequent year. d. There is a negative amount in the base year and a positive amount in the subsequent year.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
81.
Horizontal analysis is a technique for evaluating a series of financial statement data over a period of time a. that has been arranged from the highest number to the lowest number. b. that has been arranged from the lowest number to the highest number. c. to determine which items are in error. d. to determine the amount and/or percentage increase or decrease that has taken place.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
82.
Horizontal analysis of comparative financial statements includes the a. development of common size statements. b. calculation of liquidity ratios. c. calculation of dollar amount and percentage changes from financial statements over a period of time, as compared to a base year. d. evaluation of financial statement data that expresses each item in a financial statement as a percentage of a base amount.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
83.
Horizontal analysis is a technique for evaluating financial statement data a. within a period of time. b. over a period of time. c. on a certain date. d. as it may appear in the future.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
.
13-18 84.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
If Year 1 equals $750, Year 2 equals $840, and Year 3 equals $900, the percentage to be assigned for Year 3 in a trend analysis, assuming that Year 1 is the base year, is a. 120%. b. 112%. c. 83%. d. 107%.
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $900 / $750 = 120%
85.
If Year 1 equals $780, Year 2 equals $819, and Year 3 equals $896, the percentage to be assigned for Year 2 in a trend analysis, assuming that Year 1 is the base year, is a. 95%. b. 115%. c. 105%. d. 109%.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $819 / $780 = 105%
86.
Assume the following sales data for a company: 2018 $980,000 2017 875,000 2016 700,000 If 2016 is the base year, what is the percentage increase in sales from 2016 to 2017? a. 140% b. 125% c. 40% d. 25%
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: ($875,000 − $700,000) / $700,000 = 25%
87.
If Year 1 equals $700, Year 2 equals $840, and Year 3 equals $630, the percentage to be assigned for Year 1 in a trend analysis, assuming that Year 1 is the base year, is a. 100%. b. 90%. c. 111%. d. 120%.
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
88.
In horizontal or trend analysis, each item is expressed as a(n) a. amount. b. percentage. c. rate. d. amount or a percentage.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
.
Financial Analysis: The Big Picture
89.
13-19
Assume the following sales data for a company: 2018 $960,000 2017 750,000 2016 600,000 If 2016 is the base year, what is the percentage increase in sales from 2016 to 2017? a. 60% b. 25% c. 125% d. 160%
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: ($750,000 − $600,000) / $600,000 = 25%
90.
Comparative balance sheets a. are usually prepared for at least one year. b. are usually prepared for at least two years. c. do not show both dollar amount and percentage changes. d. do not show a comparison of total stockholders’ equity.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
91.
Assume the following cost of goods sold data for a company: 2018 $1,400,000 2017 1,200,000 2016 1,000,000 If 2016 is the base year, what is the percentage increase in cost of goods sold from 2016 to 2018? a. 140% b. 40% c. 20% d. 17%
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: ($1,400,000 − $1,000,000) / $1,000,000 = 40%
92.
In horizontal analysis, each item is expressed as a percentage of the a. net income amount. b. stockholders’ equity amount. c. total assets amount. d. base-year amount.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
.
13-20 93.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Boone Trading Company reported net sales of $400,000, $440,000, and $560,000 in the years 2016, 2017, and 2018, respectively. If 2016 is the base year, what is the trend percentage for 2018? a. 71% b. 127% c. 140% d. 110%
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $560,000 / $400,000 = 140%
94.
Comparisons of data within a company are an example of the following comparative basis a. industry averages. b. intercompany. c. intracompany. d. interregional.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
95.
Vertical analysis is also known as a. perpendicular analysis. b. common size analysis. c. trend analysis. d. straight-line analysis.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
96.
In a common size balance sheet, the 100 percent figure is a. total current assets. b. total property, plant and equipment. c. total liabilities. d. total assets.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
97.
In a common size financial statement, which of the following is given a percentage of 100 percent? a. Total liabilities b. Net income c. Total assets d. Cost of goods sold
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
98.
In a common size income statement, the 100% figure is a. net income. b. cost of goods sold. c. gross profit. d. net sales.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
.
Financial Analysis: The Big Picture
99.
13-21
A balance sheet that displays only component percentages is called a ________ balance sheet. a. condensed b. common size c. comparative d. trendy
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
100.
Vertical analysis is a technique that expresses each item in a financial statement a. in dollars and cents. b. as a percent of the item in the previous year. c. as a percent of a base amount. d. starting with the highest value down to the lowest value.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
101.
In vertical analysis a. a base amount is required. b. a base amount is optional. c. the same base is used across all financial statements analyzed. d. the results of the horizontal analysis are necessary inputs for performing the analysis.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
102.
The best way to study the relationship of the components within a financial statement is to prepare a. common size statements. b. a trend analysis. c. profitability analysis. d. ratio analysis.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
103.
In performing a vertical analysis, the base for prepaid expenses is a. total current assets. b. total assets. c. total liabilities. d. prepaid expenses in a previous year.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
104.
In performing a vertical analysis, the base for sales revenues on the income statement is a. net sales. b. sales revenue. c. net income. d. cost of goods available for sale.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
.
13-22 105.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
In performing a vertical analysis, the base for sales returns and allowances is a. sales revenue. b. sales discounts. c. net sales. d. total revenues.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
106.
In performing a vertical analysis, the base for cost of goods sold is a. total selling expenses. b. net sales. c. total revenues. d. total expenses.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
107.
Salamagundi, Inc. has the following Income Statement (in millions): SALAMAGUNDI, INC. Income Statement For the Year Ended December 31, 2017 Net Sales $160 Cost of Goods Sold 100 Gross Profit 60 Operating Expenses 40 Net Income $ 20 Using vertical analysis, what percentage is assigned to net sales? a. 160% b. Can’t be computed. c. 60% d. 100%
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
108.
Salamagundi, Inc. has the following Income Statement (in millions): SALAMAGUNDI, INC. Income Statement For the Year Ended December 31, 2017 Net Sales $160 Cost of Goods Sold 100 Gross Profit 60 Operating Expenses 40 Net Income $ 20 Using vertical analysis, what percentage is assigned to gross profit? a. 37.5% b. 100% c. 60% d. 62.5%
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $60 / $160 = 37.5%
.
Financial Analysis: The Big Picture
109.
13-23
Cochran Corporation, Inc. has the following income statement (in millions): COCHRAN CORPORATION, INC. Income Statement For the Year Ended December 31, 2017 Net Sales $240 Cost of Goods Sold 150 Gross Profit 90 Operating Expenses 65 Net Income $ 25 Using vertical analysis, what percentage is assigned to cost of goods sold? a. 37% b. 63% c. 100% d. 50%
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $150 / $240 = 63%
110.
Cochran Corporation, Inc. has the following income statement (in millions): COCHRAN CORPORATION, INC. Income Statement For the Year Ended December 31, 2017 Net Sales $240 Cost of Goods Sold 150 Gross Profit 90 Operating Expenses 65 Net Income $ 25 Using vertical analysis, what percentage is assigned to net income? a. 100% b. 90% c. 10% d. 17%
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $25 / $240 = 10%
111.
Given the following data for the King Company: Current liabilities $ 400 Long-term debt 480 Common stock 700 Retained earnings 920 Total liabilities & stockholders’ equity $2,500 How would common stock appear on a common size balance sheet? a. 20% b. 70% c. 28% d. 30%
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $700 / $2,500 = 28%
.
13-24 112.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The following schedule is a display of what type of analysis? Amount Percent Current assets $100,000 25% Property, plant, and equipment 300,000 75% Total assets $400,000 100% a. Horizontal analysis b. Differential analysis c. Vertical analysis d. Ratio analysis
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
113.
In vertical analysis, the base amount for salaries and wages expense is generally a. net sales. b. salary & wages expense in a previous year. c. gross profit. d. net income.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
114.
Which one of the following is not a characteristic generally evaluated in ratio analysis? a. Liquidity b. Profitability c. Marketability d. Solvency
Ans: C, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
115.
Ratios are most useful in identifying a. trends. b. differences. c. causes. d. relationships.
Ans: D, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
116.
Short-term creditors are usually most interested in assessing a. solvency. b. liquidity. c. marketability. d. profitability.
Ans: B, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
117.
A common measure of liquidity is a. return on assets. b. accounts receivable turnover. c. profit margin. d. debt to equity.
Ans: B, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
.
Financial Analysis: The Big Picture
118.
13-25
A common measure of profitability is the a. current ratio. b. times interest earned. c. return on common stockholders’ equity. d. debt to assets.
Ans: C, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
119.
A common measure of long-term solvency is a. the debt to assets ratio. b. the current ratio. c. the asset turnover. d. inventory turnover.
Ans: A, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
120.
Return on assets is most closely related to a. profit margin and debt to assets ratio. b. profit margin and asset turnover. c. times interest earned and debt to stockholders’ equity. d. profit margin and free cash flow.
Ans: B, LO: 3, 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
121.
Return on common stockholders’ equity is most closely related to a. gross profit rate and operating expenses to sales ratio. b. profit margin and free cash flow. c. times interest earned and debt to stockholders’ equity ratio. d. return on asset and leverage (debt to assets ratio).
Ans: D, LO: 3, 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
122.
Long-term creditors are usually most interested in evaluating a. liquidity. b. marketability. c. profitability. d. solvency.
Ans: D, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
123.
Which one of the following would be considered a long-term solvency ratio? a. Accounts receivable turnover b. Return on assets c. Current ratio d. Debt to assets ratio
Ans: D, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
.
13-26 124.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Stockholders are most interested in evaluating a. liquidity. b. solvency. c. profitability. d. marketability.
Ans: C, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
125.
In ratio analysis, the ratios are never expressed as a a. rate. b. logarithm. c. percentage. d. simple proportion.
Ans: B, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
126.
The current ratio is a. calculated by dividing current liabilities by current assets. b. used to evaluate a company's liquidity and short-term debt paying ability. c. used to evaluate a company's solvency and long-term debt paying ability. d. calculated by subtracting current liabilities from current assets.
Ans: B, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
127.
The current ratio is a a. liquidity ratio. b. profitability ratio. c. long-term solvency ratio. d. cash flow ratio.
Ans: A, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
128.
A company with $60,000 in current assets and $35,000 in current liabilities pays a $1,000 current liability. As a result of this transaction, the current ratio and working capital will a. both decrease. b. both increase. c. increase and remain the same, respectively. d. remain the same and decrease, respectively.
Ans: C, LO: 3, 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
129.
The accounts receivable turnover and inventory turnover are used to analyze a. long-term solvency. b. profitability. c. liquidity. d. leverage.
Ans: C, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
.
Financial Analysis: The Big Picture
130.
13-27
Winsor Clothing Store had a balance in the Accounts Receivable account of $760,000 at the beginning of the year and a balance of $840,000 at the end of the year. Net credit sales during the year amounted to $7,200,000. The average collection period of the accounts receivable in terms of days was a. 30 days. b. 81.1 days. c. 42.4 days. d. 40.6 days.
Ans: D, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $7,200,000 ÷ [($760,000 + $840,000) ÷ 2] = 9; 365 ÷ 9 = 40.6
131.
Bill's Dollar Store had a balance in the Accounts Receivable account of $760,000 at the beginning of the year and a balance of $840,000 at the end of the year. Net credit sales during the year amounted to $6,400,000. The accounts receivable turnover was a. 7.6 times. b. 8.4 times. c. 8.0 times. d. 4.0 times.
Ans: C, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: ($760,000 + $840,000) / 2 = $800,000; $6,400,000 / $800,000 = 8.0
132.
A high accounts receivable turnover indicates a. customers are making payments quickly. b. a large portion of the company’s sales are on credit. c. many customers are not paying their receivables. d. the company’s sales have increased.
Ans: A, LO: 3, 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
133.
LKN Company had net credit sales of $5,005,000 and cost of goods sold of $3,500,000 for the year. The Accounts Receivable balances at the beginning and end of the year were $600,000 and $700,000, respectively. The accounts receivable turnover was a. 8.4 times. b. 7.7 times. c. 3.9 times. d. 7.1 times.
Ans: B, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $5,005,000 / $650,000 = 7.7
134.
Hickory Hills Pro Shop had a balance in the Accounts Receivable account of $800,000 at the beginning of the year and a balance of $900,000 at the end of the year. Net credit sales during the year amounted to $8,040,000. The accounts receivable turnover was a. 9.5 times. b. 10.1 times. c. 8.9 times. d. 9.8 times.
Ans: A, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $8,040,000 / $850,000 = 9.5
.
13-28 135.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Hickory Hills Pro Shop had a balance in the Accounts Receivable account of $800,000 at the beginning of the year and a balance of $900,000 at the end of the year. Net credit sales during the year amounted to $8,040,000. The average collection period of the receivables in terms of days was a. 36.1 days. b. 38.4 days. c. 37.2 days. d. 4 days.
Ans: B, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: 365 / ($8,040,000 / $850,000) = 38.4
136.
Somen to Park Corporation had net credit sales of $5,075,000 and cost of goods sold of $3,750,000 for the year. The Accounts Receivable balances at the beginning and end of the year were $650,000 and $750,000, respectively. The accounts receivable turnover was a. 7.8 times. b. 6.8 times. c. 7.3 times. d. 5.4 times.
Ans: C, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $5,075,000 / $700,000 = 7.3
137.
Chodron Corporation had net credit sales of $13,000,000 and cost of goods sold of $9,250,000 for the year. The average inventory for the year amounted to $1,250,000. The inventory turnover for the year is a. 7.4 times. b. 10.4 times. c. 3.0 times. d. 1.4 times.
Ans: A, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $9,250,000 / $1,250,000 = 7.4
138.
Chodron Corporation had net credit sales of $13,000,000 and cost of goods sold of $9,250,000 for the year. The average inventory for the year amounted to $1,250,000. The average days in inventory during the year was approximately a. 261 days. b. 122 days. c. 49 days. d. 35 days.
Ans: C, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: 365 / ($9,250,000 / $1,250,000) = 49
.
Financial Analysis: The Big Picture
139.
13-29
Savory Thymes, Inc. had net credit sales of $9,000,000 and cost of goods sold of $5,250,000 for the year. The average inventory for the year amounted to $1,250,000. The inventory turnover for the year is a. 7.2 times. b. 5.6 times. c. 5.2 times. d. 4.2 times.
Ans: D, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $5,250,000 / $1,250,000 = 4.2
140.
Savory Thymes, Inc. had net credit sales of $9,000,000 and cost of goods sold of $5,250,000 for the year. The average inventory for the year amounted to $1,250,000. The average days in inventory during the year was approximately a. 51 days. b. 65 days. c. 70 days. d. 87 days.
Ans: D, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: 365 / ($5,250,000 / $1,250,000) = 87
141.
Which one of the following would not be considered a liquidity ratio? a. Current ratio b. Inventory turnover c. Average collection period d. Return on assets
Ans: D, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
142.
The asset turnover is a. net sales divided by net income. b. average total assets divided by net income. c. net sales divided by average total assets. d. average total assets divided by net sales.
Ans: C, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
143.
The asset turnover measures a. how often a company replaces its assets. b. how efficiently a company uses its assets to generate sales. c. the portion of the assets that have been financed by creditors. d. the overall rate of return on assets.
Ans: B, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
.
13-30 144.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The profit margin is calculated by dividing a. sales by cost of goods sold. b. gross profit by net sales. c. net income by stockholders' equity. d. net income by net sales.
Ans: D, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
145.
Tito Corporation had net income of $2,000,000 and paid dividends to common stockholders of $300,000 in 2017. The weighted average number of shares outstanding in 2017 was 400,000 shares. Tito Corporation's common stock is selling for $50 per share on the NASDAQ. Tito Corporation's price-earnings ratio is a. 20 times. b. 12 times. c. 10 times. d. 5 times.
Ans: C, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $50 / ($2,000,000 / 400,000) = 10
146.
Tito Corporation had net income of $2,000,000 and paid dividends to common stockholders of $300,000 in 2017. The weighted average number of shares outstanding in 2017 was 400,000 shares. Tito Corporation's common stock is selling for $50 per share on the NASDAQ. Tito Corporation's payout ratio for 2017 is a. $5 per share. b. 12%. c. 15%. d. 7%.
Ans: C, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $300,000 / $2,000,000 = 15%
147.
BVI Corporation had net income of $1,600,000 and paid dividends to common stockholders of $400,000 in 2017. The weighted average number of shares outstanding in 2017 was 500,000 shares. BVI Corporation's common stock is selling for $40 per share on the NASDAQ. BVI Corporation's price-earnings ratio is a. 3.2 times. b. 12.5 times. c. 8 times. d. 4 times.
Ans: B, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $40 / ($1,600,000 / 500,000) = 12.5 times
.
Financial Analysis: The Big Picture
148.
13-31
BVI Corporation had net income of $1,600,000 and paid dividends to common stockholders of $320,000 in 2017. The weighted average number of shares outstanding in 2017 was 500,000 shares. BVI Corporation's common stock is selling for $50 per share on the NASDAQ. BVI Corporation's payout ratio for 2017 is a. $5 per share. b. 20%. c. 32%. d. 5%.
Ans: B, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $320,000 / $1,600,000 = 20%
149.
The debt to assets ratio measures a. the company's profitability. b. whether interest can be paid on debt in the current year. c. the proportion of interest paid relative to dividends paid. d. the percentage of the total assets provided by creditors.
Ans: D, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
150.
Aps Company reported the following on its income statement: Income before income taxes $420,000 Income tax expense 120,000 Net income $300,000 An analysis of the income statement revealed that interest expense was $60,000. Aps Company's times interest earned was a. 6 times. b. 9 times. c. 8 times. d. 5 times.
Ans: C, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: ($60,000 + $420,000) / $60,000 = 8
151.
Trading on the equity (leverage) refers to the a. amount of working capital. b. amount of capital provided by owners. c. use of borrowed money to increase the return to owners. d. number of times interest is earned.
Ans: C, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
.
13-32 152.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Rama Company reported the following on its income statement: Income before income taxes $500,000 Income tax expense 150,000 Net income $350,000 An analysis of the income statement revealed that interest expense was $80,000. Rama Company's times interest earned was a. 5.4 times. b. 7.3 times. c. 6.3 times. d. 4.4 times.
Ans: B, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: ($80,000 + $500,000) / $80,000 = 7.3
153.
A company that is leveraged is one that a. has a high earnings per share. b. contains debt financing. c. contains equity financing. d. has a high current ratio.
Ans: B, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
154.
The current assets of Orangette Company are $292,500. The current liabilities are $130,000. The current ratio expressed as a proportion is a. 225%. b. 2.25:1. c. .44:1. d. $130,000 ÷ $292,500.
Ans: B, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $292,500 / $130,000 = 2.25
155.
A weakness of the current ratio is a. the difficulty of the calculation. b. it uses year-end balances of current asset and current liability accounts. c. it is rarely used by sophisticated analysts. d. it can be expressed as a percentage, as a rate, or as a proportion.
Ans: B, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
156.
A supplier to a company would be most interested in the a. asset turnover. b. profit margin. c. current ratio. d. earnings per share.
Ans: C, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
.
Financial Analysis: The Big Picture
157.
13-33
Which one of the following ratios would not likely be used by a short-term creditor in evaluating whether to sell on credit to a company? a. Current ratio b. Inventory turnover c. Asset turnover d. Accounts receivable turnover
Ans: C, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
158.
Ratios are used as tools in financial analysis a. instead of horizontal and vertical analyses. b. because they can provide information that may not be apparent from inspection of the individual components of the financial statements. c. because even single ratios by themselves are quite meaningful. d. because they are prescribed by GAAP.
Ans: B, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
159.
The ratios that are used to determine a company's short-term debt paying ability are a. asset turnover, times interest earned, current ratio, and accounts receivables turnover. b. times interest earned, inventory turnover, current ratio, and receivables turnover. c. times interest earned, accounts receivable turnover ratio, current ratio, and inventory turnover. d. current ratio, account receivable turnover, and inventory turnover.
Ans: D, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
160.
Ed's Drive-In had $175,000 of current assets and $80,000 of current liabilities before borrowing $60,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on Ed's Drive-In's current ratio? a. The ratio remained unchanged. b. The change in the current ratio cannot be determined. c. The ratio decreased. d. The ratio increased.
Ans: C, LO: 3, 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
161.
A liquidity ratio measures the a. income or operating success of an enterprise over a period of time. b. ability of the enterprise to survive over a long period of time. c. short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash. d. number of times interest is earned.
Ans: C, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
.
13-34 162.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
If equal amounts are added to the numerator and the denominator of the current ratio and the ratio is over one, the ratio will always a. increase. b. decrease. c. stay the same. d. equal zero.
Ans: B, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
163
If a company has a current ratio of 1.2:1, what respective effects will the borrowing of cash by short-term debt and collection of accounts receivable have on the ratio? Short-term Borrowing Collection of Receivable a. Increase No effect b. Increase Increase c. Decrease No effect d. Decrease Decrease
Ans: C, LO: 3, 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
164.
A company has an accounts receivable turnover of 10. The average net accounts receivable during the period are $900,000. What is the amount of net credit sales for the period? a. $90,000 b. $9,000,000 c. $900,000 d. $990,000
Ans: B, LO: 3, 4, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $900,000 10 = 9,000,000
165.
If the average collection period is 73 days, what is the accounts receivable turnover? a. 5 times b. 20 times c. 10 times d. 6 times
Ans: A, LO: 3, 4, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $365 73 = 5.0
166.
A general rule to use in assessing the average collection period is that it a. should not exceed 30 days. b. can be any length as long as the customer continues to buy merchandise. c. should not greatly exceed the return period. d. should not greatly exceed the credit term period.
Ans: D, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
.
Financial Analysis: The Big Picture
167.
13-35
The inventory turnover is calculated by dividing a. cost of goods sold by the ending inventory. b. cost of goods sold by the beginning inventory. c. cost of goods sold by the average inventory. d. average inventory by cost of goods sold.
Ans: C, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
168.
A company has an average inventory on hand of $90,000 and its average days in inventory is 36.5 days. What is the cost of goods sold? a. $900,000 b. $2,102,400 c. $2,106,000 d. $1,051,200
Ans: A, LO: 3, 4, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: ($365 $36.5) $90,000 = $900,000
169.
A successful grocery store would probably have a. a low inventory turnover. b. a high inventory turnover. c. zero profit margin. d. low volume.
Ans: B, LO: 3, 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
170.
Net sales are $2,700,000, beginning total assets are $700,000, and the asset turnover is 3.0. What is the ending total asset balance? a. $900,000 b. $1,100,000 c. $700,000 d. $800,000
Ans: B, LO: 3, 4, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $2,700,000 / 3 = $900,000;
171.
$700,000 + X = $900,000; X = 1,100,000 2
The following information pertains to Unique Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Cash and short-term investments $ 40,000 Accounts receivable (net) 25,000 Inventory 20,000 Property, plant and equipment 210,000 Total Assets $295,000 Liabilities and Stockholders’ Equity Current liabilities $ 60,000 Long-term liabilities 85,000 Stockholders’ equity—common 150,000 Total Liabilities and Stockholders’ Equity $295,000
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
13-36
MC 171.
(Cont.) Income Statement Sales revenue Cost of goods sold Gross profit Operating expenses Net income
Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations What is the current ratio for this company? a. 1.42 b. 0.80 c. 1.16 d. 0.60
$ 85,000 45,000 40,000 20,000 $ 20,000 6,000 $20 0.90 $30,000
Ans: A, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: ($40,000 + $25,000 + $20,000) / $60,000 = 1.42
172.
The following information pertains to Unique Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Cash and short-term investments $ 40,000 Accounts receivable (net) 25,000 Inventory 20,000 Property, plant and equipment 210,000 Total Assets $295,000 Liabilities and Stockholders’ Equity Current liabilities $ 60,000 Long-term liabilities 85,000 Stockholders’ equity—common 150,000 Total Liabilities and Stockholders’ Equity $295,000 Income Statement Sales revenue Cost of goods sold Gross margin Operating expenses Net income
$ 85,000 45,000 40,000 20,000 $ 20,000
Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations
6,000 $20 0.90 $30,000
.
Financial Analysis: The Big Picture
MC 172.
13-37
(Cont.)
What is the accounts receivable turnover for this company? a. 2.8 times b. 2 times c. 3.4 times d. 3 times Ans: C, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $85,000 / $25,000 = 3.4
173.
The following information pertains to Unique Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Cash and short-term investments $ 40,000 Accounts receivable (net) 25,000 Inventory 20,000 Property, plant and equipment 210,000 Total Assets $295,000 Liabilities and Stockholders’ Equity Current liabilities $ 60,000 Long-term liabilities 85,000 Stockholders’ equity—common 150,000 Total Liabilities and Stockholders’ Equity $295,000 Income Statement Sales revenue Cost of goods sold Gross margin Operating expenses Net income
$ 85,000 45,000 40,000 20,000 $ 20,000
Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations
6,000 $20 0.90 $30,000
What is the inventory turnover for this company? a. 2 times b. 2.25 times c. 1 time d. .44 times Ans: B, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $45,000 / $20,000 = 2.25
.
13-38 174.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The following information pertains to Unique Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Cash and short-term investments $ 40,000 Accounts receivable (net) 25,000 Inventory 20,000 Property, plant and equipment 210,000 Total Assets $295,000 Liabilities and Stockholders’ Equity Current liabilities $ 60,000 Long-term liabilities 85,000 Stockholders’ equity—common 150,000 Total Liabilities and Stockholders’ Equity $295,000 Income Statement Sales revenue Cost of goods sold Gross margin Operating expenses Net income
$ 85,000 45,000 40,000 20,000 $ 20,000
Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations
6,000 $20 0.90 $30,000
What is the return on assets for this company? a. 6.8% b. 10.0% c. 11.7% d. 26.7% Ans: A, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $20,000 / $295,000 = 6.8%
.
Financial Analysis: The Big Picture
175.
13-39
The following information pertains to Unique Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Cash and short-term investments $ 40,000 Accounts receivable (net) 25,000 Inventory 20,000 Property, plant and equipment 210,000 Total Assets $295,000 Liabilities and Stockholders’ Equity Current liabilities $ 60,000 Long-term liabilities 85,000 Stockholders’ equity—common 150,000 Total Liabilities and Stockholders’ Equity $295,000 Income Statement Sales revenue Cost of goods sold Gross margin Operating expenses Net income Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations What is the profit margin for this company? a. 42.9% b. 18.8% c. 23.5% d. 15.0%
$ 85,000 45,000 40,000 20,000 $ 20,000 6,000 $20 0.90 $30,000
Ans: C, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $20,000 / $85,000 = 23.5%
176.
The following information pertains to Unique Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Cash and short-term investments $ 40,000 Accounts receivable (net) 25,000 Inventory 20,000 Property, plant and equipment 210,000 Total Assets $295,000 Liabilities and Stockholders’ Equity Current liabilities $ 60,000 Long-term liabilities 85,000 Stockholders’ equity—common 150,000 Total Liabilities and Stockholders’ Equity $295,000
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
13-40 MC 176.
