TEST BANK FOR Financial Accounting, 5e David Spiceland, Wayne Thomas, Don Herrmann by StudyGuide

Financial Accounting, 5e David Spiceland, Wayne Thomas, Don Herrmann (Test Bank All Chapters, 100% Original Verified, A+ Grade) Financial Accounting, 5e (Spiceland) Chapter 1 A Framework for Financial Accounting 1) Accounting is a system of maintaining records of a company's operations and communicating that information to decision makers. Answer: TRUE Difficulty: 1 Easy Topic: Defining Accounting Learning Objective: 01-01 Describe the two primary functions of financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 2) Accounting information is used by investors to decide whether to invest in a company's stock. Answer: TRUE Difficulty: 1 Easy Topic: Defining Accounting Learning Objective: 01-01 Describe the two primary functions of financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 3) Accounting information is used by creditors to decide whether to invest in a company's stock. Answer: FALSE Explanation: Creditors lend money to a company. Difficulty: 1 Easy Topic: Defining Accounting Learning Objective: 01-01 Describe the two primary functions of financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 4) The primary functions of financial accounting are to measure business activities of a company and to communicate those measurements to internal parties for decision-making purposes. Answer: FALSE Explanation: Financial accounting primarily serves to provide information to external parties. Difficulty: 2 Medium Topic: Defining Accounting Learning Objective: 01-01 Describe the two primary functions of financial accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 1 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

5) Financing activities are transactions involving external sources of funding. Answer: TRUE Difficulty: 1 Easy Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement 6) Investing activities include the purchase and sale of long-term resources. Answer: TRUE Difficulty: 1 Easy Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement 7) Operating activities include transactions that relate to the primary operations of the company. Answer: TRUE Difficulty: 1 Easy Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement 8) A corporation is an entity that is legally separate from its owners. Answer: TRUE Difficulty: 1 Easy Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking

9) Cash, inventory for sale to customers, supplies, and buildings are examples of liabilities. Answer: FALSE Explanation: These are examples of assets. Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 10) Amounts owed to suppliers, employees, the government in the form of taxes, and utility companies are examples of liabilities. Answer: TRUE Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 11) If total assets of a company equal $12,000 and total stockholders' equity equals $4,000, then total liabilities equal $8,000. Answer: TRUE Difficulty: 3 Hard Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

12) If total liabilities of a company equal $16,000 and total stockholders' equity equals $9,000, then total assets equal $7,000. Answer: FALSE Explanation: Total assets = Total liabilities ($16,000) + Total stockholders' equity ($9,000) = $25,000. Difficulty: 3 Hard Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 13) The accounting equation shows that a company's resources equal creditors' and owners' claims to those resources. Answer: TRUE Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 14) The costs related to rent, utilities, and salaries in the current reporting period are examples of liabilities. Answer: FALSE Explanation: These are examples of expenses. Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

15) The difference between revenues and expenses is referred to as net income or net loss. Answer: TRUE Difficulty: 1 Easy Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement 16) If a company reports revenues of $17,000 and expenses of $12,000, then net income equals $5,000. Answer: TRUE Difficulty: 3 Hard Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 17) Expenses include a company's costs of providing products and services to customers, as well as cash payments to its stockholders. Answer: FALSE Explanation: Expenses include costs of providing products and services. Cash payments to stockholders are called dividends. Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 18) Dividends represent a return of the company's profits to its owners, the stockholders. Answer: TRUE Difficulty: 1 Easy Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 5 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

19) One of the differences between a partnership and a corporation is that owners of a partnership have limited liability. Answer: FALSE Explanation: Stockholders of a corporation have limited liability. Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 20) Limited liability means the stockholders are not held personally responsible for the financial obligations of the corporation. Answer: TRUE Difficulty: 1 Easy Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 21) A company's resources include assets and stockholders' equity. Answer: FALSE Explanation: Assets are resources of a company. Stockholders' equity represents stockholders' claims to those resources. Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

22) Double taxation refers to a corporation's income being taxed twice—first when the company pays corporate income taxes on income it earns, and then again when stockholders pay personal income taxes when the company distributes that income as dividends to them. Answer: TRUE Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 23) Financial statements are periodic reports published by the company for the purpose of providing information to managers. Answer: FALSE Explanation: Financial statements are designed to provide information to external users. Difficulty: 1 Easy Topic: Financial Statements - Income Statement Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting 24) The balance sheet is a financial statement that reports the company's revenues and expenses over an interval of time. Answer: FALSE Explanation: The income statement reports revenues and expenses. Difficulty: 1 Easy Topic: Financial Statements - Balance Sheet Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting

25) The statement of stockholders' equity is a financial statement that summarizes the changes in stockholders' equity over an interval of time. Answer: TRUE Difficulty: 1 Easy Topic: Financial Statements - Statement of Stockholders' Equity Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting 26) The two primary components of stockholders' equity include common stock and revenue. Answer: FALSE Explanation: The two components of stockholders' equity include common stock and retained earnings. Difficulty: 2 Medium Topic: Financial Statements - Statement of Stockholders' Equity Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 27) Common stock represents an external source of stockholders' equity, whereas retained earnings represents an internal source. Answer: TRUE Difficulty: 2 Medium Topic: Financial Statements - Statement of Stockholders' Equity Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

28) Retained earnings represents the cumulative amount of net income, over the life of the company, which has not been distributed to stockholders as dividends. Answer: TRUE Difficulty: 2 Medium Topic: Financial Statements - Statement of Stockholders' Equity Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 29) Dividends are considered an expense in running the business and reported in the income statement. Answer: FALSE Explanation: Dividends are a distribution of resources to owners and not considered a cost in running the business to produce revenues. Dividends are reported in the statement of stockholders' equity. Difficulty: 2 Medium Topic: Financial Statements - Statement of Stockholders' Equity Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 30) All cash transactions reported in the statement of cash flows are classified as (1) operating activities, (2) investing activities, or (3) financing activities. Answer: TRUE Difficulty: 2 Medium Topic: Financial Statements - Statement of Cash Flows Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

31) Investing cash flows generally include cash receipts and cash payments for transactions involving revenue and expense activities during the period. Answer: FALSE Explanation: These are operating activities. Difficulty: 2 Medium Topic: Financial Statements - Statement of Cash Flows Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 32) Operating cash flows generally include cash transactions for the purchase and sale of investments and long-term assets. Answer: FALSE Explanation: These are investing activities. Difficulty: 2 Medium Topic: Financial Statements - Statement of Cash Flows Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 33) Financing cash flows include cash transactions with lenders, such as borrowing money and repaying debt, and with stockholders, such as issuing stock and paying dividends. Answer: TRUE Difficulty: 2 Medium Topic: Financial Statements - Statement of Cash Flows Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

34) Any transaction that affects the income statement ultimately affects the balance sheet through the balance of retained earnings. Answer: TRUE Difficulty: 2 Medium Topic: Financial Statements - Income Statement; Financial Statements - Balance Sheet Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 35) Financial accounting has an impact on everyday business decisions as well as wide-ranging economic consequences. Answer: TRUE Difficulty: 1 Easy Topic: Making Decisions with Accounting Information Learning Objective: 01-04 Describe the role that financial accounting plays in the decisionmaking process. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 36) Investors and creditors rely heavily on financial accounting information in making investment and lending decisions. Answer: TRUE Difficulty: 1 Easy Topic: Making Decisions with Accounting Information Learning Objective: 01-04 Describe the role that financial accounting plays in the decisionmaking process. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 37) In general, if a company's net income is increasing, so will its stock price. Answer: TRUE Difficulty: 3 Hard Topic: Making Decisions with Accounting Information Learning Objective: 01-04 Describe the role that financial accounting plays in the decisionmaking process. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Decision Making 11 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

38) The rules of financial accounting are called Generally Accepted Accounting Principles (GAAP). Answer: TRUE Difficulty: 1 Easy Topic: Financial Accounting Standards Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 39) Financial accounting and reporting standards in the United States are established primarily by the Financial Accounting Standards Board (FASB). Answer: TRUE Difficulty: 1 Easy Topic: Financial Accounting Standards Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 40) The 1933 Securities Act and the 1934 Securities Exchange Act were designed to restore investor confidence in financial accounting following the stock market crash in 1929. Answer: TRUE Difficulty: 1 Easy Topic: Financial Accounting Standards Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking

41) The 1934 Securities Exchange Act gives the Securities and Exchange Commission (SEC) the power to require companies that publicly trade their stock to prepare periodic financial statements for distribution to investors and creditors. Answer: TRUE Difficulty: 2 Medium Topic: Financial Accounting Standards Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 42) The role of independent auditors is to help ensure that management has in fact appropriately applied Generally Accepted Accounting Principles (GAAP) in preparing the company's financial statements. Answer: TRUE Difficulty: 1 Easy Topic: Financial Accounting Standards Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 43) Auditors are trained individuals hired by a company as an independent party to express a professional opinion of the fairness of that company's financial statements. Answer: TRUE Difficulty: 1 Easy Topic: Financial Accounting Standards Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking

44) The primary objective of financial accounting is to provide useful information to managers in making decisions. Answer: FALSE Explanation: Financial accounting is intended primarily to provide information to investors and creditors. Difficulty: 2 Medium Topic: Financial Accounting Standards Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 45) Public accounting firms are professional service firms that traditionally have focused on three areas: auditing, tax preparation/planning, and business consulting. Answer: TRUE Difficulty: 2 Medium Topic: Career Options in Accounting Learning Objective: 01-06 Identify career opportunities in accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 46) The Financial Accounting Standards Board's conceptual framework does not prescribe Generally Accepted Accounting Principles. It provides an underlying foundation for the development of accounting standards and interpretation of accounting information. Answer: TRUE Difficulty: 2 Medium Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

47) The two fundamental decision-specific qualitative characteristics that make accounting information useful are comparability and understandability. Answer: FALSE Explanation: The two fundamental characteristics are relevance and faithful representation. Difficulty: 1 Easy Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 48) Relevance refers to accounting information having confirmatory value and/or predictive value. Answer: TRUE Difficulty: 1 Easy Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Decision Making 49) To be a faithful representation of business activities, accounting information should be complete, neutral, and free from error. Answer: TRUE Difficulty: 1 Easy Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking

50) The periodicity assumption indicates that the economic life of an enterprise can be divided into artificial time periods for financial reporting purposes. Answer: TRUE Difficulty: 1 Easy Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting 51) The economic entity assumption states that in the absence of information to the contrary, the business entity will continue to operate indefinitely. Answer: FALSE Explanation: The economic entity assumption states that we identify all economic events with a particular economic entity. In other words, only business transactions involving the specific company should be reported as part of the company's financial accounting information. Difficulty: 2 Medium Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 52) What is the primary purpose of financial accounting? A) Determine the amount of tax liability owed to the government. B) Communicate business activities to internal management. C) Measure business activities and communicate those measures to external users to make decisions. D) Measure the profitability of the company in order to assist employees with making decisions. Answer: C Difficulty: 1 Easy Topic: Defining Accounting Learning Objective: 01-01 Describe the two primary functions of financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking

53) The primary purpose(s) of financial accounting is(are) to: A) Measure and record business transactions. B) Prepare federal and state tax returns. C) Communicate financial results to investors and creditors. D) Both measure and communicate financial information to external parties. Answer: D Difficulty: 1 Easy Topic: Defining Accounting Learning Objective: 01-01 Describe the two primary functions of financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 54) Which definition below best describes financial accounting? A) Process of measuring income taxes owed to the government. B) System of maintaining communication with a company's customers and suppliers. C) Procedures designed to enhance the company's image to potential investors. D) Measuring business activities and communicating them to external parties. Answer: D Difficulty: 2 Medium Topic: Defining Accounting Learning Objective: 01-01 Describe the two primary functions of financial accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 55) Financial accounting does not deal with which of the following? A) Measuring a company's economic activity. B) Providing information to internal users. C) Preparing financial reports. D) Communicating financial results to investors. Answer: B Difficulty: 2 Medium Topic: Defining Accounting Learning Objective: 01-01 Describe the two primary functions of financial accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

56) Financial accounting: A) Provides information primarily for external decision makers. B) Provides information primarily for a company's employees. C) Provides information primarily for the use of managers of the company. D) Is primarily used to compute a company's tax obligation. Answer: A Difficulty: 1 Easy Topic: Defining Accounting Learning Objective: 01-01 Describe the two primary functions of financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 57) The primary focus for financial accounting information is to provide information useful for: Investing decisions

Credit decisions

Yes

A) Investing decisions and credit decisions. B) Investing decisions but not credit decisions. C) Credit decisions but not investing decisions. D) Neither investing decisions nor credit decisions. Answer: A Difficulty: 1 Easy Topic: Defining Accounting Learning Objective: 01-01 Describe the two primary functions of financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking

58) Which of the following groups is not among the external users for whom financial statements are prepared? A) Creditors. B) Regulators. C) Investors. D) Managers. Answer: D Difficulty: 1 Easy Topic: Defining Accounting Learning Objective: 01-01 Describe the two primary functions of financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 59) Which of the following groups is not among the external users for whom financial statements are prepared? A) Customers. B) Suppliers. C) Employees. D) Customers, suppliers, and employees are all external users of financial statements. Answer: D Difficulty: 1 Easy Topic: Defining Accounting Learning Objective: 01-01 Describe the two primary functions of financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 60) The form of business organization that is legally separate from its owners is a: A) Partnership. B) Sole proprietorship. C) Corporation. D) Separation entity. Answer: C Difficulty: 1 Easy Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking

61) Which business form has the advantage of limited liability? A) Corporation. B) Sole proprietorship. C) Partnership. D) All business forms share equal limited liability. Answer: A Difficulty: 1 Easy Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 62) Limited liability means: A) Stockholders of a corporation are not obligated to pay the corporation's debts out of their own pocket. B) Liabilities of a company cannot exceed its assets. C) Companies are not allowed to borrow unless they are profitable. D) Companies are less likely to be sued if they are formed as a corporation. Answer: A Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 63) One disadvantage of the corporate form of business is: A) Limited liability. B) Access to more capital. C) Smaller in size. D) Double taxation. Answer: D Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

64) Which of the following is an operating activity? A) Issuing common stock. B) Paying dividends. C) Borrowing cash from a bank to acquire a building. D) Paying electricity bills for the month. Answer: D Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 65) How many of the following transactions are operating activities? Borrow $50,000 from the bank. Purchase $12,000 in supplies. Provide services to customers for $27,000. Pay the utility bill of $750. Purchase a delivery truck for $12,000. Receive $25,000 from issuing common stock. A) One. B) Two. C) Three. D) Four. Answer: C Explanation: (1) Purchase supplies, (2) Provide services to customers, and (3) Pay utility bill. Difficulty: 3 Hard Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

66) Transactions related to the primary business activities of the company, such as selling goods and services to customers, are referred to as: A) Investing activities. B) Operating activities. C) Management activities. D) Financing activities. Answer: B Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 67) Stimpleton Company engages in the following cash payments: Purchase equipment Pay rent Repay loan to the bank Pay workers' salaries

2,000 500 5,000 1,000

What is the total amount of cash paid for operating activities? A) $6,000. B) $2,000. C) $7,000. D) $1,500. Answer: D Explanation: $500 + $1,000 = $1,500. Difficulty: 3 Hard Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

68) Accountants are responsible for measuring various operating, investing and financing activities. Which of the following correctly matches the activity with its type? A) Investing - paying utilities for the month. B) Investing - purchasing land. C) Operating - paying dividends to stockholders. D) Financing - selling equipment for cash. Answer: B Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 69) Transactions of a company that include the purchase and sale of long-term assets are referred to as: A) Investing activities. B) Financing activities. C) Expenditure activities. D) Operating activities. Answer: A Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 70) McGill purchases additional office equipment to better serve its customers. This purchase is classified as what type of activity? A) Company activity. B) Financing activity. C) Investing activity. D) Operating activity. Answer: C Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 23 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

71) Transactions of a company involving external sources of funding are referred to as: A) Investing activities. B) Financing activities. C) External activities. D) Operating activities. Answer: B Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 72) Financing activities include: A) Primary operations such as selling goods to customers. B) Transactions with company employees. C) Transactions involving external sources of funding. D) The purchase and sale of long-term assets. Answer: C Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 73) Financing activities include: A) The purchase of a building. B) Issuing common stock to stockholders. C) Transactions with company employees. D) Selling goods or services to customers. Answer: B Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

74) The accounting equation is defined as: A) Assets = Liabilities + Stockholders' Equity. B) Assets = Liabilities − Stockholders' Equity. C) Net Income = Revenues − Expenses. D) Liabilities + Revenues = Assets. Answer: A Difficulty: 1 Easy Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 75) Which statement below best describes the accounting equation? A) The change in retained earnings equals net income less dividends. B) Equality of revenue and expense transactions over time. C) Resources of the company equal creditors' and owners' claims to those resources. D) Financing activities equal investing and operating activities. Answer: C Explanation: Assets = Liabilities + Stockholders' Equity. Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 76) If a company has stockholders' equity of $60,000 at the end of the year, which of the following statements must be true? A) The company's assets exceed liabilities by $60,000. B) The company has issued $60,000 of common stock. C) Net income for the year equals $60,000. D) Total revenues during the year equal $60,000. Answer: A Explanation: Assets − Liabilities = Stockholders' Equity. Difficulty: 3 Hard Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement 25 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

77) Emmitt had the following final balances after the first year of operations: assets, $55,000; stockholders' equity, $25,000; dividends, $3,000; and net income, $10,000. What is the amount of Emmitt's liabilities? A) $55,000. B) $30,000. C) $13,000. D) $7,000. Answer: B Explanation: Assets ($55,000) = Liabilities ($30,000) + Stockholders' Equity ($25,000). Difficulty: 3 Hard Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 78) An alternative form of the accounting equation is: A) Net Income = Revenues − Expenses. B) Stockholders' Equity = Assets + Liabilities. C) Assets = Liabilities − Stockholders' Equity. D) Assets − Liabilities = Stockholders' Equity. Answer: D Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

79) The accounts that represent the resources of the company are called: A) Liabilities. B) Revenues. C) Expenses. D) Assets. Answer: D Difficulty: 1 Easy Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement 80) The assets of a company represent: A) Amounts owed to creditors. B) Sales of goods or services to customers. C) Resources that will be used to benefit the company. D) Investments by stockholders. Answer: C Difficulty: 1 Easy Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement 81) Which of the following accounts represents a resource of the company? A) Common stock. B) Service revenue. C) Supplies. D) Salaries expense. Answer: C Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

82) Which of the following does not represent an asset of a company? A) Supplies held by the company. B) Amounts owed to suppliers. C) Equipment owned and used for operations. D) Land owned by the company. Answer: B Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 83) Creditors' claims to a corporation's resources are referred to as: A) Dividends. B) Assets. C) Liabilities. D) Stockholders' equity. Answer: C Difficulty: 1 Easy Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement 84) Liabilities are best defined as: A) Amounts the company expects to collect in the future from customers. B) Debts or obligations the company owes resulting from past transactions. C) The amounts that owners have invested in the business. D) Payments to stockholders. Answer: B Difficulty: 1 Easy Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement

85) Amounts owed to suppliers for supplies purchased on account are defined as a(n): A) Revenue. B) Asset. C) Liability. D) Expense. Answer: C Difficulty: 1 Easy Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement 86) Which of the following does not represent a liability of a company? A) Salaries owed to employees. B) Taxes owed to the government. C) Amounts owed to suppliers. D) All of the other answers are liabilities. Answer: D Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 87) The accounts that represent resources owed to creditors are called: A) Assets. B) Liabilities. C) Dividends. D) Stockholders' equity. Answer: B Difficulty: 1 Easy Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement

88) Liabilities can be best described as: A) The amount of expenses over the past year. B) The amount expected to be distributed to stockholders. C) The amount owed to creditors. D) The amount of services provided to customers during the year. Answer: C Difficulty: 1 Easy Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement 89) The stockholders' interest in a corporation is called: A) Dividends. B) Assets. C) Liabilities. D) Stockholders' equity. Answer: D Difficulty: 1 Easy Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement 90) Stockholders' claims to the company's resources are referred to as: A) Stockholders' equity. B) Revenues. C) Assets. D) Liabilities. Answer: A Difficulty: 1 Easy Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement

91) Using the information below from the accounting records of Thomas Corporation, stockholders' claims to the company's resources amount to: Assets Liabilities Net income Retained earnings

$ $ $ $

1,200,000 800,000 100,000 250,000

A) $1,200,000. B) $800,000. C) $250,000. D) $400,000. Answer: D Explanation: Stockholders' claims (Stockholders' Equity) = Assets ($1,200,000) − Liabilities ($800,000) Difficulty: 3 Hard Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement 92) Which of the following best describes revenue? A) Resources of a company. B) Sales of goods and services to a customer. C) Cash received from a customer. D) Dividends paid to stockholders. Answer: B Difficulty: 1 Easy Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement

93) The costs of providing goods and services to customers are referred to as: A) Assets. B) Expenses. C) Liabilities. D) Revenues. Answer: B Difficulty: 1 Easy Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement 94) The costs associated with producing revenues are referred to as: A) Dividends. B) Assets. C) Liabilities. D) Expenses. Answer: D Difficulty: 1 Easy Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement 95) Net income can best be described as: A) Net cash received by a company during the year. B) Revenues minus expenses. C) The amount of profits retained in a company for the year. D) Resources of a company. Answer: B Difficulty: 1 Easy Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking; Measurement

96) Use the following appropriate amounts to calculate net income: Revenues, $12,000; Liabilities, $5,000; Expenses, $4,000; Assets, $19,000; Dividends, $4,000. A) $6,000. B) $8,000. C) $4,000. D) $14,000. Answer: B Explanation: Revenues ($12,000) − Expenses ($4,000) = Net Income ($8,000). Difficulty: 3 Hard Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 97) The account type that represents payments to stockholders is called: A) Liabilities. B) Assets. C) Stockholders' equity. D) Dividends. Answer: D Difficulty: 1 Easy Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 98) Dividends represent: A) Resources of the company. B) Cash payments to stockholders. C) Amounts owed to creditors. D) Expenses of operating the company. Answer: B Difficulty: 1 Easy Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 33 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

99) The equation best describing the income statement is: A) Revenues − Expenses = Net Income. B) Assets = Revenues − Expenses. C) Assets = Liabilities + Stockholders' Equity. D) Revenues + Expenses = Net Income. Answer: A Difficulty: 2 Medium Topic: Financial Statements - Income Statement Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 100) Expenses are shown in which of the following statements? A) Income statement. B) Statement of cash flows. C) Balance sheet. D) Statement of stockholders' equity. Answer: A Difficulty: 2 Medium Topic: Financial Statements - Income Statement Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 101) Which of the following items would not appear in an income statement? A) Salaries expense. B) Advertising expense. C) Service revenue. D) Cash. Answer: D Difficulty: 2 Medium Topic: Financial Statements - Income Statement Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

102) Which of the following items would not appear in an income statement? A) Delivery Expense. B) Accounts Payable. C) Service Revenue. D) Utilities Expense. Answer: B Difficulty: 2 Medium Topic: Financial Statements - Income Statement Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 103) Consider the following account balances of the Shattuck Law Firm at the end of the year: Accounts Payable Salaries Expense Cash Common Stock Service Revenue Supplies Retained Earnings Utilities Expense

4,400 12,800 1,700 2,400 8,300 4,300 1,100 5,000

How many of these accounts would appear in Shattuck's year-end income statement? A) Five. B) Four. C) Three. D) Two. Answer: C Explanation: Salaries Expense, Service Revenue, and Utilities Expense. Difficulty: 3 Hard Topic: Financial Statements - Income Statement Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

104) Given the information below, calculate net income in the current period. Accounts Receivable Rent Expense Insurance Expense Common Stock Service Revenue Supplies Equipment Income Tax Expense

14,700 7,500 2,100 24,000 28,300 4,300 21,600 4,200

A) $27,300. B) $29,200. C) $14,500. D) $10,200. Answer: C Explanation: Service Revenue ($28,300) − Rent Expense ($7,500) − Insurance Expense ($2,100) − Income Tax Expense ($4,200) = $14,500. Difficulty: 3 Hard Topic: Financial Statements - Income Statement Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

105) A company had the following amounts at the end of the year: Cash Supplies Expense Dividends Service Revenue Prepaid Rent Salaries Expense Accounts Payable Land

11,200 1,500 2,600 23,500 4,300 8,200 12,700 36,900

What amount would the company report for net income? A) $11,200. B) $6,900. C) $13,800. D) $42,300. Answer: C Explanation: Service Revenue ($23,500) − Supplies Expense ($1,500) − Salaries Expense ($8,200) = $13,800. Difficulty: 3 Hard Topic: Financial Statements - Income Statement Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement 106) Net income (loss) appears in which two financial statements? A) Balance sheet and income statement. B) Income statement and statement of stockholders' equity. C) Statement of stockholders' equity and balance sheet. D) Net income appears in only one financial statement. Answer: B Difficulty: 2 Medium Topic: Financial Statements - Income Statement; Financial Statements - Statement of Stockholders' Equity Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