(Cont.) Income Statement Sales revenue Cost of goods sold Gross margin Operating expenses Net income
$ 85,000 45,000 40,000 20,000 $ 20,000
Number of shares of common stock 6,000 Market price of common stock $20 Dividends per share on common stock 0.90 Cash provided by operations $30,000 What is the return on common stockholders’ equity for this company? a. 13.3% b. 5.0% c. 23.3% d. 53.3% Ans: A, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $20,000 / $150,000 = 13.3%
177.
The following information pertains to Unique Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Cash and short-term investments $ 40,000 Accounts receivable (net) 25,000 Inventory 20,000 Property, plant and equipment 210,000 Total Assets $295,000 Liabilities and Stockholders’ Equity Current liabilities $ 60,000 Long-term liabilities 85,000 Stockholders’ equity—common 150,000 Total Liabilities and Stockholders’ Equity $295,000 Income Statement Sales revenue Cost of goods sold Gross margin Operating expenses Net income
$ 85,000 45,000 40,000 20,000 $ 20,000
Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations
6,000 $20 0.90 $30,000
.
Financial Analysis: The Big Picture
MC 177.
13-41
(Cont.)
What is the price earnings ratio for this company? a. 6.0 times b. 2.5 times c. 8.0 times d. 4.0 times Ans: A, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $20,000 / 6,000 = 3.33; $20 / $3.33 = 6.00
178.
Junebag Corporation reported net income $24,000; net sales $400,000; and average assets $600,000 for 2017. What is the 2017 profit margin? a. 6% b. 4% c. 40% d. 67%
Ans: A, LO: 3, 4, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $24,000 / $400,000 = 6%
179.
The following information pertains to Blue Flower Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Cash and short-term investments $ 45,000 Accounts receivable (net) 30,000 Inventory 25,000 Property, plant and equipment 210,000 Total Assets $310,000 Liabilities and Stockholders’ Equity Current liabilities $ 60,000 Long-term liabilities 95,000 Stockholders’ equity—common 155,000 Total Liabilities and Stockholders’ Equity $310,000 Income Statement Sales revenue Cost of goods sold Gross margin Operating expenses Net income Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations
.
$ 116,000 66,000 50,000 30,000 $ 20,000 6,000 $20 .50 $35,000
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
13-42 MC 179.
(Cont.)
What is the current ratio for this company? a. 1.17 b. 1.25 c. 1.67 d. 0.75 Ans: C, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: ($45,000 + $30,000 + $25,000) / $60,000 = 1.67
180.
The following information pertains to Blue Flower Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Cash and short-term investments $ 45,000 Accounts receivable (net) 30,000 Inventory 25,000 Property, plant and equipment 210,000 Total Assets $310,000 Liabilities and Stockholders’ Equity Current liabilities $ 60,000 Long-term liabilities 95,000 Stockholders’ equity—common 155,000 Total Liabilities and Stockholders’ Equity $310,000 Income Statement Sales revenue Cost of goods sold Gross margin Operating expenses Net income
$ 116,000 66,000 50,000 30,000 $ 20,000
Number of shares of common stock 6,000 Market price of common stock $20 Dividends per share on common stock .50 Cash provided by operations $35,000 What is the accounts receivable turnover for this company? a. 2.2 times b. 4.4 times c. 7.7 times d. 3.9 times Ans: D, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $116,000 / $30,000 = 3.9
.
Financial Analysis: The Big Picture
181.
13-43
The following information pertains to Blue Flower Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Cash and short-term investments $ 45,000 Accounts receivable (net) 30,000 Inventory 25,000 Property, plant and equipment 210,000 Total Assets $310,000 Liabilities and Stockholders’ Equity Current liabilities $ 60,000 Long-term liabilities 95,000 Stockholders’ equity—common 155,000 Total Liabilities and Stockholders’ Equity $310,000 Income Statement Sales revenue Cost of goods sold Gross margin Operating expenses Net income Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations What is the inventory turnover for this company? a. 2.6 times b. 4.6 times c. 5.3 times d. 0.38 time
$ 116,000 66,000 50,000 30,000 $ 20,000 6,000 $20 .50 $35,000
Ans: A, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $66,000 / $25,000 = 2.6
.
13-44 182.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The following information pertains to Blue Flower Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Cash and short-term investments $ 45,000 Accounts receivable (net) 30,000 Inventory 25,000 Property, plant and equipment 210,000 Total Assets $310,000 Liabilities and Stockholders’ Equity Current liabilities $ 60,000 Long-term liabilities 95,000 Stockholders’ equity—common 155,000 Total Liabilities and Stockholders’ Equity $310,000 Income Statement Sales revenue Cost of goods sold Gross margin Operating expenses Net income Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations
$ 116,000 66,000 50,000 30,000 $ 20,000 6,000 $20 .50 $35,000
What is the return on assets for this company? a. 16.1% b. 11.3% c. 6.5% d. 12.9% Ans: C, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $20,000 / $310,000 = 6.5%
.
Financial Analysis: The Big Picture
183.
13-45
The following information pertains to Blue Flower Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Cash and short-term investments $ 45,000 Accounts receivable (net) 30,000 Inventory 25,000 Property, plant and equipment 210,000 Total Assets $310,000 Liabilities and Stockholders’ Equity Current liabilities $ 60,000 Long-term liabilities 95,000 Stockholders’ equity—common 155,000 Total Liabilities and Stockholders’ Equity $310,000 Income Statement Sales revenue Cost of goods sold Gross margin Operating expenses Net income Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations What is the profit margin for this company? a. 34.5% b. 43.1% c. 25.8% d. 17.2%
$ 116,000 66,000 50,000 30,000 $ 20,000 6,000 $20 .50 $35,000
Ans: D, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $20,000 / $116,000 = 17.2%
184.
The following information pertains to Blue Flower Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Cash and short-term investments $ 45,000 Accounts receivable (net) 30,000 Inventory 25,000 Property, plant and equipment 210,000 Total Assets $310,000 Liabilities and Stockholders’ Equity Current liabilities $ 60,000 Long-term liabilities 95,000 Stockholders’ equity—common 155,000 Total Liabilities and Stockholders’ Equity $310,000
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
13-46
MC 184.
(Cont.) Income Statement Sales revenue Cost of goods sold Gross margin Operating expenses Net income
$ 116,000 66,000 50,000 30,000 $ 20,000
Number of shares of common stock 6,000 Market price of common stock $20 Dividends per share on common stock .50 Cash provided by operations $35,000 What is the return on common stockholders’ equity for this company? a. 25.8% b. 12.9% c. 22.6% d. 32.3% Ans: B, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $20,000 $155,000 = 12.9%
185.
The following information pertains to Blue Flower Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. Assets Cash and short-term investments $ 45,000 Accounts receivable (net) 30,000 Inventory 25,000 Property, plant and equipment 210,000 Total Assets $310,000 Liabilities and Stockholders’ Equity Current liabilities $ 60,000 Long-term liabilities 95,000 Stockholders’ equity—common 155,000 Total Liabilities and Stockholders’ Equity $310,000 Income Statement Sales revenue Cost of goods sold Gross margin Operating expenses Net income Number of shares of common stock Market price of common stock Dividends per share on common stock Cash provided by operations
.
$ 116,000 66,000 50,000 30,000 $ 20,000 6,000 $20 .50 $35,000
Financial Analysis: The Big Picture
MC 185.
13-47
(Cont.)
What is the price-earnings ratio for this company? a. 2.4 times b. 2.0 times c. 3.4 times d. 6.0 times Ans: D, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $20 / ($20,000 / 6,000) = 6.0
186.
The following information is available for Patterson Company: 2017 2016 Accounts receivable $ 360,000 $ 340,000 Inventory 280,000 320,000 Net credit sales 3,150,000 2,600,000 Cost of goods sold 1,800,000 840,000 Net income 300,000 170,000 The accounts receivable turnover for 2017 is a. 8.8 times. b. 4.5 times. c. 9.0 times. d. 9.3 times.
Ans: C, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $3,150,000 / [($360,000 + $340,000) / 2] = 9.0
187.
The following information is available for Patterson Company: 2017 2016 Accounts receivable $ 360,000 $ 340,000 Inventory 280,000 320,000 Net credit sales 3,000,000 1,400,000 Cost of goods sold 1,800,000 840,000 Net income 300,000 170,000 The inventory turnover for 2017 is a. 6.4 times. b. 6.0 times. c. 5.6 times. d. 3.0 times.
Ans: B, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $1,800,000 / [($280,000 + $320,000) / 2] = 6.0
.
13-48
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
188.
The following amounts were taken from the financial statements of R.Dodd Company: 2017 2016 Current liabilities $1,280,000 $1,220,000 Long-term liabilities 1,800,000 1,600,000 Interest expense 100,000 50,000 Income tax expense 50,000 30,000 Net income 300,000 170,000 Net cash provided by operating activity 325,000 270,000 The times interest earned for 2017 is a. 3.0 times. b. 3.5 times. c. 4.0 times. d. 4.5 times.
Ans: D, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $450,000 / $100,000 = 4.5
189.
The following amounts were taken from the financial statements of Ando Company: 2017 2016 Total assets $800,000 $1,000,000 Net sales 720,000 650,000 Gross profit 352,000 320,000 Net income 108,000 117,000 Weighted average number of common shares outstanding 90,000 90,000 Market price of common stock $42 $39 The return on assets for 2017 is a. 14%. b. 12%. c. 11%. d. 6%.
Ans: B, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $108,000 [($800,000 + $1,000,000)/2] = 12%
.
Financial Analysis: The Big Picture
190.
13-49
The following amounts were taken from the financial statements of Ando Company: 2017 2016 Total assets $800,000 $1,000,000 Net sales 720,000 650,000 Gross profit 352,000 320,000 Net income 108,000 117,000 Weighted average number of common shares outstanding 90,000 90,000 Market price of common stock $42 $39 The profit margin ratio for 2017 is a. 14%. b. 16%. c. 15%. d. 18%.
Ans: C, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: 108,000 / $720,000 = 15%
191.
The following amounts were taken from the financial statements of Ando Company: 2017 2016 Total assets $800,000 $1,000,000 Net sales 720,000 650,000 Gross profit 352,000 320,000 Net income 108,000 117,000 Weighted average number of common shares outstanding 90,000 90,000 Market price of common stock $42 $39 The price-earnings ratio for 2017 is a. 35 times. b. 30 times. c. 42 times. d. 3 times.
Ans: A, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $42 / ($108,000 / 90,000) = 35
192.
Solvency is of most interest to a. short-term creditors. b. stockholders. c. competitors. d. long-term creditors.
Ans: D, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
193.
The current ratio would be of most interest to a. short-term creditors. b. long-term creditors. c. stockholders. d. customers.
Ans: A, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
.
13-50 194.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Which measure(s) is(are) an evaluation of a company’s ability to pay current liabilities? 1. Current ratio. 2. Free cash flow a. Both 1 and 2. b. Neither 1 nor 2. c. 1 only. d. 2 only
Ans: C, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
195.
Which measure(s) is(are) useful in evaluating the efficiency in managing inventories? 1. Inventory turnover 2. Days in inventory a. 1 only. b. 2 only. c. Both 1 and 2. d. Neither 1 nor 2.
Ans: C, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
196.
Which of these is not a liquidity ratio? a. Current ratio b. Asset turnover c. Inventory turnover d. Accounts receivable turnover
Ans: B, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
197.
Akers Corporation reported net income $36,000; net sales $480,000; and average assets $800,000 for 2017. What is the 2017 profit margin? a. 4.5% b. 7.5% c. 13.3% d. 60.0%
Ans: B, LO: 3, 4, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $36,000 / $480,000 = 7.5%
198.
Beta Corporation had net income of $325,000 and paid dividends to common stockholders of $39,000 in 2017. The weighted average number of shares outstanding in 2017 was 50,000 shares. Beta Corporation's common stock is selling for $52 per share on the New York Stock Exchange. Beta Corporation's price-earnings ratio is a. 12.5 times. b. 8.0 times. c. 6.5 times. d. 9.1 times.
Ans: B, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $52 / ($325,000 / 50,000)=8.0
.
Financial Analysis: The Big Picture
199.
13-51
Bertram Corporation had net income of $325,000 and paid dividends to common stockholders of $39,000 in 2017. The weighted average number of shares outstanding in 2017 was 50,000 shares. Bertram Corporation's common stock is selling for $52 per share on the New York Stock Exchange. Bertram Corporation's payout ratio for 2017 is a. $6.5 per share. b. 16%. c. 12%. d. 8.3%.
Ans: C, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement Solution: $39,000 / $325,000 = 12%
200.
A successful discount retail store such as Kmart would probably have a. a low inventory turnover. b. a high inventory turnover. c. zero profit margin. d. low volume.
Ans: B, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
201.
Net sales are $3,250,000, beginning total assets are $1,400,000, and the asset turnover is 2.5 times. What is the ending total asset balance? a. $1,300,000 b. $1,200,000 c. $1,400,000 d. $1,500,000
Ans: B, LO: 3, 4, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $3,250,000 / 2.5 = $1,300,000; ($1,400,000 + X) / 2 = $1,300,000; X = $1,200,000
202.
All of the following are ways that a company's current ratio would decrease except a. purchasing inventory on account. b. adding equal amounts to the numerator and denominator. c. paying off one-third of its accounts payable. d. paying cash for new equipment.
Ans: C, LO: 3, 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
203.
All of the following may be indicators of channel stuffing except a. deep discounts to customers. b. customers incentives for buying early. c. an extremely good earnings period followed by several subsequent bad periods. d. inventory levels that reflect seasonal demand levels.
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FC: None, AICPA PC: Professional Demeanor, IMA: Performance Measurement
.
13-52 204.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
The use of alternative accounting methods a. is not a problem in ratio analysis because the footnotes disclose the method used. b. may be a problem in ratio analysis even if disclosed. c. is not a problem in ratio analysis since eventually all methods will lead to the same end. d. is only a problem in ratio analysis with respect to inventory.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
205.
Which situation below might indicate a company has a low quality of earnings? a. Revenue is recorded when recognized b. Repair costs are capitalized and then depreciated. c. The financial statements are prepared in accordance with generally accepted accounting principles. d. The same accounting principles are used each year.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
206.
All of the following situtations below might indicate a company has a low quality of earnings except a. A lack of disclosure about guaranteed payments that were mentioned in the MD&A of the annual report. b. Maintenance costs are capitalized and then depreciated. c. Revenue is recognized when earned. d. Adoption of a different inventory method for each of the last three years.
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
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Financial Analysis: The Big Picture
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150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175.
c d b b c
Answers to Multiple Choice Questions 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71.
b d c b c a d d b c c d d c a d d d b b a d b a b a
72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97.
b b a c a b b c a d c b a c d a d b b b d c c b d c
98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123.
d b c a a b a c b d a b c c c a c d b b c a b d d d
.
124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149.
c b b a c c d c a b a b c a c d d d c b d c c b b d
c c b b b b c c b d c c b c b a d c a b b a c b a c
176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. 194. 195. 196. 197. 198. 199. 200. 201.
a a a c d a c d b d c b d b c a d a c c b b b c b b
202. 203. 204. 205. 206.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
BRIEF EXERCISES Be. 207 Listed below are some selected Items that may appear on a corporate income statement. Indicate the order in which these items would appear on an income statement. (The first one should be assigned the number “1”, the second “2,” etc.) _____ _____ _____ _____ _____
Income before income taxes Discontinued operations Net income Income from continuing operations Income tax expense
Ans: N/A, LO: 1, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Solution 207 1 4 5 3 2
(3-6 min.)
Income before income taxes Discontinued operations Net income Income from continuing operations Income tax expense
Be. 208 Dos Amugus Company has income from continuing operations of $621,000 (after tax) for the year ended December 31, 2017. It also has the following items (before considering income taxes): (1)
An unrealized loss of $120,000 available-for-sale-securities.
(2)
A gain of $60,000 on the discontinuance of a major component.
(3)
A cumulative effect of a change in accounting principle that resulted in an increase in prior years' depreciation of $50,000.
Assume all items are subject to income taxes at a 30% tax rate. Instructions Prepare a statement of comprehensive income, beginning with income from continuing operations. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
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Financial Analysis: The Big Picture
Solution 208
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(10-15 min.) DOS AMUGUS COMPANY Partial Statement of Comprehensive Income For the Year Ended December 31, 2017
Income from continuing operations ............................................................. Discontinued operations Gain on discontinued segment, net of $18,000 income taxes ............ Net income ................................................................................................. Other comprehensive income Unrealized holding loss, on available-for-sale securities, net of $36,000 income tax savings ............................................... Comprehensive income ..............................................................................
$621,000 42,000 663,000
(84,000) $579,000*
*(Inc. fr. con. oper. + discon. gain – unreal. loss)
Be. 209 An inexperienced accountant for CJS Transport Corporation showed the following in CJS Transport’s 2017 income statement: income before income taxes $420,000; and unrealized loss on available-for-sale securities (before taxes) $60,000. The unrealized loss and income before income taxes are both subject to a 30% tax rate. Instructions Prepare a corrected statement of income. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 209
(5-10 min.) CJS TRANSPORT CORPORATION Partial Statement of Comprehensive Income
Income before income taxes ................................................................ Income tax expense ($420,000 × 30%) ................................................ Net Income........................................................................................... Other comprehensive income Unrealized holding loss on available-for-sale securities, net of $18,000 ($60,000 × 30%) tax savings .......................................................... Comprehensive income........................................................................ *(Inc. bef. tax. – inc. tax exp. – unreal. loss)
.
$420,000 126,000 294,000
(42,000) $252,000*
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Be. 210 Comparative information taken from the Bergeron Company financial statements is shown below:
(a) (b) (c) (d) (e)
2017 $ 175,000 30,000 855,000 170,000 11,000
Accounts receivable Retained earnings Sales revenue Operating expenses Income taxes payable
2016 $ 140,000 (14,000) 750,000 200,000 10,000
Instructions Using horizontal analysis, show the percentage change from 2016 to 2017 with 2016 as the base year. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
Solution 210 (a) (b) (c) (d) (e)
(6-10 min.)
$35,000 ÷ $140,000 = 25% increase (2017 A/R – 2016 A/R) ÷ 2016 A/R Base year is negative. Not possible to compute. $105,000 ÷ $750,000 = 14% increase $30,000 ÷ $200,000 = 15% decrease (2017 op. exp. – 2016 op. exp.) ÷ 2016 op. exp. $1,000 ÷ $11,000 = 10% increase
Be. 211 The following items were taken from the financial statements of Kramer Manufacturing, Inc., over a three-year period: Item Net Sales Cost of Goods Sold Gross Profit
2018 $226,000 150,000 $ 76,000
2017 $212,000 140,000 $ 72,000
2016 $200,000 125,000 $ 75,000
Instructions Using horizontal analysis and 2016 as the base year, compute the trend percentages for net sales, cost of goods sold, and gross profit. Explain whether the trends are favorable or unfavorable for each item. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
Solution 211
(8-12 min.)
Item Net Sales Cost of Goods Sold Gross Profit
2018 113%1 120% 101%2
2017 106% 112% 96%
1
2016 100% 100% 100%
2 (2018 Net sal./2016 Net sal.) (2018 Gr. prof./2016 Gr. pref.) The trend in net sales is increasing and favorable. The cost of goods sold trend is increasing, which could be unfavorable, but the sales are increasing each year at a faster pace than cost of goods sold. This is apparent by examining the gross profit percentages, which show a favorable, increasing trend.
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Financial Analysis: The Big Picture
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Be. 212 The following items were taken from the financial statements of Mint, Inc., over a three-year period: Item Net Sales Cost of Goods Sold Gross Profit
2018 $355,000 214,000 $141,000
2017 $336,000 206,000 $130,000
2016 $300,000 186,000 $114,000
Instructions Compute the following for each of the above time periods. a. The amount and percentage change from 2016 to 2017. b. The amount and percentage change from 2017 to 2018. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
Solution 212
(5-9 min.)
Item
2018
Net Sales Cost of Goods Sold Gross Profit
$ 19,000 8,000 11,000
2017 $___ Percent 36,000 12.0 20,000 10.8** 16,000 14.0
Percent 5.6* 3.9 8.5
*((2018 Net sal. – 2017 Net sal.)/ 2017 Net sal.)
**(2017 COGS – 2016 COGS)/2016 COGS)
Be. 213 Using these data from the comparative balance sheet of Sunta Fe Spice Company, perform horizontal analysis. December 31, 2017 December 31, 2016 Accounts receivable $ 375,000 $ 300,000 Inventory 780,000 600,000 Total assets 3,220,000 2,800,000 Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
Solution 213
(5-10 min.)
Accounts receivable Inventory Total assets
Dec. 31, 2017 $ 375,000 780,000 3,220,000
$75,000 $180,000 = 0.25* $300,000 $600,000 *(2017 A/R – 2016 A/R) ÷ 2016 A/R
Dec. 31, 2016 $ 300,000 600,000 2,800,000 = 0.30
Increase or (Decrease) Amount Percentage* $75,000 25% 180,000 30% 420,000 15% $420,000 = 0.15 $2,800,000
Be. 214 If Hard in Parle Company had net income of $620,000 in 2017 and it experienced a 19% increase in net income over 2016, what was its 2016 net income? Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC:
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition Problem Solving, IMA: Performance Measurement
.
Financial Analysis: The Big Picture
Solution 214
(5-10 min.) 2017 $620,000
Net Income 0.19 =
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2016 X
Increase 19%
$620,000 – X X
0.19X = $620,000 – X 1.19X = $620,000 X = $521,008 (2017 Net inc. ÷ (1 + % inc.)) Be. 215 Horizontal analysis (trend analysis) percentages for Omega Company’s sales, cost of goods sold, and expenses are listed here. Horizontal Analysis Sales revenue Cost of goods sold Expenses
2018 98.2% 103.1 108.6
2017 104.8% 97.5 96.4
2016 100.0% 100.0 100.0
Instructions Explain whether Omega’s net income increased, decreased, or remained unchanged over the 3year period. Ans: N/A, LO: 2, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
Solution 215
(5-10 min.)
Comparing the percentages presented results in the following conclusions: The net income for Omega increased in 2017 because of the combination of an increase in sales and a decrease in both cost of goods sold and expenses. However, the reverse was true in 2018 as sales decreased, while both cost of goods sold and expenses increased. This resulted in a decrease in net income. Be. 216 Using the following selected items from the comparative balance sheet of Kato Company, illustrate horizontal and vertical analysis. December 31, 2017 $ 720,000 450,000 3,200,000
Accounts Receivable Inventory Total Assets
December 31, 2016 $ 630,000 360,000 3,000,000
Ans: N/A, LO: 2 Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 216
(8-12 min.) HORIZONTAL ANALYSIS December 31, 2017 114% 125% 107%
Accounts Receivable Inventory Total Assets
December 31, 2016 100% 100% 100%
*(2017 A/R/2016 A/R)
VERTICAL ANALYSIS December 31, 2017 22.5% 14% 100%
Accounts Receivable Inventory Total Assets
December 31, 2016 21% 12% 100%
*(Acc. rec. /Tot. assets)
Be. 217 Using these data from the comparative balance sheet of K. Leen Company, perform vertical analysis. December 31, 2017 $ 400,000 864,000 3,200,000
Accounts receivable Inventory Total assets
December 31, 2016 $ 400,000 600,000 3,000,000
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
Solution 217
(5-10 min.)
Accounts receivable Inventory Total assets
Dec. 31, 2017 Amount Percentage* $ 400,000 12.5% 864,000 27.0% 3,200,000 100.0%
Dec. 31, 2016 Amount Percentage** $ 400,000 13.3% 600,000 20.0% 3,000,000 100.0%
$400,000 $3,200,000
= 0.125
Acc. rec Tot. assets
$400,000 $3,000,000
= 0.133
$864,000 $3,200,000
= 0.270
Inven. Tot.assets
$600,000 $3,000,000
= 0.200
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Financial Analysis: The Big Picture
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Be. 218 Vertical analysis (common-size) percentages for Austin Company’s sales, cost of goods sold, and expenses are listed here. Vertical Analysis 2018 2017 2016 Sales revenue 100.0% 100.0% 100.0% Cost of goods sold 61.2 62.4 63.5 Operating expenses 26.5 27.4 28.5 Did Austin Company’s net income as a percent of sales increase, decrease, or remain unchanged over the 3-year period? Provide numerical support for your answer. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
Solution 218
(5-10 min.)
Sales revenue Cost of goods sold Expenses Net income
2018 100.0 (61.2) (26.5) 12.3
2017 100.0 (62.4) (27.4) 10.2
2016 100.0 (63.5) (28.5) 8.0
*(Sal. rev. % − COGS% − oper. exp.%)
Net income as a percent of sales for Austin increased over the three-year period because cost of goods sold and expenses both decreased as a percent of sales every year. Be. 219 Selected information from the comparative financial statements of Barcelona Company for the year ended December 31 appears below: 2017 2016 Accounts receivable (net) $ 175,000 $200,000 Inventory 130,000 170,000 Total assets 1,100,000 800,000 Current liabilities 140,000 110,000 Long-term debt 410,000 300,000 Net credit sales 900,000 700,000 Cost of goods sold 600,000 530,000 Interest expense 40,000 25,000 Income tax expense 60,000 29,000 Net income 120,000 85,000 Net cash provided by operating activities 250,000 135,000 Instructions Answer the following questions relating to the year ended December 31, 2017. Show computations. 1. The inventory turnover for 2017 is __________. 2. The number of times interest earned in 2017 is __________. 3. The accounts receivable turnover for 2017 is __________. 4. The return on assets for 2017 is __________. Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 219
(8-12 min.)
1. The inventory turnover for 2014 is 4.0 times.
$600,000 ———————————— = 4.0* times. ($130,000 + $170,000) ÷ 2 *(COGS ÷ [(beg. inv. + end. inv.)/2
2. The number of times interest earned in 2017 is 5. 5 times. $120,000 + $60,000 + $40,000 Net inc. + inc. tax exp. + int. exp. = 5.5 times. 40,000 Int. exp.
3. The accounts receivable turnover for 2017 is 4.8 times. (Net Cr. sal. ÷ [(beg. A/R + end A/R)/2]) $ 900,000 ———————————— = 4.8 times. ($175,000 + $200,000) ÷ 2 4. The return on assets for 2017 is 12.6%. $120,000 ————————————— = 12.6%. (Net inc. ÷ [(beg. tot. ass. + end. tot. ass.)/2]) ($1,100,000 + $800,000) ÷ 2 Be. 220 Selected data for Buechner Corporation appear below. Net credit sales Cost of goods sold Inventory at end of year Accounts receivable at end of year
2017 $630,000 409,500 64,000 90,000
2016 $520,000 312,000 85,000 50,000
Instructions Compute the following for 2017: (a) Gross profit percentage (b) Inventory turnover (c) Accounts receivable turnover Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
.