107) Which of the following items is reported in the statement of stockholders' equity? A) Total assets. B) Total expenses. C) Net income. D) Operating cash flows. Answer: C Difficulty: 2 Medium Topic: Financial Statements - Statement of Stockholders' Equity Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 108) Which of the following accounts appears in the statement of stockholders' equity? A) Accounts Payable. B) Accounts Receivable. C) Common Stock. D) Supplies. Answer: C Difficulty: 2 Medium Topic: Financial Statements - Statement of Stockholders' Equity Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 109) Which of the following accounts appears in the statement of stockholders' equity? A) Supplies. B) Cash. C) Salaries Payable. D) Retained Earnings. Answer: D Difficulty: 2 Medium Topic: Financial Statements - Statement of Stockholders' Equity Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

110) Which one of the following statements regarding financial reports is correct? A) The balance sheet classifies all assets according to operating, investing, and financing activities. B) The income statement is used to show that a company's resources equal claims to those resources. C) The statement of stockholders' equity updates the balances of common stock and retained earnings for related transactions during the year. D) The statement of cash flows shows cash inflows and outflows from operating activities only. Answer: C Difficulty: 2 Medium Topic: Financial Statements - Income Statement; Financial Statements - Balance Sheet; Financial Statements - Statement of Stockholders' Equity; Financial Statements - Statement of Cash Flows Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 111) Which of the following best explains the meaning of total stockholders' equity? A) The difference between total revenues and total expenses, less dividends for the year. B) The amount of common stock less dividends over the life of the company. C) All revenues, expenses, and dividends over the life of the company. D) The amount of capital invested by stockholders plus profits retained over the life of the company. Answer: D Explanation: Total stockholders' equity equals the amount of common stock plus retained earnings. Common stock is the amount of capital invested by stockholders, and retained earnings are profits retained over the life of the company. Difficulty: 3 Hard Topic: Financial Statements - Balance Sheet; Financial Statements - Statement of Stockholders' Equity Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

112) Which of the following statements regarding financial reports is not correct? A) A balance sheet contains assets, liabilities, and stockholders' equity information. B) An income statement shows revenues and expenses. C) A statement of stockholders' equity reports revenues, net income, and dividends information. D) A statement of cash flows shows cash inflows and outflows from operating, investing, and financing activities. Answer: C Difficulty: 2 Medium Topic: Financial Statements - Income Statement; Financial Statements - Balance Sheet; Financial Statements - Statement of Stockholders' Equity; Financial Statements - Statement of Cash Flows Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 113) Retained earnings at the end of the year is calculated using: A) Beginning retained earnings, net income, and dividends. B) Common stock and dividends. C) Stockholders' equity, net income, and dividends. D) Net income and dividends. Answer: A Difficulty: 2 Medium Topic: Financial Statements - Statement of Stockholders' Equity Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

114) DW has an ending Retained Earnings balance of $51,100. If during the year DW paid dividends of $4,300 and had net income of $22,500, then what was the beginning Retained Earnings balance? A) $24,300. B) $32,900. C) $300. D) $69,300. Answer: B Explanation: Beginning Retained Earnings ($32,900) + Net Income ($22,500) − Dividends ($4,300) = Ending Retained Earnings ($51,100). Difficulty: 3 Hard Topic: Financial Statements - Statement of Stockholders' Equity Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 115) The ending Retained Earnings balance of Boomer Inc. decreased by $1.0 million from the beginning of the year. The company declared a dividend of $5.4 million during the year. What was the net income for the year? A) $7.5 million. B) $6.4 million. C) $4.4 million. D) $1.0 million. Answer: C Explanation: Beginning Retained Earnings ($0) + Net Income ($4.4) − Dividends ($5.4) = Ending Retained Earnings ($−1.0). Difficulty: 3 Hard Topic: Financial Statements - Statement of Stockholders' Equity Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

116) Given the information below about Thomas Corporation, what was the amount of dividends the company paid in the current period? Beginning retained earnings Ending retained earnings Decrease in cash Net income Change in stockholders' equity

$ 54,000 $ 110,000 $ 10,000 $ 84,000 $ 15,000

A) $13,000. B) $110,000. C) $28,000. D) $18,000. Answer: C Explanation: Beginning Retained Earnings ($54,000) + Net Income ($84,000) − Dividends ($28,000) = Ending Retained Earnings ($110,000). Difficulty: 3 Hard Topic: Financial Statements - Statement of Stockholders' Equity Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

117) For the past five years, Mookie Consulting Services reported the following annual net income and dividend amounts: Year 1 2 3 4 5

Net Income $ 22,000 17,000 9,000 14,000 25,000

Dividends $ 2,000 2,000 1,000 3,000 4,000

If Mookie had Retained Earnings of $88,000 at the end of year 5, what was the company's Retained Earnings at the beginning of Year 1? A) $13,000. B) $25,000. C) $7,000. D) $1,000. Answer: A Explanation: Beginning Retained Earnings ($13,000) = Ending Retained Earnings ($88,000) Total Net Income ($87,000) + Total Dividends ($12,000). Difficulty: 3 Hard Topic: Financial Statements - Statement of Stockholders' Equity Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement 118) Nina Corp. had the following net income (loss) for the first three years of operations, respectively: $7,100, ($1,600), and $3,600. If the Retained Earnings balance at the end of year three is $1,100, what was the total amount of dividends paid over these three years? A) $500. B) $0. C) $9,100. D) $8,000. Answer: D Explanation: Beginning Retained Earnings ($0) + Net Income ($7,100 − $1,600 + $3,600) − Dividends ($8,000) = Ending Retained Earnings ($1,100). Difficulty: 3 Hard Topic: Financial Statements - Statement of Stockholders' Equity Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 43 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

119) Aikman Company paid dividends of $2,410, $0, $1,570 and $1,060 over the first four years of the company's existence, respectively. If Retained Earnings has an ending balance of $9,700 at the end of year four, what was the average annual amount of net income (loss) over the first four years for Aikman? A) $3,685. B) $14,740. C) $840. D) $1,260. Answer: A Explanation: Beginning Retained Earnings ($0) + Net Income ($14,740) − Dividends ($2,410 + $0 + $1,570 + $1,060) = Ending Retained Earnings ($9,700). Divide net income amount by 4 to get average ($14,470 / 4 years) = $3,685. Difficulty: 3 Hard Topic: Financial Statements - Statement of Stockholders' Equity Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 120) On January 1, Gucci Brothers Inc. started the year with a $492,000 balance in Retained Earnings and a $605,000 balance in Common Stock. During the year, the company reported net income of $92,000, paid a dividend of $15,200, and issued more common stock for $27,500. What is total stockholders' equity at the end of the year? A) $1,231,700. B) $1,097,000. C) $1,201,300. D) $1,588,300. Answer: C Explanation: Total Stockholders' Equity = Common Stock ($605,000 + $27,500) + Retained Earnings ($492,000 + $92,000 − $15,200) = $1,201,300. Difficulty: 3 Hard Topic: Financial Statements - Statement of Stockholders' Equity Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

121) The financial statement that represents the accounting equation is the: A) Income statement. B) Statement of cash flows. C) Balance sheet. D) Statement of stockholders' equity. Answer: C Difficulty: 2 Medium Topic: Financial Statements - Balance Sheet Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 122) The equation best describing the balance sheet is: A) Assets = Liabilities + Stockholders' Equity. B) Revenues − Expenses = Net Income. C) Ending Retained Earnings + Dividends = Net Income. D) Revenues + Expenses = Net Income. Answer: A Difficulty: 2 Medium Topic: Financial Statements - Balance Sheet Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 123) The financial statement that represents activity over the entire life of the company is the: A) Income statement. B) Balance sheet. C) Statement of financial accounting. D) Statement of cash flows. Answer: B Difficulty: 2 Medium Topic: Financial Statements - Balance Sheet Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

124) Liabilities are shown in which of the following statements? A) Income statement. B) Statement of cash flows. C) Balance sheet. D) Statement of stockholders' equity. Answer: C Difficulty: 2 Medium Topic: Financial Statements - Balance Sheet Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 125) Consider the following account balances of the Shattuck Law Firm at the end of the year: Accounts Payable Salaries Expense Cash Common Stock Service Revenue Supplies Retained Earnings Utilities Expense

4,400 12,800 1,700 2,400 8,300 4,300 1,100 5,000

How many of these accounts would appear in Shattuck's year-end balance sheet? A) Five. B) Four. C) Three. D) Two. Answer: A Explanation: Accounts Payable, Cash, Common Stock, Supplies, and Retained Earnings. Difficulty: 3 Hard Topic: Financial Statements - Balance Sheet Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

126) The two categories of stockholders' equity usually found in the balance sheet of a corporation are: A) Common stock and liabilities. B) Assets and liabilities. C) Common stock and retained earnings. D) Revenues and expenses. Answer: C Difficulty: 2 Medium Topic: Financial Statements - Balance Sheet Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 127) Which of the following is not a balance sheet item? A) Assets. B) Retained Earnings. C) Expenses. D) Liabilities. Answer: C Difficulty: 2 Medium Topic: Financial Statements - Balance Sheet Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 128) Which of the following is a balance sheet item? A) Net Income. B) Dividends. C) Utilities Expense. D) Cash. Answer: D Difficulty: 2 Medium Topic: Financial Statements - Balance Sheet Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

129) Which of the following statements is NOT correct about the financial statements? A) An income statement reports revenues, expenses, and net income information. B) The statement of stockholders' equity presents common stock, dividends, and retained earnings information. C) A balance sheet reports assets, liabilities, revenues, and expenses. D) The statement of cash flows shows cash inflows and outflows from operating, financing, and investing activities. Answer: C Difficulty: 2 Medium Topic: Financial Statements - Income Statement; Financial Statements - Balance Sheet; Financial Statements - Statement of Stockholders' Equity; Financial Statements - Statement of Cash Flows Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 130) The balance sheet depicts which of the following equations? A) Net income = revenue − expenses. B) Ending retained earnings = beginning retained earnings + net income − dividends. C) Assets = liabilities + stockholders' equity. D) Net cash flows = total cash inflows − total cash outflows. Answer: C Difficulty: 2 Medium Topic: Financial Statements - Balance Sheet Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

131) Which of the following financial statements reports a company's retained earnings? A) Income statement. B) Balance sheet. C) Statement of cash flows. D) All of the other answers are statements that report retained earnings. Answer: B Difficulty: 2 Medium Topic: Financial Statements - Balance Sheet Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 132) Which of the following is not a balance sheet item? A) Assets. B) Common stock. C) Retained earnings. D) Revenues. Answer: D Difficulty: 2 Medium Topic: Financial Statements - Balance Sheet Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 133) Which of the following is not a major section in the statement of cash flows? A) Cash flows from operating activities. B) Cash flows from customers. C) Cash flows from financing activities. D) Cash flows from investing activities. Answer: B Difficulty: 2 Medium Topic: Financial Statements - Statement of Cash Flows Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

134) Cash paid for which of the following activities would affect the amount reported for operating cash flows in the statement of cash flows? A) Issuing common stock. B) Paying dividends. C) Paying electricity bill for the month. D) Borrowing cash from a bank to acquire a building. Answer: C Difficulty: 2 Medium Topic: Financial Statements - Statement of Cash Flows Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 135) How many of the following transactions would affect operating cash flows reported in the statement of cash flows (all transaction involve cash)? Repay $40,000 borrowed from the bank. Pay $11,000 in salaries to employees. Receive $25,000 from customers for services provided. Pay $750 for advertising. Purchase equipment for $15,000. Receive $25,000 from the sale of land. A) One. B) Two. C) Three. D) Four. Answer: C Explanation: (1) Pay salaries, (2) Receive from customers, and (3) Pay advertising. Difficulty: 3 Hard Topic: Financial Statements - Statement of Cash Flows Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

136) Investing cash flows in the statement of cash flows would include which of the following? A) Paying salaries for the month. B) Purchase of land. C) Paying dividends to stockholders. D) Selling goods or services to customers. Answer: B Difficulty: 2 Medium Topic: Financial Statements - Statement of Cash Flows Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 137) FlintCo purchases additional office equipment to better serves its customers. This cash purchase is reported in the statement of cash flows as what type of activity? A) Company activity. B) Investing activity. C) Financing activity. D) Operating activity. Answer: B Difficulty: 2 Medium Topic: Financial Statements - Statement of Cash Flows Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 138) Financing cash flows in the statement of cash flows would include which of the following? A) Paying salaries for the month. B) Purchase of land. C) Paying dividends to stockholders. D) Selling goods or services to customers. Answer: C Difficulty: 2 Medium Topic: Financial Statements - Statement of Cash Flows Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

139) Cash received from bank borrowing would be reported in the statement of cash flows as what type of activity? A) Investing. B) Organizing. C) Operating. D) Financing. Answer: D Difficulty: 2 Medium Topic: Financial Statements - Statement of Cash Flows Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 140) If total change in cash = $44,000, net operating cash flows = $22,000, and net investing cash flows = ($13,000); then net financing cash flows = A) $15,000. B) $35,000. C) $25,000. D) $45,000. Answer: B Explanation: Total change in cash ($44,000) = net operating cash flows ($22,000) + net investing cash flows (−$13,000) + net financing cash flows ($35,000). Difficulty: 3 Hard Topic: Financial Statements - Statement of Cash Flows Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

141) The financial statement(s) that record activity over an interval of time include the: A) Income statement. B) Balance sheet. C) Balance sheet and income statement. D) Income statement and statement of cash flows. Answer: D Difficulty: 2 Medium Topic: Financial Statements - Income Statement; Financial Statements - Statement of Cash Flows Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 142) Which of the following is the correct order for preparing the financial statements listed? A) Balance sheet, statement of stockholders' equity, and income statement. B) Balance sheet, income statement, and statement of stockholders' equity. C) Statement of stockholders' equity, income statement, and balance sheet. D) Income statement, statement of stockholders' equity, and balance sheet. Answer: D Difficulty: 2 Medium Topic: Financial Statements - Income Statement; Financial Statements - Balance Sheet; Financial Statements - Statement of Stockholders' Equity Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

143) In what order are the following financial statements prepared: (1) balance sheet, (2) income statement, and (3) statement of stockholders' equity? A) 1, 2, 3. B) 3, 2, 1. C) 1, 3, 2. D) 2, 3, 1. Answer: D Difficulty: 2 Medium Topic: Financial Statements - Income Statement; Financial Statements - Balance Sheet; Financial Statements - Statement of Stockholders' Equity Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 144) Which financial statement is typically prepared first? A) Balance sheet. B) Income statement. C) Statement of stockholders' equity. D) Statement of cash flows. Answer: B Difficulty: 2 Medium Topic: Financial Statements - Income Statement Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 145) Which of the following best represents value created for stockholders during the current period? A) Retained earnings. B) Total assets. C) Net income. D) Stockholders' equity. Answer: C Difficulty: 2 Medium Topic: Making Decisions with Accounting Information Learning Objective: 01-04 Describe the role that financial accounting plays in the decisionmaking process. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 54 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

146) While many financial accounting numbers have an impact on stock prices, which of the following has the single greatest impact, on average? A) Total dividends. B) Total assets. C) Total revenues. D) Net income. Answer: D Difficulty: 2 Medium Topic: Making Decisions with Accounting Information Learning Objective: 01-04 Describe the role that financial accounting plays in the decisionmaking process. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Decision Making 147) Which financial accounting number impacts stock prices more than any other single piece of information? A) Retained earnings. B) Net income. C) Common stock. D) Total assets. Answer: B Difficulty: 2 Medium Topic: Making Decisions with Accounting Information Learning Objective: 01-04 Describe the role that financial accounting plays in the decisionmaking process. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Decision Making

148) Which financial statement best reveals to investors and creditors information about a company's debt? A) Income statement. B) Balance sheet. C) Statement of cash flows. D) Statement of stockholders' equity. Answer: B Difficulty: 2 Medium Topic: Making Decisions with Accounting Information Learning Objective: 01-04 Describe the role that financial accounting plays in the decisionmaking process. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Decision Making 149) GAAP is an abbreviation for: A) Generally authorized accounting procedures. B) Generally applied accounting procedures. C) Generally accepted auditing practices. D) Generally accepted accounting principles. Answer: D Difficulty: 1 Easy Topic: Financial Accounting Standards Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 150) Generally Accepted Accounting Principles (GAAP) are best defined as: A) Standards for presenting financial accounting information. B) Government-mandated rules that companies must follow. C) Rules that best estimate profitability for a company. D) The group of individuals that create and enforce all accounting rules. Answer: A Difficulty: 1 Easy Topic: Financial Accounting Standards Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking

151) The body of rules and procedures that guide the measurement and communication of financial accounting information in the United States is known as: A) Standards of Professional Compliance (SPC). B) Generally Accepted Accounting Principles (GAAP). C) Generally Accepted Auditing Standards (GAAS). D) Rules of Financial Reporting (RFR). Answer: B Difficulty: 1 Easy Topic: Financial Accounting Standards Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 152) The independent, private-sector group that is primarily responsible for setting financial reporting standards in the United States is the: A) FASB. B) IASB. C) SEC. D) IRS. Answer: A Difficulty: 1 Easy Topic: Financial Accounting Standards Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 153) Financial accounting and reporting standards in the United States are established primarily by the: A) Securities and Exchange Commission. B) Financial Accounting Standards Board. C) International Accounting Standards Board. D) U.S. Congress. Answer: B Difficulty: 1 Easy Topic: Financial Accounting Standards Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 57 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

154) The private sector organization that is currently responsible for setting accounting standards in the United States is the: A) Financial Accounting Standards Board. B) Accounting Principles Board. C) Securities and Exchange Commission. D) American Institute of Certified Public Accountants. Answer: A Difficulty: 1 Easy Topic: Financial Accounting Standards Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 155) The legal authority to set accounting standards lies with the: A) Financial Accounting Standards Board. B) Accounting Principles Board. C) Securities and Exchange Commission. D) American Institute of Certified Public Accountants. Answer: C Difficulty: 1 Easy Topic: Financial Accounting Standards Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 156) The International Accounting Standards Board: A) Is governed by the U.S. Securities and Exchange Commission. B) Can overrule the FASB when their policies disagree. C) Promotes the use of high-quality, understandable global accounting standards. D) Is the primary standard-setting body in the United States. Answer: C Difficulty: 1 Easy Topic: Financial Accounting Standards Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 58 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

157) Financial accounting objectives do not include providing information: A) Useful to investors and creditors in making decisions. B) To determine market values, assess profit potential, and evaluate management. C) Helpful to investors in predicting cash flows. D) That tells about a company's economic resources and claims to those resources. Answer: B Difficulty: 2 Medium Topic: Financial Accounting Standards Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 158) Which statement below best describes the objectives of financial accounting? A) Provide information that helps predict cash flows. B) Provide information about the economic resources, claims to resources and changes in resources and claims. C) Provide information that is useful in making decisions. D) All of the other answers are objectives of financial accounting. Answer: D Difficulty: 2 Medium Topic: Financial Accounting Standards Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 159) Of the following, the most important objective for financial accounting is to provide information useful for: A) Predicting cash flows. B) Determining taxable income. C) Providing accountability. D) Increasing future profits. Answer: A Difficulty: 2 Medium Topic: Financial Accounting Standards Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 59 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

160) Independent auditors express an opinion on the: A) Extent to which financial statements are in compliance with GAAP. B) Accuracy of the amount of income taxes a company owes to the government. C) Quality of the company's products. D) Well-being and fair treatment of a company's workforce. Answer: A Difficulty: 2 Medium Topic: Financial Accounting Standards Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 161) To ensure that management has in fact appropriately applied GAAP, the SEC requires independent outside verification of the financial statements of public traded companies by an: A) Advisor. B) Attorney. C) Auditor. D) Analyst. Answer: C Difficulty: 1 Easy Topic: Financial Accounting Standards Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting

162) Which of the following best describes the primary role of auditors in financial reporting? A) Consultants that are hired by company management to advise on key matters related to competition, product pricing, employee retention, and financial reporting strategies. B) Key employees of the company that actively participate on the management team in strategic planning, product development, and financial reporting. C) Government employees assigned by local officials to ensure accurate financial reporting and operational integrity by the company. D) Independent party hired by management to express a professional opinion of the extent to which the company's financial reporting is in compliance with generally accepted accounting principles. Answer: D Difficulty: 2 Medium Topic: Financial Accounting Standards Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 163) The role of the Public Company Accounting Oversight Board is to: A) Advise investors and creditors of companies' future profit potential. B) Ensure that auditors follow a strict set of guidelines when conducting their audits. C) Assist company management in the case of financial default on debt. D) Develop accounting and reporting standards in the United States. Answer: B Difficulty: 2 Medium Topic: Financial Accounting Standards Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

164) A career in a public accounting firm traditionally involves working in the area of: A) Auditing. B) Tax preparation/planning. C) Business consulting. D) All of the other answer choices are correct statements. Answer: D Difficulty: 1 Easy Topic: Career Options in Accounting Learning Objective: 01-06 Identify career opportunities in accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 165) A career in private accounting indicates: A) Working undercover for an organization such as the Federal Bureau of Investigation (FBI). B) Being employed by one of the "Big 4" accounting firms. C) Providing accounting services to the company that employs you. D) All of the other answer choices are correct statements. Answer: C Difficulty: 2 Medium Topic: Career Options in Accounting Learning Objective: 01-06 Identify career opportunities in accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 166) The term "cooking the books" refers to: A) Purposely providing misleading financial information to investors and creditors. B) Hiring an auditor to provide independent verification of the fairness of financial statements. C) Filing all tax-related statements by the required deadline. D) Preparing internal budgets to plan for expenditures in the following year. Answer: A Difficulty: 2 Medium Topic: Financial Accounting Standards Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

167) Fundamental qualitative characteristics of accounting information are: A) Relevance and comparability. B) Comparability and consistency. C) Faithful representation and relevance. D) Faithful representation and consistency. Answer: C Difficulty: 2 Medium Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 168) The qualitative characteristic that says accounting information can influence users' decisions by allowing them to assess past performance is: A) Timeliness. B) Neutrality. C) Confirmatory value. D) Predictive value. Answer: C Difficulty: 2 Medium Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 169) Accounting information that does not provide measurement bias in favor of a particular set of companies has the characteristic of: A) Relevance. B) Consistency. C) Materiality. D) Neutrality. Answer: D Difficulty: 2 Medium Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 63 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

170) If accounting information is considered to have faithful representation, then which of the following is true? A) The information represents to users what it claims to represent. B) The information follows conservatism principles and is also material. C) The information is considered pertinent to or affects decisions. D) The information will have predictive value, feedback value, and is timely. Answer: A Difficulty: 2 Medium Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 171) For accounting information to be relevant, it should possess which of the following characteristics? A) Predictive value and confirmatory value. B) Large in amount and timely. C) Comparability and consistency. D) Verifiability. Answer: A Difficulty: 2 Medium Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 172) Materiality is based upon which factor(s)? A) Timeliness of an item. B) Amount and nature of an item. C) Consistency of an item. D) Relevance of an item. Answer: B Difficulty: 2 Medium Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 64 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

173) The conceptual framework's qualitative characteristic of relevance includes: A) Predictive value. B) Verifiability. C) Completeness. D) Neutrality. Answer: A Difficulty: 2 Medium Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 174) According to the conceptual framework, verifiability implies: A) Consensus. B) Logic. C) Legal evidence. D) Legal verdict. Answer: A Difficulty: 2 Medium Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 175) The conceptual framework's qualitative characteristic of faithful representation includes: A) Predictive value. B) Neutrality. C) Confirmatory value. D) Comparability. Answer: B Difficulty: 2 Medium Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

176) Constraints on qualitative characteristics of accounting information include: A) Freedom from material error. B) Going concern. C) Neutrality. D) Cost effectiveness. Answer: D Difficulty: 2 Medium Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 177) Enhancing qualitative characteristics of accounting information include: A) Relevance and comparability. B) Comparability and consistency. C) Faithful representation and relevance. D) Cost effectiveness and materiality. Answer: B Difficulty: 2 Medium Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 178) The major underlying assumptions of accounting include all of the following except: A) Economic entity. B) Monetary unit. C) Legal liability. D) Going concern. Answer: C Difficulty: 2 Medium Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

179) If a company has gone bankrupt, its financial statements likely violate the: A) Periodicity assumption. B) Monetary unit assumption. C) Going concern assumption. D) Economic entity assumption. Answer: C Difficulty: 2 Medium Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 180) The assumption that a business will continue to operate into the future is the: A) Monetary unit assumption. B) Periodicity assumption. C) Economic entity assumption. D) Going concern assumption. Answer: D Difficulty: 2 Medium Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 181) The assumption that the assets and liabilities of the business are accounted for on the books of the company but not included in the records of the owner is the: A) Monetary unit assumption. B) Economic entity assumption. C) Going concern assumption. D) Periodicity assumption. Answer: B Difficulty: 2 Medium Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

182) The assumption that the life of the business can be divided into time intervals for reporting purposes is the: A) Monetary unit assumption. B) Periodicity assumption. C) Economic entity assumption. D) Going concern assumption. Answer: B Difficulty: 2 Medium Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 183) The assumption that amounts are reported using a common scale (such as the dollar in the United States) is the: A) Monetary unit assumption. B) Periodicity assumption. C) Economic entity assumption. D) Going concern assumption. Answer: A Difficulty: 2 Medium Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

Match each account classification with its example. A) Payments made to stockholders. B) Amounts owed to the bank. C) Common stock issued to investors. D) Workers' salaries for the current period. E) Cleaning services provided to customers. F) Land owned by a company. 184) Liabilities Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 185) Revenues Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 186) Dividends Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 187) Stockholders' equity Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

188) Assets Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 189) Expenses Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement Answers: 184) B 185) E 186) A 187) C 188) F 189) D

Match each business activity with its example. A) Purchase office building. B) Pay utilities. C) Receive investments from stockholders. 190) Operating Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 191) Financing Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 192) Investing Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement Answers: 190) B 191) C 192) A

Match each financial statement with the accounts reported in it. A) Dividends. B) Assets and liabilities. C) Revenues and expenses. 193) Income statement Difficulty: 2 Medium Topic: Financial Statements - Income Statement; Financial Statements - Statement of Stockholders' Equity; Financial Statements - Balance Sheet Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 194) Statement of stockholders' equity Difficulty: 2 Medium Topic: Financial Statements - Income Statement; Financial Statements - Statement of Stockholders' Equity; Financial Statements - Balance Sheet Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 195) Balance sheet Difficulty: 2 Medium Topic: Financial Statements - Income Statement; Financial Statements - Statement of Stockholders' Equity; Financial Statements - Balance Sheet Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting Answers: 193) C 194) A 195) B

Match each organization to its role. A) Ensure that auditors follow strict guidelines when conducting their audits. B) Independent, private-sector group that is primarily responsible for setting financial reporting rules in the United States. C) Develop a single set of high-quality, understandable global accounting standards. D) Enforce proper application of financial reporting rules for companies whose securities are publicly traded. 196) Financial Accounting Standards Board Difficulty: 2 Medium Topic: Financial Accounting Standards Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 197) Public Company Accounting Oversight Board Difficulty: 2 Medium Topic: Financial Accounting Standards Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 198) International Accounting Standards Board Difficulty: 2 Medium Topic: Financial Accounting Standards Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 199) Securities and Exchange Commission Difficulty: 2 Medium Topic: Financial Accounting Standards Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking Answers: 196) B 197) A 198) C 199) D 73 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Match each qualitative characteristic with its definition. A) All information necessary to describe an item is reported. B) Information provides feedback on past activities. C) Information is presented in time to make useful decisions. D) Information is useful in helping to forecast future outcomes. E) Measurements that independent parties would agree upon. F) Information that does not bias the decision maker. 200) Predictive value Difficulty: 2 Medium Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 201) Confirmatory value Difficulty: 2 Medium Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 202) Verifiability Difficulty: 2 Medium Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 203) Timeliness Difficulty: 2 Medium Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

204) Neutrality Difficulty: 2 Medium Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 205) Completeness Difficulty: 2 Medium Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking Answers: 200) D 201) B 202) E 203) C 204) F 205) A 206) For each transaction, indicate whether a company would classify the related account as an asset, liability, stockholders' equity, dividend, revenue, or expense.