Financial Analysis: The Big Picture
Solution 220 (a)
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(6-10 min.)
Gross profit = Net Sales - Cost of goods sold = $630,000 - $409,500 = $220,500 Gross profit percentage = Gross profit ÷ Net sales = $220,500 ÷ $630,000 = 35%
(b)
Inventory turnover = Cost of goods sold ÷ Average inventory = $409,500 ÷ [($64,000 + $85,000) ÷ 2] = 5.5 times
(c)
Accounts receivable turnover = Net credit sales ÷ Average accounts receivables = $630,000 ÷ [($90,000 + $50,000) ÷ 2] = $630,000 ÷ $70,000 = 9 times
Be. 221 Corsig Corporation had the following comparative current assets and current liabilities: Dec. 31, 2017 Dec. 31, 2016 Current assets Cash $ 25,000 $ 30,000 Debt investments 40,000 10,000 Accounts receivable 60,000 90,000 Inventory 110,000 90,000 Prepaid expenses 35,000 25,000 Total current assets $270,000 $245,000 Current liabilities Accounts payable $120,000 $110,000 Salaries and wages payable 40,000 30,000 Income tax payable 10,000 15,000 Total current liabilities $170,000 $155,000 During 2017, net credit sales and cost of goods sold were $570,000 and $350,000, respectively. Net cash provided by operating activities for 2017 was $140,000. Instructions Compute the following liquidity measures for 2017: 1. Current ratio 2. Accounts receivable turnover 3. Inventory turnover Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 221
(6-9 min.)
1. Current Ratio = Current Assets ÷ Current Liabilities = $270,000 ÷ $170,000 = 1.59:1 Net credit sales $570,000 2. Accounts Receivable Turnover = ————————————— = ——————————— Average accounts receivable ($60,000 + $90,000) ÷ 2 $570,000 = ———— = 7.6 times $75,500 3. Inventory Turnover
Cost of goods sold $350,000 = ————————— = ——————————— Average inventory ($110,000 + $90,000) ÷ 2 $350,000 = ———— = 3.5 times $100,000
Be. 222 Selected data from the Florida Fruit Company are presented below: Total assets $1,500,000 Average total assets 1,850,000 Net income 175,000 Net sales 1,300,000 Average common stockholders' equity 1,000,000 Net cash provided by operating activities 275,000 Instructions Assuming that no dividends were declared or paid during the period, calculate the following profitability ratios from the above information: 1. Profit margin 2. Asset turnover 3. Return on assets 4. Return on common stockholders’ equity Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
.
Financial Analysis: The Big Picture
Solution 222
13-65
(10-15 min.)
With the information provided, the profitability ratios that can be calculated are as follows: 1. Profit margin = Net income ÷ Net sales = $175,000 ÷ $1,300,000 = 13.5% 2. Asset turnover = Net sales ÷ Average total assets = $1,300,000 ÷ $1,850,000 = .70 times 3. Return on assets = Net income ÷ Average total assets = $175,000 ÷ $1,850,000 = 9.5% Net income 4. Return on common stockholders' equity = ————————————————— Average common stockholders' equity = $175,000 ÷ $1,000,000 = 17.5%
Be. 223 The following data are taken from the financial statements of Bar Harbor Company: 2017 $ 530,000 5,800,000
Average accounts receivable Net sales on account Terms for all sales are 2/10, n/30
2016 $ 550,000 5,200,000
Instructions (a) Compute the accounts receivable turnover and the average collection period for both years. (b) What conclusion can an analyst draw about the management of the accounts receivable? Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
Solution 223
(8-12 min.)
(a) Accounts receivable turnover
Average collection period
.
2017
2016
$5,800,000 ————— 530,000
$5,200,000 ————— 550,000
10.9 times
9.5 times
365 days ————— 10.9 times
365 days ———— 9.5 times
33.5 days
38.4 days
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 223 (b)
(Cont.)
The accounts receivable are turning faster in 2017 than they did in 2016. There is still a problem since the normal credit period is 30 days, and the average collection period for both years exceed this target. Therefore, improvement in the management of the accounts receivable would appear to be desirable.
Be. 224 State the effect of the following transactions on the current ratio. Use increase, decrease, or no effect for your answer. (a)
Collection of an accounts receivable
(b)
Declaration of cash dividends
(c)
Additional stock is sold for cash
(d)
Accounts payable are paid
(e)
Equipment is purchased for cash
(f)
Inventory purchases are made for cash
(g)
Temporary investments are purchased for cash
Ans: N/A, LO: 3, 4, Bloom: AN, Difficulty: Medium, Min: 7, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
Solution 224 (a) (b) (c) (d) (e) (f) (g)
(7-11 min.)
no effect decrease increase increase decrease no effect no effect
Be. 225 The balance sheet for Appalachian Corporation at the end of the current year includes the following: Bonds payable, 6% ...................................................... 6% Preferred stock, $100 par ...................................... Common stock, $10 par ...............................................
$5,000,000 1,000,000 2,000,000
Net income was $565,000 and income tax expense for the current year amounted to $285,000. Cash dividends paid on common stock were $200,000, and the common stock was selling for $28 per share at the end of the year. There were no ownership changes during the year.
.
Financial Analysis: The Big Picture
Be. 225
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(Cont.)
Instructions Determine each of the following: (a) Number of times that bond interest was earned. (b) Earnings per share for common stock. (c) Price-earnings ratio. Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
Solution 225
(6-12 min.)
(a) Times interest earned =
=
Income before income taxes and interest expense Interest expense $565,000 + $285,000 + $300,000 $300,000
= 3.8 times
Net income - Preferred dividends Weighted average common shares outstanding
(b) Earnings per share =
=
$565,000 - $60,000 200,000 shares
= $2.53 per share
Market price per share Earnings per share
(c) Price-earnings ratio = $28 $2.53
=
= 11.1 times
Be. 226 The income statement for the Carolina Service Company for the year ended December 31, 2017, appears below. Sales revenue Cost of goods sold Gross profit Expenses Net income
$670,000 390,000 280,000 180,000* $100,000
*Includes $25,000 of interest expense and $20,000 of income tax expense. Additional information: 1. Common stock outstanding on January 1, 2017, was 50,000 shares. On July 1, 2017, 10,000 more shares were issued. 2. The market price of Carolina's stock was $22 at the end of 2017. 3. Cash dividends of $35,000 were paid, $5,000 of which were paid to preferred stockholders.
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Be. 226
(Cont.)
Instructions Compute the following ratios for 2017: (a) Earnings per share. (b) Price-earnings. (c) Times interest earned. Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
Solution 226 (a)
(6-10 min.)
Earnings per share $100,000 - $5,000 $95,000 Net inc. - pref. div. = = $1.73 [50,000 + (10,000 / 2)] 55,000 Beg. com. sh. + (sh. iss. / 2)
(b)
Price-earnings $22.00 ——— = 12.7 times (Mar. pr. ÷ earn. per sh.) 1.73
(c)
Times interest earned $100,000 + $25,000 + $20,000 Net inc. + inc. exp. + int. tax exp. = 5.8 times. $25,000 Int. exp.
Be. 227 Selected data taken from the 2017 financial statements of Phillips Card Company, Inc. are as follows (in millions). Net sales Net cash provided by operating activities Capital expenditures Cash dividends
$295.9 17.0 2.6 6.5
Instructions Compute the free cash flow February 28, 2017; and briefly discuss your results. Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
.
Financial Analysis: The Big Picture
Solution 227
13-69
(5-17 min.)
Free cash flow = Cash provided by operating activities – Capital expenditures – Cash dividends $7.9 = $17.0 – $2.6 – $6.5 Phillips generated enough cash from operating activities to maintain its current productive capacity and pay dividends. The free cash flow that remained could have been used to expand operations, pay additional dividends, or reduce debt.
EXERCISES Ex. 228 Exeter Corporation had net income of $3,000,000 in 2016. Using 2016 as the base year, net income decreased by 40% in 2017 and increased by 110% in 2018. Instructions Compute the net income reported by Exeter Corporation for 2017 and 2018. Ans: N/A, LO: 2, Bloom: AN, Difficulty: Hard, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
Solution 228
(8-12 min.)
2017: X ÷ $3,000,000 = 40% X = $3,000,000 × .40 = $1,200,000 The decrease is $1,200,000; therefore net income for 2017 is $1,800,000; ($3,000,000 – $1,200,000). (Net inc. – (Net inc. ×.40)) 2018: X ÷ $3,000,000 = 110% X = $3,000,000 × 1.1 = $3,300,000 The increase is $3,300,000; therefore net income for 2018 is $6,300,000; ($3,000,000 + $3,300,000). (Net inc. + (Net inc. × 1.10))
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 229 The following items were taken from the financial statements of St. Johns, Inc., over a four-year period: Item Net Sales Cost of Goods Sold Gross Profit
2018 $655,000 520,000 $135,000
2017 $640,000 480,000 $160,000
2016 $575,000 435,000 $140,000
2015 $500,000 400,000 $100,000
Instructions Using horizontal analysis and 2015 as the base year, compute the trend percentages for net sales, cost of goods sold, and gross profit. Explain whether the trends are favorable or unfavorable for each item. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
Solution 229
(10-15 min.)
Item 2018 Net Sales 131% Cost of Goods Sold 130% Gross Profit 135% *(2018 Net sal./2015 Net sal.)
2017 2016 128% 115% 120% 109% 160% 140% **(2018 Gr. prof./2015 gr. prof.)
2015 100% 100% 100%
The trend in net sales is increasing and favorable. The cost of goods sold trend is increasing which could be unfavorable, but the sales are increasing each year at a faster pace than cost of goods sold. This is apparent by examining the gross profit percentages, which show a favorable, increasing trend except in 2018. Ex. 230 Here is financial information for Valdez Express Inc. December 31, 2017 $114,000 414,000 91,000 134,500 149,500 153,000
Current assets Plant assets (net) Current liabilities Long-term liabilities Common stock, $1 par Retained earnings
December 31, 2016 $80,000 360,000 65,000 90,000 115,000 170,000
Instructions Prepare a schedule showing a horizontal analysis for 2017 using 2016 as the base year. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
.
Financial Analysis: The Big Picture
Solution 230
13-71
(10 min.) VALDEZ EXPRESS INC. Condensed Balance Sheet December 31 Increase or (Decrease) Amount Percentage
2017
2016
Assets Current assets Plant assets (net) Total assets
$114,000 414,000 $528,000
$ 80,000 360,000 $440,000
$34,000 54,000 $88,000
42.5%* 15.0% 20.0%
Liabilities Current liabilities Long-term liabilities Total liabilities
$ 91,000 134,500 $225,500
$ 65,000 90,000 $155,000
$26,000 44,500 $70,500
40.0%** 49.4% 45.5%
Stockholders' Equity Common Stock, $1 par $149,500 $115,000 $34,500 30.0% Retained earnings 153,000 170,000 (17,000) (10.0%) Total stockholders' equity 302,500 285,000 17,500 6.1% Total liabilities and stockholders' equity $528,000 $440,000 $88,000 20.0% *[(2017 cur. ass. – 2016 cur. ass.)/2016 cur. ass.] **[(2017 cur. liab. – 2016 cur. liab)/2016 cur. liab) Ex. 231 Here are the comparative income statements of Georgia Development Corporation. GEORGIA DEVELOPMENT CORPORATION Comparative Income Statements For the Years Ended December 31 December 31, 2017 $600,000 414,000 186,000 150,000 $36,000
Net sales Cost of goods sold Gross profit Operating expenses Net income
December 31, 2016 $500,000 350,000 150,000 120,000 $30,000
Instructions (a) Prepare a horizontal analysis of the income statement data for Georgia Development Corporation using 2016 as a base. (Show the amounts of increase of decrease.) (b) Prepare a vertical analysis of the income statement data for Georgia Development Corporation for both years. Ans: N/A, LO: 2 Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 231 (a)
(12 min.) GEORGIA DEVELOPMENT CORPORATION Condensed Income Statement For the Years Ended December 31 Increase or (Decrease) During 2017
2017 Net sales $600,000 Cost of goods sold 414,000 Gross profit 186,000 Operating expenses 150,000 Net income $ 36,000 *[(2017 Net sal. – 2016 Net sal.)/2016 Net sal.] (b)
2016 $500,000 350,000 150,000 120,000 $ 30,000
Amount $100,000 64,000 36,000 30,000 $ 6,000
Percentage 20.0%* 18.3% 24.0% 25.0% 20.0%
GEORGIA DEVELOPMENT CORPORATION Condensed Income Statement For the Years Ended December 31
Net sales Cost of goods sold Gross profit Operating expenses Net income *(COGS/Net sal.) **(Net inc./Net sal.)
2017 $ Percent $600,000 100.0% 414,000 69.0%* 186,000 31.0% 150,000 25.0% $ 36,000 6.0%**
2016 $ $500,000 350,000 150,000 120,000 $ 30,000
Percent 100.0% 70.0% 30.0% 24.0% 6.0%
Ex. 232 The comparative balance sheet of Delta Company appears below: Delta COMPANY Comparative Balance Sheet December 31, ___________________________________________________________________________ Assets 2017 2016 Current assets ..................................................................................... $ 450 $280 Plant assets ......................................................................................... 550 520 Total assets ................................................................................... $1,000 $800 Liabilities and stockholders' equity Current liabilities .................................................................................. Long-term debt .................................................................................... Common stock .................................................................................... Retained earnings ............................................................................... Total liabilities and stockholders' equity .........................................
.
$ 180 250 310 260 $1,000
$120 160 320 200 $800
Financial Analysis: The Big Picture
Ex. 232
13-73
(Cont.)
Instructions (a) Using horizontal analysis, show the percentage change for each balance sheet item using 2016 as a base year. (b) Using vertical analysis, prepare a common size comparative balance sheet. Ans: N/A, LO: 2 Bloom: AP, Difficulty: Medium, Min: 14, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
Solution 232
(14-19 min.) DELTA COMPANY Comparative Balance Sheet December 31, 2017 (b)
2016 (b)
(a) Percentage Amount Percent Amount Percent Change $ 450 45%* $280 35% 61% 550 55% 520 65 6% $1,000 100% $800 100% 25% **[(2017 cur. ass. – 2016 cur. ass.)/2016 cur. ass.]
Assets Current assets Plant assets Total assets *(Curr. ass./Tot. ass.)
Liabilities and stockholders' equity Current liabilities Long-term debt Common stock Retained earnings Total liabilities and stockholders' equity
$ 180 250 310 260 $1,000
18% 25 31 26 100%
$120 160 320 200 $800
15% 20 40 25 100%
50% 56% (3)% 30% 25%
Ex. 233 The following information was taken from the financial statements of Bjorg Company: Gross profit on sales ................................................................ Income before income taxes .................................................... Net income ............................................................................... Net income as a percentage of net sales .................................
2017 $600,000 230,000 180,000 10%
2016 $680,000 221,000 153,000 9%
Instructions (a) Compute the net sales for each year. (b) Compute the cost of goods sold in dollars and as a percentage of net sales for each year. (c) Compute operating expenses in dollars and as a percentage of net sales for each year. (Income taxes are not operating expenses). Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
13-74
Solution 233 (a)
(12-15 min.)
To calculate net sales, divide net income by the percentage of net income to net sales. Net Sales
2017 $180,000 ÷ 10% = $1,800,000
2016 $153,000 ÷ 9% = $1,700,000
(b)
Using the net sales information from (a) and the gross profits given, it is possible to calculate the cost of goods sold. 2017 2016 Net Sales $1,800,000 $1,700,000 Less: Gross profit 600,000 680,000 Cost of goods sold $ 1,200,000* $ 1,020,000 *(Net sal. – gr. prof.) % of net sales 66.7%* 60% **(COGS/Net sal.) (c) Gross profit Less: Income before income taxes Operating Expenses *(Gr. prof. – inc. bef. inc. tax.) % of net sales
2017 $600,000 230,000 $370,000*
2016 $680,000 221,000 $459,000
20.55%
27.0%
Ex. 234 Operating data for Panola Land Corporation are presented below 2017 $800,000 480,000 120,000 80,000 24,000 96,000
Sales revenue Cost of goods sold Selling expenses Administrative expenses Income tax expense Net income
2016 $600,000 390,000 78,000 54,000 25,000 53,000
Instructions Prepare a schedule showing a vertical analysis for 2017 and 2016. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
.
Financial Analysis: The Big Picture
Solution 234
13-75
(10 min.)
PANOLA LAND COMPANY Condensed Income Statement For the Years Ended December 31 ___________________________________________________________________________ 2017 Amount Percent $800,000 100.0% 480,000 60.0* 320,000 40.0 120,000 15.0% 80,000 10.0% 200,000 25.0% 120,000 15.0%** 24,000 3.0% $96,000 12.0% **(Inc. bef. inc. tax./sal. rev.)
Sales revenue Cost of goods sold Gross profit Selling expenses Administrative expenses Total operating expenses Income before income taxes Income tax expense Net income *(COGS/sal. rev.)
2016 Amount Percent $600,000 100.0% 390,000 65.0% 210,000 35.0% 78,000 13.0% 54,000 9.0% 132,000 22.0% 78,000 13.0% 25,000 4.2% $53,000 8.8%
Ex. 235 Armada Company has these comparative balance sheet data: ARMADA COMPANY Balance Sheets December 31, Cash Accounts receivable (net) Inventory Plant assets (net) Accounts payable Mortgage payable (15%, due in 15 years) Common stock, $10 par Retained earnings
2017 $ 40,000 65,000 60,000 185,000 $350,000 $ 50,000 100,000 140,000 60,000 $350,000
2016 $ 30,000 60,000 50,000 180,000 $320,000 $ 60,000 100,000 120,000 40,000 $320,000
Additional information for 2017: 1. 2. 3. 4. 5.
Net income was $25,000. Sales on account were $450,000. Sales returns and allowances amounted to $25,000. Cost of goods sold was $275,000. Net cash provided by operating activities was $49,000. Capital expenditures were $23,000, and cash dividends were $18,000.
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 235
(Cont.)
Instructions Compute the following ratios at December 31, 2017. (a) Current. (e) Days in inventory (b) Accounts receivable turnover. (f) Free cash flow. (c) Average collection period. (d) Inventory turnover. Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
Solution 235
(10 min.)
(a) Current ratio =
$165,000 = 3.3:1 Cur. assets Cur. liab. $50,000
(b) Accounts receivable turnover =
$425,000 assets = 6.8 times (End. A Cur. / R + beg. A / R) / 2 ($65,000 + $60,000) / 2
(c) Average collection period = 365 days ÷ 6.8 = 53.7 days (365 ÷ A/R turn.) $275,000 ($60,000 + $50,000) / 2
(d) Inventory turnover =
= 5.0 times (End. inv.COGS + beg. inv.) / 2
(e) Days in inventory = 365 days ÷ 5.0 = 73 days (365 ÷ inven. turn.) (f) Free cash flow = $49,000 – $23,000 – $18,000 = $8,000 (Net cash from oper. act. – cap. expend. – cash div.) Ex. 236 Here is the income statement for Ginsberg, Inc. GINSBERG, INC. Income Statement For the Year Ended December 31, 2017 ___________________________________________________________________________ Sales revenue $400,000 Cost of goods sold 250,000 Gross profit 150,000 Expenses (including $12,000 interest and $22,000 income taxes) 100,000 Net income $ 50,000
.
Financial Analysis: The Big Picture
Ex. 236
13-77
(Cont.)
Additional information: 1. Common stock outstanding January 1, 2017, was 30,000 shares, and 40,000 shares were outstanding at December 31, 2017. 2. The market price of Gillman, Inc., stock was $15.86 in 2017. 3. Cash dividends of $16,000 were paid, $4,500 of which were to preferred stockholders. Instructions Compute the following measures for 2017. (a) Earnings per share. (b) Price-earnings ratio. (c) Payout ratio. (d) Times interest earned. Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
Solution 236
(10 min.)
$50,000 - $4,500 ($30,000 + $40,000) / 2 [(Net inc. – pref. div.)/(beg. sh. + end. sh.)/2
(a) Earnings per share =
$15.86 $1.30
Mar. Price = 12.2 times Earn. per sh.
$16,000 - $4,500 $50,000
paid - pref. div. = 23% Cash div.Net inc.
(b) Price-earnings ratio =
(c) Payout ratio =
=
$45,500 35,000
= $1.30
$50,000 + $12,000 + $22,000 $84,000 = $12,000 $12,000 (Net inc. + int. exp. + inc taxes)/Int. exp.
(d) Times interest earned =
= 7 times
Ex. 237 Belcanto Corporation experienced a fire on December 31, 2017, in which its financial records were partially destroyed. It has been able to salvage some of the records and has ascertained the following balances. December 31, 2017 $ 40,000 84,000 200,000 50,000 30,000 400,000 170,000
Cash Accounts receivable (net) Inventory Accounts payable Notes payable Common stock, $100 par Retained earnings
.
December 31, 2016 $ 15,000 126,000 180,000 10,000 20,000 400,000 101,000
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ex. 237
(Cont.)
Additional information: 1. The inventory turnover is 4.2 times 2. The return on common stockholders' equity is 14%. The company had no additional paid-incapital. 3. The accounts receivable turnover is 10.2 times. 4. The return on assets is 12.5%. 5. Total assets, Dec. 31, 2016 = $604,750. Instructions Compute the following values for 2017. (a) Cost of goods sold. (b) Net credit sales. (c) Net income. (d) Total assets. Ans: N/A, LO: 3, 4, Bloom: AN, Difficulty: Hard, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 237
(25 min.) Cost of goods sold Average inventory
= 4.2 times
Cost of goods sold ($200,000 + $180,000) / 2
= 4.2 times
Cost of goods sold $190,000
= 4.2 times
$190,000 X 4.2 times
= Cost of goods sold
$798,000
= Cost of goods sold
(a) Inventory turnover =
Net sales (Credit) Average accounts receivable
(b) Accounts receivable turnover =
= 10.2
Net sales (Credit) ($126,000 + $84,000) / 2
= 10.2
Net sales (Credit) $105,000
= 10.2
$105,000 X 10.2
= Net sales (Credit)
$1,071,000
= Net sales (Credit)
.
Financial Analysis: The Big Picture
Solution 237
13-79
(Cont.)
(c) Return on common stockholders' equity
Net income - Preferred dividends Average common stockholders’ equity
=
= 14%
Net income - $0 ($400,000 + $170,000 + $400,000 + $101,000) / 2
= 14%
Net income $535,500
= 14%
(d) Return on assets =
$535,500 X 14%
= Net income
$74,970
= Net income
Net income Average total assets
= 12.5%
$74,970 (See c, above) Average total assets
= 12.5%
$74,970 / 12.5%
= Average assets
$599,760
= Average assets
(Total assets 2017 + Total assets 2016) /2
= Average assets $599,760
(Total assets 2017 + $604,750) /2
= Average assets $599,760
($599,760 X 2) - $604,750
= Total assets 2017
($1,199,520) - $604,750
= Total assets 2017
$594,770
= Total assets 2017
Ex. 238 The financial statements of Elcamino Company appear below: ELCAMINO COMPANY Comparative Balance Sheet December 31, ___________________________________________________________________________ Assets 2017 2016 Cash ............................................................................................. $ 25,000 $ 40,000 Debt investments .......................................................................... 20,000 60,000 Accounts receivable (net) .............................................................. 50,000 30,000 Inventory ....................................................................................... 140,000 170,000 Property, plant and equipment (net) .............................................. 170,000 200,000 Total assets ............................................................................. $405,000 $500,000
.
13-80 Ex. 238
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
(Cont.)
Liabilities and stockholders' equity Accounts payable .......................................................................... $ 25,000 Short-term notes payable .............................................................. 40,000 Bonds payable ............................................................................... 75,000 Common stock .............................................................................. 160,000 Retained earnings ......................................................................... 105,000 Total liabilities and stockholders' equity .................................... $405,000
$ 30,000 90,000 160,000 145,000 75,000 $500,000
ELCAMINO COMPANY Income Statement For the Year Ended December 31, 2017 Net sales (all on credit) .................................................................. Cost of goods sold ......................................................................... Gross profit .................................................................................... Expenses Interest expense ...................................................................... Selling expenses ..................................................................... Administrative expenses .......................................................... Total expenses .................................................................. Income before income taxes .......................................................... Income tax expense ...................................................................... Net income ....................................................................................
$360,000 184,000 176,000 $11,000 30,000 20,000 61,000 115,000 35,000 $ 80,000
Additional information: a. Cash dividends of $50,000 were declared and paid on common stock in 2017. b. Weighted-average number of shares of common stock outstanding during 2017 was 50,000 shares. c. Market price of common stock on December 31, 2017, was $16 per share. d. Net cash provided by operating activities for 2017 was $70,000.
.
Financial Analysis: The Big Picture
Ex. 238
13-81
(Cont.)
Instructions Using the financial statements and additional information, compute the following ratios for the Lewis Company for 2017. Show all computations. Computations 1.
Current ratio _________.
2.
Return on common stockholders' equity _________.
3.
Price-earnings ratio _________.
4.
Inventory turnover _________.
5.
Accounts receivable turnover _________.
6.
Times interest earned _________.
7.
Profit margin _________.
8.
Days in inventory _________.
9.
Payout ratio _________.
10.
Return on assets _________.
Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
Solution 238 1.
2.
3.
(15-20 min.) $235,000 ————— = 3.6 $65,000
Current ratio 3:6. (Cur. assets/cur. liab.)
$80,000 Return on common stockholders' equity 32.99%. ———— ———————— = .3299 ($265,000 + $220,000) ÷ 2 (Net inc./[(end. st. eq. +beg. st. eq.) ÷ 2]) $80,000 Price-earnings ratio 10.0 times. EPS = ———— = $1.60 50,000 $16 = 10.0 times $1.60
Mar. price Net inc. / Com. sh. out.
4.
Inventory turnover 1.19 times. (COGS/[(end. inv. + beg. end.) ÷ 2])
5.
Accounts receivable turnover 9.0 times. (Cr. sal./[(end. A/R + beg.A/R) ÷ 2])
.
$184,000 ———————————— = 1.19 ($140,000 + $170,000) ÷ 2 $360,000 ——————————— = 9.0 ($50,000 + $30,000) ÷ 2
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
13-82
Solution 238 6.
(Cont.)
Times interest earned 11.5 times.
$80,000 + $35,000 + $11,000 —————————————— = 11.5 $11,000
Net inc. + inc. tax exp. + int. exp. Int. exp.
7.
Profit margin 22.2%. (Net inc./Net sales)
$80,000 ———— = .222 $360,000
8.
Average Days in inventory 306.7 days. (365/A/R turn.)
365 days ———— = 306.7 1.19
9.
Payout ratio 63%. (Cash div. paid/Net inc.)
$50,000 ———— = .63 $80,000
10.
Return on assets 17.7%. (Net inc./[(end. tot. ass. + beg. tot. ass.) ÷ 2])
$80,000 ———————————— = .177 ($405,000 + $500,000) ÷ 2
Ex. 239 The following ratios have been computed for Southern Company for 2017. Profit margin ratio Times interest earned Accounts receivable turnover
20% 12 times 5 times
Current ratio Debt to assets ratio
2.5:1 24%
The 2017 financial statements for Southern Company with missing information follows: SOUTHERN COMPANY Comparative Balance Sheet December 31, —————————————————————————————————————————— Assets 2017 2016 Cash ........................................................................................ $ 25,000 $ 35,000 Debt Investments ..................................................................... 15,000 15,000 Accounts receivable (net) ........................................................ ? (6) 50,000 Inventory ................................................................................. ? (7) 50,000 Property, plant, and equipment (net) ....................................... 200,000 160,000 Total assets ...................................................................... $ ? (8) $310,000
.
Financial Analysis: The Big Picture
Ex. 239
13-83
(Cont.)
Liabilities and stockholders' equity Accounts payable ..................................................................... $ 15,000 Short-term notes payable ......................................................... 35,000 Bonds payable ......................................................................... ? (9) Common stock ......................................................................... 200,000 Retained earnings .................................................................... 47,000 Total liabilities and stockholders' equity ............................. $ ? (10)
$ 25,000 30,000 20,000 200,000 35,000 $310,000
SOUTHERN COMPANY Income Statement For the Year Ended December 31, 2017 —————————————————————————————————————————— Net sales .................................................................................. $200,000 Cost of goods sold ................................................................... 100,000 Gross profit ............................................................................... 100,000 Expenses: Depreciation expense ......................................................... $ ? (5) Interest expense ................................................................. 5,000 Selling expenses ................................................................ 10,000 Administrative expenses .................................................... 15,000 Total expenses ............................................................. ? (4) Income before income taxes .................................................... ? (2) Income tax expense ........................................................... ? (3) Net income ............................................................................... $ ? (1) Instructions Use the above ratios and information from the Southern Company financial statements to fill in the missing information on the financial statements. Follow the sequence indicated. Show computations that support your answers. Ans: N/A, LO: 3, 4, Bloom: AN, Difficulty: Medium, Min: 35, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
Solution 239
(35-40 min.)
SOUTHERN COMPANY Comparative Balance Sheet December 31, —————————————————————————————————————————— Assets 2017 2016 Cash .................................................................................. $ 25,000 $ 35,000 Debt investments ............................................................... 15,000 15,000 Accounts receivable (net) ................................................... 30,000 (6) 50,000 Inventory ............................................................................ 55,000 (7) 50,000 Property, plant, and equipment (net) .................................. 200,000 160,000 Total assets ................................................................ $325,000 (8) $310,000
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 239
(Cont.) Liabilities and stockholders' equity
Accounts payable .............................................................. Short-term notes payable .................................................. Bonds payable ................................................................... Common stock .................................................................. Retained earnings ............................................................. Total liabilities and stockholders' equity .......................
$ 15,000 35,000 28,000 (9) 200,000 47,000 $325,000 (10)
$ 25,000 30,000 20,000 200,000 35,000 $310,000
SOUTHERN COMPANY Income Statement For the Year Ended December 31, 2017 —————————————————————————————————————————— Net sales ........................................................................... $200,000 Cost of goods sold ............................................................. 100,000 Gross profit ......................................................................... 100,000 Expenses Depreciation expense .................................................. $15,000 (5) Interest expense .......................................................... 5,000 Selling expenses ......................................................... 10,000 Administrative expenses .............................................. 15,000 Total expenses ...................................................... 45,000 (4) Income before income taxes .............................................. 55,000 (2) Income tax expense .......................................................... 15,000 (3) Net income ........................................................................ $ 40,000 (1) (1)
Net income = $40,000; ($200,000 × 20%).
(2)
Income before income taxes = $55,000. Let X = Income before income taxes and interest expense. X ——— = 12 times; X = $60,000; $60,000 – $5,000 = $55,000. 5,000
(3)
Income tax expense = $15,000; ($55,000 – $40,000). (Inc. bef. inc. tax. – Net inc.)
(4)
Total operating expenses = $45,000; ($100,000 – $55,000). (Gr. profit – inc. bef. inc. tax.)
(5)
Depreciation expense = $15,000; [$45,000 – ($5,000 + $10,000 + $15,000)].
(6)
Accounts receivable (net) = $30,000. Let X = Average receivables. $200,000 ———— = 5 times; 5X = $200,000; X = $40,000. (Net sal. ÷ A/R turn.) X
.
Financial Analysis: The Big Picture
Solution 239
13-85
(Cont.)
Let Y = Accounts receivable at 12/31/17. $50,000 + Y —————— = $40,000; $50,000 + Y = $80,000; Y = $30,000. [(2 × ave. A/R) – beg. A/R] 2 (7)
Inventory = $55,000 Let X = Total current assets. X ———— = 2.5; X = $125,000; $125,000 – ($25,000 + $15,000 + $30,000) = $55,000.* $50,000 *[(End. A/P + end. N/P) × cur. rat.] – (end. cash + end. invest. + end. A/R)
(8)
Total assets = $325,000
($25,000 + $15,000 + $30,000 + $55,000 + $200,000)
(9)
Bonds payable = $28,000 Let X = Total debt X ———— = 24%; X = $78,000; $78,000 – ($15,000 + $35,000) = $28,000.* $325,000 *[Tot. ass. × debt – ass. rat.) – A/P – N/P]
(10) Total liabilities and stockholders' equity = $325,000; same as total assets—see (9) above. Ex. 240 B. Jones Corporation has issued common stock only. The company has been successful and has a gross profit rate of 20%. The information shown below was taken from the company's financial statements. Beginning inventory $ 482,000 Purchases 4,346,000 Ending inventory ? Average accounts receivable 700,000 Average common stockholders' equity 3,100,000 Sales revenue (all on credit) 5,600,000 Net income 341,000 Instructions Compute the following: (a) Accounts receivable turnover and the average number of days required to collect the accounts receivable. (b) The inventory turnover and the average days in inventory. (c) Return on common stockholders' equity. Ans: N/A, LO: 3, 4, Bloom: AP, Difficulty: Medium, Min: 13, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 240 (13-18 min.) (a) Accounts receivable turnover
= = =
Average collection period
= = =
(b)
Credit sales ————————————— Average accounts receivable $5,600,000 ÷ $700,000 8.0 times
365 days —————————————— Accounts receivable turnover 365 ÷ 8.0 times 45.6 days
Inventory turnover = Cost of goods sold ÷ Average inventory First calculate ending inventory. Beginning Inventory $ 482,000 + Purchases 4,346,000 - Cost of Goods Sold (4,480,000)* Ending Inventory $ 348,000 *Since the gross profit ratio is 20%, the cost of goods sold ratio is 80%. 80% × $5,600,000 (net sales) = $4,480,000. Ending Inventory = $348,000 (per above) Average Inventory = ($482,000 + $348,000) ÷ 2 = $415,000 Inventory Turnover = $4,480,000 ÷ $415,000 = 10.8 times Days in Inventory = 365 days ÷ 10.8 times = 33.8 days
(c)
Net income Return on common stockholders' equity = ————————————————— Average common stockholders' equity $341,000 ÷ $3,100,000 = 11%
COMPLETION STATEMENTS 241. Discontinued operations refers to the disposal of a __________________ of a business. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
242. A change in inventory methods during the year would be classified as a change in ____________________. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Financial Analysis: The Big Picture
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243. ______________ analysis, also called trend analysis, is a technique for evaluating a series of financial statement data over a period of time. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
244. Expressing each item in a financial statement as a percent of a base amount is called ______________ analysis. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
245. For analysis of the financial statements, ratios can be classified into three types: (1)_____________ ratios, (2)_____________ ratios, and (3)______________ ratios. Ans: N/A, LO: 3,4 , Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
246. The times interest earned is calculated by dividing ___________________ before __________________ and __________________ by interest expense. Ans: N/A, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
247. The liquidity ratio, known as the _______________ ratio, has a disadvantage that it uses year-end balances for current assets and current liabilities. Ans: N/A, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
248. The accounts receivable turnover is calculated by dividing ________________ by average ___________________. Ans: N/A, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
249. If the inventory turnover is 7.3 times, and the average inventory was $600,000, the cost of goods sold during the year was $______________ and the average days to sell the inventory was ______________ days. Ans: N/A, LO: 3, 4, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
250. Hobson Corporation had net sales for the year of $300,000 and average total assets of $200,000. The asset turnover is ____________ times. Ans: N/A, LO: 3, 4, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement
251. The ______________ ratio measures the percentage of earnings distributed in the form of cash dividends. Ans: N/A, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
252. The lower the _______________ to _______________ ratio, the more equity "buffer" is available to the creditors if the company becomes insolvent. Ans: N/A, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
13-88
Answers to Completion Statements 241. 242. 243. 244. 245. 246.
significant component accounting principle Horizontal vertical (common size) liquidity, solvency, profitability (any order) income, income taxes, interest expense
247. 248. 249. 250. 251. 252.
current net credit sales, net receivables 4,380,000, 50 1.5 payout debt, assets
MATCHING SET A 253. For each of the ratios listed below, indicate by the appropriate code letter, whether it is a liquidity ratio, a profitability ratio, or a solvency ratio. Code: L = P = S =
Liquidity ratio Profitability ratio Solvency ratio
____ 1. Price-earnings ratio ____ 2. Return on assets ____ 3. Accounts receivable turnover ____ 4. Earnings per share ____ 5. Payout ratio ____ 6. Working capital ____ 7. Current ratio ____ 8. Debt to assets ratio ____ 9. Free cash flow ____ 10. Inventory turnover Ans: N/A, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
Answers to Matching P
1. Price-earnings ratio
L
6. Working capital
P
2. Return on assets
L
7. Current ratio
L
3. Accounts receivable turnover
S
8. Debt to assets ratio
P
4. Earnings per share
S
9. Free cash flow
P
5. Payout ratio
L 10.
.
Inventory turnover
Financial Analysis: The Big Picture
13-89
SET B 254. Match the ratios with their formulas by entering the appropriate letter in the space provided. A. Current ratio B. Price-earnings ratio C. Profit margin D. Asset turnover E. Earnings per share
F. Times interest earned G. Inventory turnover H. Average collection period I. Days in inventory J. Payout ratio
____ 1.
Cost of goods sold Average inventory
____ 2.
Net income Net sales
____ 3.
Cash dividends declared on common stock Net income
____ 4.
Net sales Average total assets
____
Current assets Current liabilities
5.
____ 6.
365 days Accounts receivable turnover
____ 7.
Net income − preferred dividends Average common shares outstanding
____ 8.
365 days Inventory turnover
____ 9.
Income before income taxes and interest expense Interest expense
____ 10.
Market price per share Earnings per share
Ans: N/A, LO: 6, 8, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Performance Measurement
Answers to Matching 1. 2. 3. 4. 5.
G C J D A
6. 7. 8. 9. 10.
H E I F B
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
SHORT-ANSWER ESSAY QUESTIONS S-A E 255 Explain sustainable income. What relationship does this concept have to the treatment of irregular items on the income statement? Ans: N/A, LO: 1, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 255 Sustainable income is defined as the most likely level of income to be obtained in the future. It is the amount of regular income that a company can expect to earn from its normal operations. In order to distinguish a company's net income from its sustainable income, irregular items, such as a once-in-a lifetime gain or discontinued operations, are reported separately on the income statement. S-A E 256 Tim Forsyth, the CEO of Magical Products, is a successful entrepreneur and his focus is his products, not his accounting system. He asks you to explain to him, in a memo, the bases of comparison for ratio analysis. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Performance Measurement
Solution 256 To: Tim Forsyth From: Student name Re: Bases of Comparison for Ratio Analysis There are three bases of comparison for ratio analysis. They include: Intra-company: This basis compares a ratio for the current year to the same ratio for one or more prior years. Inter-company: This basis compares a ratio for one company with the same ratio for one or more competing companies. Industry averages: This basis compares a ratio for a company with the industry average for the same ratio.
.
Financial Analysis: The Big Picture
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S-A E 257 Horizontal and vertical analyses are analytical tools frequently used to analyze financial statements. What type of information or insights can be obtained by using these two techniques? Explain how the output of horizontal analysis and vertical analysis can be compared to industry averages and/or competitive companies. Ans: N/A, LO: 2 Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Performance Measurement
Solution 257 Horizontal analysis allows an analyst to develop a picture of current trends in a company's operations. The analyst can see whether the account amounts are increasing or decreasing and how large these changes actually are in comparison to a base year. Vertical analysis allows an analyst to evaluate financial statement items within a single financial statement. This technique helps the analyst to evaluate the relative size of the financial statement items and how the items relate to the financial statement as a whole. An example would be if current liabilities were a very large percentage of total liabilities and stockholders' equity. Both techniques allow an analyst to evaluate a company’s performance and position relative to its competitors and its industry as a whole. For example, the analyst could evaluate a company’s current trend in sales and see how favorably its sales performance compared to the sales performance of other companies in the industry. Another example would be comparing the relative size of long-term liabilities or retained earnings. This would show which companies have taken on a large amount of debt and which companies have reinvested earnings. S-A E 258 What does each type of ratio measure? (a) Liquidity ratios. (b) Solvency ratios. (c) Profitability ratios. Ans: N/A, LO: 3, 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Performance Measurement
Solution 258 (a) Liquidity ratios measure the short-term ability of the enterprises to pay its maturing obligations and to meet unexpected needs for cash. (b) Solvency ratios measure the company's ability to survive over a long period of time. (c) Profitability ratios measure the income or operating success of an enterprise for a given period of time. S-A E 259 Identify and explain factors that affect quality of earnings. Ans: N/A, LO: 1, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Performance Measurement
.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 259 (1) Use of alternative accounting methods. Variations among companies in the application of generally accepted accounting principles may hamper comparability. (2) Use of pro forma income measures that do not follow GAAP. Pro forma income is calculated by excluding items that the company believes are unusual or nonrecurring. It is often difficult to determine what was included and excluded. (3) Improper revenue and expense recognition. Many high-profile cases of inappropriate accounting involve recording items in the wrong period. S-A E 260
(Communication)
Zip Delivery specializes in the overnight transportation of medical equipment and laboratory specimens. The company has selected the following information from its most recent annual report to be the subject of an immediate press release. • • • • • •
The financial statements are being released. Net income this year was $3.1 million. Last year's net income had been $2.8 million. The current ratio has changed to 2:1 from last year's 1.6:1. The debt to assets ratio has changed to 4:6 from last year's 3:6. The company expanded its truck fleet substantially by purchasing ten new delivery vans. The company already had twelve delivery vans. The company is now the largest medical courier in the mid-Atlantic region.
Required: Prepare a brief press release incorporating the above information. Include all information. Think carefully which information (if any) is good news for the company, and which (if any) is bad news. Ans: N/A, LO: 3, 4, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Performance Measurement
Solution 260 Zip Delivery released its financial statements today, disclosing an 11% increase in earnings, to $3.1 million from $2.8 million last year. The company also improved its short-term liquidity. Its current ratio improved to 2:1 from last year's 1.6:1. Part of the improved performance is no doubt due to the addition of ten new delivery vans to its fleet, allowing it to become the largest medical courier in the mid-Atlantic region. The purchase of the vans, however, caused the debt to assets ratio to deteriorate. There are now $4 of debt for every $6 in assets, while last year, there were only $3 of debt to $6 in assets.
.
Financial Analysis: The Big Picture
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IFRS QUESTIONS 1. Under IFRS, there is no classification for a. changes in accounting estimates. b. changes in accounting principles. c. discontinued operations. d. extraordinary items. Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
2. The accounting for each of the following is the same under IFRS and GAAP except for a. extraordinary items. b. discontinued operations. c. changes in accounting principles. d. changes in accounting estimates. Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
3. Distinguishing normal levels of income from irregular items is of interest for the FASB IASB a. no no b. no yes c. yes no d. yes yes Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
4. All revenue and expense items are considered ordinary in nature under a. both IFRS and GAAP. b. GAAP. c. IFRS. d. neither IFRS or GAAP. Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
5. Under IFRS, the statement of comprehensive income can be prepared under a. the one-statement approach only. b. the two-statement approach only. c. either the one-statement approach or the two-statement approach. d. either the two-statement approach or the stockholders' equity statement approach. Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
6. Under IFRS, the components of other comprehensive income can be reported in each of the following ways except a. the one-statement approach. b. the two-statement approach. c. the statement of stockholders' equity approach. d. All of the above are acceptable. Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
APPENDIX G TIME VALUE OF MONEY SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY Item
LO
BT
Item
LO
BT
Item
LO
BT
Item
LO
BT
Item
LO
BT
2 3
C K
9. 10.
3 4
K K
29. 30. 31. 32. 33. 34.
2 2 2 2 2 2
AP AP AP C AP AP
35. 36. 37. 38. 39. 40.
2 2 2 2 2 2
AP AP C AP AP AP
59. 60. 61. 62. 63. 64.
2 2 2 2 2 2
AP AP AP AP AN AP
65. 66.
2 2
AP AP
3
K
True-False Statements 1. 2.
1 1
K K
3. 4.
1 1
K C
5. 6.
2 2
K K
7. 8.
Multiple Choice Questions 11. 12. 13. 14. 15. 16.
1 1 1 1 1 1
K C AP K K C
17. 18. 19. 20. 21. 22.
1 1 1 1 2 2
AP K AP K K C
23. 24. 25. 26. 27. 28.
2 2 2 2 2 2
C AP AP AP AP C
Exercises 41. 42. 43. 44. 45. 46.
1 1 1 1 1 1
AP AP AP AP AP AP
47. 48. 49. 50. 51. 52.
1 1 1 1 1 2
AP AP AP AP AP AP
53. 54. 55. 56. 57. 58.
2 2 2 2 2 2
AP AP AP AP AP AP
Completion Statements 67.
1
K
68.
1
K
69.
2
K
70.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Item
Type
Item
Type
Item
1. 2. 3. 4.
TF TF TF TF
11. 12. 13. 14.
MC MC MC MC
15. 16. 17. 18.
5. 6. 7. 8. 9. 21.
TF TF TF MC MC MC
22. 23. 24. 25. 26. 27.
MC MC MC MC MC MC
28. 29. 30. 31. 32. 33.
10.
TF
70.
C
Note: TF = True-False MC = Multiple Choice
Type
Item
Type
Item
Learning Objective 1 MC 19. MC 43. MC 20. MC 44. MC 41. Ex 45. MC 42. Ex 46. Learning Objective 2 MC 34. MC 40. MC 35. MC 52. MC 36. MC 53. MC 37. MC 54. MC 38. MC 55. MC 39. MC 56. Learning Objective 3
C = Completion Ex = Exercise
The chapter also contains one set of five Matching questions.
Type
Item
Type
Item
Type
Ex Ex Ex Ex
47. 48. 49. 50.
Ex Ex Ex Ex
51. 67. 68.
Ex C C
MC Ex Ex Ex Ex Ex
57. 58. 59. 60. 61. 62.
Ex Ex Ex Ex Ex Ex
63. 64. 65. 66. 69.
Ex Ex Ex Ex C
Time Value of Money
G-3
CHAPTER LEARNING OBJECTIVES 1. Compute interest and future values. Simple interest is computed on the principal only, while compound interest is computed on the principal and any interest earned that has not been withdrawn. To solve for future value of a single amount, prepare a time diagram of the problem. Identify the principal amount, the number of compounding periods, and the interest rate. Using the future value of 1 table, multiply the principal amount by the future value factor specified at the intersection of the number of periods and the interest rate. To solve for future value of an annuity, prepare a time diagram of the problem. Identify the amount of the periodic payments (receipts), the number of payments, and the interest rate. Using the future value of an annuity of 1 table, multiply the amount of the payments by the future value factor specified at the intersection of the number of periods and the interest rate. 2. Compute present value. The following three variables are fundamental to solving present value problems: (1) the future amount, (2) the number of periods, and (3) the interest rate (the discount rate). To solve for present value of a single amount, prepare a time diagram of the problem. Identify the future amount, the number of discounting periods, and the discount (interest) rate. Using the present value of a single amount table, multiply the future amount by the present value factor specified at the intersection of the number of periods and the discount rate. To solve for present value of an annuity, prepare a time diagram of the problem. Identify the amount of future periodic receipts or payment (annuities), the number of discounting periods, and the discount (interest) rate. Using the present value of an annuity of 1 table, multiply the amount of the annuity by the present value factor specified at the intersection of the number of periods and the interest rate. To compute the present value of notes and bonds, determine the present value of the principal amount: Multiply the principal amount (a single future amount) by the present value factor (from the present value of 1 table) intersecting at the number of periods (number of interest payments) and the discount rate. To determine the present value of the series of interest payments: Multiply the amount of the interest payment by the present value factor (from the present value of an annuity of 1 table) intersecting at the number of periods (number of interest payments) and the discount rate. Add the present value of the principal amount to the present value of the interest payments to arrive at the present value of the note or bond. 3. Use a financial calculator to solve time value of money problems. Financial calculators can be used to solve the same and additional problems as those solved with time value of money tables. Enter into the financial calculator the amounts for all of the known elements of a time value of money problem (periods, interest rate, payments, future or present value), and it solves for the unknown element. Particularly useful situations involve interest rates and compounding periods not presented in the tables.
G-4
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
TRUE-FALSE STATEMENTS 1.
Interest is the difference between the amount borrowed and the principal.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Project Management, IMA: Investment Decision
2.
Compound interest is computed on the principal and any interest earned that has not been paid or received.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Project Management, IMA: Investment Decision
3.
The future value of a single amount is the value at a future date of a given amount invested now, assuming compound interest.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Project Management, IMA: Investment Decision
4.
When the periodic payments are not equal in each period, the future value can be computed by using a future value of an annuity table.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Project Management, IMA: Investment Decision
5.
The process of determining the present value is referred to as discounting the future amount.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Project Management, IMA: Investment Decision
6.
A higher discount rate produces a higher present value.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Project Management, IMA: Investment Decision
7.
In computing the present value of an annuity, it is not necessary to know the number of discount periods.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Project Management, IMA: Investment Decision
8.
The present value of a long-term note or bond is a function of two variables.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Project Management, IMA: Investment Decision
9.
The present value of an annuity is the value now of a series of future receipts or payments, discounted assuming compound interest.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Project Management, IMA: Decision Analysis
10.
With a financial calculator, one can solve for any interest rate or for any number of periods in a time value of money problem.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Project Management, IMA: Decision Analysis
Answers to True-False Statements Item
Ans.
1. 2.
F T
Item
3. 4.
Ans.
T F
Item
5. 6.
Ans.
T F
Item
7. 8.
Ans.
Item
Ans.
F F
9. 10.
T T
Time Value of Money
G-5
MULTIPLE CHOICE QUESTIONS Note: Students will need future value and present value tables for some questions. 11.
Compound interest is the return on principal a. only. b. for one or more periods. c. plus interest for two or more periods. d. for one period.
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Project Management, IMA: Investment Decision
12.
The factor 1.0609 is taken from the 3% column and 2 periods row in a certain table. From what table is this factor taken? a. Future value of 1 b. Future value of an annuity of 1 c. Present value of 1 d. Present value of an annuity of 1
Ans: a, LO: 1, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
13.
If $40,000 is put in a savings account paying interest of 4% compounded annually, what amount will be in the account at the end of 5 years? a. $32,878 b. $48,000 c. $48,620 d. $48,666
Ans: d, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods
14.
The future value of 1 factor will always be a. equal to 1. b. greater than 1. c. less than 1. d. equal to the interest rate.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Project Management, IMA: Investment Decision
15.
All of the following are necessary to compute the future value of a single amount except the a. interest rate. b. number of periods. c. principal. d. maturity value.
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Project Management, IMA: Investment Decision
16.
Which table has a factor of 1.00000 for 1 period at every interest rate? a. Future value of 1 b. Future value of an annuity of 1 c. Present value of 1 d. Present value of an annuity of 1
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ans: b, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Project Management, IMA: Investment Decision
17.
McGoff Company deposits $20,000 in a fund at the end of each year for 5 years. The fund pays interest of 4% compounded annually. The balance in the fund at the end of 5 years is computed by multiplying a. $20,000 by the future value of 1 factor. b. $100,000 by 1.04. c. $100,000 by 1.20. d. $20,000 by the future value of an annuity factor.
Ans: d, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
18.
The future value of an annuity factor for 2 periods is equal to a. 1 plus the interest rate. b. 2 plus the interest rate. c. 2 minus the interest rate. d. 2.
Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Project Management, IMA: Investment Decision
19.
If $30,000 is deposited in a savings account at the end of each year and the account pays interest of 5% compounded annually, what will be the balance of the account at the end of 10 years? a. $48,867 b. $315,000 c. $377,337 d. $450,000
Ans: c, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods
20.
Which of the following is not necessary to know in computing the future value of an annuity? a. Amount of the periodic payments b. Interest rate c. Number of compounding periods d. Year the payments begin
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Project Management, IMA: Quantitative Methods
21.
In present value calculations, the process of determining the present value is called a. allocating. b. pricing. c. negotiating. d. discounting.
Ans: d, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Project Management, IMA: Quantitative Methods
22.
Present value is based on a. the dollar amount to be received. b. the length of time until the amount is received. c. the interest rate. d. All of these answers are correct.
Time Value of Money
G-7
Ans: d, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Project Management, IMA: Quantitative Methods
G-8 23.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Which of the following accounting problems does not involve a present value calculation? a. The determination of the market price of a bond. b. The determination of the declining-balance depreciation expense. c. The determination of the amount to report for long-term notes payable. d. The determination of the amount to report for lease liability.
Ans: b, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Project Management, IMA: Quantitative Methods
24.
If you are able to earn an 8% rate of return, what amount would you need to invest to have $30,000 one year from now? a. $27,747 b. $27,778 c. $27,273 d. $29,700
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods
25.
If you are able to earn a 15% rate of return, what amount would you need to invest to have $15,000 one year from now? a. $14,852 b. $13,125 c. $12,750 d. $13,044
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods
26.
If the single amount of $2,000 is to be received in 2 years and discounted at 11%, its present value is a. $1,818. b. $1,623. c. $1,802. d. $2,754.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods
27.
If the single amount of $3,000 is to be received in 3 years and discounted at 6%, its present value is a. $2,519. b. $2,830. c. $2,600. d. $2,820.
Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods
28.
Which of the following discount rates will produce the smallest present value? a. 8% b. 9% c. 10% d. 4%
Ans: c, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods
Time Value of Money
29.
G-9
Suppose you have a winning lottery ticket and you are given the option of accepting $3,000,000 three years from now or taking the present value of the $3,000,000 now. The sponsor of the prize uses a 6% discount rate. If you elect to receive the present value of the prize now, the amount you will receive is a. $2,518,860. b. $2,591,520. c. $2,670,000. d. $3,000,000.
Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
30.