1. 2. 3. 4. 5.

Transactions Receive cash from investors. Pay rent for the current period. Purchase office equipment. Pay cash to stockholders. Provide services to customers.

Related Accounts Common Stock Rent Expense Equipment Dividends Service Revenue

Answer: 1. Stockholders' equity; 2. Expense; 3. Asset; 4. Dividend; 5. Revenue Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

207) Account classifications include assets, liabilities, stockholders' equity, dividends, revenues, and expenses. Indicate the account classification for each account name. Account Classifications 1. ________ 2. ________ 3. ________ 4. ________ 5. ________ 6. ________ 7. ________ 8. ________ 9. ________ 10. ________

Accounts Common Stock Cash Salaries Payable Service Revenue Utilities Expense Supplies Advertising Expense Buildings Accounts Payable Dividends

Related Transactions Sell common stock to investors. Receive cash from customers. Incur amounts owed to employees. Sell services to customers. Incur cost of utilities. Purchase of office supplies. Pay for cost of advertising. Purchase building for operations. Purchase supplies on credit. Distribute cash to stockholders.

Answer: 1. Stockholders' equity; 2. Asset; 3. Liability; 4. Revenue; 5. Expense; 6. Asset; 7. Expense; 8. Asset; 9. Liability; 10. Dividend Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 208) Indicate whether a company would classify the transaction as financing, investing, or operating.

1. 2. 3. 4. 5.

Transactions Receive cash from investors. Pay rent for the current period. Purchase office equipment. Pay cash to stockholders. Provide services to customers.

Answer: 1. Financing; 2. Operating; 3. Investing; 4. Financing; 5. Operating Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

209) Below are typical transactions for a company. Indicate whether each transaction is classified as a financing, investing, or operating activity. Type of Business Activity 1. ________ 2. ________ 3. ________ 4. ________ 5. ________ 6. ________ 7. ________ 8. ________

Transactions Purchase office building. Pay building maintenance fees. Pay sales taxes to the local government. Provide services to customers. Borrow from the bank. Pay workers' salaries. Sell equipment used in operations. Sell common stock to investors.

Answer: 1. Investing; 2. Operating; 3. Operating; 4. Operating; 5. Financing; 6. Operating; 7. Investing; 8. Financing Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

210) Below are typical transactions for a company. Indicate whether each transaction is classified as a financing, investing, or operating activity. Type of Business Activity 1. ________ 2. ________ 3. ________ 4. ________ 5. ________ 6. ________ 7. ________ 8. ________ 9. ________ 10. ________

Related Transactions Sell common stock to investors. Receive cash from customers. Incur amounts owed to employees. Sell services to customers. Incur cost of utilities. Purchase rent one year in advance. Pay for cost of advertising. Purchase building for operations. Purchase supplies on credit. Distribute cash to stockholders.

Answer: 1. Financing; 2. Operating; 3. Operating; 4. Operating; 5. Operating; 6. Operating; 7. Operating; 8. Investing; 9. Operating; 10. Financing Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

211) Below are cash transactions of a company. Indicate whether the transaction will affect an account reported in the income statement or the balance sheet. Ignore the impact of the transaction on the Cash and Retained Earnings accounts. The first one is done as an example. Financial Statement 1. Income Statement 2. ________ 3. ________ 4. ________ 5. ________ 6. ________ 7. ________ 8. ________ 9. ________ 10. ________

Related Transactions Pay taxes for the current period. Borrow cash from the bank. Pay salaries to employees for the current period. Receive from customers for services provided in the current period. Pay one year of rent in advance. Pay for supplies. Pay for advertising for the current period. Pay for land. Pay utilities for the current period. Repay amount borrowed from the bank.

Answer: 1. Income Statement; 2. Balance Sheet; 3. Income Statement; 4. Income Statement; 5. Balance Sheet; 6. Balance Sheet; 7. Income Statement; 8. Balance Sheet; 9. Income Statement; 10. Balance Sheet Difficulty: 3 Hard Topic: Financial Statements - Income Statement; Financial Statements - Balance Sheet Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

212) At the end of the current period, Maltese, Inc. reports the following amounts: Assets = $50,000; Liabilities = $28,000; Dividends = $4,000; Revenues = $22,000; Expenses = $16,000. Calculate net income and stockholders' equity at the end of the period. Answer: Revenues Expenses = Net Income $22,000 $16,000 = $6,000 Assets = Liabilities + Stockholders' equity $50,000 = $28,000 + $X $50,000 $28,000 = $22,000 Difficulty: 3 Hard Topic: Financial Statements - Income Statement; Financial Statements - Balance Sheet Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 213) At the end of the current period, Rogers Company reports the following amounts: Assets = $25,000; Liabilities = $15,000; Dividends = $3,000; Revenues = $20,000; Expenses = $13,000. Calculate net income and stockholders' equity at the end of the period. Answer: Revenues Expenses = Net Income $20,000 $13,000 = $7,000 Assets = Liabilities + Stockholders' equity $25,000 = $15,000 + $X $25,000 $15,000 = $10,000 Difficulty: 3 Hard Topic: Financial Statements - Income Statement; Financial Statements - Balance Sheet Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

214) Below are the account balances for Huffman Corporation at the end of December. Use only the appropriate accounts to prepare an income statement. Accounts Cash Salaries expense Retained earnings Advertising expense Equipment Service revenue Common stock Accounts payable

Balances $5,200 2,300 2,500 1,200 12,400 9,400 8,000 2,200

Answer: Huffman Corporation Income Statement For the year ended December 31 Service revenue $9,400 Expenses: Salaries $2,300 Advertising 1,200 Total expenses 3,500 Net income $5,900 Difficulty: 3 Hard Topic: Financial Statements - Income Statement Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

215) At the beginning of the year (January 1), Maurice and Sons has $12,000 of common stock outstanding and retained earnings of $4,200. During the year, the company reports net income of $3,200 and pays dividends of $1,200. In addition, the company issues additional common stock for $5,000. Prepare the statement of stockholders' equity at the end of the year (December 31). Answer: Maurice and Sons Statement of Stockholders' Equity For the year ended December 31 Common Retained Total Stockholders' Stock Earnings Equity Balance at January 1 $12,000 $4,200 $16,200 Issuance of common stock 5,000 5,000 Add: Net income for the year 3,200 3,200 Less: Dividends (1,200) (1,200) Balance at December 31 $17,000 $6,200 $23,200 Difficulty: 3 Hard Topic: Financial Statements - Statement of Stockholders' Equity Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

216) Klein Interiors has the following account balances at the end of the year. Use only the appropriate accounts to prepare a balance sheet. Accounts Equipment Accounts Payable Common Stock Service Revenue Cash Retained Earnings Salaries Expense Notes Payable Answer:

Assets Cash Equipment

Total assets

Balances $78,000 12,000 20,000 62,000 8,000 ? 38,000 25,000 Klein Interiors Balance Sheet December 31 Liabilities $8,000 Accounts payable 78,000 Notes payable Total liabilities Stockholders' Equity Common stock Retained earnings Total stockholders' equity Total liabilities and $86,000 stockholders' equity

$12,000 25,000 37,000 20,000 29,000* 49,000 $86,000

* Assets = Liabilities + Stockholders' equity $86,000 = $37,000 + ($20,000 + Retained earnings) $86,000 - $37,000 - $20,000 = Retained earnings $29,000 = Retained earnings Difficulty: 3 Hard Topic: Financial Statements - Balance Sheet Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

217) Thomason Financial has the following cash transactions for the year. Assume cash at the beginning of the period is $6,000. Prepare a statement of cash flows. Accounts Cash received for sale of services to customers Cash received from issuance of common stock Cash paid to purchase office equipment Cash paid for building maintenance Cash paid for advertisement Cash paid to workers Cash paid for dividends to stockholders Cash received from sale of land Cash received from borrowing Thomason Financial Statement of Cash Flows For the year ended December 31 Cash Flows from Operating Activities Cash inflows: From sale of services to customers Cash outflows: For building maintenance For advertisement For workers Net cash flows from operating activities Cash Flows from Investing Activities Purchase office equipment Sale of land Net cash flows from investing activities Cash Flows from Financing Activities Issue common stock Borrow from bank Pay dividends Net cash flows from financing activities Net increase in cash Cash at the beginning of the year Cash at the end of the year

Amounts $42,000 33,000 (49,000) (7,000) (8,000) (18,000) (3,000) 7,000 14,000

Answer:

$42,000 (7,000) (8,000) (18,000) $9,000 (49,000) 7,000 (42,000) 33,000 14,000 (3,000) 44,000 11,000 6,000 $17,000

Difficulty: 3 Hard Topic: Financial Statements - Statement of Cash Flows Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 84 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

218) Each of the following independent situations represents amounts shown on the four basic financial statements. Fill in the missing blanks using your knowledge of amounts that appear on the financial statements. 1. Revenues = $27,000; Expenses = $18,000; Net income = ________. 2. Increase in stockholders' equity = $20,000; Issuance of common stock = $12,000; Dividends = $5,000; Net income = ________. 3. Assets = $25,000; Liabilities = $13,000; Stockholders' equity = ________. 4. Total change in cash = +$28,000; Net operating cash flows = +$30,000; Net financing cash flows = +$18,000; Net investing cash flows = ________. Answer: 1. Revenues $27,000 Change in stockholders' 2. equity $20,000 $20,000 3.

= = -

Expenses $18,000 Issue common stock $12,000 $12,000

= =

Net Income $9,000

Dividends + $5,000 + $5,000 = Stockholders' equity $X $12,000 Financing cash flows + $18,000 + $18,000 =

Net Income $X $13,000

Assets = Liabilities + $25,000 = $13,000 + $25,000 $13,000 = Total change in Operating Investing 4. cash = cash flows + cash flows $28,000 = $30,000 + $X $28,000 $30,000 ($20,000) Difficulty: 3 Hard Topic: Financial Statements - Income Statement; Financial Statements - Statement of Stockholders' Equity; Financial Statements - Balance Sheet; Financial Statements - Statement of Cash Flows Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

219) During its first five years of operations, Della Manufacturing reports net income and pays dividends as follows. Calculate the balance of retained earnings at the end of each year. Note that retained earnings will always equal $0 at the beginning of year 1.

Year 1 2 3 4 5

Net Retained Income Dividends Earnings $1,700 $1,000 ________ 2,700 1,000 ________ 3,200 2,000 ________ 5,400 2,000 ________ 7,600 3,000 ________

Answer: Net Retained Year Income Dividends Earnings* 1 $1,700 $1,000 $700 2 2,700 1,000 2,400 3 3,200 2,000 3,600 4 5,400 2,000 7,000 5 7,600 3,000 11,600 Feedback: * Retained earnings = Beginning Retained Earnings + Net Income - Dividends Difficulty: 3 Hard Topic: Financial Statements - Statement of Stockholders' Equity Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

220) Below is information related to retained earnings for five independent situations. Calculate the answer to each. 1. A company reports an increase in retained earnings of $3,200 and net income of $4,800. What is the amount of dividends? 2. A company reports beginning retained earnings of $1,800, net income of $1,200, and $200 dividends. What is the amount of ending retained earnings? 3. A company reports an increase in retained earnings of $2,500 and dividends of $1,500. What is the amount of net income? 4. A company reports ending retained earnings of $2,700, net income of $900, and dividends of $500. What is the amount of beginning retained earnings? 5. A company reports an increase in retained earnings of $500 and net income of $1,200. What is the amount of dividends? Answer: Change in Retained Earnings = Net Income - Dividends 1. $3,200 = $4,800 $X $3,200 = $4,800 $1,600 2. [$X - $1,800] = $1,200 $200 $X = $2,800 3. $2,500 = $X $1,500 $2,500 = $4,000 $1,500 4. [$2,700 - $X] = $900 $500 $X = $2,300 5. $500 = $1,200 $X $500 = $1,200 $700 Difficulty: 3 Hard Topic: Financial Statements - Statement of Stockholders' Equity Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

221) Below is balance sheet information for five independent situations. Calculate the answer to each. 1. A company reports total assets of $2,000 and total liabilities of $900. What is the amount of stockholders' equity? 2. A company reports total liabilities of $2,400 and stockholders' equity of $1,100. What is the amount of total assets? 3. A company reports total assets of $2,700 and total stockholders' equity of $700. What is the amount of total liabilities? 4. A company reports an increase in assets of $1,700 and an increase in liabilities of $400. What is the amount of the change in stockholders' equity? 5. A company reports an increase in liabilities of $300 and a decrease in stockholders' equity of $800. What is the amount of the change in total assets? Answer: 1. Assets $2,000 $2,000 2. Assets $X $3,500 3. Assets $2,700 $2,700

= Liabilities + Stockholders' equity = $900 + $X = $900 + $1,100 = Liabilities + Stockholders' equity = $2,400 + $1,100 = $2,400 + $1,100 = Liabilities + Stockholders' equity = $X + $700 = $2,000 + $700 Change in Change in 4. Change in Assets = liabilities + stockholders' equity $1,700 = $400 + $X $1,700 = $400 + $1,300 Change in Change in 5. Change in Assets = liabilities + stockholders' equity $X = $300 + ($800) ($500) = $300 + ($800) Difficulty: 3 Hard Topic: Financial Statements - Balance Sheet Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

222) Below is cash flow information for five independent situations. Calculate the answer to each. 1. A company reports operating cash flows of $3,200, investing cash flows of $700, and financing cash flows of -$400. What is the amount of the change in total cash? 2. A company reports operating cash flows of $1,800, investing cash flows of -$400, and financing cash flows of -$1,100. If the beginning cash amount is $500, what is the ending cash amount? 3. A company reports operating cash flows of $700, investing cash flows of $300, and a change in total cash of $100. What is the amount of cash flows from financing activities? 4. A company reports operating cash flows of $600, financing cash flows of $400, and a change in total cash of $100. What is the amount of cash flows from investing activities? 5. A company reports investing cash flows of -$1,400, financing cash flows of $900, and a change in total cash of $200. What is the amount of cash flows from operating activities? Answer: Investing Operating cash Financing = cash flows + flows + cash flows Operating Investing cash Financing 1. Total change in cash = cash flows + flows + cash flows $3,500 = $3,200 + $700 + ($400) Operating Investing cash Financing 2. Total change in cash = cash flows + flows + cash flows ($X - $500) = $1,800 + ($400) + ($1,100) $X = $800 Operating Investing cash Financing 3. Total change in cash = cash flows + flows + cash flows $100 = $700 + $300 + ($900) Operating Investing cash Financing 4. Total change in cash = cash flows + flows + cash flows $100 = $600 + ($900) + $400 Operating Investing cash Financing 5. Total change in cash = cash flows + flows + cash flows $200 = $700 + ($1,400) + $900 Difficulty: 3 Hard Topic: Financial Statements - Statement of Cash Flows Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting Total change in cash

223) Riley, Incorporated reports the following amounts at the end of the year: Cash Buildings Accounts Payable Interest Expense Advertising Expense

$3,200 Service Revenue 60,000 Salaries Expense 8,500 Equipment 4,000 Supplies 11,300 Notes payable

$92,500 72,800 72,000 6,400 40,000

In addition, the company had common stock of $65,000 at the beginning of the year and issued an additional $5,000 during the year. The company also had retained earnings of $20,700 at the beginning of the year and paid dividends of $2,000 during the year. Prepare the income statement, statement of stockholders' equity, and balance sheet.

Answer:

Riley, Incorporated Income Statement For the year ended December 31 Service revenue Expenses: Salaries $72,800 Advertising 11,300 Interest 4,000 Total expenses Net income

$92,500

88,100 $4,400

Riley, Incorporated Statement of Stockholders' Equity For the year ended December 31 Total Common Retained Stockholders' Stock Earnings Equity Balance at beginning of the year $65,000 $20,700 $85,700 Issuance of common stock 5,000 5,000 Add: Net income for the year 4,400 4,400 Less: Dividends (2,000) (2,000) Balance at end of the year $70,000 $23,100 $93,100 Riley, Incorporated Balance Sheet December 31 Assets Liabilities Cash $3,200 Accounts payable $8,500 Supplies 6,400 Notes payable 40,000 Equipment 72,000 Total liabilities 48,500 Building 60,000 Stockholders' Equity Common stock 70,000 Retained earnings 23,100 Total stockholders' equity 93,100 Total liabilities and stockholders' Total assets $141,600 equity $141,600 Difficulty: 3 Hard Topic: Financial Statements - Income Statement; Financial Statements - Statement of Stockholders' Equity; Financial Statements - Balance Sheet Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 91 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

224) Below are incomplete financial statements for Beasley, Incorporated. Calculate the missing amounts. Income Statement

Statement of Stockholders' Equity

Retained Revenues $(a) Common Stock Earnings Expenses: Beginning $25,000 $12,000 Salaries 8,000 Issuances (c) Delivery 7,000 Net income 5,000 Utilities 5,000 Dividends (d) Net income (b) Ending $30,000 $15,000 Balance Sheet Assets: Liabilities: Cash $15,000 Accounts payable 15,000 Supplies 7,000 Stockholders' Equity: Prepaid rent (e) Common stock (g) Equipment 35,000 Retained earnings (h) Total liabilities and stockholders' Total assets (f) equity (i) Answer: Income Statement, Net Income (b) = $5,000 (from Statement of Stockholders' Equity). Income Statement, Revenues (a) = $25,000 (Net Income $5,000 + Total Expenses $20,000). Statement of Stockholders' Equity, Common Stock Issuances (c) = $5,000 ($25,000 + (c) = $30,000). Statement of Stockholders' Equity, Dividends (d) =$2,000 ($12,000 + $5,000 - (d) = $15,000). Balance Sheet, Common Stock (g) = $30,000 (from Statement of Stockholders' Equity). Balance Sheet, Retained Earnings (h) = $15,000 (from Statement of Stockholders' Equity). Balance Sheet, Total liabilities and stockholders' equity (i) = $60,000 ($15,000 liabilities + $30,000 common stock + $15,000 retained earnings). Balance Sheet, Total assets (f) = $60,000 (Total assets = Total liabilities and stockholders' equity). Balance Sheet, Prepaid Rent (e) = ($60,000 Total assets - $15,000 Cash - $7,000 Supplies $35,000 Equipment). Difficulty: 3 Hard Topic: Financial Statements - Income Statement; Financial Statements - Statement of Stockholders' Equity; Financial Statements - Balance Sheet Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

225) Use the following information available as of December 31 to prepare an income statement for the year and a balance sheet for Goldie Company. Fees for services performed during the year, $120,000 Accounts payable, $18,500 Accounts receivable, $17,300 Miscellaneous expenses for the year, $8,700 Supplies on hand, $2,700 Notes payable, $30,000 Interest expense on the note for the year, $3,000 Equipment, $84,400 Cash on hand, $11,200 Salaries expense for the year, $71,500 Supplies expense for the year, $9,400 Rent expense for the year, $12,000 Common stock that has been issued, $60,000 Retained earnings at the end of the year, $7,100

Answer:

Goldie Company Income Statement For the year ended December 31 Service revenue $120,000 Expenses: Salaries 71,500 Rent 12,000 Supplies 9,400 Interest 3,000 Miscellaneous 8,700 Total expenses 104,600 Net income $15,400

Assets Cash Accounts Receivable Supplies Equipment

Goldie Company Balance Sheet December 31 Liabilities $11,200 Accounts payable 17,300 Notes payable 2,700 Total liabilities 84,400 Stockholders' Equity Common stock Retained earnings Total stockholders' equity Total liabilities and $115,600 stockholders' equity

$18,500 30,000 48,500

60,000 7,100 67,100

Total assets $115,600 Difficulty: 3 Hard Topic: Financial Statements - Income Statement; Financial Statements - Balance Sheet Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

226) Below are typical transactions for a company. Type of Business Activity 1. ________ 2. ________ 3. ________ 4. ________ 5. ________ 6. ________ 7. ________ 8. ________ 9. ________ 10. ________

Transactions Issue common stock. Receive cash from a bank loan. Sell products to customers. Pay employees' wages. Purchase equipment. Pay dividends to stockholders. Sell building. Purchase office supplies. Pay utilities. Pay for maintenance on delivery vehicles.

Required: Indicate whether each transaction is classified as a financing, investing, or operating activity. Answer: Type of Business Activity Transactions 1. Financing Issue common stock. 2. Financing Receive cash from a bank loan. 3. Operating Sell products to customers. 4. Operating Pay employees' wages. 5. Investing Purchase equipment. 6. Financing Pay dividends to stockholders. 7. Investing Sell building. 8. Operating Purchase office supplies. 9. Operating Pay utilities. 10. Operating Pay for maintenance on delivery vehicles. Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

227) Account classifications include assets, liabilities, stockholders' equity, dividends, revenues, and expenses. Account Classifications 1. ________ 2. ________ 3. ________ 4. ________ 5. ________ 6. ________ 7. ________ 8. ________ 9. ________ 10. ________

Accounts Accounts Receivable Land Prepaid Rent Salaries Expense Utilities Expense Service Revenue Accounts Payable Notes Payable Dividends Common Stock

Related Transactions Provide services on account. Purchase land. Pay rent in advance. Pay employee salaries. Pay utilities. Provide services to customers. Purchase materials on account. Borrow from the bank. Distribute cash to stockholders. Issue stock to stockholders.

Required: Indicate the account classification for each account name. Answer: Account Classifications Account Names 1. Asset Accounts Receivable 2. Asset Land 3. Asset Prepaid Rent 4. Expense Salaries Expense 5. Expense Utilities Expense 6. Revenue Service Revenue 7. Liability Accounts Payable 8. Liability Notes Payable 9. Dividends Dividends 10. Stockholders' Equity Common Stock Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

228) Tiffany's provides financial services related to investment selections, retirement planning, and general insurance needs. For the current year, the company reports the following amounts: Advertising Expense Buildings Salaries Expense Accounts Payable Cash

$31,200 Service Revenue 108,000 Interest Expense 67,800 Utilities Expense 6,300 Equipment 6,400 Notes Payable

$129,300 3,500 14,500 25,700 30,000

In addition, the company had common stock of $60,000 at the beginning of the year and issued an additional $15,000 during the year. The company also had retained earnings of $20,000 at the beginning of the year and paid dividends of $3,500. Required: Prepare the income statement, statement of stockholders' equity, and balance sheet for Tiffany's for the year ended December 31.