The amount you must deposit now in your savings account, paying 6% interest, in order to accumulate $6,000 for a down payment 5 years from now on a new car is a. $1,200. b. $4,484. c. $4,477. d. $4,200.
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
31.
The amount you must deposit now in your savings account, paying 5% interest, in order to accumulate $10,000 for your first tuition payment when you start college in 3 years is a. $8,500. b. $7,830. c. $8,638. d. $8,860.
Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
32.
The present value of $10,000 to be received in 5 years will be smaller if the discount rate is a. increased. b. decreased. c. not changed. d. equal to the stated rate of interest.
Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
33.
Dexter Company is considering purchasing equipment. The equipment will produce the following cash flows: Year 1 $120,000 Year 2 $200,000 Dexter requires a minimum rate of return of 10%. What is the maximum price Dexter should pay for this equipment? a. $274,381 b. $165,290 c. $320,000 d. $160,000
Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
G - 10 34.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
If Sloane Joyner invests $10,514.81 now and she will receive $30,000 at the end of 11 years, what annual rate of interest will she be earning on her investment? a. 8% b. 8.5% c. 9% d. 10%
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
35.
Suzy Douglas has been offered the opportunity of investing $73,540 now. The investment will earn 8% per year and at the end of its life will return $200,000 to Suzy. How many years must Suzy wait to receive the $200,000? a. 10 b. 11 c. 12 d. 13
Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
36.
Peter Johnson invests $35,516.80 now for a series of $5,000 annual returns beginning one year from now. Peter will earn 10% on the initial investment. How many annual payments will Peter receive? a. 10 b. 12 c. 13 d. 15
Ans: c, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
37.
In order to compute the present value of an annuity, it is necessary to know the 1. discount rate. 2. number of discount periods and the amount of the periodic payments or receipts. a. b. c. d.
1 2 both 1 and 2 something in addition to 1 and 2
Ans: c, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
38.
A $10,000, 6%, 5-year note payable that pays interest quarterly would be discounted back to its present value by using tables that would indicate which one of the following periodinterest combinations? a. 5 interest periods, 6% interest b. 20 interest periods, 6% interest c. 20 interest periods, 1.5% interest d. 5 interest periods, 1.5% interest
Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
Time Value of Money
39.
G - 11
Hazel Company has just purchased equipment that requires annual payments of $40,000 to be paid at the end of each of the next 4 years. The appropriate discount rate is 15%. What is the present value of the payments? a. $114,199 b. $160,000 c. $46,975 d. $150,135
Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
40.
Perdue Company has purchased equipment that requires annual payments of $30,000 to be paid at the end of each of the next 6 years. The appropriate discount rate is 12%. What amount will be used to record the equipment? a. $180,000 b. $123,342 c. $165,772 d. $115,650
Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: FSA
Answers to Multiple Choice Questions Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
11. 12. 13. 14. 15.
c a d b d
16. 17. 18. 19. 20.
b d b c d
21. 22. 23. 24. 25.
d d b b d
26. 27. 28. 29. 30.
b a c a b
31. 32. 33. 34. 35.
c a a d d
36. 37. 38. 39. 40.
c c c a b
EXERCISES Ex. 41 Jose Reynolds deposited $10,000 in an account paying interest of 4% compounded annually. What amount will be in the account at the end of 4 years? Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods
Solution 41
(5 min.)
Use Table 1. $10,000 × 1.16986 (4 periods and 4%) = $11,698.60
Ex. 42 Wingate Company borrowed $90,000 on January 2, 2017. This amount plus accrued interest of 6% compounded annually will be repaid at the end of 3 years. What amount will Wingate repay at the end of the third year? Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods
G - 12
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 42
(5 min.)
Use Table 1. $90,000 × 1.19102 (3 periods and 6%) = $107,191.80
Ex. 43 Pleasant Company has decided to begin accumulating a fund for plant expansion. The company deposited $80,000 in a fund on January 2, 2013. Pleasant will also deposit $40,000 annually at the end of each year, starting in 2013. The fund pays interest at 4% compounded annually. What is the balance of the fund at the end of 2017 (after the 2017 deposit)? Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
Solution 43
(8 min.)
Use Tables 1 and 2. $80,000 × 1.21665 (5 periods and 4%; Table 1) = $ 97,332.00 $40,000 × 5.41632 (5 periods and 4%; Table 2) = 216,652.80 Fund Balance at 12-31-17 $313,984.80
Ex. 44 Mandy How plans to buy an automobile and can deposit $3,000 toward the purchase today. If the annual interest rate is 8%, how much can Mandy expect to have as a down payment in 3 years? Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
Solution 44
(3 min.)
Use Table 1 $3,000 × 1.25971 = $3,779.13.
Ex. 45 Rob Honda plans to buy a home and can deposit $15,000 for the purchase today. If the annual interest rate is 8%, how much can Rob expect to have for a down payment in 5 years? Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
Solution 45
(5 min.)
Use Table 1 $15,000 × 1.46933 = $22,039.95.
Ex. 46 Bill and Ellen Sweatt plan to invest $2,500 a year in an educational IRA for their granddaughter, Sloane Martin. They will make these deposits on January 2nd of each year. Bill and Ellen feel they can safely earn 8%. How much will be in this account on December 31 of the 18th year? Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
Time Value of Money
Solution 46
G - 13
(5 min.)
Use Table 2 $2,500 × 37.45024 = $93,625.60.
Ex. 47 Bill Cigarettes acquired a bad habit of smoking in high school. Bill spends approximately $70 a month or $840 a year on cigarettes. He is not concerned with health issues, but he is keenly aware of financial issues. Show Bill how much he would have at retirement in 20 years if he invested $840 a year at 8% instead of smoking. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods
Solution 47
(5 min.)
Use Table 2 $840 × 45.76196 = $38,440.05.
Ex. 48 Robin Clark has a cell phone that she uses only for emergencies. The cost of the phone is $40 a month. The cellular company is offering unlimited nights and weekends for an additional $10 a month ($120 a year). Robin thinks it would be “cool” to have this benefit and after all $10 a month is not so much. Show Robin how much she will have in 20 years if she invests this $120 a year at 9% instead of accepting the unlimited nights and weekends offer. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
Solution 48
(5 min.)
Use Table 2 $120 × 51.16012 = $6,139.21.
Ex. 49 Lamb Company deposited $15,000 annually for 6 years in an account paying 5% interest compounded annually. What is the balance of the account at the end of the 6th year? Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
Solution 49
(5 min.)
Use Table 2. $15,000 × 6.80191 (6 periods and 5%) = $102,028.65
Ex. 50 Martin Company issued $900,000, 10-year bonds and agreed to make annual sinking fund deposits of $72,000. The deposits are made at the end of each year to a fund paying 5% interest compounded annually. What amount will be in the sinking fund at the end of the 10 years?
G - 14
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
Time Value of Money
Solution 50
G - 15
(5 min.)
Use Table 2. $72,000 × 12.57789 (10 periods and 5%) = $905,608.08
Ex. 51 Compute the future value of $6,000 invested every year at an interest rate of 9%. You invest the money for 20 years with the first payment made at the end of the year. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods
Solution 51
(5 min.)
Use Table 2 $6,000 × 51.16012 = $306,960.72.
Ex. 52 Flower Company is considering an investment which will return a lump sum of $2,500,000 six years from now. What amount should Flower Company pay for this investment to earn an 11% return? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
Solution 52
(5 min.)
Use Table 3. $2,500,000 × .53464 (6 periods and 11%) = $1,336,600
Ex. 53 Chang Company earns 12% on an investment that will return $400,000 eleven years from now. What is the amount Chang Company should invest now to earn this rate of return? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
Solution 53
(5 min.)
Use Table 3. $400,000 × .28748 (11 periods and 12%) = $114,992
Ex. 54 If Kelly Cranford invests $11,970 now, she will receive $40,000 at the end of 14 years. What annual rate of return will Kelly earn on her investment? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
Solution 54
(5 min.)
Use Table 3. Answer: 9%
G - 16
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
$11,970 ÷ $40,000 = .29925
Read across the 14-period row in Table 3 to find .29925 in the 9% column.
Ex. 55 Luis Rodriguez wants to buy a car in 3 years. He will need $3,000 for a down payment. The annual interest rate is 9%. How much money must Luis invest today for the purchase? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
Solution 55
(5 min.)
Use Table 3 $3,000 × .77218 = $2,316.54.
Ex. 56 Amy Brown plans to buy a surround sound stereo system for $1,100 after 3 years. If the interest rate is 6%, how much money should Amy set aside today for the purchase? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
Solution 56
(5 min.)
Use Table 3 $1,100 × .83962 = $923.58.
Ex. 57 (a) (b)
What is the present value of $90,000 due 7 years from now, discounted at 9%? What is the present value of $150,000 due 5 years from now, discounted at 12%?
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
Solution 57
(8 min.)
Use Table 3. (a) $90,000 × .54703 (7 periods and 9%) = $49,232.70 (b) $150,000 × .56743 (5 periods and 12%) = $85,114.50 Ex. 58 Kim Black plans to buy a truck for $24,000 after 3 years. If the interest rate is 6%, how much money should Kim set aside today for the purchase? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
Solution 58
(3 min.)
Use Table 3. $24,000 × .83962 = $20,150.88
Time Value of Money
G - 17
Ex. 59 DMV leases a building for 20 years. The lease requires 20 annual payments of $12,000 each, with the first payment due immediately. The interest rate in the lease is 10%. What is the present value of the cost of leasing the building? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
Solution 59
(3 min.)
Use Table 4. $12,000 + ($12,000 8.36492) = $112,379.04
Ex. 60 Frye Company is considering investing in an annuity contract that will return $50,000 annually at the end of each year for 20 years. What amount should Frye Company pay for this investment if it earns an 8% return? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
Solution 60
(3 min.)
Use Table 4. $50,000 9.81815 (20 periods and 8%) = $490,907.50
Ex. 61 Sarah Denny purchased an investment for $40,260.48. From this investment, she will receive $6,000 annually for the next 10 years starting one year from now. What rate of interest will Sarah be earning on her investment? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods
Solution 61
(4 min.)
Use Table 4. Answer: 8% $40,260.48 $6,000 = 6.71008 (10 periods and 8%) = 6.71008
Ex. 62 You are purchasing a car for $25,000, and you obtain financing as follows: $2,500 down payment, 12% interest, semiannual payments over 5 years. Instructions Compute the payment you will make every 6 months. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
G - 18
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Solution 62
(3 min.)
Use Table 4. $25,000 cost – $2,500 down payment = $22,500 Payment 7.36009 = $22,500 Payment = $22,500/7.36009 = $3,057.03
Ex. 63 Frostmore Company is considering investing in an annuity contract that will return $50,000 annually at the end of each year for 20 years. What amount should Frostmore pay for this investment if it earns an 8% return? Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
Solution 63
(5 min.)
Use Table 4 $50,000 × 9.81815 (20 periods and 8%) = $490,907.50.
Ex. 64 Cecilia Jeffries purchased an investment for $49,090.75. From this investment, she will receive $5,000 annually for the next 20 years starting one year from now. What rate of interest will Cecilia be earning on her investment? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods
Solution 64
(5 min.)
Use Table 4. Answer: 8% ($49,090.75 ÷ $5,000) = 9.81815
Read across the 20-period row in Table 4 to find 9.81815 in the 8% column.
Ex. 65 Lucky Lou has just won the lottery and will receive an annual payment of $100,000 every year for the next 20 years. If the annual interest rate is 8%, what is the present value of the winnings? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods
Solution 65
(5 min.)
Use Table 4 $100,000 × 9.81815 = $981,815.
Time Value of Money
G - 19
Ex. 66 CVS leases a building for 20 years. The lease requires 20 annual payments of $10,000 each, with the first payment due immediately. The interest rate in the lease is 10%. What is the present value of the cost of leasing the building? Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods
Solution 66
(5 min.)
Use Table 4 $10,000 + ($10,000 × 8.36492) = $93,649.20.
COMPLETION STATEMENTS 67.
Payments or receipts of equal dollar amounts are referred to as __________________.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics
68.
The _____________________ of an annuity is the sum of all the payments plus the accumulated compound interest on them.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics
69.
The process of determining the present value is referred to as _________________ the future amount.
Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Quantitative Methods
70.
The ______________ of a long-term note or bond is a function of three variables.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics
Answers to Completion Statements 67. 68. 69. 70.
annuities future value discounting present value (or market price)
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
G - 20
MATCHING 71.
Match the items below by entering the appropriate code letter in the space provided. A. Compound interest B. Future value of a single amount C. Future value of an annuity
D. Present value of a single amount E. Present value of an annuity
_____ 1. The value today of a future amount to be received or paid. _____ 2. The value at a future date of a given amount invested. _____ 3. Return on principal plus interest for two or more periods. _____ 4. Value today of a series of future amounts to be received or paid. _____ 5. The sum of all the payments or receipts plus the accumulated compound interest on them. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Reflective Thinking, AICPA BB: Resource Management, AICPA FC: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Investment Decision
Answers to Matching 1. D 2. B 3. A
4. E 5. C
APPENDIX H REPORTING AND ANALYZING INVESTMENTS SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY Item
LO
BT
Item
LO
1. 2. 3. 4. 5. 6. 7. 8.
1 1 1 1 1 1 1 1
K K K K K K K K
9. 10. 11. 12. 13. 14. 15. 16.
1 1 2 2 2 2 2 2
41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66.
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
K K K K K K K K AP AP AP C AP AP AP AP AP AP AP AP AP AP AP AP AP AP
67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92.
1 1 1 1 1 1 1 1 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2
169. 170.
1 2
AP AP
171. 172.
2 2
175. 176. 177.
1 1 1, 2
AP AP AP
178. 179. 180.
2 2 2
190. 191. 192.
1 1 2
K K K
193. 194. 195.
2 2 2
BT
Item
LO
BT
Item
True-False Statements C 17. 2 C 25. K 18. 2 K 26. C 19. 2 C 27. K 20. 2 K 28. K 21. 2 K 29. C 22. 2 C 30. K 23. 2 K 31. C 24. 2 K 32. Multiple Choice Questions AP 93. 2 AP 119. AP 94. 2 K 120. AP 95. 2 C 121. AP 96. 2 C 122. AP 97. 2 K 123. K 98. 2 C 124. AP 99. 2 K 125. K 100. 2 K 126. AP 101. 2 K 127. AP 102. 2 K 128. AP 103. 2 K 129. AP 104. 2 C 130. AP 105. 2 K 131. K 106. 2 AP 132. AP 107. 2 AP 133. K 108. 2 AP 134. AP 109. 2 AP 135. AP 110. 2 AP 136. K 111. 2 AP 137. AP 112. 2 AP 138. AP 113. 2 AP 139. AP 114. 2 AP 140. AP 115. 2 K 141. AP 116. 2 K 142. AP 117. 2 K 143. AP 118. 2 K 144. Brief Exercises AP 173. 2 AP AP 174. 3 AP Exercises AP 181. 2 AP 184. AP 182. 2 AP 185. AP 183, 2 AP 186. Completion Statements K 196. 3 K 199. AP 197. 3 K 200. K 198. 3 K 201.
.
LO
BT
Item
LO
BT
2 2 3 3 3 3 3 3
K K C C K K K C
33. 34. 35. 36. 37. 38. 39. 40.
3 3 3 3 3 3 3 3
K C C C K K K K
2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3
K C C C C AP K K AP AP AP K K K K K C K C K K AP K K K AP
145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168.
3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3
AP AP AP K C K C K K AP AP AP AP K AP AP K C C K K K K K
2 2 2, 3
AP AP AP
187. 188. 189.
2, 3, 2, 3, 3
AP AP AP
3 3 3
K K K
H-2
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition Matching
202.
1-3
K
203. 204.
1 2
K K
205. 206.
2 2
C C
Short-Answer Essay 207. 2 C 209. 208. 3 K 210.
3 3
C C
211. 212.
3 3
E C
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Item 1. 2. 3. 4. 5. 6. 7. 8. 9.
Type TF TF TF TF TF TF TF TF TF
Item 10. 41. 42. 43. 44. 45. 46. 47. 48.
Type TF MC MC MC MC MC MC MC MC
11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 75. 76.
TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF MC MC
77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94.
MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC
Learning Objective 1 Item Type Item Type 49. MC 58. MC 50. MC 59. MC 51. MC 60. MC 52. MC 61. MC 53. MC 62. MC 54. MC 63. MC 55. MC 64. MC 56. MC 65. MC 57. MC 66. MC Learning Objective 2 95. MC 113. MC 96. MC 114. MC 97. MC 115. MC 98. MC 116. MC 99. MC 117. MC 100. MC 118. MC 101. MC 119. MC 102. MC 120. MC 103. MC 121. MC 104. MC 122. MC 105. MC 123. MC 106. MC 124. MC 107. MC 125. MC 108. MC 126. MC 109. MC 127. MC 110. MC 128. MC 111. MC 129. MC 112. MC 130. MC
.
Item 67. 68. 69. 70. 71. 72. 73. 74. 169.
Type MC MC MC MC MC MC MC MC Be
Item 175. 176. 177. 190. 191. 202. 203.
Type Ex Ex Ex C C Ma SA
131. 132. 133. 134. 135. 136. 170. 171. 172. 173. 177. 178. 179. 180. 181. 182. 183. 184.
MC MC MC MC MC MC Be Be Be Be Ex Ex Ex Ex Ex Ex Ex Ex
185. 186. 187. 188. 192. 193. 194. 195. 202. 204. 205. 206. 207.
Ex Ex Ex Ex C C C C Ma SA SA SA SA
Reporting and Analyzing Investments
Item 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37.
Type TF TF TF TF TF TF TF TF TF TF TF
Item 38. 39. 40. 137. 138. 139. 140. 141. 142. 143. 144.
Type TF TF TF MC MC MC MC MC MC MC MC
Learning Objective 3 Item Type Item Type 145. MC 156. MC 146. MC 157. MC 147. MC 158. MC 148. MC 159. MC 149. MC 160. MC 150. MC 161. MC 151. MC 162. MC 152. MC 163. MC 153. MC 164. MC 154. MC 165. MC 155. MC 166. MC
Note: TF = True-False MC = Multiple Choice Ma = Matching
Item 167. 168. 174. 186. 187. 188. 189. 196. 197. 198. 199.
Type MC MC Be Ex Ex Ex Ex C C C C
Item 200. 201. 202. 208. 209. 210. 211. 212.
H-3
Type C C Ma SA SA SA SA SA
C = Completion Ex = Exercise
CHAPTER LEARNING OBJECTIVES 1. Explain how to account for debt investments. Corporations invest for three common reasons: (a) they have excess cash. (b) They view investment income as a significant revenue source, and (c) They have strategic goals such as gaining control of a competitor or supplier or moving into a new line of business. Entries for investments in debt securities are required when companies purchase bonds, receive or accrue interest, and sell bonds. 2. Explain how to account for stock investments. Entries for investments in common stock are required when companies purchase stock, receive dividends, and sell stock. When ownership is less than 20%, the cost method is used–the investment is recorded at cost. When ownership is between 20% and 50%, the equity method should be used–the investor records its share of the net income of the investee in the year it is earned. When ownership is more than 50%, consolidated financial statements should be prepared. When a company owns more than 50% of the common stock of another company, consolidated financial statements are usually prepared. These statements are especially useful to the stockholders, board of directors, and management of the parent company. 3. Discuss how debt and stock investments are reported in the financial statements. Investments in debt and stock securities are classified as trading, available-for-sale, or heldto-maturity for valuation and reporting purposes. Trading securities are reported as current assets at fair value, with changes from cost reported in net income. Available-for-sale securities are also reported at fair value, with the changes from cost reported as items of other comprehensive income. Available-for-sale securities are classified as short-term or long-term depending on their expected realization.
.
H-4
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Short-term investments are securities held by a company that are readily marketable and intended to be converted to cash within the next year or operating cycle, whichever is longer. Investments that do not meet both criteria are classified as long-term investments.
TRUE-FALSE STATEMENTS 1.
Corporations purchase investments in debt or equity securities generally for one of two reasons.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Decision Modeling, AICPA PC: Project Management, IMA: Corporate Finance
2.
A reason some companies purchase investments is because they generate a significant portion of their earnings from investment income.
Ans: T , LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Decision Modeling, AICPA PC: Project Management, IMA: Corporate Finance
3.
Pension funds and mutual funds are corporations that regularly invest for strategic reasons.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Decision Modeling, AICPA PC: Project Management, IMA: Corporate Finance
4.
Some companies attempt to generate investement income through speculative investements.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Corporate Finance
5.
When investing excess cash for short periods of time, corporations invest in debt securities and stock securities.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Decision Modeling, AICPA PC: Project Management, IMA: Corporate Finance
6.
In accordance with the historical cost principle, brokerage fees should be added to the cost of an investment.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
7.
In accordance with the historical cost principle, the cost of debt investments includes brokerage fees and accrued interest.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
8.
The accounting for short-term debt investments and for long-term debt investments is similar.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
9.
When investments in bonds are sold, any difference between the sales price and the fair value of the bonds is recorded as a gain or loss.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
Reporting and Analyzing Investments
10.
H-5
Debt investments are investments in government and corporation bonds.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
11.
Dividends received on stock investments of less than 20% should be credited to the Stock Investments account.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
12.
Dividends received on investments are accounted for in the same way under the cost and the equity method.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
13.
Unless there is evidence to the contrary, an investor owning 25% of the stock of an investee is assumed to have significant influence.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
14.
If the cost method is used to account for an investment in stock, the Stock Investments account is increased by the amount of dividends received during the period.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
15.
Under the equity method the investor records a proportionate share of the investee’s income in the year when it is earned.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
16.
When the cost method is used to account for an investment in stock, dividends received are accounted for as a reduction in the investment account.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
17.
Using the cost method of accounting for a stock investment, the journal entry to record the receipt of dividends involves a credit to Dividend Revenue.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
18.
If an investor owns between 20% and 50% of an investee's common stock, it is presumed that the investor has significant influence on the investee.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
19.
The Stock Investments account is debited at acquisition under both the equity method and cost method of accounting for investments in common stock.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
20.
Under the equity method, the investment in common stock is initially recorded at cost, and the Stock Investments account is adjusted annually.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
H-6 21.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Under the equity method, the receipt of dividends from the investee company results in an increase in the Stock Investments account.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
22.
Under the equity method, the receipt of dividends from the investee company results in a credit to the Dividend Revenue account.
Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
23.
In accounting for stock investments of less than 20%, the equity method is typically used.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
24.
Consolidated financial statements are prepared in place of the financial statements for the parent and subsidiary companies.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
25.
Consolidated financial statements should be prepared only when a subsidiary company has a controlling interest in the parent company.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
26.
Consolidated financial statements are appropriate when an investor controls an investee by ownership of more than 50% of the investee's common stock.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
27.
If the fair value of an available-for-sale security exceeds its cost, the security should be written up to fair value and a realized gain should be recognized.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
28.
The Fair Value Adjustment account can only have a credit balance or a zero balance.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
29.
Unrealized gains and losses are recognized on trading securities.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
30.
Trading securities are valued on the balance sheet at market value.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
31.
Unrealized gains and losses on available-for-sale securities are reported on the income statement.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
32.
The valuation of available-for-sale securities is similar to the procedures followed for trading securities, except that changes in fair value are not recognized in current income.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
Reporting and Analyzing Investments
33.
H-7
An unrealized gain or loss on trading securities is reported as a separate component of stockholders' equity.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
34.
For available-for-sale securities, the unrealized gain or loss account is carried forward to future periods.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
35.
The account Fair Value Adjustment-Trading appears as a contra account in the income statement.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
36.
A decline in the fair value of a trading security is recorded by debiting an unrealized loss account and crediting the Fair Value Adjustment account.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
37.
To be classified as a short-term investment, the investment must be readily marketable and intended to be converted into cash within the next year or operating cycle.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Business Economics
38.
An investment in short-term equity securities should be charged to a nominal account since the investment is temporary.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
39.
An investment is readily marketable if it is management's intent to sell the investment.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
40.
Stocks traded on the New York Stock Exchange are considered readily marketable.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Business Economics
Answers to True-False Statements 1. 2. 3. 4. 5. 6. 7.
F T F T F T F
8. 9. 10. 11. 12. 13. 14.
T F T F F T F
15. 16. 17. 18. 19. 20. 21.
T F T T T T F
22. 23. 24. 25. 26. 27. 28.
.
F F F F T F F
29. 30. 31. 32. 33. 34. 35.
T T F T F T F
36. 37. 38. 39. 40.
T T F F T
H-8
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
MULTIPLE CHOICE QUESTIONS 41.
Corporations invest in other companies for all of the following reasons except to a. house excess cash until needed. b. generate earnings. c. meet strategic goals. d. increase trading of the other companies’ stock.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Investment Decisions
42.
When investing excess cash for short periods of time, corporations invest in a. stocks of companies in a related industry. b. debt securities. c. low-risk, highly liquid securities. d. stock securities.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: Problem Solving, IMA: Investment Decisions
43.
In accounting for debit investments, companies make entries for each of the following: a. acquisition b. intereste revenue c. sale d. unrealized gain or loss
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Investment Decisions
44.
Banks and financial institutions often purchase debt securities to a. house excess cash until needed. b. generate earnings. c. meet strategic goals. d. improve their public image.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Investment Decisions
45.
Why do corporations generally invest in debt or equity securities? a. They have excess cash. b. They want to generate earnings from investment income. c. They invest for strategic reasons. d. All of these answer choices are correct.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: Project Management, IMA: Investment Decisions
46.
Why do pension and mutual funds invest in debt and equity securities? a. They have excess cash. b. They want to generate earnings from investment income. c. They invest for strategic reasons. d. They invest for speculative reasons.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: Project Management, IMA: Investment Decisions
.
Reporting and Analyzing Investments
47.
H-9
Which is not a strategic reason to invest? a. There has been a change in the economic climate. b. To establish a presence in a related industry. c. To exercise some influence over a customer or supplier. d. To enter a new industry without starting from scratch.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FC: Risk Analysis, AICPA PC: Project Management, IMA: Investment Decisions
48.
Which of the following is a debt security? a. IBM stock. b. Treasury stock. c. Treasury bills. d. None of these answer choices are correct.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Investment Decisions
49.
Mazzeo Company acquires 80 Dodd’s 10%, 5 year, $1,000 bonds on January 1, 2017 for $80,000. The journal entry to record this investment includes a debit to a. Debt Investments for $88,000. b. Debt Investments for $80,000. c. Cash for $80,000. d. Stock Investments for $80,000.
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
50.
Mazzeo Company acquires 80 Dodd’s 10%, 5 year, $1,000 bonds on January 1, 2017 for $80,000. Assume Dodd’s pays interest annually on January 1. Mazzeo’s journal entry at December 31, 2017 would include a credit to a. Interest Receivable for $4,000. b. Interest Receivable for $8,000. c. Interest Expense for $8,000. d. Interest Revenue for $8,000.