Answer:

Tiffany's Income Statement For the year ended December 31 Service revenue $129,300 Expenses: Advertising 31,200 Salaries 67,800 Utilities 14,500 Interest 3,500 Total expenses 117,000 Net income $12,300 Tiffany's Statement of Stockholders' Equity For the year ended December 31 Total Common Retained Stockholders' Stock Earnings Equity Balance at beginning of the year $60,000 $20,000 $80,000 Issuance of common stock 15,000 15,000 Add: Net income for the year 12,300 12,300 Less: Dividends (3,500) (3,500) Balance at end of the year $75,000 $28,800 $103,800

Assets Cash Equipment Buildings

Tiffany's Balance Sheet December 31 Liabilities $6,400 Accounts payable 25,700 Notes payable 108,000 Total liabilities Stockholders' Equity Common stock Retained earnings Total stockholders' equity Total liabilities and $140,100 stockholders' equity

$6,300 30,000 36,300 75,000 28,800 103,800

Total assets $140,100 Difficulty: 3 Hard Topic: Financial Statements - Income Statement; Financial Statements - Statement of Stockholders' Equity; Financial Statements - Balance Sheet Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 98 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

229) Below are incomplete financial statements. Income Statement Revenues Expenses: Salaries Rent Advertising Net income Balance Sheet Assets: Cash Supplies Land Buildings

Statement of Stockholders' Equity Common Retained (a) Stock Earnings Beginning $15,000 $8,000 $11,000 Issuances (c) 5,000 Net income 3,000 7,000 Dividends (d) (b) Ending $18,000 $9,000 Liabilities: $6,000 (e) 7,000 14,000

Total assets

Accounts payable $5,000 Stockholders' Equity: Common Stock (g) Retained Earnings (h) Total liabilities and stockholders' (f) equity (i)

Required: Calculate the missing amounts.

Answer: (Suggested order of calculation) Statement of Stockholders' Equity: $15,000 + (c) = $18,000 (c) = $3,000. $8,000 + $3,000 - (d) = $9,000 (d) = $2,000. Income Statement: (b) = $3,000 (from Statement of Stockholders' Equity). (a) - $11,000 - $5,000 - $7,000 = $3,000 (b) (a) = $26,000. Balance Sheet: (g) = $18,000 (from Statement of Stockholders' Equity). (h) = $9,000 (from Statement of Stockholders' Equity). $5,000 + $18,000 (g) + $9,000 (h) = (i) (i) = $32,000. (f) = $32,000 (total assets = total liabilities and stockholders' equity). $6,000 + (e) + $7,000 + $14,000 = $32,000 (f) (e) = $5,000. Difficulty: 3 Hard Topic: Financial Statements - Income Statement; Financial Statements - Statement of Stockholders' Equity; Financial Statements - Balance Sheet Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

The following information applies to problems 230 to 232. Simplex Corporation provides the following information at the end of the year. Salaries payable to workers at the end of the year Advertising expense for the year Building that has been purchased Supplies at the end of the year Retained earnings at the end of the year Utilities expense for the year Note payable to the bank Service revenue during the year Salaries expense for the year Accounts payable to suppliers Dividends paid to stockholders during the year Common stock that has been issued, including $8,000 that was issued this year Cash remaining Interest expense for the year Accounts receivable from customers

$3,500 8,700 70,000 7,500 38,000 4,200 21,500 67,800 24,200 6,700 ? 30,000 5,500 1,800 16,700

230) Prepare the income statement for the year ended December 31, 20XX. Answer:

Simplex Corporation Income Statement For the year ended December 31, 20XX Service revenue $67,800 Expenses: Advertising 8,700 Utilities 4,200 Salaries 24,200 Interest 1,800 Total expenses 38,900 Net income $28,900 Difficulty: 3 Hard Topic: Financial Statements - Income Statement Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

231) Prepare the statement of stockholders' equity for the year ended December 31, 20XX. The balance of retained earnings at the beginning of the year equals $24,500. Answer:

Simplex Corporation Statement of Stockholders' Equity For the year ended December 31, 20XX

Balance at January 1 Issuance of common stock Net income for the year Less: Dividends Balance at December 31

Total Common Retained Stockholders' Stock Earnings Equity $22,000 $24,500 $46,500 8,000 8,000 28,900 28,900 (15,400)* (15,400) $30,000 $38,000 $68,000

* Beginning retained earnings $24,500 + Net income 28,900 - Dividends ? = Ending retained earnings $38,000 Difficulty: 3 Hard Topic: Financial Statements - Statement of Stockholders' Equity Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

232) Prepare the balance sheet for Simplex Corporation on December 31, 20XX. Answer:

Assets Cash Accounts receivable Supplies Buildings

Simplex Corporation Balance Sheet December 31, 20XX Liabilities $5,500 Accounts payable 16,700 Salaries payable 7,500 Notes payable 70,000 Total liabilities Stockholders' Equity Common stock Retained earnings Total stockholders' equity Total liabilities and $99,700 stockholders' equity

$6,700 3,500 21,500 31,700 30,000 38,000 68,000

Total assets $99,700 Difficulty: 3 Hard Topic: Financial Statements - Balance Sheet Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

233) The four underlying assumptions of generally accepted accounting principles are economic entity, monetary unit, periodicity, and going concern. Consider the following four independent situations. 1. Masterson has provided music cassettes for the past 30 years. Because of the advance in electronic musical devices, customer demand has dwindled over the years to almost nothing in the current year and the company can no longer pay its debts. For the most recent year, the company reports its assets in the balance sheet at historical (original) cost. 2. Phillips Flooring specializes in the installation of wood flooring. The company has the usual business expenses: salaries, supplies, utilities, advertising, and taxes. Mr. Phillips took his wife and two sons to Six Flags. Mr. Phillips reported the airfare and hotel expenses in the income statement of Phillips Flooring. 3. Mama's Restaurant has over 200 stores throughout the Southeast. Approximately 100,000 customers visit its stores each day. Because of the continual nature of dining, the company does not publish an income statement. The company feels that it has an indefinite life and a periodic report would mislead investors. 4. Indian Packaging delivers packages between the United States and India. During the current year, the company delivered 2,000 packages for its American customers totaling $75,000 in revenue. For its Indian customers, the company delivered 1,000 packages totaling 1,500,000 Indian Rupee. The company's income statement indicates that total revenue equals 3,000 packages delivered with no corresponding amount in the income statement. Required: For each situation, indicate which of the underlying assumptions of GAAP is violated. Answer: Assumption violated 1. Going concern 2. Economic entity 3. Periodicity 4. Monetary unit Difficulty: 2 Medium Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

234) Listed below are several terms and definitions associated with the FASB's conceptual framework. Terms Definitions a. Requires the consideration of the costs and 1. ________ Verifiability value of information. 2. ________ Relevance b. Recording transactions only for the company. c. The indefinite life of a company can be broken 3. ________ Timeliness into definite periods. d. Accounting should be useful in making 4. ________ Cost effectiveness decisions. e. Agreement between a measure and the 5. ________ Decision usefulness phenomenon it represents. 6. ________ Faithful representation f. Information arrives prior to the decision. 7. ________ Materiality g. Information is related to the decision at hand. Economic entity 8. ________ assumption h. Implies consensus among different measures. i. Concerns the relative size of an item and its 9. ________ Periodicity assumption effect on decisions. Required: Pair each term with its related definition. Answer: 1. h; 2. g; 3. f; 4. a; 5. d; 6. e; 7. i; 8. b; 9. c. Difficulty: 2 Medium Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 235) Define accounting. Describe the two primary functions of financial accounting and its role in our society. Answer: Accounting is "the language of business." The functions of financial accounting are to measure the business activities of a company and to communicate those measurements to external parties for decision-making purposes. A large number of people, including investors and creditors, rely on financial accounting information to make informed, and presumably, better decisions about companies. Difficulty: 1 Easy Topic: Defining Accounting Learning Objective: 01-01 Describe the two primary functions of financial accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 105 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

236) Describe the three fundamental business activities that accountants measure. What account classifications are typically associated with each type of business activity? Answer: Financing activities are transactions involving external sources of funding. There are two basic sources of this external funding–the owners of the company who invest their own funds in the business, and creditors who lend money to the company. Investing activities include the purchase and sale of (1) long-term resources such as land, buildings, equipment, and machinery; and (2) any resources not directly related to a company's normal operations. Operating activities include transactions that relate to the primary operations of the company, such as providing products and services to customers and the associated costs of doing so, like utilities, taxes, advertising, wages, rent, and maintenance. In general, financing activities are associated with long-term liabilities and stockholders' equity (including dividends), investing activities are associated with long-term assets, and operating activities are associated with revenues and expenses. Difficulty: 2 Medium Topic: Measuring Business Activities Learning Objective: 01-02 Understand the business activities that financial accounting measures. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 237) List and describe the four financial statements most frequently provided to external users. Answer: The income statement presents revenues and expenses over an interval of time. The statement of shareholders' equity summarizes the changes in stockholders' equity (common stock and retained earnings) over an interval of time. The balance sheet presents the assets, liabilities, and stockholders' equity at a point in time. The statement of cash flows presents the cash receipts and cash payments over an interval of time for operating, investing, & financing activities. Difficulty: 2 Medium Topic: Financial Statements - Income Statement; Financial Statements - Statement of Stockholders' Equity; Financial Statements - Balance Sheet; Financial Statements - Statement of Cash Flows Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

238) How does the value of an audit affect financial statements? Answer: Outside auditors add credibility to financial statements, increasing the confidence of capital market participants who rely on financial statements in making investment and credit decisions and recommendations. Difficulty: 2 Medium Topic: Financial Accounting Standards Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 239) Define the four basic assumptions underlying Generally Accepted Accounting Principles: (a) economic entity, (b) going concern, (c) periodicity, (d) monetary unit. Answer: Economic entity - All economic events can be identified with a particular economic entity. Going concern - In the absence of information to the contrary, it is anticipated that a business entity will continue to operate indefinitely. Periodicity - The life of a company can be divided into artificial time periods to provide timely information to external users. Monetary unit - In the U.S., financial statement elements should be measured in terms of the U.S. dollar. It assumes that the value of a dollar is stable over time. Difficulty: 1 Easy Topic: Conceptual Framework Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking

Financial Accounting, 5e (Spiceland) Chapter 2 The Accounting Cycle: During the Period 1) External transactions are transactions the company conducts with a separate economic entity, such as selling products to a customer, purchasing supplies from a vendor, paying salaries to an employee, and borrowing money from a bank. Answer: TRUE Difficulty: 1 Easy Topic: External Transactions Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 2) Internal transactions are events that affect the financial position of the company but do not include an exchange with a separate economic entity. Answer: TRUE Difficulty: 1 Easy Topic: External Transactions Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 3) A list of all account names used to record transactions of a company is referred to as a Taccount. Answer: FALSE Explanation: This is referred to as a chart of accounts. Difficulty: 1 Easy Topic: External Transactions Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 4) A source document provides information related to external transactions. Answer: TRUE Difficulty: 1 Easy Topic: External Transactions Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 1 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

5) After recording each transaction, total assets must equal total liabilities plus stockholders' equity. Answer: TRUE Difficulty: 1 Easy Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement 6) If a transaction causes total assets of the company to increase by $2,000, then liabilities plus stockholders' equity also increases by $2,000. Answer: TRUE Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Analytical Thinking AICPA: FN Measurement 7) If a transaction causes total assets of the company to increase by $5,000 and total liabilities to increase by $3,000, then stockholders' equity increases by $8,000. Answer: FALSE Explanation: Stockholders' equity increases by $2,000. Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

8) Borrowing cash from the bank causes assets to increase and liabilities to increase. Answer: TRUE Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 9) Purchasing equipment using cash causes assets to increase. Answer: FALSE Explanation: One asset goes up; another asset goes down. There is no change to total assets. Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 10) Providing services to customers for cash causes stockholders' equity to increase. Answer: TRUE Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 11) Paying employees' salaries for the current month causes no change to stockholders' equity. Answer: FALSE Explanation: Salaries expense would reduce stockholders' equity. Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

12) Paying dividends to its stockholders causes a company's stockholders' equity to decrease. Answer: TRUE Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 13) Selling common stock for cash causes assets to increase and stockholders' equity to decrease. Answer: FALSE Explanation: Stockholders' equity increases. Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 14) Purchasing office supplies on account causes assets to increase and liabilities to increase. Answer: TRUE Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 15) Providing services to customers on account causes assets to increase and stockholders' equity to increase. Answer: TRUE Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

16) Receiving cash in advance from a customer for services to be provided in the future causes assets to increase and stockholders' equity to increase. Answer: FALSE Explanation: Assets increase and liabilities increase. Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 17) Paying for one year of rent in advance causes one asset to increase and another asset to decrease, so there is no effect on the accounting equation. Answer: TRUE Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 18) Purchasing supplies on account increases the balance of the Accounts Receivable account. Answer: FALSE Explanation: The balance of Accounts Payable increases. Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 19) Amounts owed from customers are recorded in the Accounts Receivable account. Answer: TRUE Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 5 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

20) The two components of stockholders' equity are Debits and Credits. Answer: FALSE Explanation: The two components of stockholders' equity are Common Stock and Retained Earnings. Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 21) Revenues have the effect of increasing retained earnings. Answer: TRUE Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 22) Expenses have the effect of decreasing retained earnings. Answer: TRUE Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

23) Receiving cash in advance from customers increases the Service Revenue account. Answer: FALSE Explanation: Receiving cash in advance from customers increases the Deferred Revenue account. Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 24) Deferred Revenue is a liability account. Answer: TRUE Difficulty: 1 Easy Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement 25) Liability accounts increase with a debit and decrease with a credit. Answer: FALSE Explanation: Liability accounts increase with a credit and decrease with a debit. Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 26) Liability accounts increase with a credit and decrease with a debit. Answer: TRUE Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 7 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

27) Common Stock increases with a credit and decreases with a debit. Answer: TRUE Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 28) Revenue accounts increase with a debit and decrease with a credit. Answer: FALSE Explanation: Revenue accounts increase with a credit and decrease with a debit. Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 29) Expense accounts increase with a debit and decrease with a credit. Answer: TRUE Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 30) The Dividends account increases with a credit and decreases with a debit. Answer: FALSE Explanation: The Dividends account increases with a debit and decreases with a credit. Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

31) A debit to an account balance always results in the balance increasing. Answer: FALSE Explanation: A debit increases assets, dividends, and expenses, but decreases liabilities, stockholders' equity, and revenues. Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 32) A credit to an account balance always results in the balance decreasing. Answer: FALSE Explanation: A credit decreases assets, dividends, and expenses, but increases liabilities, stockholders' equity, and revenues. Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 33) A journal provides a chronological record of all transactions affecting a firm. Answer: TRUE Difficulty: 1 Easy Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 34) For each transaction, there must be at least one debit amount and one credit amount. Answer: TRUE Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

35) For each transaction, the total debit amounts must equal the total credit amounts. Answer: TRUE Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 36) Selling common stock for cash is recorded with a debit to common stock. Answer: FALSE Explanation: Selling common stock for cash is recorded with a credit to common stock. Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 37) Borrowing cash from the bank is recorded with a debit to cash. Answer: TRUE Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 38) Purchasing office supplies is recorded with a credit to office supplies. Answer: FALSE Explanation: Purchasing office supplies is recorded with a debit to office supplies. Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

39) Paying employees' salaries for the current period is recorded with a debit to Salaries Expense. Answer: TRUE Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 40) Providing services to customers is recorded with a debit to Service Revenue. Answer: FALSE Explanation: Providing services to customers is recorded with a credit to Service Revenue. Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 41) The general ledger includes all accounts used to record the company's transactions. Answer: TRUE Difficulty: 1 Easy Topic: Posting to the General Ledger Learning Objective: 02-05 Post transactions to the general ledger. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 42) The process of transferring the debit and credit information from the journal to individual accounts in the general ledger is called journalizing. Answer: FALSE Explanation: This process is called posting. Difficulty: 1 Easy Topic: Posting to the General Ledger Learning Objective: 02-05 Post transactions to the general ledger. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking

43) After posting transactions to the general ledger accounts, the sum of the accounts with debit balances should equal the sum of the accounts with credit balances. Answer: TRUE Difficulty: 2 Medium Topic: Trial Balance Learning Objective: 02-06 Prepare a trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 44) A trial balance is a list of all accounts and their balances at a particular date, showing that assets equal liabilities. Answer: FALSE Explanation: The trial balance shows that total debits equal total credits. Difficulty: 1 Easy Topic: Trial Balance Learning Objective: 02-06 Prepare a trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 45) If total debits equal total credits in the trial balance, then all balances are correct. Answer: FALSE Explanation: A trial balance could contain offsetting errors where the balance of one account is misstated in one direction but the balance of another account (with the same type of debit or credit balance) is misstated in the other direction. Difficulty: 2 Medium Topic: Trial Balance Learning Objective: 02-06 Prepare a trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

46) Which of the following is not part of measuring external transactions? A) Using source documents to analyze accounts affected. B) Recording transactions. C) Making payments on all amounts owed. D) Analyzing transactions for their effect on the accounting equation. Answer: C Difficulty: 1 Easy Topic: External Transactions Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 47) External events include all of the following except: A) Paying rent. B) Purchasing equipment. C) Using office supplies. D) Collecting an account receivable. Answer: C Difficulty: 2 Medium Topic: External Transactions Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 48) The full set of procedures used to accomplish the measurement/communication process of financial accounting is referred to as the: A) Trial balance. B) Accounting cycle. C) Chart of accounts. D) General ledger. Answer: B Difficulty: 1 Easy Topic: External Transactions Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking

49) Which step in the process of measuring external transactions involves assessing the equality of total debits and total credits for the period? A) Use source documents to determine accounts affected by the transaction. B) Prepare a trial balance. C) Analyze the impact of the transaction on the accounting equation. D) Post the transaction to the T-account in the general ledger. Answer: B Difficulty: 2 Medium Topic: External Transactions Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 50) Which step in the process of measuring external transactions involves determining the effect on assets, liabilities, and stockholders' equity? A) Use source documents to determine accounts affected by the transaction. B) Prepare a trial balance. C) Analyze the impact of the transaction on the accounting equation. D) Post the transaction to the T-account in the general ledger. Answer: C Difficulty: 2 Medium Topic: External Transactions Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 51) Which of the following typically is considered a source document for gathering information about a transaction? A) Trial balance. B) Income statement. C) Sales invoice. D) General ledger. Answer: C Difficulty: 1 Easy Topic: External Transactions Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking

52) Which of the following best describes a purpose of source documents? A) Provide information related to external transactions, such as date and amount. B) Used by accountants to record transactions in specific accounts. C) Keep a record of transactions between the company and its vendors, customers, and other parties with whom the company conducts business. D) All of the other answers provide a correct statement. Answer: D Difficulty: 2 Medium Topic: External Transactions Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 53) A(n) ________ summarizes all transactions related to a particular item over a period of time. A) Debit B) Account C) Chart of accounts D) Source document Answer: B Difficulty: 1 Easy Topic: External Transactions Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 54) A list of all account names used to record transactions of a company is referred to as the: A) Chart of Accounts. B) Income statement. C) General journal. D) Balance sheet. Answer: A Difficulty: 1 Easy Topic: External Transactions Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking

55) For each transaction recorded in an accounting system, the basic equation that must be maintained at all times is: A) Assets = Liabilities + Stockholders' Equity. B) Cash Increases = Cash Decreases. C) Revenues = Expenses + Dividends. D) Assets = Liabilities. Answer: A Difficulty: 1 Easy Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement 56) The equation which shows a company's resources equal claims to those resources is: A) Revenues − Expenses = Net Income. B) Cash Increases − Cash Decreases = Change in Cash. C) Common Stock + Retained Earnings = Stockholders' Equity. D) Assets = Liabilities + Stockholders' Equity. Answer: D Difficulty: 1 Easy Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement 57) The equation that shows assets equal liabilities plus stockholders' equity signifies that a company: A) Is able to pay its obligations as they come due. B) Is profitable. C) Has resources equal to claims to those resources. D) All of the other answers provide a correct statement. Answer: C Difficulty: 1 Easy Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement 16 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

58) The following amounts are reported in the ledger of Mariah Company: Assets Liabilities Retained Earnings

$ 80,000 36,000 12,000

What is the balance in the Common Stock account? A) $44,000. B) $32,000. C) $48,000. D) $42,000. Answer: B Explanation: Assets ($80,000) = Liabilities ($36,000) + Stockholders' Equity ($32,000 + $12,000) Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 59) When a company pays employees' salaries for the current period, how will the basic accounting equation be affected? A) Stockholders' equity decreases. B) Revenues decrease. C) Expenses decrease. D) Liabilities decrease. Answer: A Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

60) When cash payments are made to stockholders, what is the effect on the company's accounts? A) Cash decreases and dividends increase. B) Cash increases and dividends decrease. C) Cash decreases and common stock decreases. D) Cash increases and common stock increases. Answer: A Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 61) Receiving cash from customers before services are performed results in: A) Prepaid Assets. B) Service Revenue. C) Deferred Revenues. D) Accounts Receivable. Answer: C Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 62) When the company pays stockholders a dividend, what is the effect on the accounting equation for that company? A) Decrease stockholders' equity and increase assets. B) Increase liabilities and increase assets. C) Decrease assets and decrease liabilities. D) Decrease assets and decrease stockholders' equity. Answer: D Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 18 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

63) Pumpkin Inc. sold $500 in pumpkins to a customer on account on January 1. On January 11, Pumpkin collected the cash from that customer. What is the impact on Pumpkin's accounting equation from the collection of cash? A) No net effect to the accounting equation. B) Decrease assets and increase liabilities. C) Increase assets and increase liabilities. D) Decrease assets and decrease liabilities. Answer: A Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 64) A company receives a $50,000 cash deposit from a customer on October 15, but will not provide services until November 20. Which of the following statements is true? A) The company records service revenue on October 15. B) The company records cash collection on November 20. C) The company records deferred revenue on October 15. D) The company records nothing on October 15. Answer: C Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 65) Which of the following would increase assets and increase liabilities? A) Provide services to customers on account. B) Purchase office supplies on account. C) Pay dividends to stockholders. D) Receive a utility bill for the current month. Plan to pay bill beginning of next month. Answer: B Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 19 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

66) Receiving cash from an account receivable: A) Increases revenue and decreases an asset. B) Decreases a liability and increases an asset. C) Increases an asset and increases revenue. D) Increases one asset and decreases another asset. Answer: D Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 67) An expense has what effect on the accounting equation? A) Decrease liabilities. B) Decrease stockholders' equity. C) Increase assets. D) No effect. Answer: B Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 68) Revenues have what effect on the accounting equation? A) Increase liabilities. B) Decrease assets. C) Increase stockholders' equity. D) No effect. Answer: C Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

69) Investments by stockholders have what effect on the accounting equation? A) Assets increase and liabilities increase. B) Expenses increase and liabilities increase. C) Assets increase and revenues increase. D) Assets increase and stockholders' equity increases. Answer: D Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 70) Which of the following is not possible when recording a transaction? A) Liabilities increase and assets decrease. B) Stockholders' equity increases and assets increase. C) One asset increases and another asset decreases. D) Stockholders' equity decreases and assets decrease. Answer: A Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand; Apply AACSB: Knowledge Application AICPA: FN Measurement 71) Purchasing office supplies on account will: A) Not change assets. B) Increase assets and decrease liabilities. C) Increase assets and increase liabilities. D) Increase assets and increase stockholders' equity. Answer: C Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

72) Providing services and receiving cash will: A) Increase assets and increase stockholders' equity. B) Increase assets and increase liabilities. C) Decrease assets and increase liabilities. D) Decrease liabilities and increase stockholders' equity. Answer: A Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 73) When a company provides services on account, the accounting equation would be affected as follows: A) Assets increase. B) Revenues increase. C) Assets increase and liabilities decrease. D) Assets increase and stockholders' equity increases. Answer: D Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 74) Borrowing cash from the bank would have what effect on the accounting equation? A) Assets increase and stockholders' equity increases. B) Assets increase and liabilities increase. C) Liabilities increase and stockholders' equity decreases. D) Liabilities decrease and stockholders' equity increases. Answer: B Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

75) Paying salaries to employees for the current period would have what effect on the accounting equation? A) Liabilities increase and stockholders' equity decreases. B) Assets decrease and liabilities decrease. C) Assets decrease and stockholders' equity decreases. D) Liabilities decrease and stockholders' equity increases. Answer: C Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 76) Providing services to customers for cash would have what effect on the accounting equation? A) Total assets increase; total stockholders' equity increases. B) Total assets increase; total liabilities decrease. C) Total liabilities decrease; total stockholders' equity increases. D) Total liabilities increase; total stockholders' equity decreases. Answer: A Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 77) Paying for supplies previously purchased would have what effect on the accounting equation? A) Assets decrease and stockholders' equity decreases. B) Assets increase and liabilities increase. C) Liabilities decrease and stockholders' equity increases. D) Assets decrease and liabilities decrease. Answer: D Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 23 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

78) If a company provides services on account, which of the following is true? A) Expenses increase. B) Liabilities increase. C) Stockholders' equity increases. D) Assets decrease. Answer: C Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 79) When a payment is made on an account payable: A) Assets and stockholders' equity decrease. B) Assets and liabilities decrease. C) Liabilities and revenues decrease. D) Assets and expenses decrease. Answer: B Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 80) Purchasing office equipment on account has what impact on the accounting equation? A) Stockholders' equity decreases and assets increase. B) Liabilities increase and assets increase. C) Assets decrease and liabilities decrease. D) Assets increase and stockholders' equity increases. Answer: B Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

81) Purchasing supplies for cash has what effect on the accounting equation? A) Increase assets. B) Decrease stockholders' equity. C) Decrease liabilities. D) No net effect. Answer: D Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 82) On January 1, Brad Inc. sold $30,000 in products to a customer on account. Then on January 10, Brad collected the cash on that account. What is the impact on Brad's accounting equation from the collection of cash on January 10? A) No net effect on the accounting equation. B) Assets increase and liabilities decrease. C) Assets decrease and liabilities decrease. D) Assets increase and stockholders' equity increases. Answer: A Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 83) On September 10, MFP Co. paid employee salaries of $7,000 owed to its employees last month. What are the effects of this transaction on the accounting equation? A) Expenses increase and liabilities increase. B) Assets decrease and liabilities decrease. C) Assets decrease and expenses decrease. D) Expenses decrease and liabilities decrease. Answer: B Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 25 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

84) Following are transactions of Gotebo Tanners, Inc., a new company, during the month of January: Issued 10,000 shares of common stock for $15,000 cash. Purchased land for $12,000, signing a note payable for the full amount. Purchased office equipment for $1,200 cash. Received cash of $14,000 for services provided to customers during the month. Purchased $300 of office supplies on account. Paid employees $10,000 for their first month's salaries. What was the total amount of Gotebo's liabilities following these six transactions? A) $12,300. B) $27,300. C) $22,600. D) $15,500. Answer: A Explanation: Liabilities = ($12,000 + $300) = $12,300. Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

85) Following are transactions of Gotebo Tanners, Inc., a new company, during the month of January: Issued 10,000 shares of common stock for $15,000 cash. Purchased land for $12,000, signing a note payable for the full amount. Purchased office equipment for $1,200 cash. Received cash of $14,000 for services provided to customers during the month. Purchased $300 of office supplies on account. Paid employees $10,000 for their first month's salaries. How many of these transactions decreased Gotebo's total assets? A) One. B) Two. C) Three. D) Four. Answer: A Explanation: Transaction #6. Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

86) Following are transactions of Gotebo Tanners, Inc., a new company, during the month of January: Issued 10,000 shares of common stock for $15,000 cash. Purchased land for $12,000, signing a note payable for the full amount. Purchased office equipment for $1,200 cash. Received cash of $14,000 for services provided to customers during the month. Purchased $300 of office supplies on account. Paid employees $10,000 for their first month's salaries. How many of these transactions increased Gotebo's liabilities? A) Four. B) Three. C) Two. D) One. Answer: C Explanation: Transactions #2 and #5. Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

87) Consider the following transactions: Issued common stock for cash. Purchased equipment by signing a note payable. Paid rent for the current month. Collected cash from customers on account. How many of these transactions increased the company's total assets? A) One. B) Two. C) Three. D) Four. Answer: B Explanation: (1) Issued common stock for cash, and (2) purchased equipment by signing a note payable. Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 88) How many of the following transactions would increase total assets in the current period? • Collect cash from customer prior to providing service. • Provide services to customer and receive cash at time of service. • Provide services on account to customer. • Collect cash from customer for services provided on account. A) One. B) Two. C) Three. D) Four. Answer: C Explanation: (1) Collect cash from customer prior to providing service, (2) provide services to customer and receive cash at time of service, and (3) provide services on account to customer. Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

89) How many of the following transactions would increase total liabilities in the current period? • Pay for advertising that will not occur until the following period. • Collect cash from customer prior to providing service. • Incur, but not pay, utilities cost in the current period. • Order supplies that have not yet been received. A) One. B) Two. C) Three. D) Four. Answer: B Explanation: (1) Collect cash from customer prior to providing service, and (2) incur, but not pay, utilities cost in the current period. Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 90) How many of the following transactions would increase total stockholders' equity in the current period? • Pay dividends to stockholders. • Delay payment on supplies purchased until the following period. • Provide services on account to customers. • Borrow cash from a local bank. A) One. B) Two. C) Three. D) Four. Answer: A Explanation: Provide services on account to customers. Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

91) How many of the following transactions would decrease total stockholders' equity in the current period? • Pay dividends to stockholders. • Delay payment on supplies purchased until the following period. • Provide services on account to customers. • Borrow cash from a local bank. A) One. B) Two. C) Three. D) Four. Answer: A Explanation: Pay dividends to stockholders. Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

92) Assume that Sallisaw Sideboards, Inc. had a retained earnings balance of $10,000 on April 1, and that the company had the following transactions during April. Issued common stock for cash, $5,000. Provided services to customers on account, $2,000. Provided services to customers in exchange for cash, $900. Purchased equipment and paid cash, $4,300. Paid April rent, $800. Paid employees' salaries for April, $700. What was Sallisaw's retained earnings balance at the end of April? A) $11,400. B) $12,100. C) $16,400. D) Some other amount. Answer: A Explanation: Beginning retained earnings $10,000 + Net income $1,400 − Dividends $0 = Ending retained earnings $11,400. Net Income = Revenue ($2,000 + $900) − Expenses ($800 + $700) = $1,400. Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

93) Consider the following transactions: Issued common stock for cash. Purchased equipment by signing a note payable. Provided services to customers on account. Collected cash from customers on account. How many of these transactions increased the company's total liabilities? A) One. B) Two. C) Three. D) Four. Answer: A Explanation: Purchased equipment by signing a note payable. Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 94) Which of the following transactions causes a decrease in stockholders' equity? A) Pay dividends to stockholders. B) Obtain cash by borrowing from a local bank. C) Provide services to customers on account. D) Purchase office equipment for cash. Answer: A Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

95) How many of the following events would require an expense to be recorded? Ordering office supplies. Hiring a receptionist. Paying employees' salaries for the current month. Receiving, but not paying, a current utility bill. Paying for insurance in advance. A) One. B) Two. C) Three. D) Four. Answer: B Explanation: (1) Paying employee salaries for the current month, and (2) receiving, but not paying, a current utility bill. Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 96) Which of the following is NOT possible for a business transaction? A) Increase assets and decrease revenue. B) Decrease assets and increase expenses. C) Increase liabilities and increase expenses. D) Decrease liabilities and increase revenue. Answer: A Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

97) Which of the following transactions would cause a decrease in both assets and stockholders' equity? A) Paying insurance premium for the next two years. B) Purchasing office equipment on account. C) Paying advertising for the current month. D) Providing services to customers on account. Answer: C Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 98) When a company issues common stock for cash, what is the effect on the accounting equation for the company? A) Assets increase and liabilities increase. B) Assets increase and stockholders' equity increases. C) Assets decrease and liabilities decrease. D) Liabilities decrease and stockholders' equity increases. Answer: B Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

99) If the liabilities of a company increased by $55,000 during a month and the stockholders' equity decreased by $21,000 during that same month, did assets increase or decrease and by how much? A) $34,000 increase. B) $55,000 increase. C) $34,000 decrease. D) $76,000 increase. Answer: A Explanation: Increase in Liabilities ($55,000) − Decrease in Stockholders' Equity ($21,000) = Increase in Assets ($34,000). Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement 100) Which of the following transactions would cause an increase in both the assets and liabilities of a company? A) Pay for the current month's rent. B) Pay for inventory purchased 90 days ago. C) Purchase a building by issuing a note payable. D) Provide services on account. Answer: C Explanation: One asset (building) and one liability (notes payable) increases. Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

101) When a company pays cash for equipment, what is the effect on the accounting equation for that company? A) Increase assets and increase liabilities. B) Decrease assets and decrease liabilities. C) No net change. D) Increase assets and increase stockholders' equity. Answer: C Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 102) "Record revenue when goods or services are provided to customers" is the definition of which principle in accounting? A) Trial balance. B) Debits and credits. C) Revenue recognition. D) Accounting equation. Answer: C Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 103) Which of the following is possible for a particular business transaction? A) Increase assets and decrease liabilities. B) Decrease one asset and increase another asset. C) Decrease assets and increase stockholders' equity. D) Decrease liabilities and increase expenses. Answer: B Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 37 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

104) Which of the accounts are decreased on the debit side and increased on the credit side? A) Liabilities, stockholders' equity, and revenues. B) Dividends, liabilities, and assets. C) Expenses, dividends, and stockholders' equity. D) Assets, dividends, and expenses. Answer: A Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 105) Which of the following is true about a "debit"? I. It is part of the double-entry procedure that keeps the accounting equation in balance. II. It represents an increase to assets. III. It represents a decrease to liabilities. IV. It is on the right side of a T-account. A) I and II. B) IV only. C) I, II, and III. D) I, II, III, and IV. Answer: C Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

106) Which of the following is true about a "credit"? I. It is part of the double-entry procedure that keeps the accounting equation in balance. II. It represents a decrease to assets. III. It represents an increase to liabilities. IV. It is on the right side of a T-account. A) I and II. B) IV only. C) I, II, and III. D) I, II, III, and IV. Answer: D Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 107) Assets normally carry a ________ balance and are shown in the ________. A) Debit; Statement of stockholders' equity B) Debit; Income statement C) Credit; Balance sheet D) Debit; Balance sheet Answer: D Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement; FN Reporting

108) Revenues normally carry a ________ balance and are shown in the ________. A) Debit; Statement of stockholders' equity B) Credit; Income statement C) Credit; Balance sheet D) Debit; Balance sheet Answer: B Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement; FN Reporting 109) Dividends normally carry a ________ balance and are shown in the ________. A) Debit; Statement of stockholders' equity B) Debit; Income statement C) Credit; Balance sheet D) Debit; Balance sheet Answer: A Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement; FN Reporting 110) Expenses normally carry a ________ balance and are shown in the ________. A) Debit; Statement of stockholders' equity B) Debit; Income statement C) Credit; Balance sheet D) Debit; Balance sheet Answer: B Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement; FN Reporting

111) Liabilities normally carry a ________ balance and are shown in the ________. A) Debit; Statement of stockholders' equity B) Debit; Income statement C) Credit; Balance sheet D) Debit; Balance sheet Answer: C Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement; FN Reporting 112) Which of the following accounts has a debit balance? A) Accounts Payable. B) Deferred Revenue. C) Service Revenue. D) Salaries Expense. Answer: D Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 113) Which of the following accounts would normally have a credit balance? A) Accounts Payable, Service Revenue, Common Stock. B) Salaries Payable, Deferred Revenue, Delivery Expense. C) Income Tax Payable, Service Revenue, Dividends. D) Cash, Repairs and Maintenance Expense, Dividends. Answer: A Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

114) Which of the following accounts would normally have a debit balance? A) Accounts Payable, Service Revenue, Common Stock. B) Salaries Payable, Deferred Revenue, Utilities Expense. C) Income Tax Payable, Service Revenue, Dividends. D) Cash, Delivery Expense, Dividends. Answer: D Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 115) Which of the following accounts would normally have a debit balance and appear in the balance sheet? A) Accounts Receivable. B) Deferred Revenue. C) Salaries Expense. D) Dividends. Answer: A Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement; FN Reporting 116) Which of the following accounts has a credit balance? A) Salaries Expense. B) Accounts Payable. C) Land. D) Prepaid Rent. Answer: B Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

117) An increase to an asset account is shown with a ________. An increase to a liability account is shown with a ________. A) Debit; Debit B) Credit; Debit C) Debit; Credit D) Credit; Credit Answer: C Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 118) An increase to an expense account is shown with a ________. An increase to a revenue account is shown with a ________. A) Debit; Debit B) Debit; Credit C) Credit; Debit D) Credit; Credit Answer: B Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 119) An increase to an asset account is shown with a ________. A decrease to an asset account is shown with a ________. A) Debit; Debit B) Credit; Debit C) Debit; Credit D) Credit; Credit Answer: C Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 43 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

120) Which of the accounts are increased with a debit and decreased with a credit? A) Liabilities, stockholders' equity, and revenues. B) Dividends, liabilities, and assets. C) Expenses, dividends, and stockholders' equity. D) Assets, dividends, and expenses. Answer: D Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 121) Consider the following list of accounts: Cash Service Revenue Salaries Expense Accounts Payable Equipment Retained Earnings Utilities Expense Accounts Receivable Common Stock Dividends How many of these accounts have a normal debit balance? A) Four. B) Five. C) Six. D) Seven. Answer: C Explanation: Cash, Salaries Expense, Equipment, Utilities Expense, Accounts Receivable, Dividends. Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

122) Consider the following list of accounts: Accounts Payable Cash Prepaid Rent Common Stock Salaries Payable Equipment Supplies Rent Expense How many of these accounts have a normal credit balance? A) Two. B) Three. C) Four. D) Five. Answer: B Explanation: Accounts Payable, Common Stock, Salaries Payable. Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

123) Consider the following accounts: Utilities Expense Accounts Payable Service Revenue Common Stock How many of these accounts are increased with debits? A) One. B) Two. C) Three. D) Four. Answer: A Explanation: Utilities Expense. Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 124) Which one of the following accounts will have a normal credit balance? A) Dividends. B) Salary Expense. C) Supplies. D) Common Stock. Answer: D Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

125) Consider the following accounts: Dividends Insurance Expense Cash Service Revenue How many of these accounts are increased with credits? A) One. B) Two. C) Three. D) Four. Answer: A Explanation: Service Revenue. Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 126) When viewing a company's accounting records, the terms "debit" and "credit" would typically be seen in which location? A) Financial statements B) Source documents C) Chart of accounts D) Journal Answer: D Difficulty: 1 Easy Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking

127) Cooper Law Offices has the following source document from one of its suppliers:

Description Legal paper Ink cartridge

Invoice Number: Date of purchase: Payment due:

Allen Office Supplies Price per Quantity unit 100 $ 15 40 $ 30

Total $ 1,500 $ 1,200 $ 2,700

#127874 January 17, 2021 30 days from date of purchase

What should Cooper record on the date of the purchase? A) Debit Cash; Credit Accounts Receivable for $2,700. B) Debit Supplies; Credit Accounts Payable for $2,700. C) Debit Accounts Payable; Credit Cash for $2,700. D) Debit Accounts Receivable; Credit Sales Revenue for $2,700. Answer: B Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 128) The term commonly used in accounting to describe the format for recording a transaction is: A) Chart of accounts. B) Trial balance. C) General ledger. D) Journal entry. Answer: D Difficulty: 1 Easy Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking

129) Which of the following is the appropriate debit/credit format for recording a business transaction? A. B. C. D.

Credit Name Debit Name Debit Amount Credit Amount Debit Name Credit Name Credit Name Debit Name

Credit Amount Debit Amount Debit Name Credit Name Debit Amount Credit Amount Debit Amount Credit Amount

A) Option A B) Option B C) Option C D) Option D Answer: C Difficulty: 1 Easy Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 130) The following statements pertain to recording transactions. Which of them are true? I. Total debits should equal total credits. II. It is possible to have multiple debits or credits in one journal entry. III. Assets are always listed first in journal entries. IV. Some journal entries will have debits only. A) I only. B) I and II. C) I, II, and IV. D) II, III, and IV. Answer: B Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

131) Which of the following is not a possible journal entry? A) Credit assets; Debit expenses. B) Debit assets; Debit stockholders' equity. C) Credit revenues; Debit assets. D) Debit expenses; Credit liabilities. Answer: B Difficulty: 3 Hard Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 132) Providing services on account would be recorded with a: A) Debit to Service Revenue. B) Credit to Accounts Receivable. C) Credit to Accounts Payable. D) Debit to Accounts Receivable. Answer: D Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 133) Xenon Corporation borrows $75,000 from First Bank. Xenon Corporation records this transaction with a: A) Debit to Investments. B) Credit to Retained Earnings. C) Credit to Notes Payable. D) Credit to Interest Expense. Answer: C Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

134) Childers Service Company provides services to customers totaling $3,000, for which it billed the customers. How would the transaction be recorded? A) Debit Cash $3,000, credit Service Revenue $3,000. B) Debit Accounts Receivable $3,000, credit Service Revenue $3,000. C) Debit Accounts Receivable $3,000, credit Cash $3,000. D) Debit Service Revenue $3,000, credit Accounts Receivable $3,000. Answer: B Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 135) A company received a bill for newspaper advertising services, $400. The bill will be paid in 10 days. How would the transaction be recorded today? A) Debit Advertising Expense $400, credit Accounts Payable $400. B) Debit Accounts Payable $400, credit Advertising Expense $400. C) Debit Accounts Payable $400, credit Cash $400. D) Debit Advertising Expense $400, credit Cash $400. Answer: A Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 136) When a company pays utilities of $1,800 in cash, the transaction is recorded as: A) Debit Utilities Expense $1,800, credit Utilities Payable $1,800. B) Debit Utilities Payable $1,800, credit Cash $1,800. C) Debit Cash $1,800, credit Utilities Expense $1,800. D) Debit Utilities Expense $1,800, credit Cash $1,800. Answer: D Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

137) Assume that cash is paid for rent to cover the next year. The appropriate debit and credit would be: A) Debit Rent Expense, credit Cash. B) Debit Prepaid Rent, credit Rent Expense. C) Debit Prepaid Rent, credit Cash. D) Debit Cash, credit Prepaid Rent. Answer: C Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 138) Summer Leasing received $12,000 from a customer to cover 24 months of rent in advance. How should Summer record this transaction? A) Debit Prepaid Rent; credit Rent Expense. B) Debit Cash; credit Deferred Revenue. C) Debit Cash; credit Service Revenue. D) Debit Rent Expense; credit Cash. Answer: B Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 139) Styleson Inc. performed cleaning services for its customers for cash. These transactions would be recorded as: A) Debit Service Revenue, credit Cash. B) Debit Cash, credit Service Revenue. C) Debit Cash, credit Accounts Receivable. D) Debit Accounts Receivable, credit Service Revenue. Answer: B Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

140) Assume that $18,000 cash is paid for insurance to cover the next year. The appropriate debit and credit would be: A) Debit Insurance Expense $18,000, credit Prepaid Insurance $18,000. B) Debit Prepaid Insurance $18,000, credit Insurance Expense $18,000. C) Debit Prepaid Insurance $18,000, credit Cash $18,000. D) Debit Cash $18,000, credit Prepaid Insurance $18,000. Answer: C Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 141) Providing services to customers for $1,000 on account is recorded as: A) Debit Accounts Receivable $1,000, credit Service Revenue $1,000. B) Debit Service Revenue $1,000, credit Cash $1,000. C) Debit Cash $1,000, credit Accounts Receivable $1,000. D) Debit Service Revenue $1,000, credit Accounts Receivable $1,000. Answer: A Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 142) Issuing common stock for $5,000 cash is recorded as: A) Debit Cash $5,000, credit Service Revenue $5,000. B) Debit Cash $5,000, credit Common Stock $5,000. C) Debit Cash $5,000, credit Dividends $5,000. D) Debit Common Stock $5,000, credit Cash $5,000. Answer: B Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

143) Purchasing equipment for $10,000 cash is recorded as: A) Debit Cash $10,000, credit Equipment $10,000. B) Debit Equipment $10,000, credit Notes Payable $10,000. C) Debit Equipment $10,000, credit Cash $10,000. D) Debit Notes Payable $10,000, credit Equipment $10,000. Answer: C Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 144) Schooner Inc. purchased equipment by signing a note payable. This transaction would be recorded as: A) Debit Equipment, credit Cash. B) Debit Cash, credit Notes Payable. C) Debit Notes Payable, credit Equipment. D) Debit Equipment, credit Notes Payable. Answer: D Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 145) When a company pays $2,500 dividends to its stockholders, the transaction should be recorded as: A) Debit Cash; credit Dividends. B) Debit Retained Earnings; credit Dividends. C) Debit Dividends; credit Cash. D) Debit Dividends; credit Accounts Payable. Answer: C Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

146) Daniel Dino Restaurant owes employees' salaries of $15,000. This would be recorded as: A) Debit Salaries Expense, credit Cash. B) Debit Salaries Payable, credit Cash. C) Debit Salaries Expense, credit Salaries Payable. D) Debit Salaries Payable, credit Salaries Expense. Answer: C Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 147) Jerome purchased a building for his business by signing a note to be repaid over the next ten years. Which of the following correctly describes how to record this transaction? A) Debit assets, credit liabilities. B) Debit assets, credit stockholders' equity. C) Debit liabilities, credit assets. D) Debit expenses, credit liabilities. Answer: A Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 148) Incurring an expense for advertising on account would be recorded by: A) Debiting a liability account. B) Crediting an asset account. C) Debiting an expense account. D) Debiting an asset account. Answer: C Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

149) Tyler Incorporated receives $150,000 from investors in exchange for shares of its common stock. Tyler Incorporated records this transaction with a: A) Debit to Investments. B) Credit to Retained Earnings. C) Credit to Common Stock. D) Credit to Service Revenue. Answer: C Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 150) The owner of an office building should report rent collected in advance as a debit to Cash and a credit to: A) A liability. B) An asset other than Cash. C) Revenue. D) Stockholders' equity. Answer: A Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 151) Clement Company paid an account payable related to a previous utility bill of $1,000. This transaction should be recorded as follows on the payment date: A) Debit Accounts Payable $1,000, credit Cash $1,000. B) Debit Cash $1,000, credit Accounts Payable $1,000. C) Debit Utilities Expense $1,000, credit Cash $1,000. D) Debit Cash $1,000, credit Utilities Expense $1,000. Answer: A Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

152) On July 7, Saints Incorporated received $10,000 in cash from a customer for services to be provided on October 10. Which of the following describes how the transaction should be recorded on July 7? A) Debit Cash $10,000, credit Service Revenue $10,000. B) Debit Accounts Receivable $10,000, credit Service Revenue $10,000. C) Debit Cash $10,000, credit Deferred Revenue $10,000. D) Debit Deferred Revenue $10,000, credit Cash $10,000. Answer: C Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 153) On December 1, Bears Lawn Maintenance, Inc. signed a contract with a retailer to supply maintenance for the next calendar year. How should this transaction be recorded on December 1? A) Debit Cash, credit Service Revenue. B) Debit Cash, credit Accounts Receivable. C) Debit Accounts Receivable, credit Service Revenue. D) No transaction should be recorded on December 1. Answer: D Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 154) Sooner purchased office supplies on account. The transaction would be recorded as: A) Debit Supplies, Credit Cash B) Debit Cash, Credit Accounts Payable C) Debit Accounts Payable, Credit Supplies D) Debit Supplies, Credit Accounts Payable Answer: D Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

155) Tomlin & Company provides music for special occasions. On January 14, the Smith family hired Tomlin for an upcoming family wedding for an agreed-upon fee of $10,000. The wedding was scheduled for May 23. As part of the agreement, the Smiths paid Tomlin half of the fee at the end of April with the remaining amount due by the end of June. How would Tomlin record the receipt of the final payment in June? A) Credit to Accounts Receivable. B) Credit to Service Revenue. C) Credit to Cash. D) Debit to Deferred Revenue. Answer: A Difficulty: 3 Hard Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 156) Bostel wanted to expand the size of its warehouse in order to generate more profits. The company decided to purchase the building adjacent to its existing warehouse. The company pays for the building by borrowing from the bank. The purchase would be recorded as: A) Debit Cash; credit Notes Payable. B) Debit Buildings; credit Cash. C) Debit Buildings; credit Notes Payable. D) Debit Cash and Buildings; credit Notes Payable. Answer: C Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

157) On July 5, Harris Company purchased supplies from the hardware store for $600 on account. On July 10, Harris receives a bill from the hardware store as a reminder about the account balance. On July 17, Harris pays the account in full. How does Harris record the transaction on July 17? A. Supplies Accounts Payable B. Accounts Payable Supplies C. Cash Accounts Payable D. Accounts Payable Cash

600 600 600 600 600 600 600 600

A) Option A B) Option B C) Option C D) Option D Answer: D Difficulty: 3 Hard Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 158) On July 31, ALOE Inc. received $5,000 cash from a customer who previously purchased ALOE's products on account. What entry should ALOE Inc. record at the time it receives cash? A) Debit Accounts Receivable, $5,000; credit Cash, $5,000. B) Debit Cash, $5,000; credit Accounts Receivable, $5,000. C) Debit Cash, $5,000; credit Accounts Payable, $5,000. D) Debit Cash, $5,000; credit Service Revenue, $5,000. Answer: B Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

159) A transaction is initially recorded in the ________, and then subsequently posted to the general ________. A) Debit; Credit B) Statement; Account C) Journal; Ledger D) Chart; Statement Answer: C Difficulty: 2 Medium Topic: Recording Transactions in a Journal; Posting to the General Ledger Learning Objective: 02-04 Record transactions in a journal using debits and credits.; 02-05 Post transactions to the general ledger. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 160) An account balance represents: A) A chart showing the list of all accounts used to record transactions. B) The net amount of all debits and credits posted to an account over a period of time. C) All transactions that affect net income for the period. D) The equality of debits and credits in the accounting records. Answer: B Difficulty: 1 Easy Topic: Posting to the General Ledger Learning Objective: 02-05 Post transactions to the general ledger. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 161) Posting is the process of: A) Analyzing the impact of the transaction on the accounting equation. B) Obtaining information about external transactions from source documents. C) Transferring the debit and credit information from the journal to individual accounts in the general ledger. D) Listing all accounts and their balances at a particular date. Answer: C Difficulty: 1 Easy Topic: Posting to the General Ledger Learning Objective: 02-05 Post transactions to the general ledger. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking

162) A debit in a journal entry is always posted to the general ledger as a(n): A) Increase. B) Credit. C) Decrease. D) Debit. Answer: D Difficulty: 2 Medium Topic: Posting to the General Ledger Learning Objective: 02-05 Post transactions to the general ledger. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 163) Posting transactions to T-accounts involves: A) Analyzing source documents to determine the effects of transactions on the company's accounts. B) Listing all accounts and their balances at a particular date to ensure that debits equal credits. C) Preparing a chronological record of all transactions affecting the company. D) Transferring debit and credit information from the journal to the accounts in the general ledger. Answer: D Difficulty: 2 Medium Topic: Posting to the General Ledger Learning Objective: 02-05 Post transactions to the general ledger. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

164) Below is the company's Cash T-account.