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $80,000 .10 = $8,000 (Inv cost int. rate)
51.
Mazzeo Company acquires 80 Dodd’s 10%, 5 year, $1,000 bonds on January 1, 2017 for $80,000. If Mazzeo sells all of its Dodd’s Bonds for $78,900 what gain or loss is recognized? a. Loss of $9,100 b. Loss of $1,100 c. Gain of $1,100 d. Gain of $9,100
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $78,900 − $80,000 = $1,100 (Sell.pr. − inv. cost)
.
H-10 52.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
At the time of acquisition of a debt investment a. no journal entry is required. b. the historical cost principle applies. c. the Stock Investments account is debited when bonds are purchased. d. the investment account is credited for its cost plus brokerage fees.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
53.
On January 1, 2017, the LaRoche Company purchased at face value, a $1,000, 4%, bond that pays interest on January 1. LaRoche Company has a calendar year end. The entry for the receipt of interest on January 1, 2018, is a. Cash 40 Interest Receivable 40 b. Cash 40 Interest Revenue 40 c. Interest Receivable 40 Cash 40 d. Interest Receivable 40 Interest Revenue 40
Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,000 × .04 = $40 (Face val. × int. rate)
54.
On January 1, 2017, the LaRoche Company purchased at face value, a $1,000, 4%, bond that pays interest on January 1. LaRoche Company has a calendar year end. The adjusting entry on December 31, 2017, is a. not required. b. Cash 40 Interest Revenue 40 c. Interest Receivable 40 Interest Revenue 40 d. Interest Receivable 40 Debt Investments 40
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,000 × .04 = $40 (Face val. × int. rate)
55.
On January 1, 2017, the LaRoche Company purchased at face value, a $1,000, 5%, bond that pays interest on January 1. LaRoche Company has a calendar year end. The entry for the receipt of interest on January 1, 2018 is a. Cash 55 Interest Revenue 55 b. Cash 55 Interest Receivable 55 c. Cash 50 Interest Revenue 50 d. Cash 50 Interest Receivable 50
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,000 × .05= $50 (Face val. × int. rate)
.
Reporting and Analyzing Investments
56.
H-11
On January 1, 2017, JBT Company purchased at face value, a $1,000 6%, bond that pays interest on January 1. JBT Company has a calendar year end. The entry on January 1, 2017, is a. Cash 60 Interest Revenue 60 b. Debt Investments 1,000 Cash 1,000 c. Cash 1,000 Debt Investments 1,000 d. Interest Receivable 60 Interest Revenue 60
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,000 cost
57.
On January 1, 2017, JBT Company purchased at face value, a $1,000 6%, bond that pays interest on January 1. JBT Company has a calendar year end. The adjusting entry on December 31, 2017, is a. not required. b. Cash 60 Interest Revenue 60 c. Interest Receivable 60 Interest Revenue 60 d. Interest Receivable 60 Debt Investments 60
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,000 × .06 = $60 (Inv. cost × int. rate)
58.
On January 1, 2017, JBT Company purchased at face value, a $1,000 6%, bond that pays interest on January 1. JBT Company has a calendar year end. The entry for the receipt of interest on January 1, 2018 is a. Interest Receivable 60 Interest Revenue 60 b. Interest Receivable 60 Cash 60 c. Cash 60 Interest Revenue 60 d. Cash 60 Interest Receivable 60
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,000 × .06 = $60 (Inv. cost × int. rate)
.
H-12 59.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
On January 1, 2017, Tri-State Supply Company purchased at face value, a $1,000, 5%, bond that pays interest annually on January 1. Tri-State Company has a calendar year end. The entry on January 1, 2017, is a. Debt investments 1,000 Cash 1,000 b. Cash 1,000 Interest Revenue 1,000 c. Interest Receivable 50 Interest Revenue 50 d. Cash 1,000 Debt Investments 1,000
Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,000 cost
60.
On January 1, 2017, Tri-State Supply Company purchased at face value, a $1,000, 5%, bond that pays interest annually on January 1. Tri-State Company has a calendar year end. The adjusting entry on December 31, 2017, is a. not required. b. Cash 50 Interest Revenue 50 c. Interest Receivable 50 Interest Revenue 50 d. Interest Receivable 50 Debt Investments 50
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,000 × .05 = $50 (Inv. cost × int. rate)
61.
On January 1, 2017, Tri-State Company purchased at face value, a $1,000, 5%, bond that pays interest annually on January 1. Tri-State Company has a calendar year end. The entry for the receipt of interest on January 1, 2018 is a. Cash 50 Interest Revenue 50 b. Cash 50 Interest Receivable 50 c. Cash 55 Interest Revenue 55 d. Cash 55 Interest Receivable 55
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,000 × .05 = $50 (Inv. cost × int. rate)
62.
Vangaurd Co. purchased 80, 5% McLaughlin Company bonds for $80,000 cash. Interest is payable annually on January 1. The entry to record the purchase would include debit to a. Debt Investments for $82,000. b. Cash for $84,000. c. Debt Investments for $80,000. d. Stock Investments for $80,000.
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Reporting and Analyzing Investments
63.
H-13
Charleston Co. purchased 60, 6% APS Company bonds on January 1, 2017 for $60,000 cash. Interest is payable annually on January 1. The entry to record the January 1, 2018 annual interest payment would include a a. debit to Interest Receivable for $3,600. b. credit to Interest Receivable for $3,600. c. credit to Interest Revenue for $3,600. d. credit to Debt Investments for $3,600.
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $60,000 × .06 = $3,600
64.
Charleston Co. purchased 60, 6% APS Company bonds on January 1, 2017 for $60,000 cash. Interest is payable annually on January 1. The entry to record the December 31 interest accrual would include a a. debit to Interest Receivable for $3,600. b. debit to Interest Revenue for $3,600. c. credit to Cash Revenue for $3,600. d. debit to Debt Investments for $3,600.
Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $60,000 × .06 = $3,600 (Tot. face val. × int. rate)
65.
Cedar Co. purchased 80, 6% LKN Company bonds for $80,000 cash. Interest is payable annually on January 1. If 40 of the securities are sold January 1 for $41,000 the entry would include a credit to Gain on Sale of Debt Investments of a. $500. b. $1,200. c. $5,400. d. $1,000.
Ans: D, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $41,000 − ($80,000/2) = $1,000 (Sell. pr. − (Cost/2))
66.
On January 1, Vega Company purchased as an investment a $1,000, 6% bond for $1,000. The bond pays interest on January 1. The bond is sold on July 1 for $1,100 plus accrued interest. Interest has not been accrued since the last interest payment date. What is the entry to record the cash proceeds at the time the bond is sold? a. Cash 1,100 Debt Investments 1,100 b. Cash 1,130 Debt Investments 1,000 Gain on Sale of Debt Investments 100 Interest Revenue 30 c. Cash 1,130 Debt Investments 1,100 Interest Revenue 30 d. Cash 1,130 Debt Investments 1,000 Interest Revenue 130
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,000 × .06 × 6/12 = $30; $1,100 − $1,000 = $100 (Face val. × int. rate × 6/12); (Sell. pr. − face val,)
.
H-14 67.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
On January 1, U.K. Enterprise purchased as an investment a $1,000, 7% bond for $1,000. The bond pays interest on January 1. The bond is sold on July 1 for $1,120 plus accrued interest. Interest has not been accrued since the last interest payment date. What is the entry to record the cash proceeds at the time the bond is sold? a. Cash 1,120 Debt Investments 1,120 b. Cash 1,155 Debt Investments 1,000 Gain on Sale of Debt Investments 120 Interest Revenue 35 c. Cash 1,155 Debt Investments 1,120 Interest Revenue 35 d. Cash 1,155 Debt Investments 1,000 Interest Revenue 155
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,000 × .07 × 6/12; $1,120 − $1,000 = $120 (Face val. × int. rate × 6/12); (Sell. pr. face − val.)
68.
On January 1, Connid Company purchased as an investment a $1,000, 8% bond for $1,000. The bond pays interest on January 1. What is the entry to record the interest accrual on December 31? a. Interest Receivable 80 Debt Investments 80 b. Cash 80 Interest Revenue 80 c. Interest Receivable 80 Interest Revenue 80 d. Cash 80 Debt Investments 80
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,000 × .08 = $80 (Face val. × int. rate)
69.
On January 1, Belvedere Company purchased as an investment a $1,000, 7% bond for $1,000. The bond pays interest on January 1. What is the entry to record the interest accrual on December 31? a. Cash 70 Interest Receivable 70 b. Debt Investments 70 Interest Revenue 70 c. Interest Receivable 70 Interest Revenue 70 d. Cash 70 Interest Revenue 70
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,000 × .07 = $70 (Face val. × int. rate)
.
Reporting and Analyzing Investments
70.
H-15
On January 1, Waverly Company purchased as an investment a $1,000, 7% bond for $1,000. The bond pays interest on January 1. What is the entry to record the interest accrual on December 31? a. Interest Receivable 70 Interest Revenue 70 b. Debt Investments 70 Interest Revenue 70 c. Interest Receivable 35 Interest Revenue 35 d. Debt Investments 35 Interest Revenue 35
Ans: A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,000 × .07 = $70 (Inv. cost × int. rate)
71.
On January 1, Bay View Company purchased as an investment a $1,000, 5% bond for $1,000. The bond pays interest on January 1. The bond is sold on July 1 for $1,070 plus accrued interest. Interest has not been accrued since the last interest payment date. What is the entry to record the cash proceeds at the time the bond is sold? a. Cash 1,070 Debt Investments 1,070 b. Cash 1,095 Debt Investments 1,000 Gain on Sale of Debt Investments 70 Interest Revenue 25 c. Cash 1,095 Debt Investments 1,070 Interest Revenue 25 d. Cash 1,070 Debt Investments 1,000 Interest Revenue 70
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $1,000 × .05 × 6/12; $1,070 − $1,000 = $70 (Inv. cost × int. rate × 6/12; (sell. pr. − inv. cost)
72.
Which of the following is not a true statement about the accounting for long-term debt investments? a. The investment is initially recorded at cost. b. The cost includes any brokerage fees. c. Debt investments include investment in government and corporation bonds. d. The cost includes any accrued interest.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
73.
If a debt investment is sold, the investment account is a. debited for the book value of the bonds at the sale date. b. credited for the cost of the bonds at the sale date. c. credited for the fair value of the bonds at the sale date. d. debited for the cost of the bonds at the sale date.
Ans: B, LO: 1, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
H-16 74.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Porter Brothers Company purchased a debt investment for $80,000 on January 1, 2017. On January 1, 2018, Porter received cash interest of $4,000. Which of the following correctly presents the journal entries for the purchase and the receipt of interest? a. 1-1-17 Debt Investments 80,000 Cash 80,000 1-1-18 Cash 4,000 Interest Receivable 4,000 b. 1-1-17 Cash 80,000 Debt Investments 80,000 1-1-18 Interest Revenue 4,000 Cash 4,000 c. 1-1-17 Debt Investments 80,000 Cash 80,000 1-1-18 Interest Revenue 4,000 Cash 4,000 d. 1-1-17 Cash 80,000 Debt Investments 80,000 1-1-18 Cash 4,000 Interest Revenue 4,000
Ans: A, LO: 1, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
75.
On August 1, Basil Company buys 2,000 shares of Zingo common stock for $61,500 cash. On December 1, the stock investments are sold for $71,000 in cash. Which of the following are the correct journal entries of record for the purchase and sale of the common stock? a. Aug. 1 Cash 61,500 Stock Investments 61,500 Dec. 1 Cash 71,000 Stock Investments 61,500 Gain on Sale of Stock Investments 9,500 b. Aug. 1 Stock Investments 61,500 Cash 61,500 Dec. 1 Cash 71,000 Stock Investments 61,500 Gain on Sale of Stock Investments 9,500 c. Aug 1 Stock Investments 61,500 Cash 61,500 Dec. 1 Stock Investment 71,000 Cash 60,000 Gain on Sale of Stock Investments 9,000 d. Aug. 1 Cash 61,500 Stock Investments 61,500 Dec 1 Stock Investments 71,000 Cash 61,500 Gain on Sale of Stock Investments 9,500
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $71,000 − $61,500 = $9,500 (sell. pr. - inv. cost)
.
Reporting and Analyzing Investments
76.
H-17
Buford Industries owns 40% of Appalachian Company. For the current year, Appalachian reports net income of $250,000 and declares and pays a $70,000 cash dividend. Which of the following correctly presents the journal entries to record Buford’s equity in Appalachian net income and the receipt of dividends from Appalachian? a. Dec. 31 Stock Investments 100,000 Revenue from Stock Investments 100,000 Dec. 31 Cash 28,000 Stock Investments 28,000 b. Dec. 31 Stock Investments 100,000 Revenue from Stock Investments 100,000 Dec. 31 Cash 70,000 Stock Investments 70,000 c. Dec. 31 Stock Investments 72,000 Revenue from Stock Investments 72,000 d. Dec. 31 Revenue from Stock Investments 100,000 Stock Investments 100,000 Dec. 31 Stock Investments 28,000 Cash 28,000
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: .40 × $250,000 40 × $70,000 = $28,000 ((Own. % × Net inc.); Own. % × div. pd.)
77.
On January 1, 2017, Chic Corp. paid $750,000 for 100,000 shares of Toto Company's common stock, which represents 25% of Toto’s outstanding common stock. Toto reported income of $300,000 and paid cash dividends of $80,000 during 2017 Chic should report the investment in Toto Company on its December 31, 2017, balance sheet at a. $750,000 b. $825,000 c. $770,000 d. $805,000
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $750,000 + (.25 × $300,000) − (.25 × $80,000) = $805,000 (Inv. cost + (own. % × Net inv.) - (own. % × div. pd.)
78.
McComb Inc. earns $1,350,000 and pays cash dividends for $450,000 during 2017. SFX Corporation owns 70,000 of the 210,000 outstanding shares of McComb. What amount should SFX show in the investment account at December 31, 2017 if the beginning of the year balance in the account was $150,000? a. $450,000 b. $300,000 c. $420,000 d. $600,000
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $150,000 + (70/210 x $1,350,000) – (7/210 x $450,000) (Inv. bal. + (Net inc. × 70/210) − (div. pd. × 70/210))
.
H-18 79.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
McComb Inc. earns $1,350,000 and pays cash dividends for $450,000 during 2017. SFX Corporation owns 70,000 of the 210,000 outstanding shares of McComb. How much revenue from investment should SFX report in 2017? a. $150,000 b. $300,000 c. $450,000 d. $600,000
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (70 / 210) × $1,350,000 = $450,000 (sh. own./sh. out) × Net inc.
80.
All of the following factors would be signs of an investor's significant influence over an investee except a. the investor has representation on the investee's board of directors. b. the investor participates in the investee's policy-making process. c. there are immaterial transactions between the investor and the investee. d. the common stock held by other stockholders is dispersed.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics
81.
On January 1, 2017, Orleans industries acquired a 15% interest in Florida Corporation through the purchase of 12,000 shares of Florida Corporation common stock for $640,000. During 2017, Florida Corp. paid $160,000 in dividends and reported a net loss of $200,000. Orleans is able to exert significant influence on Florida. However, Orleans mistakenly records these transactions using the cost method rather than the equity method of accounting. Which of the following would show the correct presentation for Orlean’s investment using the equity method? Investment Net Account Earnings (loss) a. $200,000 ($40,000) b. $586,000 ($30,000) c. $610,000 ($30,000) d. $610,000 ($6,000)
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $640,000 − (.15 $200,000) − (.15 × $160,000) = $586,000 (Inv. cost - (own. % × Net loss) - (own. % × div. pd.))
82.
When a company holds stock of several different corporations, the group of securities is identified as a(n) a. affiliated investment. b. consolidated portfolio. c. investment portfolio. d. controlling interest.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Reporting and Analyzing Investments
83.
H-19
CGS Corporation makes an investment in 300 shares of Bama Company's common stock. The stock is purchased for $53 a share. The entry for the purchase is: a. Debt Investments 15,000 Cash 15,000 b. Stock Investments 15,900 Cash 15,900 c. Stock Investments 15,000 Cash 15,000 d. Cash 15,900 Stock Investments 15,900
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 300 $53/sh = $15,900
84.
Gulf Coast Corporation makes an investment in 200 shares of Eta Company's common stock. The stock is purchased for $52 a share. The entry for the purchase is a. Debt Investments 10,400 Cash 10,400 b. Stock Investments 10,400 Cash 10,400 c. Stock Investments 10,000 Cash 10,000 d. Cash 10,400 Stock Investments 10,400
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 200 $52 = $10,400
85.
For accounting purposes, the method used to account for investments in common stock is determined by a. the amount paid for the stock by the investor. b. the extent of an investor's influence over the operating and financial affairs of the investee. c. whether the stock has paid dividends in past years. d. whether the acquisition of the stock by the investor was "friendly" or "hostile."
Ans: B, LO: 2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
H-20 86.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Outer Banks Corporation sells 300 shares of common stock being held as an investment. The shares were acquired six months ago at a cost of $40 a share. Outer Banks sold the shares for $43 a share. The entry to record the sale is a. Cash 12,000 Loss on Sale of Stock Investments 900 Stock Investments 8,600 b. Cash 12,900 Gain on Sale of Stock Investments 900 Stock Investments 12,000 c. Cash 12,900 Stock Investments 12,900 d. Stock Investments 12,000 Loss on Sale of Stock Investments 900 Cash 12,900
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (300 × $43) − (300 × $40) = $900 (Sell. pr./sh. – inv, cost) × sh. sold
87.
Ashland Corporation sells 150 shares of common stock being held as an investment. The shares were acquired six months ago at a cost of $30 a share. Ashland sold the shares for $38 a share. The entry to record the sale is a. Cash 4,500 Loss on Sale of Stock Investments 1,200 Stock Investments 5,700 b. Stock Investments 5,700 Cash 5,700 c. Cash 5,700 Gain on Sale of Stock Investments 1,200 Stock Investments 4,500 d. Cash 5,700 Stock Investments 5,700
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($38 − $30) × 150 = $1,200 (sol. pr.sh./ - cost/sh.) × sh. sold
88.
Crosby Corporation sells 400 shares of common stock being held as an investment. The shares were acquired six months ago at a cost of $50 a share. Crosby sold the shares for $46 a share. The entry to record the sale is: a. Cash 18,400 Loss on Sale of Stock Investments 1,600 Stock Investments 20,000 b. Cash 20,000 Gain on Sale of Stock Investments 1,600 Stock Investments 18,400 c. Cash 18,400 Stock Investments 18,400 d. Stock Investments 18,400 Loss on Sale of Stock Investments 1,600 Cash 20,000
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($46 − $50) × 400 = $1.600
.
Reporting and Analyzing Investments
H-21
(sell. pr./sh. - cost/sh.) × sh. sold
89.
A purchase of common stock of Blue Wave Corporation for $29,000 was sold three months later for $30,000. The entry to record the sale would include a a. debit to Cash of $29,000. b. credit to Gain on Sale of Stock Investments of $1,000. c. credit to Stock Investments of $30,000. d. credit to Interest Revenue of $1,000.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $30,000 − $29,000 = $1,000 (Sell. pr. - inv. cost)
90.
Hardin Park Company had these transactions pertaining to stock investments Feb. 1 Purchased 5,000 shares of Raley Company (10%) for $89,000 cash. June 1 Received cash dividends of $1 per share on Raley stock. Oct. 1 Sold 2,000 shares of Raley stock for 39,000. Dec. 1 Received cash dividends of $2 per share on Reley stock. The entry to record the purchase of the Raley stock would include a a. credit to the Stock Investments account for $89,000. b. credit to Cash for $90,000 c. debit to the Stock Investments account for $89,000. d. debit to Investment Expense for $1,000.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $89,000 cost
91.
Hardin Park Company had these transactions pertaining to stock investments Feb. 1 Purchased 5,000 shares of Raley Company (10%) for $89,000 cash. June 1 Received cash dividends of $1 per share on Raley stock. Oct. 1 Sold 2,000 shares of Raley stock for $39,000. Dec. 1 Received cash dividends of $2 per share on Raley stock. The entry to record the receipt of the dividends June 1 would include a a. debit to Stock Investments of $5,000. b. credit to Dividend Revenue of $5,000. c. debit to Dividend Revenue of $5,000. d. credit to the Stock Investments of $5,000.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $5,000 × $1 = $5,000 (sh. purch.× div./sh.)
92.
Hardin Park Company had these transactions pertaining to stock investments Feb. 1 Purchased 5,000 shares of Raley Company (10%) for $89,000 cash. June 1 Received cash dividends of $1 per share on Raley stock. Oct. 1 Sold 2,000 shares of Raley stock for $39,000. Dec. 1 Received cash dividends of $2 per share on Raley stock. The entry to record the sale of the stock would include a a. debit to Cash for $35,600. b. credit to Gain on Sale of Stock Investments for $1,360. c. debit to Stock Investment for $35,600. d. credit to Gain on Sale of Stock Investments of $3,400.
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $39,000 – ($89,000/5,000 x 2,000) (sell pr. -[(inv. cost/sh. pur.) × sh. sold]
.
H-22
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
93.
Hardin Park Company had these transactions pertaining to stock investments Feb. 1 Purchased 5,000 shares of Raley Company (10%) for $89,000 cash. June 1 Received cash dividends of $1 per share on Raley stock. Oct. 1 Sold 2,000 shares of Raley stock for $39,000. Dec. 1 Received cash dividends of $2 per share on Raley stock. The entry to record the receipt of the dividends Dec. 1 would include a a. debit to Stock Investments of $6,000. b. credit to Dividend Revenue of $6,000. c. debit to Dividend Revenue of $6,000. d. credit to the Stock Investments of $6,000.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (5,000 − 2,000) × $2 = $6,000 (Sh. pur. sh. sold) × div./sh.
94.
If an investor owns less than 20% of the common stock of another corporation as an investment a. the equity method of accounting for the investment should be employed. b. no dividends can be expected. c. it is presumed that the investor has relatively little influence on the investee. d. it is presumed that the investor has significant influence on the investee.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Business Economics
95.
If the cost method is used to account for an investment in common stock, dividends received should be a. credited to the Stock Investments account. b. credited to the Dividend Revenue account. c. debited to the Stock Investments account. d. recorded only when 20% or more of the stock is owned.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
96.
Under the cost method of accounting for dividends a. Revenue is credited when dividends are received. b. the Investment account is credited when the investee reports a net income. c. the Investment account is credited when dividends are received. d. Investment Revenue is credited when the investee reports a net income.
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
97.
If 10% of the common stock of an investee company is purchased as an investment, the appropriate method of accounting for the investment is a. the cost method. b. the equity method. c. the preparation of consolidated financial statements. d. determined by agreement with whomever owns the remaining 90% of the stock.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Investment Decisions
.
Reporting and Analyzing Investments
98.
H-23
When the cost method is used to account for a stock investment the carrying value of the investment is affected by a. the earnings of the investee. b. the dividend distributions of the investee. c. the earnings and dividend distributions of the investee. d. neither the earnings nor the dividends of the investee.
Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Investment Decisions
99.
The cost method of accounting for investments in stock should be employed when the a. investor owns more than 50% of the investee's stock. b. investor has significant influence on the investee and the stock held by the investor are marketable equity securities. c. market value of the shares held is greater than their historical cost. d. investor's influence on the investee is insignificant.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Investment Decisions
100.
The equity method should generally be used to account for an investment in stock when the level of ownership is a. less than 10%. b. between 10% and 20%. c. between 20% and 50%. d. 10% or more.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Investment Decisions
101.
When an investor owns between 20% and 50% of the common stock of a corporation, it is generally presumed that the investor a. has insignificant influence on the investee and that the cost method should be used to account for the investment. b. should apply the cost method in accounting for the investment. c. will prepare consolidated financial statements. d. has significant influence on the investee and that the equity method should be used to account for the investment.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Investment Decisions
102.
The cost method of accounting for investments in stock should be used when the investment is a. influential and controlling. b. influential and noncontrolling. c. controlling. d. non-influential and noncontrolling.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Investment Decisions
103.
The ability of an investing company to affect the operating and financial activities of another company, even though the investor holds less than 50% of the stock, is known as a. significant influence. b. control. c. a combination. d. influence and control.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Investment Decisions
.
H-24 104.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Under the equity method of accounting for investments in common stock, when a dividend is received from the investee company a. the Dividend Revenue account is credited. b. the Stock Investments account is increased. c. the Stock Investments account is decreased. d. no entry is necessary.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
105.
The receipt of dividends on an investment affects the Stock Investment account when which of the following methods is used? a. Cost method. b. Equity method. c. Combination method. d. Market method.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Investment Decisions
106.
Bing Company owns 30% interest in the stock of Yeti Corporation. During the year, Yeti pays $75,000 in dividends to Bing, and reports $400,000 in net income. Bing Company’s investment in Yeti will increase Bing net income by a. $120,000. b. $97,500. c. $75,000. d. $22,500.
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: 30% × $400,000 = $120,000 (Own. % × Net inc.)
107.
Chopper Company owns 15% interest in the stock of Elton Corporation. During the year, Elton pays $10,000 in dividends to Chopper, and reports $400,000 in net income. Chopper Company’s investment in Elton will increase Chopper net income by a. $10,000. b. $50,000. c. $60,000. d. $1,500.
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
108.
Barcelona Company owns 40% interest in the stock of ABX Corporation. During the year, ABX pays $40,000 in dividends to Barcelona, and reports $300,000 in net income. Barcelona Company’s investment in ABX will increase Barcelona net income by a. $104,000. b. $120,000. c. $80,000. d. $16,000.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: 40% × $300,000 = $120,000 (Own. % × Net inc.)
.
Reporting and Analyzing Investments
109.
H-25
Barcelona Company owns 40% interest in the stock of ABX Corporation. During the year, ABX pays $40,000 in dividends to Barcelona, and reports $300,000 in net income. Barcelona Company’s investment in ABX will increase by a. $104,000. b. $120,000. c. $16,000. d. $80,000.
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: (40% × $300,000) − $40,000 = $80,000 (Own. % × Net inc.) – div. rec.
110.
Jambon Company owns 10% interest in the stock of Fanth Corporation. During the year, Fanth pays $12,000 in dividends to Jambon, and reports $200,000 in net income. Jambon Company’s investment in Fanth will increase Jambon net income by a. $20,000. b. $19,200. c. $12,000. d. $8,000.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
111.
Eglin Company owns 30% interest in the stock of Bosco Corporation. During the year, Bosco pays $10,000 in dividends to Eglin, and reports a net loss of $200,000. Eglin Company’s investment in Bosco will affect Eglin net income by a a. $10,000 increase. b. $60,000 increase. c. $60,000 decrease. d. $10,000 decrease.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $200,000 × 30% = $60,000 (Net loss × own. %)
112.