Beg. End.

Cash 1,200 5,200 3,300

3,100

The $3,100 amount could represent which of the following? A) Purchase of supplies on account. B) Ending balance of cash. C) Payment for salaries. D) Collection from customers. Answer: C Difficulty: 2 Medium Topic: Posting to the General Ledger Learning Objective: 02-05 Post transactions to the general ledger. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 165) Below is the company's Cash T-account.

Beg. End.

Cash 1,200 5,200 3,300

3,100

The $5,200 amount could represent which of the following? A) Purchase of supplies on account. B) Ending balance of cash. C) Payment for salaries. D) Collection from customers. Answer: D Difficulty: 2 Medium Topic: Posting to the General Ledger Learning Objective: 02-05 Post transactions to the general ledger. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

166) The figure below is a depiction of a T-account. Account 1,200

1,700 800 3,300

Beg. End.

Which of the following statements is correct? A) The account could be a liability account. B) During the period, a journal entry was recorded that included a credit to the account for $800. C) The amount reported to stockholders at the end of the period for this account is $3,300. D) All of the other answers provide a correct statement. Answer: D Difficulty: 2 Medium Topic: Posting to the General Ledger Learning Objective: 02-05 Post transactions to the general ledger. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 167) Following are transactions of Gotebo Tanners, Inc., a new company, during the month of January: Issued 10,000 shares of common stock for $15,000 cash. Purchased land for $12,000, signing a note payable for the full amount. Purchased office equipment for $1,200 cash. Received cash of $14,000 for services provided to customers during the month. Purchased $300 of office supplies on account. Paid employees $10,000 for their first month's salaries. What was the balance of Gotebo's Cash account following these six transactions? A) $29,800. B) $19,300. C) $17,800. D) $22,400. Answer: C Explanation: Cash = ($15,000 − $1,200 + $14,000 − $10,000) = $17,800. Difficulty: 3 Hard Topic: Posting to the General Ledger Learning Objective: 02-05 Post transactions to the general ledger. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 63 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

168) The Accounts Payable account has a beginning balance of $12,000 and the company purchased $50,000 of supplies on account during the month. The ending balance was $10,000. How much did the company pay to creditors during the month? A) $50,000. B) $52,000. C) $60,000. D) $62,000. Answer: B Explanation: $12,000 + $50,000 − $10,000 = $52,000. Difficulty: 3 Hard Topic: Posting to the General Ledger Learning Objective: 02-05 Post transactions to the general ledger. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 169) On March 3, Cobra Inc. purchased a desk for $450 on account. On March 22, Cobra purchased another desk for $500 also on account, and then on March 24, Cobra paid $400 on account. At the end of March, what amount should Cobra report for desks (assuming these two desks were the only desks they had)? A) $50. B) $450. C) $500. D) $950. Answer: D Explanation: $450 + $500 = $950 Difficulty: 3 Hard Topic: Posting to the General Ledger Learning Objective: 02-05 Post transactions to the general ledger. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

170) The Accounts Receivable account has a beginning balance of $10,000 and the company provides services of $50,000 on account during the month. The ending balance was $12,000. How much did the company receive from customers during the month? A) $50,000. B) $52,000. C) $48,000. D) $62,000. Answer: C Explanation: $10,000 + $50,000 − $12,000 = $48,000. Difficulty: 3 Hard Topic: Posting to the General Ledger Learning Objective: 02-05 Post transactions to the general ledger. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 171) A trial balance can best be explained as a list of: A) The income statement accounts used to calculate net income. B) Revenue, expense, and dividend accounts used to show the balances of the components of retained earnings. C) The balance sheet accounts used to show the equality of the accounting equation. D) All accounts and their balances at a particular date. Answer: D Difficulty: 1 Easy Topic: Trial Balance Learning Objective: 02-06 Prepare a trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 172) A trial balance represents the: A) Source documents used to determine the effects of transactions on the company's accounts. B) List of all accounts and their balances at a particular date to ensure that debits equal credits. C) Chronological record of all transactions affecting the company. D) Process of transferring debit and credit information from the journal to the accounts in the general ledger. Answer: B Difficulty: 1 Easy Topic: Trial Balance Learning Objective: 02-06 Prepare a trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 65 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

173) Lithuanian Motors has the following balance sheet accounts: Land Equipment Salaries Payable Notes Payable Supplies Cash Common Stock Retained Earnings Accounts Payable Prepaid Rent

$ 170,000 66,000 ? 88,000 14,000 26,000 100,000 40,000 ? 12,000

If the company has total assets of $288,000, what is the balance of the company's Salaries Payable account? A) $15,000. B) $25,000. C) $12,000. D) Cannot be determined given the information provided. Answer: D Explanation: Total liabilities + Stockholders' equity = ($288,000) = Accounts Payable (?) + Salaries Payable (?) + Notes Payable ($88,000) + Common Stock ($100,000) + Retained Earnings ($40,000); therefore, with two unknowns there is not enough information to solve the problem. Difficulty: 3 Hard Topic: Trial Balance Learning Objective: 02-06 Prepare a trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

174) Finnish Motors has the following balance sheet accounts: Land Equipment Salaries Payable Notes Payable Supplies Cash Common Stock Retained Earnings Accounts Payable Prepaid Rent

$ 150,000 90,000 12,000 99,000 10,000 25,000 40,000 100,000 ? ?

If the company has total liabilities and stockholders' equity of $290,000, what is the balance of the company's Prepaid Rent account? A) $15,000. B) $25,000. C) $12,000. D) $39,000. Answer: A Explanation: Total assets ($290,000) = Land ($150,000) + Equipment ($90,000) + Supplies ($10,000) + Cash ($25,000) + Prepaid Rent (?); therefore, Prepaid Rent = $15,000. Difficulty: 3 Hard Topic: Trial Balance Learning Objective: 02-06 Prepare a trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

175) Finnish Motors has the following balance sheet accounts: Land Equipment Salaries Payable Notes Payable Supplies Cash Common Stock Retained Earnings Accounts Payable Prepaid Rent

$ 150,000 90,000 12,000 99,000 10,000 25,000 40,000 100,000 ? ?

If the company has total assets of $290,000, what is the balance of the company's Accounts Payable account? A) $15,000. B) $25,000. C) $12,000. D) $39,000. Answer: D Explanation: Total liabilities and stockholders' equity ($290,000) = Salaries Payable ($12,000) + Notes Payable ($99,000) + Common Stock ($40,000) + Retained Earnings ($100,000) + Accounts Payable (?); therefore, Accounts Payable = $39,000. Difficulty: 3 Hard Topic: Trial Balance Learning Objective: 02-06 Prepare a trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

Match each step of the measurement process with its description. A) Assess whether the transaction results in a debit or credit to the account balance. B) Post transactions to the general ledger. C) Analyze the impact of the transaction on the accounting equation. D) Use source documents to identify accounts affected by an external transaction. E) Prepare a trial balance. F) Record transactions in a journal using debits and credits. 176) Step 6 Difficulty: 2 Medium Topic: External Transactions Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 177) Step 3 Difficulty: 2 Medium Topic: External Transactions Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 178) Step 5 Difficulty: 2 Medium Topic: External Transactions Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 179) Step 2 Difficulty: 2 Medium Topic: External Transactions Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

180) Step 4 Difficulty: 2 Medium Topic: External Transactions Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 181) Step 1 Difficulty: 2 Medium Topic: External Transactions Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking Answers: 176) E 177) A 178) B 179) C 180) F 181) D

Match each term with its definition. A) Activities of the company conducted with separate economic entities. B) Events that affect the financial position of the company but do not include an exchange with a separate economic entity. C) A summary of the effects of all transactions related to a particular item over a period of time. D) Full set of procedures used to accomplish the measurement/communication process of financial accounting. E) A list of all account names used to record transactions of a company. 182) Chart of accounts Difficulty: 2 Medium Topic: External Transactions Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 183) Internal transactions Difficulty: 2 Medium Topic: External Transactions Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 184) Accounting cycle Difficulty: 2 Medium Topic: External Transactions Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 185) External transactions Difficulty: 2 Medium Topic: External Transactions Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

186) Accounts Difficulty: 2 Medium Topic: External Transactions Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking Answers: 182) E 183) B 184) D 185) A 186) C

Match each term with how related transactions affect the accounting equation. A) Transactions that increase stockholders' equity. B) Transactions that decrease stockholders' equity related to distributions to stockholders. C) Transactions that affect the right side of the accounting equation not related to stockholders' equity. D) Transactions that affect the left side of the accounting equation. E) Transactions that decrease stockholders' equity related to cost of generating revenues. 187) Assets Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 188) Revenues Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 189) Liabilities Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 190) Dividends Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

191) Expenses Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking Answers: 187) D 188) A 189) C 190) B 191) E

Match each term with its description. A) Simplified form of a general ledger account. B) List of all accounts and their balances showing that debits equal credits. C) Right side of an account. D) Left side of an account. E) Format used to record transactions of a company. F) Chronological record of all transactions. 192) Debit Difficulty: 2 Medium Topic: Recording Transactions in a Journal; Posting to the General Ledger; Trial Balance Learning Objective: 02-04 Record transactions in a journal using debits and credits.; 02-05 Post transactions to the general ledger.; 02-06 Prepare a trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 193) Journal entry Difficulty: 2 Medium Topic: Recording Transactions in a Journal; Posting to the General Ledger; Trial Balance Learning Objective: 02-04 Record transactions in a journal using debits and credits.; 02-05 Post transactions to the general ledger.; 02-06 Prepare a trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 194) Journal Difficulty: 2 Medium Topic: Recording Transactions in a Journal; Posting to the General Ledger; Trial Balance Learning Objective: 02-04 Record transactions in a journal using debits and credits.; 02-05 Post transactions to the general ledger.; 02-06 Prepare a trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 195) Credit Difficulty: 2 Medium Topic: Recording Transactions in a Journal; Posting to the General Ledger; Trial Balance Learning Objective: 02-04 Record transactions in a journal using debits and credits.; 02-05 Post transactions to the general ledger.; 02-06 Prepare a trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

196) Trial balance Difficulty: 2 Medium Topic: Recording Transactions in a Journal; Posting to the General Ledger; Trial Balance Learning Objective: 02-04 Record transactions in a journal using debits and credits.; 02-05 Post transactions to the general ledger.; 02-06 Prepare a trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 197) T-account Difficulty: 2 Medium Topic: Recording Transactions in a Journal; Posting to the General Ledger; Trial Balance Learning Objective: 02-04 Record transactions in a journal using debits and credits.; 02-05 Post transactions to the general ledger.; 02-06 Prepare a trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking Answers: 192) D 193) E 194) F 195) C 196) B 197) A 198) Below are the steps in the measurement process of external transactions. Arrange them from first (1) to last (6). (a) Post the transaction to the T-accounts in the general ledger. (b) Assess whether the impact of the transaction results in a debit or credit to the account balance. (c) Use source documents to identify accounts affected by external transactions. (d) Analyze the impact of the transaction on the accounting equation. (e) Prepare a trial balance. (f) Record transactions using debits and credits. Answer: 1(c); 2(d); 3(b); 4(f); 5(a); 6(e) Difficulty: 2 Medium Topic: External Transactions Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

199) A company received a utility bill of $600 but did not pay it. Indicate the amount of increases and decreases in the accounting equation. Answer: Assets = Liabilities + Stockholders' Equity $0 = $600 + -$600 Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 200) A company purchases supplies on account for $1,700. Indicate the amount of increases and decreases in the accounting equation. Answer: Assets = Liabilities + Stockholders' Equity $1,700 = $1,700 + $0 Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 201) A company provides services to customers on account for $2,400. Indicate the amount of increases and decreases in the accounting equation. Answer: Assets = Liabilities + Stockholders' Equity $2,400 = $0 + $2,400 Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

202) A company pays $800 dividends to stockholders. Indicate the amount of increases and decreases in the accounting equation. Answer: Assets = Liabilities + Stockholders' Equity -$800 = $0 + -$800 Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 203) A company pays $1,300 for supplies previously purchased on account. Indicate the amount of increases and decreases in the accounting equation. Answer: Assets = Liabilities + Stockholders' Equity -$1,300 = -$1,300 + $0 Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

204) The following transactions occur for the Hamilton Manufacturers. (a) Provide services to customers on account for $4,500. (b) Purchase equipment by signing a note with the bank for $10,000. (c) Pay advertising of $1,500 for the current month. Analyze each transaction and indicate the amount of increases and decreases in the accounting equation. Answer: Assets = Liabilities + Stockholders' Equity (a) +$4,500 = $0 + +$4,500 (b) +$10,000 = +$10,000 + $0 (c) -$1,500 = $0 + -$1,500 Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 205) Using the notion that the accounting equation (Assets = Liabilities + Stockholders' Equity) must remain in balance, indicate whether each of the following transactions is possible. (a) Cash decreases; Accounts Payable decreases. (b) Salaries Expense increases; Salaries Payable decreases. (c) Accounts Receivable decreases; Service Revenue increases. Answer: (a) Yes; (b) No; (c) No Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

206) Suppose a company has the following balance sheet accounts: Accounts Land Building Salaries payable Common stock Accounts payable Cash Retained earnings Supplies Equipment

Balances $9,000 ? 3,700 ? 2,600 5,300 11,600 3,200 4,500

Calculate the missing amounts assuming the company has total assets of $40,000. Answer: Building = $18,000; Common stock = $22,100. Feedback: Building: Total Assets ($40,000) = Land ($9,000) + Building (?) + Cash ($5,300) + Supplies ($3,200) + Equipment ($4,500); therefore, Building = $18,000. Total Liabilities and Stockholders' Equity ($40,000) = Salaries Payable ($3,700) + Common Stock (?) + Accounts Payable ($2,600) + Retained Earnings ($11,600); therefore, Common Stock = $22,100. Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

207) For each of the following accounts, indicate whether a debit or credit is used to increase (+) or decrease (-) the balance of the account. Account (a) Common Stock (b) Liability (c) Asset (d) Revenue (e) Dividend (f) Retained Earnings (g) Expense

Debit

Credit

Answer: (a) -,+; (b) -,+; (c) +,-; (d) -,+; (e) +,-; (f) -,+; (g) +,Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 208) For each of the following accounts, indicate whether we use a debit or a credit to increase the balance of the account. (a) Accounts Receivable (b) Accounts Payable (c) Salaries Expense (d) Service Revenue (e) Supplies (f) Common Stock (g) Advertising Expense (h) Dividends Answer: (a) debit; (b) credit; (c) debit; (d) credit; (e) debit; (f) credit; (g) debit; (h) debit Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

209) For each of the following accounts, indicate whether we use a debit or a credit to decrease the balance of the account. (a) Accounts Receivable (b) Accounts Payable (c) Salaries Expense (d) Service Revenue (e) Supplies (f) Common Stock (g) Advertising Expense (h) Dividends Answer: (a) credit; (b) debit; (c) credit; (d) debit; (e) credit; (f) debit; (g) credit; (h) credit Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 210) A company issues common stock for $20,000 cash. Record the transaction. Answer: Cash 20,000 Common Stock 20,000 Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 211) A company purchases a building for $100,000, signing a note payable. Record the transaction. Answer: Building 100,000 Notes Payable 100,000 Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 82 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

212) A company purchases equipment for $15,000 cash. Record the transaction. Answer: Equipment 15,000 Cash 15,000 Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 213) A company purchases office supplies on account for $7,500. Record the transaction. Answer: Office Supplies 7,500 Accounts Payable 7,500 Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 214) A company provides services to customers on account, $3,500. Record the transaction. Answer: Accounts Receivable 3,500 Service Revenue 3,500 Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

215) A company provides services to customers for $2,400 cash. Record the transaction. Answer: Cash 2,400 Service Revenue 2,400 Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 216) A company pays employees' salaries of $4,200 for the current period. Record the transaction. Answer: Salaries Expense 4,200 Cash 4,200 Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 217) A company pays $2,000 dividends to its stockholders. Record the transaction. Answer: Dividends 2,000 Cash 2,000 Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

218) A company collects $4,000 cash from customers for services previously provided on account. Record the transaction. Answer: Cash 4,000 Accounts Receivable 4,000 Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 219) A company receives $6,500 cash in advance from customers for services to be provided next year. Record the transaction. Answer: Cash 6,500 Deferred Revenue 6,500 Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 220) A company pays $5,400 for maintenance in the current period. Record the transaction. Answer: Maintenance Expense 5,400 Cash 5,400 Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

221) A company pays $12,000 to purchase a one-year insurance policy. Record the transaction. Answer: Prepaid Insurance 12,000 Cash 12,000 Difficulty: 2 Medium Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 222) Record the following transactions for Acme Builders: (a) Purchase office supplies on account, $1,200. (b) Provide services to customers for cash, $2,500. (c) Pay $1,100 in salaries for the current month. Answer: (a) Supplies 1,200 Accounts Payable 1,200 (b) Cash 2,500 Service Revenue 2,500 (c) Salaries Expense 1,100 Cash 1,100 Difficulty: 3 Hard Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

223) Record the following transactions for the Stroud Music Store: (a) Provide music lessons to students for $12,000 on account. (b) Purchase music supplies on account, $1,500. (c) Pay rent for the current month, $2,000. (d) Receive $10,000 cash from students in (a) above. Answer: (a) Accounts Receivable 12,000 Service Revenue 12,000 (b) Supplies 1,500 Accounts Payable 1,500 (c) Rent Expense 2,000 Cash 2,000 (d) Cash 10,000 Accounts Receivable 10,000 Difficulty: 3 Hard Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

224) Rite Shoes was involved in the transactions described below. Record each transaction. If an entry is not required, state "No Entry." (a) Purchased $8,200 of supplies on account. (b) Paid weekly salaries, $920. (c) Provided services to customers on account, $5,300. (d) Paid for supplies purchased in (a) above. (e) Placed an order for $6,200 of supplies. Answer: (a) Supplies 8,200 Accounts Payable 8,200 (b) Salaries expense 920 Cash 920 (c) Accounts Receivable 5,300 Service Revenue 5,300 (d) Accounts Payable 8,200 Cash 8,200 (e) No Entry. Difficulty: 3 Hard Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

225) Record the following transactions. If an entry is not required, state "No Entry." (a) Started business by issuing 10,000 shares of common stock for $20,000. (b) Hired Rebecca as an administrative assistant, promising to pay her $2,000 every two weeks. (c) Rented a building for three years at $500 per month and paid six months' rent in advance. (d) Purchased equipment for $5,400 cash. (e) Purchased $1,800 of supplies on account. (f) Provided services to customers for $7,800 cash. (g) Paid employees' salaries, $5,200. (h) Paid for supplies purchased in item (e). (i) Paid $800 for current advertising in a local newspaper. (j) Paid utility bill of $1,300 for the current month. Answer: (a) Cash 20,000 Common Stock 20,000 (b) No Entry. (c) Prepaid Rent 3,000 Cash 3,000 (d) Equipment 5,400 Cash 5,400 (e) Supplies 1,800 Accounts Payable 1,800 (f) Cash 7,800 Service Revenue 7,800 (g) Salaries expense 5,200 Cash 5,200 (h) Accounts Payable 1,800 Cash 1,800 (i) Advertising Expense 800 Cash 800 (j) Utilities Expense 1,300 Cash 1,300 Difficulty: 3 Hard Topic: Recording Transactions in a Journal Learning Objective: 02-04 Record transactions in a journal using debits and credits. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

226) Consider the following T-account for Accounts Payable. Accounts Payable 10,200 8,800 4,500 1. Compute the balance of the Accounts Payable account. 2. Give an example of a transaction that would have resulted in the $8,800 posting to the account. 3. Give an example of a transaction that would have resulted in the $4,500 posting to the account. Answer: 1. $10,200 - $8,800 + $4,500 = $5,900. 2. Postings on the left side (or debit side) of the Accounts Payable T-account represent decreases to accounts payable, such as making a payment on the account. 3. Postings on the right side (or credit side) of the Accounts Payable T-account represent increases to accounts payable, such as purchasing office supplies on account. Difficulty: 3 Hard Topic: Posting to the General Ledger Learning Objective: 02-05 Post transactions to the general ledger. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

227) Consider the following transactions for Mittel Corporation: a. Issue common stock for $10,000. b. Purchase equipment for $11,500 cash. c. Pay employees' salaries of $3,700. e. Provide services to customers for $6,200 cash. 1. Post these transactions to the Cash T-account. Assume the balance of Cash before these transactions is $4,200. 2. Calculate the ending balance of the Cash account. Answer:

Cash 4,200 10,000 11,500 6,200 3,700 5,200 Difficulty: 3 Hard Topic: Posting to the General Ledger Learning Objective: 02-05 Post transactions to the general ledger. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

228) Use the following information to prepare a trial balance. Cash Deferred revenue Prepaid insurance Accounts payable Retained earnings Utilities expense Dividends Salaries expense Accounts receivable Common stock Service revenue Maintenance expense

$6,200 1,200 1,200 1,900 1,600 3,000 1,200 2,200 3,400 6,200 7,100 800

Answer: Trial Balance Debit Credit Cash $6,200 Accounts Receivable 3,400 Prepaid insurance 1,200 Accounts payable $1,900 Deferred revenue 1,200 Common stock 6,200 Retained earnings 1,600 Dividends 1,200 Service revenue 7,100 Salaries expense 2,200 Utilities expense 3,000 Maintenance expense 800 Totals $18,000 $18,000 Difficulty: 3 Hard Topic: Trial Balance Learning Objective: 02-06 Prepare a trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

229) Below is a list of activities.

Transaction Assets 1. Obtain a loan at the bank Increase 2. Issue common stock to stockholders for cash. 3. Purchase equipment for cash. 4. Pay cash for insurance in advance. 5. Pay cash for employees' salaries in the current period. 6. Pay accounts payable. 7. Purchase office supplies on account. 8. Provide services to customers for cash. 9. Provide services to customers on account. 10. Pay cash dividends to stockholders. 11. Pay cash for utilities in the current period.

= Liabilities = Increase

Stockholders' + Equity + No Effect

Required: For each activity, indicate whether the transaction increases, decreases, or has no effect on assets, liabilities, and/or stockholders' equity.

Answer: Transaction 1. Obtain a loan at the bank. 2. Issue common stock to stockholders for cash. 3. Purchase equipment for cash. 4. Pay cash for insurance in advance. 5. Pay cash for employees' salaries in the current period. 6. Pay accounts payable. 7. Purchase office supplies on account. 8. Provide services to customers for cash. 9. Provide services to customers on account. 10. Pay cash dividends to stockholders. 11. Pay cash for utilities in the current period.

Assets Increase

Stockholders' = Liabilities + Equity = Increase + No effect

Increase = No effect No effect* = No effect

+ Increase + No effect

No effect* = No effect

+ No effect

Decrease Decrease

= No effect = Decrease

+ Decrease + No effect

Increase

= Increase

+ No effect

Increase

= No effect

+ Increase

Increase

= No effect

+ Increase

Decrease

= No effect

+ Decrease

Decrease

= No effect

+ Decrease

*One asset increases and another asset decreases. Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

230) Below is a list of activities.

Transaction Assets = Liabilities 1. Issue common stock in exchange for cash, $15,000 +$15,000 = $0 2. Purchase equipment for cash, $20,000. 3. Pay cash for insurance in advance, $2,400. 4. Pay cash for employees' salaries in the current period, $17,200. 5. Pay accounts payable, $1,000. 6. Purchase office supplies on account, $3,750. 7. Provide services to customers for cash, $6,800. 8. Provide services to customers on account, $12,300. 9. Pay cash dividends to stockholders, $2,500. 10. Pay cash for utilities in the current period, $1,200. Totals

Stockholders' + Equity +

+$15,000

Required: For each activity, indicate the impact on the accounting equation. After doing all the transactions, ensure that the accounting equation remains in balance.