FTX Company owns 10% interest in the stock of Zip Corporation. During the year, Zip pays $5,000 in dividends to FTX, and reports a net loss of $100,000. FTX Company’s investment in Zip will affect FTX net income by a a. $5,000 increase. b. $10,000 increase. c. $10,000 decrease. d. $5,000 decrease.
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
.
H-26 113.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
On January 1, 2017, Valentine Corporation purchased 25% of the common stock outstanding of Betz Corporation for $200,000. During 2017, Betz Corporation reported net income of $80,000 and paid cash dividends of $48,000. The balance of the Stock Investments—Betz account on the books of Valentine Corporation at December 31, 2017, is a. $200,000. b. $208,000. c. $220,000. d. $192,000.
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $200,000 + [($80,000 − $48,000) × .25] = $208,000 (Inv. Cost + [(Net inc. – div. pd.) × own%])
114.
On January 1, 2017, the Express Corporation purchased 30% of the common stock outstanding of the Bangor Corporation for $300,000. During 2017, the Bangor Corporation reported net income of $120,000 and paid cash dividends of $30,000. The balance of the Stock Investments—Bangor account on the books of Express Corporation at December 31, 2017, is a. $300,000. b. $330,000. c. $420,000. d. $327,000.
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $300,000 + (30% × $120,000) − (30% × $30,000) = $327,000 (Inv. cost + (own. % × Net inc.) - (own. % × div. pd.)
115.
Under the equity method, the Stock Investments account is increased when the a. investee company reports net income. b. investee company pays a dividend. c. investee company reports a loss. d. stock investment is sold at a gain.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Project Management, IMA: FSA
116.
Which of the following is the correct matching concerning an investor's influence on the operations and financial affairs of an investee? % of Investor Ownership Presumed Influence a. Less than 20% Short-term b. Between 20%-50% Significant c. More than 50% Long-term d. Between 20%-50% Controlling
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
117.
Which of the following is the correct matching concerning the appropriate accounting for long-term stock investments? % of Investor Ownership Accounting Guidelines a. Less than 20% Cost method b. Between 20%-50% Cost method c. More than 50% Cost or equity method d. Between 20%-50% Consolidated financial statements
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Reporting and Analyzing Investments
118.
H-27
If the cost method is used to account for an investment in common stock a. it is presumed that the investor has significant influence on the investee. b. the earning of net income by the investee is considered a proper basis for recognition of income by the investor. c. net income of the investee is not considered earned by the investor until dividends are declared by the investee. d. the investment account may be at times greater than the acquisition cost.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: Project Management, IMA: Investment Decisions
119.
If a company acquires a 40% common stock interest in another company a. the equity method is usually applicable. b. all influence is classified as controlling. c. the cost method is usually applicable. d. the ability to exert significant influence over the activities of the investee does not exist.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: Project Management, IMA: Investment Decisions
120.
If a stock investment is sold at a gain, the gain a. is reported as operating revenue. b. is reported under a special section, "Discontinued investments," on the income statement. c. is reported in the Other Revenue and Gain section of the income statement. d. contributes to gross profit on the income statement.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
121.
If the equity method is being used, cash dividends received a. are credited to the Dividend Revenue account. b. require no entry because investee net income has already been recorded at the proper proportion on the investor's books. c. are credited to the Stock Investments account. d. are credited to the Revenue from Investment in Stock account.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
122.
If the equity method is being used, the Revenue from Investment in Stock account is a. just another name for a Dividend Revenue account. b. credited when dividends are declared by the investee. c. credited when net income is reported by the investee. d. debited when dividends are declared by the investee.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
123.
Under the equity method, the Stock Investments account is credited when the a. investee reports net income. b. investee reports a net loss. c. investment is originally acquired. d. investee reports net income and when the investment is originally acquired.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
.
H-28 124.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
King Corporation purchased 2,000 shares of Cable common stock ($50 par) at $73 per share as a short-term investment. The shares were subsequently sold at $77 per share. The cost of the securities purchased and gain or loss on the sale were Cost Gain or Loss a. $100,000 $54,000 loss b. $100,000 $54,000 gain c. $146,000 $8,000 loss d. $146,000 $8,000 gain
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: (2,000 × $73) − (2,000 × $77) = $8,000 (Sh. pur. × cost/sh.) - (sh. sold × sell. pr./sh.)
125.
Which of the following is not a method of accounting for stock investments? a. Cost method. b. Stock method. c. Consolidated financial statements. d. Equity method.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Investment Decisions
126.
In order to use the cost method of accounting for stock investments, how much stock must the investor own? a. Less than 20%. b. More than 50%. c. Between 20% and 50%. d. The cost method is always used for stock investments of any size.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Investment Decisions
127.
Assume that Oslo Corp. acquires 30% of Celdon Corp. for $360,000 on January 1, 2017. If Celdon declares and pays $120,000 in total dividends on February 14th, the journal entry would include a credit to a. Dividend Revenue for $120,000. b. Dividend Revenue for $36,000. c. Stock Investments for $36,000. d. No entry is necessary.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: 30% × $120,000 = $36,000 (Own. % × div. paid.)
128.
Assume that Oslo Corp. acquires 30% of Celdon Corp. for $360,000 on January 1, 2017. The journal entry on Oslo’s books assuming Celdon’s net income for 2017 was $600,000 would include a debit to a. No entry is necessary. b. Cash for $600,000. c. Cash for $180,000. d. Stock Investments for $180,000.
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $600,000 × 30% = $180,000 (Net inc. × own. %)
.
Reporting and Analyzing Investments
129.
H-29
Mega Company receives net proceeds of $73,000 on the sale of stock investments that cost $79,000. This transaction will result in reporting in the income statement a a. loss of $6,000 under “Other expenses and losses.” b. loss of $6,000 under “Operating expenses.” c. gain of $6,000 under “Other revenues and gains.” d. gain of $6,000 under “Operating revenues.”
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
130.
Consolidated financial statements are useful to all of the following except a. creditors of subsidiary companies. b. management of the parent company. c. stockholders of the parent company. d. board of directors of the parent company.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
131.
When a company owns more than 50% of the common stock of another company a. consolidated financial statements are usually prepared. b. the cost method of accounting is used. c. they are referred to as the subsidiary. d. they recognize revenue when dividends are received.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
132.
The company whose stock is owned by the parent company is called the a. controlled company. b. subsidiary company. c. investee company. d. sibling company.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
133.
A company that owns more than 50% of the common stock of another company is known as the a. charge company. b. subsidiary company. c. parent company. d. management company.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
134.
If one company owns more than 50% of the common stock of another company a. the cost method should be used to account for the investment. b. a partnership exists. c. a parent–subsidiary relationship exists. d. the company whose stock is owned must be liquidated.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Investment Decisions
.
H-30 135.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
If a parent company has two wholly owned subsidiaries, how many legal and economic entities are there from the viewpoint of the shareholders of the parent company? Legal Economic a. 3 3 b. 1 2 c. 3 1 d. 2 1
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
136.
When a company owns more than 50% of the common stock of another company a. affiliated financial statements are prepared. b. consolidated financial statements are prepared. c. controlling financial statements are prepared. d. significant financial statements are prepared.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
137.
In recognizing a decline in the fair value of short-term stock investments, an Unrealized Loss account is debited because a. management intends to realize this loss in the near future. b. the securities have not been sold. c. the stock market is volatile. d. management cannot determine the exact amount of the loss in value.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
138.
Which of the following statements is true about investments classified as trading securities? a. The investor’s intent and ability is to hold them to maturity. b. They are valued on the balance sheet at cost. c. They can consist of debt, but not equity, securities. d. Changes in market value are reflected as part of net income.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Investment Decisions
139.
The Fair Value Adjustment account a. is set up for each security in the company's portfolio. b. relates to the entire portfolio of securities held by the company. c. is closed at the end of each accounting period. d. appears on the income statement as Other Expenses and Losses.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Investment Decisions
.
Reporting and Analyzing Investments
140.
H-31
At the end of the first year of operations, the total cost of the trading securities portfolio is $179,000 and the total fair value is $174,000. What should the financial statements show? a. A reduction of an asset of $5,000 and a realized loss of $5,000. b. A reduction of an asset of $5,000 and an unrealized loss of $5,000 in the stockholders’ equity section. c. A reduction of an asset of $5,000 in the current assets section and an unrealized loss of $5,000 under “Other expenses and losses.” d. A reduction of an asset of $5,000 in the current assets section and a realized loss of $75,000 under “Other expenses and losses.”
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $179,000 − $174,000 = $5,000
141.
Trading securities are reported on the balance sheet at a. fair value. b. cost. c. cost, adjusted for the effects of interest. d. lower of cost or market.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
142.
The Fair Value Adjustment account is a(n) a. offset account. b. adjustment account. c. valuation allowance account. d. opposite account.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
143.
Reporting investments at fair value is a. applicable to equity securities only. b. applicable to debt securities only. c. applicable to both debt and equity securities. d. a conservative approach because only losses are recognized.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
144.
Deutsche Corporation's trading portfolio at the end of the year is as follows: Investment Cost Market Value Common Stock A $16,000 $18,000 Common Stock B 13,000 7,000 $29,000 $25,000 At the end of the year, Deutsche Corporation should a. set up a Fair Value Adjustment account for Common Stock B. b. set up a Fair Value Adjustment account for the portfolio. c. recognize an Unrealized Gain or Loss—Income for $6,000. d. report a loss on the income statement for $6,000 under "Other Expenses and Losses."
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
H-32 145.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Deutsche Corporation's trading portfolio at the end of the year is as follows: Investment Cost Fair Value Common Stock A $16,000 $18,000 Common Stock B 13,000 7,000 $29,000 $25,000 The year-end adjusting entry to reflect a decrease in the value of stock trading securities includes a a. credit to Fair Value Adjustment—Trading. b. debit to Fair Value; Market Adjustment—Trading. c. debit to Unrealized Gain—Income. d. credit to Stock Investments.
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
146.
Deutsche Corporation's trading portfolio at the end of the year is as follows: Investment Cost Fair Value Common Stock A $16,000 $18,000 Common Stock B 13,000 7,000 $29,000 $25,000 Deutsche subsequently sells Common Stock B for $15,000. What entry is made to record the sale? a. Cash 15,000 Stock Investments 15,000 b. Cash 15,000 Market Adjustment 2,000 Stock Investments 13,000 c. Cash 15,000 Stock Investments 13,000 Gain on Sale of Stock Investments 2,000 d. Cash 15,000 Stock Investments 7,000 Gain on Sale of Stock Investments 8,000
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $15,000 − $13,000 = $2,000 (Sell. pr. - inv. B cost)
147.
A stock investment classified as trading securities is purchased for $73,500. At year end, when the market value of the stock is $65,000, the adjusting entry includes a a. credit to Stock Investments. b. debit to Loss on Sale of Stock Investment. c. credit to Fair Value-Adjustment—Trading. d. credit to Unrealized Loss—Income.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
148.
Which of the following would not be reported under "Other Revenues and Gains" on the income statement? a. Unrealized gain on available-for-sale securities. b. Dividend revenue. c. Interest revenue. d. Gain on sale of debt investments.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Reporting and Analyzing Investments
.
H-33
H-34 149.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
If the cost of an available-for-sale security exceeds its fair value by $29,000, the entry to recognize the loss a. is not required since the share prices will likely rebound in the long run. b. will show a debit to an expense account. c. will show a credit to a valuation allowance account that appears in the stockholders’ equity section of the balance sheet. d. will show a debit to an unrealized loss account that is deducted in the stockholders' equity section of the balance sheet.
Ans: D, LO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
150.
The balance in the Unrealized Loss—Equity account will a. appear on the balance sheet as a contra asset. b. appear on the income statement under Other Expenses and Losses. c. appear as a deduction in the stockholders' equity section. d. not be shown on the financial statements until the securities are sold.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
151.
Assume that Chapman’s Inc.’s trading securities have a total cost of $185,000 and a total fair value of $215,000 at year end. The related adjusting entry would include a debit to a. Unrealized Gain for $30,000. b. Fair Value Adjustment – Trading for $30,000. c. No adjustment since only realized gains are recorded. d. Fair Value Adjustment – Trading for $215,000.
Ans: B, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $215,000 − $185,000 = $30,000
152.
Which of the following is not a category used for valuing and reporting investments? a. Securities held for investing purposes. b. Trading securities. c. Held-to-maturity securities. d. Available-for-sale securities.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
153.
Unrealized gains or losses on available-for-sale securities are reported where in the financial statements? a. Nowhere since only realized gains are reported. b. In the “Other revenues and gains” or “Other expenses and losses” sections of the income statement. c. Below extraordinary items in the income statement. d. In the stockholders’ equity section of the balance sheet.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Reporting and Analyzing Investments
154.
H-35
At the end of its first year, the trading securities portfolio consisted of the following common stocks. Cost Fair value Draper Corporation $ 46,400 $ 50,000 Edmunds Inc. 60,000 55,800 Feazell Corporation 80,000 76,000 $186,400 $181,800 The unrealized loss to be recognized under the fair value method is a. $4,200. b. $8,200. c. $4,600. d. $4,000.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $186,400 − $181,800 = $4,600 (Tot. cost - tot. FV)
155.
At the end of its first year, the trading securities portfolio consisted of the following common stocks. Cost Fair Value Draper Corporation $ 46,400 $ 50,000 Edmunds Inc. 60,000 55,800 Feazell Corporation 80,000 76,000 $186,400 $181,800 In the following year, the Edmunds common stock is sold for cash proceeds of $57,000. The gain or loss to be recognized on the sale is a a. gain of $1,200. b. loss of $3,000. c. gain of $10,600. d. loss of $1,200.
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $57,000 − $60,000 = ($3,000) (Cash proc. - inv. cost)
156.
At the end of the first year of operations, the total cost of the trading securities portfolio is $245,000. Total fair value is $250,000. The financial statements should show a. an addition to an asset of $5,000 and a realized gain of $5,000. b. an addition to an asset of $5,000 and an unrealized gain of $5,000 in the stockholders’ equity section. c. an addition to an asset of $5,000 in the current assets section and an unrealized gain of $5,000 in “Other revenues and gains.” d. an addition to an asset of $5,000 in the current assets section and a realized gain of $5,000 in “Other revenues and gains.”
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $250,000 − $245,000 = $5,000
.
H-36 157.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
Giphons Corp. has common stock of $3,500,000, Retained Earnings of $1,800,000, unrealized gains on trading securities of $60,000 and unrealized losses on available-forsale securities of $110,000. What is the total amount of their stockholders’ equity? a. $5,190,000. b. $5,300,000. c. $5,240,000. d. $5,130,000.
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $3,500,000 + $1,800,000 − $110,000 = $5,190,000 (Com. st. + R/E - un. loss.)
158.
Cost and fair value data for the trading securities of Beltway Company at December 31, 2017, are $100,000 and $88,000, respectively. Which of the following correctly presents the adjusting journal entry to record the securities at fair value? a. Dec. 31 Unrealized Loss⎯Income 12,000 Trading Securities 12,000 b. Dec. 31 Unrealized Gain⎯Income 12,000 Trading Securities 12,000 c. Dec. 31 Unrealized Loss⎯Income 12,000 Market Adjustment⎯Trading 12,000 d. Dec. 31 Fair Value Adjustment - Trading 12,000 Unrealized Gain-Income 12,000
Ans: C, LO: 3, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $100,000 − $88,000 = $12,000 (Cost - fair val.)
159.
At December 31, 2017, the trading securities for Blue Bell, Inc. are as follow Fair Value Security Cost 12/31/17 X-tra $ 90,000 $ 92,000 Yeti 150,000 144,000 Zeta 30,000 28,000 Blue Bell should report the following amount related to the securities transactions in its 2017 income statement a. $2,000 gain. b. $6,000 realized loss. c. $6,000 unrealized loss. d. $8,000 unrealized loss.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($90,000 + $150,000 + $30,000) − ($92,000 + $144,000 + $28,000) = $6,000 (Tot. cost - tot. FV)
.
Reporting and Analyzing Investments
160.
H-37
At December 31, 2017, Grey beard Inc. has these data on its security investments Fair Value Security Cost 12/31/17 Trading $140,000 $172,000 Available-for-sale 137,000 127,000 If the available-for-sale securities are held as long-term investments, which of the following will be recorded to adjust the securities to fair value? a. Securities 22,000 Unrealized Gain⎯Income 22,000 b. Unrealized Loss⎯Income 10,000 Securities 22,000 Unrealized Gain⎯Income 32,000 c. Fair Value Adjustment⎯Trading 32,000 Unrealized Gain⎯Income 32,000 Unrealized Gain or Loss⎯Equity 10,000 Fair Value Adjustment⎯Available-for-sale 10,000 d. Unrealized Gain – Income 32,000 Fair Value Adjustment⎯Trading 32,000 Fair Value Adjustment – Available-for-sale 10,000 Unrealized Gain or Loss⎯Equity 10,000
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $172,000 − $140,000 = $32,000; $137,000 − $127,000 = $10,000 (Trad. FV - trad. cost); (AFS cost - AFS FV)
161.
All of the following statements about financial statement gains and losses on investments are true except a. the account "Fair Value Adjustment – Available-For-Sale" is reported on the balance sheet. b. unrealized losses on trading securities are reported on the income statement. c. unrealized losses on available-for-sale securities are reported on the income statement. d. the account "Fair Value Adjustment – Trading" is reported on the balance sheet.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
162.
Baggles Company owns stock in Hampshire Industries, which it intends to hold indefinitely because of some negative tax consequences if sold. Which of the following statements is true regarding Baggles’ reporting of the stock? a. The stock would be classified as trading securities. b. The stock would be classified as available-for-sale securities. c. The stock requires no market adjustments since there are no plans to sell it. d. Any losses on the stock are recorded in the income statement.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
H-38 163.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
All of the following statements about short-term investments are true except a. short-term investments are also call marketable securities. b. trading securities are always classified as short-term investments. c. short-term investments are listed below accounts receivable in the current asset section of the balance sheet. d. short-term assets must be readily marketable.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
164.
Short-term investments are listed on the balance sheet immediately below a. cash. b. inventory. c. accounts receivable. d. prepaid expenses.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
165.
Short-term investments should be valued on the balance sheet at a. the lower of cost or fair value. b. the higher of cost or fair value. c. cost. d. fair value.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
166.
Which one of the following would not be classified as a short-term investment? a. Marketable equity securities. b. Marketable merchandise. c. Marketable debt securities. d. Short-term paper.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
167.
Short-term investments are securities that are readily marketable and intended to be converted into cash within the next a. year. b. two years. c. year or operating cycle, whichever is shorter. d. year or operating cycle, whichever is longer.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: Project Management, IMA: Investment Decisions
168.
Which of the following would not be classified as a short-term investment? a. Short-term commercial paper. b. Idle cash in a bank checking account. c. Marketable equity securities. d. Marketable debt securities.
Ans: B, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
Reporting and Analyzing Investments
H-39
Answers to Multiple Choice Questions 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56.
d c d b d d a c b d b b a c d b
57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72.
c d a c b c b a d b b c c a b d
73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88.
b a b a d a c c b c b b b b c a
89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104.
b c b d b c b a a d d c d d a c
105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120.
b a a b d c c a b d a b a c a c
121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136.
c c b d b a c d a a a b c c c b
137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152.
b d b c a c c b a c c a d c b a
153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168.
d c b c a c c c c b c a d b d b
BRIEF EXERCISES Be. 169 Ingles Company had the following transactions pertaining to debt securities held as an investment. Jan. 1
Purchased 80, 6%, $1,000 Omega Company bonds for $80,000 cash. Interest is payable annually on January 1.
Dec. 31 Accrued $4,800 annual interest on Omega Company bonds. Instructions Journalize the purchase and the receipt of interest. Assume no interest has been accrued. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 169
(5-8 min.)
(a) Jan. 1
Debt Investments ......................................................... Cash .................................................................... Dec. 31 Interest Receivable ...................................................... Interest Revenue ................................................. *(Bond face val. x int. rate)
.
80,000 80,000 4,800* 4,800
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
H-40 Be. 170
The following transactions were made by Aquavore Company. Assume all investments are temporary. July
1
Purchased 400 shares of Delta Corporation common stock for $35 per share.
30
Received a cash dividend of $1.25 per share from the Delta Corporation.
Sept. 15
Sold 80 shares of Delta Corporation stock for $38 per share.
Instructions Journalize the transactions. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 170 July
1
30
Sept. 15
(5-8 min.)
Stock Investments ............................................................ Cash ....................................................................... (To record purchase of 400 shares of Delta Corporation common stock)
14,000
Cash .................................................................................. Dividend Revenue .................................................. (To record receipts of cash dividend)
500
Cash .................................................................................. Stock Investments .................................................. Gain on Sale of Stock Investments ......................... (To record sale of Delta Corporation stock) *(sell. pr./sh. − cost/sh) x sh. sold
3,040
14,000
500
2,800 240*
Be. 171 Cupcake Company had the following transactions pertaining to its temporary stock investments. Jan.
1
Purchased 600 shares of La Crema Company stock for $7,050 cash .
June
1
Received cash dividends of $0.40 per share on the La Crema Company stock.
Sept. 15
Sold 300 shares of the La Crema Company stock for $3,400 cash.
Instructions Journalize the transactions. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Reporting and Analyzing Investments
Solution 171 Jan.
1
June 1
Sept. 15
H-41
(5 min.) Stock Investments ...................................................... Cash ..................................................................
7,050
Cash (600 × $0.40) .................................................... Dividend Revenue .............................................
240
Cash ............................................................................. Loss on Sale of Stock Investments ............................. Stock Investments ............................................. [300 × ($7,050 ÷ 600)] *[$3,400 − ($7,050 × 300/600)]
7,050
240 3,400 125* 3,525
Be. 172 On January 1, 2017, Redwood Creek Company purchased 5,000 shares of Monticello Company stock for $300,000. Redwood Creek’s investment represents 30 percent of the total outstanding shares of Monticello. During 2017, Monticello paid total dividends of $100,000 and reported net income of $290,000. What revenue does Redwood report related to this investment and what is the amount to be reported as an investment in Monticello stock at December 31. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 172
(5-8 min.)
Revenue for 2017 ($290,000 x 0.30)
$87,000
Balance in Investment account Purchase price $300,000 Less dividend receipt ($100,000 x 0.30) − 30,000 Plus Investment Revenue ($290,000 x 0.30) + 87,000 Ending balance Investment in Monticello $357,000* *(Purch. pr. + (tot. div. × own. %) - (Net inc. × own. %)) Be. 173 On January 1, Ollinger Company purchased a 25% equity investment in Fava Company for $300,000. At December 31 Fava declared and paid a $20,000 dividend and reported net income of $120,000. Instructions (a) Journalize the transactions (b) Determine the amount to be reported as an investment in Fava stock at December 31. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
H-42
Solution 173 (a)
(8–12 minutes) Stock Investments……………………………………….. Cash……………………………………………….
300,000
Dec. 31 Cash ($20,000 x .25)……………………………………… Stock Investments………………………………..
5,000
Dec. 31 Stock Investments ($120,000 x .25)……………………. Revenue from Stock Investments…………..
30,000
Jan. 1
300,000
5,000
30,000
(b)
Investment in Fava, January 1 Less: Dividend received Plus: Share of reported income Investment in Fava, December 31 *(Inv. cost − div. dec. × own. %) + (Net inc. × own. %)
$300,000 (5,000) 30,000 $325,000*
Be. 174 At January 1, 2017, the available-for-sale securities portfolio held by Darma Corporation consisted of the following investments: 1. 2,500 shares of H2 common stock purchased for $43 per share. 2. 1,500 shares of Krypto common stock purchased for $50 per share. At December 31, 2017, the fair values per share were H2 $36 and Krypto $54. Instructions (a) Prepare a schedule showing the cost and fair value of the portfolio at December 31, 2017. (b) Prepare the adjusting entry to report the portfolio at fair value at December 31, 2017. Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 174 (a)
(b)
Security H2 Krypto Totals Dec. 31
(8-10 min.) Cost $ 107,500 75,000 $182,500
Fair Value $ 90,000 81,000 $171,000
(2,500 × $36) (1,500 × $54)
Unrealized Gain or Loss—Equity ............................... Fair Value Adjustment—Available-for-Sale ...... *(Tot. cost − tot. fair val.)
.
11,500* 11,500
Reporting and Analyzing Investments
H-43
EXERCISES Ex. 175 Le Tourneau Company had the following transactions pertaining to debt investments. Jan. 1
Purchased 80, 6%, $1,000 Lido Company bonds for $80,000 cash.
July 1
Sold 40 Lido Company bonds for $42,400.
Instructions Journalize the entries for the purchase and sale of the Lido Company bonds. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 175 Jan. 1
July
1
(7 min.) Debt Investments ......................................................... Cash ....................................................................
80,000
Cash
42,400
.......................................................................... Debt Investments ................................................ Gain on Sale of Debt Investments ....................... *(Sell. pr. − (# of bonds sold × $1,000))
80,000
40,000 2,400*
Ex. 176 Trafton Company had the following transactions pertaining to debt invesments. 2017 Jan. 1 Purchased 60, 6%, $1,000 Hammond Company bonds for $60,000 cash. Interest is payable annually on January 1. Dec. 31 Accrued interest on Hammond Company bonds. 2018 Jan. 1
Received interest from Hammond Company bonds.
Jan. 1 Sold 30 Hammond Company bonds for $32,000. Instructions Journalize the transactions for 2017 and 2018. Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
H-44
Solution 176 2017 Jan. 1
(10-15 min.) Debt Investments ......................................................... Cash ....................................................................
60,000
Dec. 31 Interest Receivable ($60,000 × 6%) ............................. Interest Revenue .................................................
3,600
2018 Jan. 1
Cash
.......................................................................... Interest Receivable ............................................... Cash .......................................................................... Debt Investments ................................................. Gain on Sale of Debt Investments ....................... *(sell. pr. − (# of bonds sold × $1,000
60,000
3,600
3,600 3,600 32,000 30,000 2,000*
Ex. 177 The following transactions were made by Coral Company. Assume all investments are short-term. June
2
Purchased 600 shares of Schmidt Corporation common stock for $45 per share.
July
1
Purchased 210 Dantzler Corporation bonds for $210,000.
30
Received a cash dividend of $2.25 per share from the Schmidt Corporation.
Sept. 15
Sold 120 shares of Schmidt Corporation stock for $50 per share.
Dec. 31
Received semiannual interest check for $9,240 from the Dantzler Corporation.
31
Received a cash dividend of $2.25 per share from the Schmidt Corporation.
Instructions Journalize the transactions. Ans: N/A, LO: 1, 2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Reporting and Analyzing Investments
Solution 177 June
2
July
1
30
Sept. 15
Dec. 31
31
(15-20 min.)