Answer: Transaction 1. Issue common stock in exchange for cash, $15,000. 2. Purchase equipment for cash, 20,000. 3. Pay cash for insurance in advance, $2,400.

Assets

Stockholders' = Liabilities + Equity

+$15,000 =

$0 +

+$15,000

+$20,000 = -$20,000

$0 +

+$2,400 = -$2,400

$0 +

4. Pay cash for employees' salaries in the current period, $7,200. -$17,200 = $0 + -$17,200 5. Pay accounts payable, $1,000. -$1,000 = -$1,000 + $0 6. Purchase office supplies on account, $3,750. +$3,750 = +$3,750 + $0 7. Provide services to customers for cash, $6,800. +$6,800 = $0 + +$6,800 8. Provide services to customers on account, $12,300. +$12,300 = $0 + +$12,300 9. Pay cash dividends to stockholders, $2,500. -$2,500 = $0 + -$2,500 10. Pay cash for utilities in the current period, $1,200. -$1,200 = $0 + -$1,200 Totals +$15,950 = +$2,750 + +$13,200 Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

231) Reed owns a consulting services company, while Sophie operates an auto maintenance shop. For the month of June, the following transactions occurred.

June 2 June 5 June 7 June 14 June 19 June 25 June 28 June 30

Sophie decides that she would like consulting services at the end of the month and pays Reed $300 in advance. Sophie provides maintenance services to Reed on account, $175. Reed borrows $500 from Sophie by signing a note to repay her. Sophie purchases maintenance supplies from Tap Corporation, paying cash of $250. Reed pays $175 to Sophie for maintenance services provided on June 5. Reed pays the utility bill for the month of June, $200. Sophie receives consulting services from Reed, equaling the amount paid on June 2. Reed pays $500 to Sophie for money borrowed on June 7.

Required: Record each transaction for Reed. Keep in mind that Reed may not need to record all transactions.

Answer: Transactions for Reed June 2

Debit 300

Credit

Cash Deferred Revenue 300 (Receive cash in advance from customer) June 5 Maintenance Expense 175 Accounts Payable 175 (Receive maintenance services on account) June 7 Cash 500 Notes Payable 500 (Receive cash and sign note payable) June 14 No entry for Reed. June 19 Accounts Payable 175 Cash 175 (Pay cash on account) June 25 Utilities Expense 200 Cash 200 (Pay utilities for the current month) June 28 Deferred Revenue 300 Service Revenue 300 (Provide service previously paid) June 30 Notes Payable 500 Cash 500 (Pay cash on note payable) Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation; Effects of Debits and Credits on Account Balances; Recording Transactions in a Journal Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.; 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance.; 02-04 Record transactions in a journal using debits and credits. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

232) Reed owns a consulting services company, while Sophie operates an auto maintenance shop. For the month of June, the following transactions occurred.

June 2 June 5 June 7 June 14 June 19 June 25 June 28 June 30

Sophie decides that she would like consulting services at the end of the month and pays Reed $300 in advance. Sophie provides maintenance services to Reed on account, $175. Reed borrows $500 from Sophie by signing a note promising to repay her. Sophie purchases maintenance supplies from Tap Corporation, paying cash of $250. Reed pays $175 to Sophie for maintenance services provided on June 5. Reed pays the utility bill for the month of June, $200. Sophie receives consulting services from Reed, equaling the amount paid on June 2. Reed pays $500 to Sophie for money borrowed on June 7. Reed

Assets = Liabilities + June 2 +$300 =

+$300 +

Sophie Stockholders' Stockholders' Equity Assets = Liabilities + Equity $0 +$300 = -$300

$0 +

5 7 14 19 25 28 30 Required: 1. Record transactions for Sophie. Keep in mind that Sophie may not need to record all transactions. 2. Using the format shown above, indicate the impact of each transaction on the accounting equation for each company.

Answer: Requirement 1 June 2

June 5

June 7

June 14

June 19

June 25 June 28

June 30

Transactions for Sophie Prepaid Services Cash (Pay for consulting services in advance) Accounts Receivable Service Revenue (Provide services on account) Notes Receivable Cash (Loan cash and accept note receivable) Supplies Cash (Purchase maintenance supplies with cash) Cash Accounts Receivable (Receive cash on account) No entry for Sophie. Consulting Expense Prepaid Services (Received services paid in advance) Cash Notes Receivable (Receive cash on note receivable)

Debit 300

Credit 300

175 175 500 500 250 250

175 175

300 300 500 500

Requirement 2 Reed

Sophie Stockholders' Stockholders' Assets = Liabilities + Equity Assets = Liabilities + Equity June 2 +$300 =

+$300 +

$0 =

+$175 +

+$500 =

+$500 +

$0 =

$0 +

19 25 28

-$175 = -$200 = $0 =

-$175 + $0 + -$300 +

$0 +$300 = -$300 -$175 +$175 = +$500 $0 -$500 = +$250 $0 -$250 = +$175 $0 -$175 = -$200 $0 = +$300 -$300 = +$500 $0 -$500 =

$0 +

+$175

$0 +

$0 + $0 + $0 +

$0 $0 -$300

30 -$500 = -$500 + $0 + $0 Difficulty: 3 Hard Topic: Effects of Transactions on the Accounting Equation; Effects of Debits and Credits on Account Balances; Recording Transactions in a Journal Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.; 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance.; 02-04 Record transactions in a journal using debits and credits. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

233) Below is a list of typical accounts.

Accounts 1. Service Revenue 2. Common Stock 3. Dividends 4. Salaries Expense 5. Accounts Payable 6. Buildings 7. Deferred Revenue 8. Accounts Receivable 9. Retained Earnings 10. Notes Payable 11. Utilities Expense 12. Advertising Expense

Type of Account

Normal Balance (Debit or Credit)

Required: For each account, (1) indicate the type of account and (2) whether the normal account balance is a debit or credit. For type of account, choose from asset, liability, stockholders' equity, dividend, revenue, or expense. Answer: Normal Balance Account Title Type of Account (Debit or Credit) 1. Service Revenue Revenue Credit 2. Common Stock Stockholders' equity Credit 3. Dividends Dividends Debit 4. Salaries Expense Expense Debit 5. Accounts Payable Liability Credit 6. Building Asset Debit 7. Deferred Revenue Liability Credit 8. Accounts Receivable Asset Debit 9. Retained Earnings Stockholders' equity Credit 10. Notes Payable Liability Credit 11. Utilities Expense Expense Debit 12. Advertising Expense Expense Debit Difficulty: 2 Medium Topic: Effects of Debits and Credits on Account Balances Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

234) Below are the transactions for Cleaning Racer, Inc. for April, the first month of operations. April 1 April 2 April 7 April 10 April 12 April 16 April 19 April 23 April 29 April 30 April 30

Borrow$50,000 from the bank by signing a note. Issue common stock in exchange for cash of $20,000. Purchase equipment for $40,000 cash. Purchase cleaning supplies of $4,000 on account. Provide services of $5,000 for cash. Pay employees $1,200 for work performed. Pay for advertising in a local newspaper, costing $500. Provide services of $7,000 on account. Pay employees $1,500 for work performed. A utility bill of $1,200 for the current month is paid. Pay dividends of $700 to stockholders.

Required: 1. Record each transaction. 2. Post each transaction to the appropriate T-accounts. 3. Calculate the balance of each account. 4. Prepare a trial balance for June. Racer uses the following accounts: Cash, Accounts Receivable, Supplies, Equipment, Accounts Payable, Notes Payable, Common Stock, Dividends, Service Revenue, Salaries Expense, Advertising Expense, and Utilities Expense.

Answer: Requirement 1 April 1

April 2

April 7

April 10

April 12

April 16

April 19

April 23

April 29

April 30

Cash Notes Payable (Borrow from bank)

Debit 50,000

Credit 50,000

Cash Common Stock (Issue common stock) Equipment Cash (Purchase equipment) Supplies Accounts Payable (Purchase cleaning supplies on account) Cash Service Revenue (Provide services for cash) Salaries Expense Cash (Pay employees' salaries) Advertising Expense Cash (Pay for current advertising) Accounts Receivable Service Revenue (Provide services on account)

20,000

Salaries Expense Cash (Pay employees' salaries) Utilities Expense Cash (Pay current utility bill) Dividends Cash (Pay dividends to stockholders)

1,500

20,000 40,000 40,000 4,000 4,000

5,000 5,000 1,200 1,200 500 500 7,000 7,000

1,500 1,200 1,200 700 700

Requirements 2 and 3 Cash 50,000 40,000 20,000 1,200 5,000 500 1,500 1,200 700 Bal. 29,900 Notes Payable 50,000 Bal. 50,000 Service Revenue 5,000 7,000 Bal. 12,000 Utilities Expense 1,200 Bal. 1,200

Accounts Receivable 7,000 Bal. 7,000 Equipment 40,000 Bal. 40,000 Common Stock 20,000 Bal. 20,000 Salaries Expense 1,200 1,500 Bal. 2,700

Supplies 4,000 Bal. 4,000 Accounts Payable 4,000 Bal. 4,000 Dividends 700 Bal. 700 Advertising Expense 500 Bal. 500

Requirement 4 Cleaning Racer Inc. Trial Balance June 30 Debit $29,900 7,000 4,000 40,000

Account Title Credit Cash Accounts Receivable Supplies Equipment Accounts Payable $4,000 Notes Payable 50,000 Common Stock 20,000 Dividends 700 Service Revenue 12,000 Salaries Expense 2,700 Advertising Expense 500 Utilities Expense 1,200 Totals $86,000 $86,000 Difficulty: 3 Hard Topic: Recording Transactions in a Journal; Posting to the General Ledger; Trial Balance Learning Objective: 02-04 Record transactions in a journal using debits and credits.; 02-05 Post transactions to the general ledger.; 02-06 Prepare a trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement 105 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

235) Wolverine Incorporated had the following trial balance at the beginning of April. Account Title Cash Accounts receivable Supplies Equipment Accounts payable Notes payable Common stock Retained earnings

Debits Credits $2,800 900 3,600 9,100 $2,200 3,600 9,000 1,600

The following transactions occur in April: April 1 April 2 April 4 April 10 April 15 April 20 April 22 April 24 April 26 April 28 April 30

Issue common stock in exchange for $15,000 cash. Purchase equipment with a long-term note for $4,500 from Hoosier Corporation. Purchase supplies for $1,500 on account. Provide services to customers on account for $9,000. Pay creditors on accounts payable, $1,200. Pay employees $2,300 for the first half of the month. Provide services to customers for $11,500 cash. Pay $1,300 on the note from Hoosier Corporation. Collect $7,100 on account from customers. Pay $1,700 to the local utility company for April gas and electricity. Pay $3,200 rent for the month of April.

Required: 1. Record each transaction. 2. Post each transaction to the appropriate T-accounts. 3. Calculate the balance of each account at April 30. (Hint: Be sure to include the balance at the beginning of April in each T-account.) 4. Prepare a trial balance as of April 30.

Answer: Requirement 1 April 1

Cash Common Stock (Issue common stock) April 2 Equipment Notes Payable (Purchase equipment with note payable) April 4 Supplies Accounts Payable (Purchase supplies on account) April 10 Accounts Receivable Service Revenue (Provide services on account) April 15 Accounts Payable Cash (Pay cash on account) April 20 Salaries Expense Cash (Pay current salaries) April 22 Cash Service Revenue (Provide services for cash) April 24 Notes Payable Cash (Pay on note payable) April 26 Cash Accounts receivable (Receive cash on account) April 28 Utilities Expense Cash (Pay utilities for current month) April 30 Rent Expense Cash (Pay rent for current month)

Debit 15,000

Credit 15,000

4,500 4,500 1,500 1,500 9,000 9,000 1,200 1,200 2,300 2,300 11,500 11,500 1,300 1,300 7,100 7,100 1,700 1,700 3,200 3,200

Requirements 2 and 3 Cash Bal. 2,800 1,200 15,000 2,300 11,500 1,300 7,100 1,700 3,200 Bal. 26,700 Equipment Bal. 9,100 4,500 Bal. 13,600 Common Stock Bal. 9,000 15,000 Bal. 24,000 Salaries Expense 2,300 Bal. 2,300

Accounts Receivable Bal. 900 7,100 9,000

Supplies Bal. 3,600 1,500

Bal. 2,800 Accounts Payable 1,200 Bal. 2,200 1,500 Bal. 2,500 Retained Earnings Bal. 1,600

Bal. 5,100 Notes Payable 1,300 Bal. 3,600 4,500 Bal. 6,800 Service Revenue 9,000 11,500 Bal. 20,500 Rent Expense 3,200 Bal. 3,200

Bal. 1,600 Utilities Expense 1,700 Bal. 1,700

Requirement 4 Wolverine Incorporated Trial Balance April 30 Account Title Debit Credit Cash $26,700 Accounts Receivable 2,800 Supplies 5,100 Equipment 13,600 Accounts Payable $2,500 Notes Payable 6,800 Common Stock 24,000 Retained Earnings 1,600 Service Revenue 20,500 Salaries Expense 2,300 Utilities Expense 1,700 Rent Expense 3,200 Totals $55,400 $55,400 Difficulty: 3 Hard Topic: Recording Transactions in a Journal; Posting to the General Ledger; Trial Balance Learning Objective: 02-04 Record transactions in a journal using debits and credits.; 02-05 Post transactions to the general ledger.; 02-06 Prepare a trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement 108 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

236) Baker Incorporated specializes in training and veterinary services for household pets, such as cats, dogs, birds, lizards, and fish. After the first 11 months of operations in 2021, Baker has the following account balances. Account Title Cash Supplies Prepaid rent Equipment Buildings Accounts payable Deferred revenue Common stock Retained earnings Dividends Service revenue Salaries expense Advertising expense Utilities expense Totals

Debits Credits $13,300 2,600 4,800 82,100 200,000 $9,500 3,400 145,000 50,200 9,000 250,000 100,000 15,600 30,700 458,100 $458,100

The following transactions occur during December 2021: Throughout the month, Baker provides services to customers for cash, $25,400.(Hint: Record the entire month's services in a single December 1-31 entry.) December 4 Purchase pet supplies on account, $2,700. Pay for fliers to be distributed to local residences to advertise the December 8 company's services, $3,100. December 9 Pay for supplies purchased on December 4. December 12 Issue additional shares of common stock for cash, $6,000. December 16 Pay cash on accounts payable, $6,600. December 19 Purchase equipment with cash, $7,800. December 22 Pay utilities for December, $4,400. Receive cash from customers for services to be provided next December 24 January, $2,500. One of Baker's trainers takes a part-time job at the zoo and earns a December 27 salary of $1,300. The zoo and Baker are separate companies. December 30 Pay employees' salaries for the current month, $10,000. December 31 Pay dividends to stockholders, $3,000.

Required: 1. Record each transaction. 2. Post each transaction to the appropriate T-accounts. 3. Calculate the balance of each account at December 31. (Hint: Be sure to include the balance at the beginning of December in each T-account.) 4. Prepare a trial balance as of December 31.

Answer: Requirement 1 Entries are numbered for posting. Debit 25,400

(1) December 1-31 Cash Service Revenue (Provide services for cash) (2) December 4 Supplies 2,700 Accounts Payable (Purchase supplies on account) (3) December 8 Advertising Expense 3,100 Cash (Purchase advertising for December) (4) December 9 Accounts Payable 2,700 Cash (Pay cash on account) (5) December 12 Cash 6,000 Common Stock (Issue shares of common stock) (6) December 16 Accounts Payable 6,600 Cash (Pay cash on account) (7) December 19 Equipment 7,800 Cash (Purchase equipment) (8) December 22 Utilities Expense 4,400 Cash (Pay utilities for current month) (9) December 24 Cash 2,500 Deferred Revenue (Receive cash in advance from customers) December 27 No journal entry is required (10) December 30 Salaries Expense 10,000 Cash (Pay salaries for December) (11) December 31 Dividends 3,000 Cash (Pay dividends)

Credit 25,400

2,700

3,100

2,700

6,000

6,600

7,800

4,400

2,500

10,000

3,000

Requirements 2 and 3 Cash Supplies (3) 3,100 (4) 2,700 (6) 6,600 Bal. 13,300 (7) 7,800 (1) 25,400 (8) 4,400 (5) 6,000 (10) 10,000 Bal. 2,600 (9) 2,500 (11) 3,000 (2) 2,700 Bal. 9,600 Bal. 5,300 Equipment Buildings Bal. 82,100 (7) 7,800 Bal. 200,000 Bal. 89,900 Bal. 200,000 Deferred Revenue

Common Stock

Prepaid Rent

Bal. 4,800 Bal. 4,800 Accounts Payable (4) 2,700 Bal. 9,500 (6) 6,600 (2) 2,700 Bal. 2,900 Retained Earnings

Bal. 145,000 (5) 6,000 Bal. 50,200 Bal. Bal. 5,900 151,000 Bal. 50,200 Dividends Service Revenue Salaries Expense Bal. Bal. Bal. 9,000 250,000 100,000 (11) 3,000 (1) 25,400 (10) 10,000 Bal. Bal. Bal. 12,000 275,400 110,000 Advertising Expense Utilities Expense Bal. 15,600 Bal. 30,700 (3) 3,100 (8) 4,400 Bal. 18,700 Bal. 35,100 Bal. 3,400 (9) 2,500

Requirement 4 Baker Incorporated Trial Balance December 31 Accounts Debit Credit Cash $9,600 Supplies 5,300 Prepaid Rent 4,800 Equipment 89,900 Buildings 200,000 Accounts Payable $2,900 Deferred Revenue 5,900 Common Stock 151,000 Retained Earnings 50,200 Dividends 12,000 Service Revenue 275,400 Salaries Expense 110,000 Advertising Expense 18,700 Utilities Expense 35,100 Totals $485,400 $485,400 Difficulty: 3 Hard Topic: Recording Transactions in a Journal; Posting to the General Ledger; Trial Balance Learning Objective: 02-04 Record transactions in a journal using debits and credits.; 02-05 Post transactions to the general ledger.; 02-06 Prepare a trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

237) Below are the account balances of Heron Company at the end of November. Accounts Cash Accounts Receivable Rent Expense Supplies Equipment Accounts Payable Service Revenue Utilities Payable Deferred Revenue Common Stock Utilities Expense Retained Earnings Salaries Payable Salaries Expense Insurance Expense Advertising Expense Supplies Expense Dividends Prepaid Insurance Legal Fees Expense

Balances $12,000 ? 1,000 5,000 19,000 7,000 40,000 1,000 6,000 19,000 2,000 15,000 2,000 9,000 6,000 1,000 10,000 3,000 4,000 6,000

Required: Prepare a trial balance by placing amounts in the appropriate debit or credit column and determining the balance of the Accounts Receivable account.

Answer: Accounts Cash Accounts Receivable Supplies Prepaid Insurance Equipment Accounts Payable Utilities Payable Salaries Payable Deferred Revenue Common Stock Retained Earnings Dividends Service Revenue Rent Expense Utilities Expense Salaries Expense Insurance Expense Advertising Expense Supplies Expense Legal Fees Expense

Debits Credits $12,000 12,000 5,000 4,000 19,000 $7,000 1,000 2,000 6,000 19,000 15,000 3,000 40,000 1,000 2,000 9,000 6,000 1,000 10,000 6,000 $90,000 $90,000

Difficulty: 3 Hard Topic: Trial Balance Learning Objective: 02-06 Prepare a trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement 238) Describe the external events and give two examples. Answer: External events involve an exchange between the company and a separate economic entity. Examples include purchasing office supplies on account or borrowing money from a bank. Difficulty: 2 Medium Topic: External Transactions Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

239) Describe the six steps in the measurement process of external transactions. Answer: The six steps include: (1) Use source documents to identify accounts affected by an external transaction, (2) analyze the impact of the transaction on the accounting equation, (3) assess whether the transaction results in a debit or credit to the account balances, (4) record the transaction in a journal using debits and credits, (5) post the transaction to the to the general ledger, and (6) prepare a trial balance. Difficulty: 2 Medium Topic: External Transactions Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 240) Explain what it means that external transactions have a dual effect. Answer: Dual effect refers to each transaction having at least two effects on the accounting equation. Either an economic event increases (decreases) one side of the equation and also increases (decreases) the other side of the equation by the same amount, or the economic event increases one element and decreases another element by an equal amount, both on the same side of the accounting equation. Difficulty: 2 Medium Topic: Effects of Transactions on the Accounting Equation Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

Financial Accounting, 5e (Spiceland) Chapter 3 The Accounting Cycle: End of the Period 1) Accrual-basis accounting involves recording revenues when providing goods and services to customers and recording expenses with their related revenues. Answer: TRUE Difficulty: 1 Easy Topic: Accrual-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement 2) The revenue recognition principle states that we record revenue in the period in which we collect cash. Answer: FALSE Explanation: The revenue recognition principle states that we record revenue in the period in which we provide goods and services to customers. Difficulty: 1 Easy Topic: Accrual-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 3) According to the revenue recognition principle, if a company provides services to a customer in the current year but does not collect cash until the following year, the company should report the revenue in the current year. Answer: TRUE Difficulty: 2 Medium Topic: Accrual-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

4) Jones Corporation provides services to a customer on June 17, but the customer does not pay for the services until August 12. According to the revenue recognition principle, Jones Corporation should record the revenue on August 12. Answer: FALSE Explanation: The revenue recognition principle requires that revenue be recorded at the time goods or services are provided to the customer (June 17). Difficulty: 3 Hard Topic: Accrual-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 5) For financial reporting purposes, we typically recognize expenses in the same period as the revenues they help to generate. Answer: TRUE Difficulty: 1 Easy Topic: Accrual-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting 6) According to the concept of expense recognition under accrual-basis accounting, if costs associated with producing revenue in the current year are not paid in cash until the following year, the costs should be expensed in the current year. Answer: TRUE Difficulty: 2 Medium Topic: Accrual-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 7) Under cash-basis accounting, we record revenues at the time we receive cash and expenses at the time we pay cash. Answer: TRUE Difficulty: 1 Easy Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement 2 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

8) Under cash-basis accounting, the timing of cash inflows and outflows exactly matches the reporting of revenues and expenses in the income statement. Answer: TRUE Difficulty: 1 Easy Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting 9) Under cash-basis accounting, if a company provides services to a customer in the current year but does not collect cash until the following year, the company should report the revenue in the current year. Answer: FALSE Explanation: Under cash-basis accounting, revenues are recorded at the time cash is collected. Difficulty: 2 Medium Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 10) Under cash-basis accounting, if costs associated with producing revenue in the current year are not paid in cash until the following year, the costs should be expensed in the following year. Answer: TRUE Difficulty: 2 Medium Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 11) Because cash-basis accounting violates both the principles of revenue recognition and expense recognition, it is generally not accepted in preparing financial statements. Answer: TRUE Difficulty: 1 Easy Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting 3 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

12) Adjusting entries involve recording events that have occurred but have not yet been recorded by the end of the period. Answer: TRUE Difficulty: 1 Easy Topic: Adjusting Entries - Accrued Expenses; Adjusting Entries - Accrued Revenues Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 13) Adjusting entries should be prepared after financial statements are prepared. Answer: FALSE Explanation: Adjusting entries should be prepared before financial statements are prepared. Difficulty: 1 Easy Topic: Adjusting Entries - General Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 14) Because adjusting entries update balances for the recognition of revenues and expenses, they are a necessary part of cash-basis accounting. Answer: FALSE Explanation: Adjusting entries are a necessary part of accrual-basis accounting. Difficulty: 1 Easy Topic: Adjusting Entries - General Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 15) Prepaid expenses involve payment of cash (or an obligation to pay cash) for the purchase of an asset before the expense is incurred. Answer: TRUE Difficulty: 2 Medium Topic: Adjusting Entries - Prepaid Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

16) Deferred revenues occur when cash is received after the revenue is recognized. Answer: FALSE Explanation: Deferred revenues occur when cash is received before the revenue is recognized. Difficulty: 2 Medium Topic: Adjusting Entries - Deferred Revenues Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 17) Accrued expenses involve the payment of cash before recording an expense and a liability. Answer: FALSE Explanation: Accrued expenses involve the payment of cash after recording an expense and a liability. Difficulty: 2 Medium Topic: Adjusting Entries - Accrued Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 18) Accrued revenues involve the receipt of cash after the revenue has been recognized and an asset has been recorded. Answer: TRUE Difficulty: 2 Medium Topic: Adjusting Entries - Accrued Revenues Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 19) When a prepaid expense has been recorded during the period, the adjusting entry at the end of the period includes recognizing an expense and adjusting the balance of a liability account. Answer: FALSE Explanation: The adjusting entry includes recognizing an expense and adjusting the balance of an asset account. Difficulty: 2 Medium Topic: Adjusting Entries - Prepaid Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 5 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