Stock Investments ............................................................ Cash ...................................................................... (To record purchase of 600 shares of Schmidt Corporation common stock)
27,000
Debt Investments ............................................................. Cash ...................................................................... (To record purchase of 210 Dantzler Corporation bonds)
210,000
Cash
H-45
27,000
210,000
............................................................................. Dividend Revenue .................................................. (To record receipts of cash dividend)
1,350
Cash ................................................................................ Stock Investments .................................................. Gain on Sale of Stock Investments ......................... (To record sale of Schmidt Corporation stock)
6,000
Cash ................................................................................ Interest Revenue .................................................... (To record receipt of interest on Dantzler Corporation bonds)
9,240
Cash ................................................................................ Dividend Revenue .................................................. (To record receipt of cash dividend on remaining Brock stock (600 - 120 X $2.25) *(Sell. pr./sh. − cost/sh.) × sh. sold **(6/2 sh. − 7/1 sh.) × div. sh.
1,080
1,350
5,400 600*
9,240
1,080**
Ex. 178 Eaton Company had the following transactions pertaining to its short-term stock investments. Jan.
1
Purchased 900 shares of Stafford Company stock for $11,880 cash.
June
1
Received cash dividends of $0.60 per share on the Stafford Company stock.
Sept. 15
Sold 450 shares of the Stafford Company stock for $5,200.
Dec.
Received cash dividends of $0.60 per share on the Stafford Company stock.
1
Instructions (a) Journalize the transactions. (b) Indicate the income statement effects of the transactions. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
H-46
Solution 178 (a) Jan.
1
June 1
Sept. 15
Dec.
1
(10-15 min.) Stock Investments ....................................................... Cash ...................................................................
11,880
Cash (900 × $0.60) ..................................................... Dividend Revenue ..............................................
540
Cash ......................................................................... Loss on Sale of Stock Investments ............................. Stock Investments .............................................. [450 × ($11,880 ÷ 900)] *(sell. pr. − (cost × 450/900))
5,200 740*
Cash (450 × $0.60) ..................................................... Dividend Revenue .............................................. **(sell. pur. − sh. sold) × div./sh.
270*
11,880
540
5,940
270
(b) Dividend Revenue is reported under Other Revenues and Gains on the income statement. Loss on Sale of Stock Investments is reported under Other Expenses and Losses on the income statement. Ex. 179 Grafton Company had the following transactions pertaining to its short-term stock investments. Jan.
1
Purchased 2,000 shares of Hortez Company stock for $101,100 cash.
June
1
Received cash dividends of $2.70 per share on the Hortez Company stock.
Sept. 15
Sold 1,000 shares of the Hortez Company stock for $49,600.
Dec. 31
The fair values of the securities were $50,800. Prepare the adjusting entry to report the portfolio at fair value.
Instructions (a) Journalize the transactions. (b) Indicate the income statement effects of the transactions. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Reporting and Analyzing Investments
H-47
Solution 179 (10-15 min.) (a) Jan.
1
June 1
Sept. 15
Dec. 31
Stock Investments ...................................................... Cash ..................................................................
101,100
Cash (2,000 × $2.70) .................................................. Dividend Revenue .............................................
5,400
Cash ........................................................................ Loss on Sale of Stock Investments ............................. Stock Investments ............................................. [1,000 × ($101,100 ÷ 1,000)] *(sell. pr. – (inv. cost × 1,000/2,000))
49,600 950*
Fair Value Adjustment—Trading .................................. Unrealized Gain—Income ................................... {($101,100 – $50,550) - $50,800} [Inv. cost − (inv. cost × 1,000/2,000)] − fair val.
250
101,100 5,400
50,550
250
(b) Dividend Revenue is reported under Other Revenues and Gains on the income statement. Loss on Sale of Stock Investments is reported under Other Expenses and Losses on the income statement.
Ex. 180 Crespo Company purchased 42,000 shares of common stock of the Paive Corporation as an investment for $1,000,000. During the year, Paive Corporation reported net income of $400,000 and paid dividends of $100,000. Instructions (a)
Assuming that the 42,000 shares represent a 15% interest in Paive Corporation: 1. Prepare the journal entry to record the investment in Paive stock. 2. Prepare any entries that Crespo Company should make in accounting for its investment in Paive stock during the year. 3. What is the balance of the Stock Investments account on Crespo Company's books at the end of the year?
(b)
Repeat requirement (a) above except assume that the 42,000 shares represent a 25% interest in Paive Corporation.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 16, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
H-48
Solution 180 (16-21 min.) (a)
Cost Method 1. Stock Investments ................................................................. 1,000,000 Cash ............................................................................. (To record purchase of 42,000 shares of Paive Corporation stock)
1,000,000
2. Cash ..................................................................................... 15,000 Dividend Revenue ........................................................ [(To record dividends received); $100,000 × 15% = $15,000]
15,000
3. The Stock Investments account balance at the end of the year is $1,000,000. (b)
Equity Method 1. Stock Investments ................................................................. 1,000,000 Cash ............................................................................. (To record purchase of 42,000 shares of Paive Corporation stock)
1,000,000
2. Stock Investments ................................................................. 100,000* Revenue from Stock Investments .................................. (To record 25% equity in Paive net income) $400,000 × 25% = $100,000 *(Net inc.× own. %) Cash ..................................................................................... 25,000 Stock Investments ........................................................ [(To record dividends received); $100,000 × 25% = $25,000]
100,000
25,000
3. The Stock Investments account balance at the end of the year is $1,075,000* ($1,000,000 + $100,000 - $25,000). *(Purch. pr. + (Net × inc. × own.%) − (div. paid × own. %))
Ex. 181 Information pertaining to stock investments in 2017 by Com-ex Corporation follows: Acquired 15% of the 200,000 shares of common stock of Buffalo Company at a total cost of $9 per share on January 1, 2017. On July 1, Buffalo Company declared and paid a cash dividend of $1.90 per share. On December 31, Buffalo reported net income was $675,000 for the year. Obtained significant influence over Eta Company by buying 30% of Eta's 120,000 outstanding shares of common stock at a total cost of $25 per share on January 1, 2017. On June 15, Eta Company declared and paid a cash dividend of $2.50 per share. On December 31, Eta's reported net income was $330,000. Instructions Prepare all necessary journal entries for 2017 for Com-ex Corporation. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Reporting and Analyzing Investments
Solution 181 Jan.
1
1
June 15
July
1
Dec. 31
H-49
(15-20 min.)
Stock Investments ............................................................. Cash ......................................................................... (200,000 × 15% × $9 = $270,000) *(Tot sh. × own.% × cost/sh.)
270,000*
Stock Investments ............................................................. Cash ......................................................................... (30% × 120,000 × $25 = $900,000)
900,000
Cash (36,000 × $2.50) ....................................................... Stock Investments .....................................................
90,000
Cash (30,000 × $1.90) ....................................................... Dividend Revenue .....................................................
57,000
Stock Investments ............................................................. Revenue from Stock Investments .............................. ($330,000 × 30% = $99,000) *(Net inc. × own.%)
99,000*
270,000
900,000
90,000
57,000
99,000
Ex. 182 Sandafor Company had these transactions pertaining to stock investments: Feb
1
Purchased 2,400 shares of BFF common stock (2% of outstanding shares) for $16,500 cash.
July
1
Received cash dividends of $0.80 per share on BFF common stock.
Sept.
1
Sold 800 shares of BFF common stock for $7,900
Dec.
1
Received cash dividends of $.80per share on BFF common stock.
Instructions Journalize the transactions. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
H-50
Solution 182 (8 min.) Feb.
July
1
1
Sept. 1
Dec.
1
Stock Investments ....................................................... Cash ...................................................................
16,500
Cash (2,400 × $.80) .................................................... Dividend Revenue ..............................................
1,920
Cash ............................................................................ Stock Investments ($16,500 × 800/2,400) ........................................ Gain on Sale of Stock Investments ($7,900 – $5,500) ................................................ *(sell. pr. − (inv. cost × 800/2,400))
7,900
Cash (1,600 × $.80) .................................................... Dividend Revenue ............................................... *(sh. pur. − sh. sold) × div./sh.
1,280*
16,500
1,920
5,500 2,400*
1,280
Ex. 183 PWAT Inc. had these transactions pertaining to investments in common stock: Jan
1
Purchased 2,000 shares of Pasco Corporation common stock (5% of outstanding shares) for $96,500 cash.
July
1
Received a cash dividend of $1.70 per share.
Dec.
1
Sold 800 shares of Pasco Corporation common stock for $40,200.
31
Received a cash dividend of $1.70 per share.
Instructions Journalize the transactions. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Reporting and Analyzing Investments
Solution 183 Jan. July
Dec.
1 1
1
Dec. 31
H-51
(8 min.) Stock Investments ...................................................... Cash ..................................................................
96,500
Cash (2,000 × $1.70) .................................................. Dividend Revenue .............................................
3,400
Cash ....................................................................... Gain on Sale of Stock Investments ......................... Stock Investments ($96,500 × 800/2,000) ........................................ *(Sell. price − (inv. cost × 800/2,000))
40,200
Cash (1,200 × $1.70) .................................................. Dividend Revenue ................................................... *(Sh. pur. − sh. sold) × div./sh.
2,040*
96,500 3,400
1,600* 38,600
2,040
Ex. 184 Ultra Cosmetics acquired 10% of the 200,000 shares of common stock of Kardashian Fashion at a total cost of $14 per share on March 18, 2017. On June 30 Kardashian declared and paid a $96,000 dividend. On December 31 Kardashian reported net income of $244,000 for the year. At December 31 the market price of Kardashian Fashion was $16 per share. The stock is classified as available-for-sale. Instructions Prepare all the necessary entries for 2017 for Ultra Cosmetics. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 184 Mar. 18 June 30
Dec. 31
(5 min.) Stock Investments ...................................................... Cash (200,000 × 10% × $14)..............................
280,000
Cash ............................................................................ Dividend Revenue (96,000× 10%) ................................................
9,600
Fair Value Adjustment— Available-for-Sale .................................................... Unrealized Gain or Loss—Equity ($320,000 – $280,000) .................................... *(sh. purch. × mar. pr./sh.) − inv. cost
.
280,000
9,600 40,000* 40,000
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
H-52 Ex. 185
La Bouisse Inc. obtained significant influence over E-Stock Corporation by buying 40% of E-Stock 30,000 outstanding shares common stock at a total cost of $11 per share on January 1, 2017. On June 15 E-Stock declared and paid a cash dividend of $32,000. On December 31 E-Stock reported a net income of $120,000 for the year. Instructions Prepare all the necessary journal entries for 2017 for La Bouisse Inc. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 185 (5 min.) Jan.
1
June 15
Dec. 31
Stock Investments ....................................................... Cash (30,000 × 40% × $11) ................................
132,000
Cash ............................................................................ Stock Investments ($32,000 × 40%) ..............................................
12,800
Stock Investments........................................................ Revenue from Stock Investments ($120,000 × 40%). ................................................. *(Div. dec. × own.%)
48,000
132,000
12,800*
48,000
Ex. 186 Cantor Corporation's balance sheet at December 31, 2016, showed the following: Short-term investments, at fair value $46,500 Cantor Corporation's trading portfolio of stock investments consisted of the following at December 31, 2016: Investment Interstate Common Stock Danforth Preferred Stock Georgia Common Stock
Number of Shares 200 400 300
Cost $30,000 6,000 9,000 $45,000
During 2017, the following transactions took place: Feb. 5 Mar. 30 Sept. 9
Sold 50 shares of Interstate common stock for $7,900. Purchased 25 shares of Georgia common stock for $850. Purchased 50 shares of Georgia common stock for $2,000.
At year end on December 31, 2017, the fair values per share were: Interstate Common Stock Danforth Delta Preferred Stock Georgia Common Stock .
Fair Value Per Share $151.00 $ 13.00 $ 33.00
Reporting and Analyzing Investments
Ex. 186
H-53
(Cont.)
Instructions (a)
Prepare the journal entries to record the 2017 stock transactions.
(b)
On December 31, 2017, prepare any adjusting entry that might be necessary relative to the trading portfolio.
(c)
Show how the stock investments will appear on Cantor Corporation's balance sheet at December 31, 2017.
Ans: N/A, LO: 2, 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 186 (a)
Feb.
5
Mar. 30
Sept. 9
(b)
(15-20 min.) Cash
....................................................................... 7,900 Stock Investments ............................................ Gain on Sale of Stock Investments ................... (To record sale of 50 shares of Interstate common stock) *(sell. pr. - (Tot. cost × 50/200)) Stock Investments ..................................................... Cash ................................................................. (To record purchase of 25 shares of Georgia common stock)
850
Stock Investments ..................................................... Cash ................................................................. (To record purchase of 50 shares of Georgia common stock)
2,000
Investment Interstate Common Stock Danforth Preferred Stock Georgia Common Stock
Number of Shares 150 400 375
Cost $22,500 6,000 11,850 $40,350
Unrealized Loss—Income [($40,350 - $40,225) + $1,500*] ........ Fair Value Adjustment—Trading ........................................ *($46,500 fair value – $45,000 cost) **(Tot. cost - tot. fair val.) (c)
Short-term investments, at fair value
.
7,500 400*
850
2,000
Fair Value $22,650 5,200 12,375 $40,225 1,625** 1,625
$40,225
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
H-54 Ex. 187
On January 5, 2017, JBC Company purchased the following stock investments: 300 shares Getz Corporation common stock for $4,800. 500 shares Keller Corporation common stock for $10,000. 600 shares R-tel Corporation common stock for $18,000. Assume that JBC Company cannot exercise significant influence over the activities of the investee companies and that the cost method is used to account for the investments. On June 30, 2017, JBC Company received the following cash dividends: Getz Corporation.......................................... Keller Corporation ....................................... R-tel Corporation .........................................
$2.00 per share $3.00 per share $1.50 per share
On November 15, 2017, JBC Company sold 100 shares of R-tel Corporation common stock for $3,600.
On December 31, 2017, the fair value of the securities held by JBC Company is as follows: Per Share Getz Corporation common stock $12 Keller Corporation common stock 16 R-tel Corporation common stock 33 Instructions Prepare the appropriate journal entries that the JBC Company should make on the following dates: January 5, 2017 June 30, 2017 November 15, 2017 December 31, 2017 Ans: N/A, LO: 2, 3,, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 187
(20-25 min.)
January 5, 2017 Stock Investments ...................................................................... Cash .................................................................................. (To record purchase of equity securities as a long-term investment) June 30, 2017 Cash ........................................................................................... Dividend Revenue .............................................................. (To record cash dividends received) *300 × $2 = $600; 500 × $3 = $1,500; and 600 × $1.50 = $900.
.
32,800 32,800
3,000* 3,000
Reporting and Analyzing Investments
H-55
Solution 187 (Cont.) November 15, 2017 Cash ........................................................................................... Stock Investments ............................................................. Gain on Sale of Stock Investments .................................... (To record sale of 100 shares of R-tel Corporation common stock) *(sell. pr. – (cost × 100/600)) December 31, 2017 Unrealized Gain or Loss—Equity ................................................ Fair Value Adjustment—Available-for-Sale ........................ (To value long-term investments at fair value) *(Tot. cost – tot. fair val.)
3,600 3,000 600
1,700* 1,700
Investment Portfolio Investment Getz Corporation Keller Corporation R-tel Corporation Total
Shares 300 500 500
Cost $ 4,800 10,000 15,000 $29,800
Fair Value $ 3,600 8,000 16,500 $28,100
Ex. 188 Santos Corporation has the following trading portfolio of stock investments as of December 31, 2017. Security Cost Fair Value A $17,000 $16,000 B 23,000 25,000 C 32,000 28,000 $72,000 $69,000 On January 22, 2018, Santos Corporation sold security C for $30,000. Instructions (a)
Prepare the adjusting entry for Santos Corporation on December 31, 2017 to report the portfolio at fair value.
(b)
Indicate the balance sheet and income statement presentation of the fair value data for the Santos Corporation at December 31, 2017.
(c)
Prepare the journal entry for the 2018 sale.
Ans: N/A, LO: 2, 5,, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
H-56
Solution 188 (a) Dec. 31
(b)
(12-17 min.) 2017 Unrealized Loss—Income ........................................... Fair Value Adjustment—Trading ......................... *(Tot. cost – tot. fair val.)
3,000* 3,000
On the balance sheet, the short-term investments are reported in the current assets section as follows: Current Assets Short-term Investments, at fair value
$69,000
The unrealized loss account is reported under Other Expenses and Losses in the income statement.
(c) Jan. 22
2018 Cash ........................................................................... Loss on Sale of Stock Investments ............................. Stock Investments .............................................. *(Sell. pr. – sec. C cost)
30,000 2,000* 32,000
Ex. 189 King George Company has these data at December 31, 2017: Securities Cost Fair Value Trading $110,000 $119,000 Available-for-sale 100,000 95,000 The available-for-sale securities are held as a long-term investment. Instructions (a)
Prepare the adjusting entries to report each class of securities at fair value.
(b)
Indicate the statement presentation of each class of securities and the related unrealized gain (loss) accounts.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 189 (a)
(5 min.)
Fair Value Adjustment—Trading ($199,000 – $110,000) ........................................................ Unrealized Gain—Income ........................................... Unrealized Gain or Loss—Equity .............................................. Fair Value Adjustment—Available-for-Sale.......................... *(AFS cost – AFS fair val.)
.
9,000 9,000 5,000* 5,000
Reporting and Analyzing Investments
H-57
Solution 189 (Cont.) (b)
Balance Sheet Current Assets Short-term Investments, at fair value .................................. Investments Investments in stock of less than 20% owned companies, at fair value Stockholders' equity Less: Unrealized loss on available-for-sale securities .........
$119,000
Income Statement Other revenues and gains Unrealized gain—income ....................................................
95,000 $ (5,000)
$ 9,000
COMPLETION STATEMENTS 190. The purchase of a company in the same industry that does the same activity is called a ______________ acquisition. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Investment Decisions
191. Debt investments are investments in government and _____________ bonds. Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Investment Decisions
192. When an investor owns between 20% and 50% of the common stock of a corporation, it is generally presumed that the investor has _______________ influence over the investee and therefore, the appropriate method of accounting for this type of investment is the _______________ method. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Investment Decisions
193. Under the cost method, dividends received from an investee company are credited to the _______________ account, whereas under the equity method, dividends received from an investee company are credited to the _______________ account. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: FSA
194. At the beginning of the year, Dynamite Corporation acquired 15% of Tuesday Company common stock for $600,000. Tuesday Company reported net income for the year of $60,000 and paid $20,000 cash dividends during the year. The balance of the Stock Investments account on the books of the Dynamite Corporation at the end of the year should be $______________. Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Problem Solving, IMA: Reporting
195. A company that owns more than 50% of the common stock of another company is known as the ______________ company and _____________ financial statements are usually prepared. Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
.
H-58
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
196. _______________ securities are bought and held primarily for sale in the near future. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Investment Decisions
197. Fair Value Adjustment is a valuation ____________ account, which is _______________ to (from) the cost of the investments. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
198. At the end of an accounting period, if the fair value of the trading portfolio is less than its cost, then the company should recognize an ______________ that is reported on the _________________. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: None, IMA: Investment Decisions
199. An unrealized loss on trading securities is reported under Other ____________________ in the income statement. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
200. An unrealized gain or loss on available-for-sale securities is reported as a separate component of _________________. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
201. Short-term investments are securities that are _____________ and ______________ to be converted into cash within the next year. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Project Management, IMA: Investment Decisions
Answers to Completion Statements 190. horizontal 191. corporation 192. significant, equity 193. Dividend Revenue, Stock Investments 194. 600,000 195. parent, consolidated
.
196. 197. 198. 199. 200. 201.
Trading allowance, added (subtracted) unrealized loss, income statement Expenses and Losses stockholders’ equity readily marketable, intended
Reporting and Analyzing Investments
H-59
MATCHING 202.
Match the items below by entering the appropriate code letter in the space provided. A. Available-for-sale securities B. Subsidiary company C. Equity method D. Unrealized Gain or Loss—Equity E. Fair value
F. Consolidated financial statements G. Controlling interest H. Fair Value Adjustment I. Debt investments J. Long-term investments
____ 1. Valuation allowance account. ____ 2. Amount for which a security could be sold. ____ 3. Ownership of more than 50% of another company's common stock. ____ 4. Securities that may be sold in the future. ____ 5. Investments that are not readily marketable. ____ 6. Financial statements that present the assets and liabilities controlled by the parent and the aggregate profitability of the affiliated companies. ____ 7. The Stock Investments account is adjusted for net income and dividends received. ____ 8. Investments in government and corporation bonds. ____ 9. Entity whose stock is owned by the parent company. ____ 10. An account that is reported in the stockholders' equity section. Ans: N/A, LO: 1-3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: None, IMA: Reporting
Answers to Matching 1. 2. 3. 4. 5.
H E G A J
6. 7. 8. 9. 10.
F C I B D
.
H-60
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
SHORT-ANSWER ESSAY QUESTIONS S-A E 203 1. What are the reasons that corporations invest in securities? Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Risk Analysis, AICPA PC: Communications, IMA: Investment Decisions
Solution 203 Companies invest because (1) they have excess cash for a short period of time, or (2) they want to generate investment income or (3) they have strategic reasons such as controlling a competitor or supplier or entering a new industry. S-A E 204 (a) When should a long-term investment in common stock be accounted for by the equity method? (b)
When is revenue recognized under the equity method?
Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 204 (a) Whenever the investor's influence on the operating and financial affairs of the investee is significant, the equity method should be used. The major factor in determining significant influence is the percentage of ownership interest held by the investor in the investee. The general guideline for use of the equity method is 20% or more ownership interest. Companies are required to use judgement, however, rather than blindly follow the 20% guideline. For example, 25% ownership in a company that is 75% controlled by another organization would not indicate significant influence. (b)
Revenue is recognized as it is earned by the investee.
S-A E 205 If a company has a stock investment that is properly accounted for by the equity method, what will be the effect on the financial statements when they receive a dividend from its investee? Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 205 There will be no effect on the income statement. However, on the balance sheet Cash will be increased by the same amount that the Investment account is decreased. S-A E 206 Distinguish between the cost and equity methods of accounting for investments in stocks. Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Investment Decisions
.
Reporting and Analyzing Investments
H-61
Solution 206 Under the cost method, an investment is originally recorded and reported at cost. Dividends are recorded as revenue. In subsequent periods, it is adjusted to fair value and an unrealized holding gain or loss is recognized and included in income (trading security) or as separate component of stockholders' equity (available-for-sale security). Under the equity method, the investment is originally recorded and reported at cost; subsequently, the investment account is adjusted during each period for the investor's share of the earnings or losses of the investee. The investor's share of the investee's earnings is recognized in the earnings of the investor. Dividends received from the investee are reductions in the carrying amount of the investment. S-A E 207 A consolidated balance sheet reports the financial position of two or more legal entities just as if they were one reporting unit. Explain why all the individual items appearing on the separate balance sheets of each of the affiliated companies cannot be added together to arrive at a consolidated total for each item. Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 207 A consolidated balance sheet does not include transactions that occurred between the affiliated companies (intercompany transactions). The inclusion of intercompany transactions would cause the assets, liabilities, and stockholders' equity accounts to all be overstated in the consolidated balance sheet. Thus, the individual items appearing on the separate balance sheets cannot simply be added together. S-A E 208 The Fair Value Adjustment account is a balance sheet account. Identify the asset account it is related to. Explain how this account is increased and describe the procedure followed when its related asset account is disposed of. Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 208 The Fair Value Adjustment account is a valuation allowance account for temporary and long-term investments. The Fair Value Adjustment account is increased when the difference between the investments’ fair value and cost increases. When specific securities are sold, the Fair Value Adjustment account is ignored because the account relates to the entire portfolio and not the specific securities. S-A E 209 When a year-end adjustment is made to reduce the trading securities portfolio to market, what effect, if any, will the adjustment have on the balance sheet and the income statement? Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 209 The unrealized loss would be reported in the Other Expenses and losses section of the Income Statement and the assets would be decreased by a credit balance in the Fair Value Adjustment— Trading valuation account.
.
H-62
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
S-A E 210 When a year-end adjustment is made to reduce the available-for-sale securities portfolio to market, what effect, if any, will the adjustment have on the balance sheet and the income statement? Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 210 There would be no effect on the income statement related to this adjustment. The unrealized loss would be reported as a reduction in the stockholders’ equity section of the balance sheet and the assets would be decreased by a credit balance in the Fair Value Adjustment—Available-For-Sale valuation account. S-A E 211 (Ethics) High Country Stables, Inc., operates several dog-racing tracks throughout the United States. Since most facilities are outdoor tracks only, most of the cash receipts for High Country are received from April through October. These funds are usually invested in temporary, very liquid investments, such as stocks and bonds. Among the stocks purchased last year, was Vendable, Inc. a company specializing in automatic vending equipment. The company decided not to sell its Vendable stock at the end of last year, and has purchased more of the stock this year. The company intends to continue to purchase stock until it holds enough to make a takeover bid for the company. The accountants have been instructed to continue to classify the investment as temporary until the takeover is accomplished, so that less attention will be directed to it. (Presently, High Country has no long-term investment in stock at all.) Required: 1. Is it ethical for High Country to attempt to take over another company? Explain. 2. Is it ethical for High Country to leave its investment in the temporary investment category? Explain. Ans: N/A, LO: 3, Bloom: E, Difficulty: Easy, Min: 3, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 211 1. Yes, High Country may attempt to "take over" or purchase another company. The means that it uses to accomplish its goal must be ethical, and certainly building up a portfolio of the stock in question is ethical. Unethical takeovers are those in which a company is purchased for its assets and "harvested," leaving employees without jobs, and possibly irreparably damaging a community. 2. It is not ethical for the company to leave the stock in the temporary category if it no longer meets the criterion for a temporary investment. It would depend upon whether the company was serious in its intention to purchase a controlling interest in Vendable. Since there is no evidence to the contrary, it appears that High Country's investment should be classified as long-term.
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Reporting and Analyzing Investments
H-63
S-A E 212 (Communication) Kalyn Gise is the daughter of Mark Gise, the founder and president of Carolina Blue Sky Enterprises. She has been working in various departments during school vacations throughout high school. She burst into the accounting department excitedly one morning. She said that the stock price of several of the firm's temporary investments are up, and that her father said that the company had made over $10,000 because of this jump in stock prices. She asks to see how the increase is recorded. It is a very busy time in the accounting department, and so her question is deferred. Required: Prepare a brief note to answer Kalyn question. Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Measurement, AICPA PC: Communications, IMA: FSA
Solution 212 This communication can be informal, but it should contain the key elements of the answer.
Dear Kalyn, Yesterday, you asked to see how we recorded the $10,000 that the company had "earned" because of the jump in the price of some of the stock we hold. Since we were finishing month-end closing, we couldn't answer your question right away. An increase in the value of temporary investments is an unrealized gain. An unrealized gain is reported in the income statement because of the likelihood that the securities will be sold at fair value since they are a temporary investment. The gain is recorded by increasing the amount reported as temporary investments and recording an unrealized gain. Again, I'm sorry we couldn't ask you to stay yesterday. Stop by again sometime (any time except month’s end!) (signed)
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