20) The adjusting entry for a prepaid expense has the effect of reducing total assets and reducing net income. Answer: TRUE Difficulty: 3 Hard Topic: Adjusting Entries - Prepaid Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 21) The Supplies account is an example of an accrued expense. Answer: FALSE Explanation: The Supplies account is an example of a prepaid expense. Difficulty: 2 Medium Topic: Adjusting Entries - Accrued Expenses; Adjusting Entries - Prepaid Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 22) Suppose Simeon Company begins the year with $1,000 in supplies, purchases an additional $5,500 of supplies during the year, and ends the year with $700 in supplies. The year-end adjusting entry includes Supplies Expense of $7,200. Answer: FALSE Explanation: Supplies Expense = beginning ($1,000) + purchases ($5,500) − ending ($700). Difficulty: 3 Hard Topic: Adjusting Entries - Prepaid Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 23) When a deferred revenue has been recorded during the period, the adjusting entry at the end of the period includes recognizing a revenue and adjusting the balance of an asset account. Answer: FALSE Explanation: The adjusting entry includes recognizing a revenue and adjusting the balance of a liability account. Difficulty: 2 Medium Topic: Adjusting Entries - Deferred Revenues Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 6 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

24) The adjusting entry for a deferred revenue has the effects of reducing liabilities and increasing net income. Answer: TRUE Difficulty: 3 Hard Topic: Adjusting Entries - Deferred Revenues Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 25) On November 1, 2021, a company receives $1,800 for services to be provided evenly over the next six months. The December 31, 2021, adjusting entry for the company would include a credit to Deferred Revenue for $600. Answer: FALSE Explanation: The adjusting entry would involve a debit to Deferred Revenue and a credit to Service Revenue for $600. Difficulty: 3 Hard Topic: Adjusting Entries - Deferred Revenues Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 26) The adjusting entry at the end of the period to recognize an accrued expense includes an expense account and a liability account. Answer: TRUE Difficulty: 2 Medium Topic: Adjusting Entries - Accrued Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

27) The adjusting entry for an accrued expense has the effects of decreasing net income and decreasing liabilities. Answer: FALSE Explanation: The adjusting entry has the effect of increasing liabilities. Difficulty: 3 Hard Topic: Adjusting Entries - Accrued Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 28) On December 31, 2021, employees who earn $500 per day have worked eight days and will be paid on January 6, 2022. The adjusting entry on December 31, 2021, includes a debit to Salaries Expense for $4,000. Answer: TRUE Difficulty: 3 Hard Topic: Adjusting Entries - Accrued Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 29) At December 31, 2021, a company has received, but not paid, its December utility bill for $250. The amount of utility expense for December 2021 equals $250. Answer: TRUE Difficulty: 2 Medium Topic: Adjusting Entries - Accrued Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Analytical Thinking AICPA: FN Measurement 30) The adjusting entry at the end of the period to recognize an accrued revenue includes a liability account and a revenue account. Answer: FALSE Explanation: The adjusting entry includes an asset account and a revenue account. Difficulty: 2 Medium Topic: Adjusting Entries - Accrued Revenues Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 8 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

31) The adjusting entry for an accrued revenue has the effects of increasing assets and increasing net income. Answer: TRUE Difficulty: 3 Hard Topic: Adjusting Entries - Accrued Revenues Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 32) Adjusting entries are unnecessary for transactions that do not involve revenue or expense activities, such as selling common stock or paying dividends. Answer: TRUE Difficulty: 2 Medium Topic: Adjusting Entries - General Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 33) Adjusting entries are not necessary when cash is received at the same time revenues are recognized. Answer: TRUE Difficulty: 2 Medium Topic: Adjusting Entries - General Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 34) Adjusting entries are not necessary when cash is paid at the same time expenses are incurred. Answer: TRUE Difficulty: 2 Medium Topic: Adjusting Entries - General Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

35) A post-closing trial balance is a list of all accounts and their balances after we have updated account balances for adjusting entries. Answer: FALSE Explanation: This is an adjusted trial balance. Difficulty: 1 Easy Topic: Adjusted Trial Balance Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 36) An adjusted trial balance is a list of all accounts and their balances after we have updated account balances for adjusting entries. Answer: TRUE Difficulty: 1 Easy Topic: Adjusted Trial Balance Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 37) An adjusted trial balance is prepared before adjusting entries. Answer: FALSE Explanation: The adjusted trial balance is prepared after adjusting entries. Difficulty: 1 Easy Topic: Adjusted Trial Balance Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 38) Once the adjusted trial balance is complete, the income statement can be prepared. Answer: TRUE Difficulty: 1 Easy Topic: Financial Statements - Income Statement Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting

39) A classified balance sheet separates assets into current and long-term, and separates liabilities into current and long-term. Answer: TRUE Difficulty: 1 Easy Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting 40) Current assets are assets that provide a benefit to a company over more than one year. Answer: FALSE Explanation: Current assets provide a benefit to a company over the next year only. Difficulty: 1 Easy Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting 41) Long-term assets are assets that provide a benefit to a company for more than one year. Answer: TRUE Difficulty: 1 Easy Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting 42) Current liabilities are liabilities due within one year. Answer: TRUE Difficulty: 1 Easy Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting

43) Long-term liabilities are liabilities due in more than one year. Answer: TRUE Difficulty: 1 Easy Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting 44) Long-term asset categories include investments; property, plant, and equipment; and intangible assets. Answer: TRUE Difficulty: 2 Medium Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 45) The components of retained earnings include assets, expenses, and dividends. Answer: FALSE Explanation: The components of retained earnings include revenues, expenses, and dividends. Difficulty: 2 Medium Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 46) Closing entries transfer the balances of all temporary accounts (revenues, expenses, and dividends) to the Common Stock account. Answer: FALSE Explanation: Balances of temporary accounts are transferred to Retained Earnings. Difficulty: 2 Medium Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

47) The closing entry for revenue accounts includes a debit to Retained Earnings and a credit to all revenue accounts. Answer: FALSE Explanation: The closing entry for revenue accounts includes a debit to all revenue accounts and a credit to Retained Earnings. Difficulty: 2 Medium Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 48) The closing entry for expense accounts includes a debit to Retained Earnings and a credit to all expense accounts. Answer: TRUE Difficulty: 2 Medium Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 49) The closing entry for dividends includes a debit to the Dividends account and a credit to Retained Earnings. Answer: FALSE Explanation: The closing entry for dividends includes a debit to Retained Earnings and a credit to the Dividends account. Difficulty: 2 Medium Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

50) If the beginning balance of Retained Earnings equals $10,000, net income for the year equals $6,000, and dividends for the year equal $2,000, then the ending balance of Retained Earnings equals $18,000. Answer: FALSE Explanation: Ending Retained Earnings = beginning Retained Earnings ($10,000) + net income ($6,000) − dividends ($2,000) = $14,000. Difficulty: 3 Hard Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 51) If the beginning balance of Retained Earnings equals $12,000, the ending balance of Retained Earnings equals $15,000, and dividends for the year equal $1,000, then net income for the year equals $4,000. Answer: TRUE Difficulty: 3 Hard Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement 52) After closing entries are posted to the accounts in the general ledger, all asset and liability accounts have a balance of zero. Answer: FALSE Explanation: After closing entries are prepared, all revenue, expense, and dividend accounts have a balance of zero. Difficulty: 2 Medium Topic: Post-Closing Trial Balance Learning Objective: 03-07 Post closing entries and prepare a post-closing trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

53) After closing entries are prepared, the balance of Retained Earnings is updated to reflect the activity in the revenue, expense, and dividend accounts for the period. Answer: TRUE Difficulty: 2 Medium Topic: Post-Closing Trial Balance Learning Objective: 03-07 Post closing entries and prepare a post-closing trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 54) The post-closing trial balance is a list of accounts and their balances at a particular date after the account balances have been updated for closing entries. Answer: TRUE Difficulty: 1 Easy Topic: Post-Closing Trial Balance Learning Objective: 03-07 Post closing entries and prepare a post-closing trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 55) The post-closing trial balance does not include any assets or liabilities, because these accounts all have zero balances after closing entries. Answer: FALSE Explanation: The post-closing trial balance does not include any revenues, expenses, or dividends, because these accounts all have zero balances after closing entries. Difficulty: 2 Medium Topic: Post-Closing Trial Balance Learning Objective: 03-07 Post closing entries and prepare a post-closing trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

56) The accounting basis that helps to measure and report revenues and expenses in a way that clearly reflects the ability of a company to generate value for its owners is referred to as: A) Cash-basis. B) Accrual-basis. C) Profit-basis. D) Reporting-basis. Answer: B Difficulty: 1 Easy Topic: Accrual-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 57) The accounting basis that records revenues when goods or services are provided to customers and expenses with related revenues is referred to as: A) Cash-basis. B) Profit-basis. C) Accrual-basis. D) Reporting-basis. Answer: C Difficulty: 1 Easy Topic: Accrual-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 58) The revenue recognition principle states that: A) Revenue should be recognized in the period the cash is received. B) Revenue should be recognized in the period goods and services are provided. C) Revenue should be recognized in the balance sheet. D) Revenue is a component of common stock. Answer: B Difficulty: 1 Easy Topic: Accrual-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking

59) Which accounting principle states that a company should "record revenues when they provide goods and services to customers?" A) Valuation. B) Revenue recognition. C) Conservatism. D) Materiality. Answer: B Difficulty: 1 Easy Topic: Accrual-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 60) A company recognizes revenue in the period in which it records an asset for the related account receivable, rather than in the period in which the account receivable is collected in cash. This company is using: A) Cash-basis accounting. B) Accrual-basis accounting. C) The recording principle. D) The entity assumption. Answer: B Difficulty: 2 Medium Topic: Accrual-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 61) The basic principle involved with expense recognition is: A) All costs that are used to generate revenue are recorded in the period the revenue is recognized. B) All transactions are recorded at the exchange price. C) The business is separate from its owners. D) The business will continue to operate indefinitely unless there is evidence to the contrary. Answer: A Difficulty: 1 Easy Topic: Accrual-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking

62) Which of the following provides a description of the relation between revenues and expenses for financial reporting purposes? A) Valuation consequences. B) Equal dollar amounts. C) Cause-and-effect. D) Comparability of transactions. Answer: C Difficulty: 2 Medium Topic: Accrual-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 63) Air France collected cash on February 4 from the sale of a ticket to a customer on January 26. The flight took place on April 5. According to the revenue recognition principle, in which month should Air France have recognized this revenue? A) January. B) February. C) April. D) Evenly in each of the three months. Answer: C Difficulty: 3 Hard Topic: Accrual-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 64) A customer purchased a drill press on November 14 on account from Sears. The drill press was delivered two weeks later. The customer paid for the drill press on December 5. When should Sears record the revenue for this transaction according to the revenue recognition principle? A) November. B) December. C) Evenly in each of the two months. D) One-third in November and two-thirds in December. Answer: A Difficulty: 3 Hard Topic: Accrual-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 18 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

65) A company received an order from a customer in June for services to be provided. Those services were provided in July, and the customer paid the full amount in August. According to the revenue recognition principle, in which month should the company record revenue? A) June. B) July. C) August. D) Evenly over the three months. Answer: B Difficulty: 3 Hard Topic: Accrual-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 66) A company orders office supplies in June. Those supplies are received and paid for in July. The supplies are used in August. In which month should the company record supplies expense? A) June. B) July. C) August. D) Evenly over the three months. Answer: C Difficulty: 3 Hard Topic: Accrual-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 67) A company orders office supplies in June. Those supplies are received and used in July. The supplies are paid for in August. In which month should the company record supplies expense? A) June. B) July. C) August. D) Evenly over the three months. Answer: B Difficulty: 3 Hard Topic: Accrual-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 68) In November, a company hires three temporary employees that are scheduled to work only the 19 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

month of December. Those employees work during December, and they are then paid their full salaries in January. In which month should the company record salaries expense? A) November. B) December. C) January. D) Evenly over the three months. Answer: B Difficulty: 3 Hard Topic: Accrual-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 69) The accounting basis that records revenues when cash is received and expenses when cash is paid is referred to as: A) Cash-basis. B) Accrual-basis. C) Realization-basis. D) Reporting-basis. Answer: A Difficulty: 1 Easy Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking

70) The following events pertain to Jasper Corporation: May May May May

1 5 8 9

Jasper purchased office supplies of $3,000 on account. The office supplies were shipped to Jasper. Jasper used these office supplies for a one-time event. Jasper paid $3,000 cash for the office supplies purchased on May 1.

Using cash-basis accounting, on which date should Jasper record supplies expense? A) May 1. B) May 5. C) May 8. D) May 9. Answer: D Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 71) A company provided $1,500 of services to customers during the month of May. The customers paid in June. What would the impact of these transactions be during May on (1) the balance of cash, (2) cash-basis net income, and (3) accrual basis net income? A) (1) No effect, (2) No effect, (3) Increase. B) (1) No effect, (2) No effect, (3) No effect. C) (1) Increase, (2) Increase, (3) Increase. D) (1) Increase, (2) Increase, (3) No effect. Answer: A Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

72) A company purchased $400 of office supplies on account during May. All the supplies were used in May, and the account was paid during June. What would the impact of these transactions be during May on (1) the balance of cash, (2) cash-basis net income, and (3) accrual-basis net income? A) (1) No effect, (2) No effect, (3) Decrease. B) (1) Decrease, (2) Decrease, (3) No effect. C) (1) Decrease, (2) Decrease, (3) Decrease. D) (1) Decrease, (2) No effect, (3) No effect. Answer: A Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement 73) A company paid $900 to workers during May. Of this amount, $600 was for work performed in April, while the other $300 was for work performed during May. What would the impact of this transaction be during May on (1) the balance of cash, (2) cash-basis net income, and (3) accrual-basis net income? A) (1) No effect, (2) No effect, (3) Decrease. B) (1) Decrease, (2) Decrease, (3) No effect. C) (1) Decrease, (2) Decrease, (3) Decrease. D) (1) Decrease, (2) No effect, (3) No effect. Answer: C Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

74) Pawn Shops Unlimited recorded the following four transactions during April. Which of these transactions would have the same income statement impact in April regardless of whether the company used accrual-basis or cash-basis accounting? A) Received $600 from customers for services to be provided in May. B) Paid $1,800 for a six-month insurance policy covering the period July 1—December 31. C) Paid $700 for an advertisement that appeared in the April 17 edition of the Las Vegas Sun newspaper. D) Received $300 from customers for services performed in March. Answer: C Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 75) Pawn Shops Unlimited recorded the following four transactions during April. Which of these transactions would have the same income statement impact in April regardless of whether the company used accrual-basis or cash-basis accounting? A) Purchased $500 of office supplies on account (supplies were used in May and paid for in May). B) Paid $1,800 for a six-month insurance policy covering the period July 1—December 31. C) Paid $700 for an advertisement that appeared in the May 17 edition of the Las Vegas Sun newspaper. D) Received $300 from customers for services performed in March. Answer: A Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

76) The following events pertain to Bills Company: December December January January

28, 2021 Bills was contacted by a customer for possible accounting and tax services. 30, 2021 Bills signed a formal agreement with the customer to provide accounting and tax services in 2022. 4, 2022 The customer paid $1,000 in advance for the services to be provided by Bills Company. 11, 2022 Bills provided accounting and tax services to the customer.

Using cash-basis accounting, on which date should Bills Company record revenue for the accounting and tax services? A) December 30, 2021. B) December 31, 2021. C) January 4, 2022. D) January 11, 2022. Answer: C Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 77) When a company provides services on account, which of the following would be recorded using cash-basis accounting? A) Debit to Cash. B) Debit to Service Revenue. C) Credit to Deferred Revenue. D) No entry would be recorded. Answer: D Difficulty: 2 Medium Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

78) The following events pertain to Bills Company: December December January January

Using accrual-basis accounting, on which date should Bills Company record revenue for the accounting and tax services? A) December 30, 2021. B) December 31, 2021. C) January 4, 2022. D) January 11, 2022. Answer: D Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 79) Consider the following transactions: The company uses supplies purchased in the previous period, $1,500. The company pays cash for rent in advance, $6,000. The company repays a loan to the bank, $10,000 (ignore any interest cost). The amount of accrual-basis expense is ________ while the amount of cash-basis expense is ________. A) $6,000; $11,500 B) $6,000; $16,000 C) $1,500; $16,000 D) $1,500; $6,000 Answer: D Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

80) A company has the following three events in December: December 1 - Pay last month's rent (November), $500. December 15 - Pay rent for the current month (December), $500. December 31 - Pay rent for the following year, $6,000. How much would be recorded as Rent Expense for the month of December using accrual-basis accounting? A) $6,500. B) $7,000. C) $1,000. D) $500. Answer: D Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 81) A company has the following transactions: Pay employees' salaries for the current period. Pay rent in advance. Pay dividends to stockholders in the current period. Receive (but do not pay) a utility bill. Use supplies previously purchased. How many of these transactions result in an expense being reported in the current period using accrual-basis accounting? A) 1. B) 2. C) 3. D) 4. Answer: C Explanation: The three accrual-basis expenses include paying employees' salaries for the current period, receiving a utility bill, and using supplies previously purchased. Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

82) A company has the following transactions: Pay employees' salaries for the current period. Pay rent in advance. Pay dividends to stockholders in the current period. Receive (but do not pay) a utility bill. Use supplies previously purchased. How many of these transactions result in an expense being reported in the current period using cash-basis accounting? A) 1. B) 2. C) 3. D) 4. Answer: B Explanation: The two cash-basis expenses are paying employees' salaries for the current period and paying rent in advance. Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 83) The primary difference between accrual-basis and cash-basis accounting is: A) The timing of when revenues and expenses are recorded. B) Cash-basis accounting is allowed for financial reporting purposes but not accrual-basis accounting. C) Accrual-basis accounting violates both the concepts of revenue recognition and expense recognition. D) Adjusting entries are only a necessary part of cash-basis accounting. Answer: A Difficulty: 2 Medium Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

84) When the amount of interest receivable decreases during an accounting period: A) Accrual-basis revenues exceed cash collections from borrowers. B) Accrual-basis net income exceeds cash-basis net income. C) Accrual-basis revenues are less than cash collections from borrowers. D) Accrual-basis expenses are less than cash payments to borrowers. Answer: C Explanation: A decrease in interest receivable indicates cash was collected without a related revenue recorded, making cash received greater than revenues recognized. Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement 85) During the current period, a company recognizes revenue for services provided to customers who paid in advance in the previous period. When the balance of the Deferred Revenue account decreases in the current period: A) Accrual-basis revenues exceed cash collections from customers. B) Accrual-basis expenses exceed cash collections from customers. C) Accrual-basis revenues are less than cash collections from customers. D) Accrual-basis net income is less than cash-basis net income. Answer: A Explanation: A decrease in revenue collected in advance (Deferred Revenue) means that services were provided without a related cash collection, making revenues recognized greater than cash collected. Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement 86) Which transaction would not be recorded under cash-basis accounting? A) Providing services to customers for cash. B) Paying one year of rent in advance. C) Paying salaries to employees. D) Purchasing supplies on account. Answer: D Explanation: Purchasing supplies on account does not involve a cash flow. Difficulty: 2 Medium Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Understand 28 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AACSB: Reflective Thinking AICPA: FN Measurement 87) Which of the following statements are correct? For accrual-basis accounting: (1) record revenues when providing goods and services to customers. (2) record expenses when cash is paid. For cash-basis accounting: (3) record revenue when cash is received. (4) record expenses when benefit is received. A) (1) and (4). B) (2) and (3). C) (1) and (3). D) (2) and (4). Answer: C Difficulty: 2 Medium Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 88) On July 1, 2021, Rents-A-Lot Inc. paid $72,000 for 36 months of advance rent on its warehouse. What would be the amount of rent expense in the 2022 financial statements for Rents-A-Lot under both cash-basis and accrual-basis accounting? A) Cash-basis = $24,000; Accrual-basis = $24,000. B) Cash-basis = $72,000; Accrual-basis = $12,000. C) Cash-basis = $0; Accrual-basis = $24,000. D) Cash-basis = $0; Accrual-basis = $12,000. Answer: C Explanation: No cash is paid in 2022, so cash-basis rent expense equals $0. The monthly rent costs equal $2,000 ($72,000/36 months) per month, so the accrual-basis rent expense for 2022 equals $24,000 ($2000 × 12 months). Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

89) The following information pertains to Sooner Company: May

May 2 May 8 May 15 May 20

Customer ordered an installation service to be done by Sooner Company on May 15. Customer paid cash for the installation job to be done on May 15. The Sooner Company purchased installation supplies on account for the job. The installation job was started and completed. Amount owed for supplies purchased on May 8 is paid.

Assuming that Sooner Company uses cash-basis accounting, when would the company record the expense related to the supplies? A) May 2. B) May 8. C) May 15. D) May 20. Answer: D Explanation: Cash-basis expenses are recorded at the time cash is paid. Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

90) The following information pertains to Sooner Company: May

May 2 May 8 May 15 May 20

Assuming that Sooner Company uses accrual-basis accounting, when would the company record the expense related to the supplies? A) May 2. B) May 8. C) May 15. D) May 20. Answer: C Explanation: Accrual-basis expenses are recorded at the time they help to produce revenue. Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

91) Consider the following events for Betterment Incorporated: January January January January January

1 7 9 12

Betterment purchases gasoline for $200 on account. Betterment advertises lawn mowing services for $100 per lawn. Betterment signs up 8 customers who pay a total of $800 cash. Betterment mows the lawns of the 8 customers and all gasoline purchased on January 1 is used. 13 Betterment pays for the gasoline purchased on January 1.

Under accrual-basis accounting, what is the appropriate day to record the revenues related to lawn services? A) January 1. B) January 7. C) January 9. D) January 12. Answer: D Explanation: Accrual-basis revenues are recorded when services are provided. Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

92) Consider the following events for Betterment Incorporated: January January January January January

1 7 9 12

Under accrual-basis accounting, what is the appropriate day to record the expenses related to the gasoline? A) January 1. B) January 7. C) January 12. D) January 13. Answer: C Explanation: Accrual-basis expenses are recorded at the time they help to produce revenue. Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

93) Consider the following events for Betterment Incorporated: January January January January January

1 7 9 12

Under cash-basis accounting, what is the appropriate day to record the expenses related to the gasoline? A) January 1. B) January 9. C) January 12. D) January 13. Answer: D Explanation: Cash-basis expenses are recorded at the time cash is paid. Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

94) Consider the following events for Sophia Incorporated: April April April April April

5 6 12 21 23

Sophia purchases volleyballs for $200 on account. Sophia advertises a sand volleyball camp for $20 a person. Thirty people sign up for the camp paying a total of $600. Sophia hosts the sand volleyball camp. Sophia pays for the volleyballs purchased on April 5.

Under accrual-basis accounting, what is the appropriate day to record the revenues from the sand volleyball camp? A) April 5. B) April 6. C) April 12. D) April 21. Answer: D Explanation: Accrual-basis revenues are recorded when services are provided. Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 95) Consider the following events for Sophia Incorporated: April April April April April

5 6 12 21 23

Under accrual-basis accounting, what is the appropriate day to record the expenses related to the sand volleyball camp? A) April 5. B) April 12. C) April 21. D) April 23. Answer: C Explanation: Accrual-basis expenses are recorded at the time they help to produce revenue. Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 35 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

96) Consider the following events for Sophia Incorporated: April April April April April

5 6 12 21 23

Under cash-basis accounting, what is the appropriate day to record the expenses related to the sand volleyball camp? A) April 5. B) April 12. C) April 21. D) April 23. Answer: D Explanation: Cash-basis expenses are recorded at the time cash is paid. Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

97) Consider the following events for Sophia Incorporated: April April April April April

5 6 12 21 23

Under cash-basis accounting, what is the appropriate day to record the revenues related to the sand volleyball camp? A) April 5. B) April 12. C) April 21. D) April 23. Answer: B Explanation: Cash-basis revenues are recorded at the time cash is received. Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 98) Which one of the following best describes the characteristics of adjusting entries? A) Adjusting entries reduce the balance of revenue, expense, and dividend accounts to zero. B) Adjusting entries update balances for the recognition of cash flows. C) Adjusting entries update balances for the recognition of investments from and distributions to stockholders. D) Adjusting entries update balances for the recognition of revenue and expenses. Answer: D Difficulty: 2 Medium Topic: Adjusting Entries - General Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

99) Examples of adjusting entries could include all of the following except: A) Recording interest earned on bank account balances. B) Recording the expiration of prepaid insurance. C) Recording unpaid taxes. D) Recording the purchase of office supplies. Answer: D Difficulty: 2 Medium Topic: Adjusting Entries - General Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 100) Which of the following regarding adjusting entries is correct? A) Adjusting entries are recorded for all external transactions. B) Adjusting entries are recorded to make sure all cash inflows and outflows are recorded in the current period. C) Adjusting entries are needed because we use accrual-basis accounting. D) After adjusting entries, all temporary accounts should have a balance of zero. Answer: C Difficulty: 2 Medium Topic: Adjusting Entries - General Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 101) Adjusting entries are primarily needed for: A) Cash-basis accounting. B) Accrual-basis accounting. C) Current value accounting. D) Manual accounting systems. Answer: B Difficulty: 2 Medium Topic: Adjusting Entries - General Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

102) Which of the following is true about adjusting entries? A) Entries are necessary due to the conservatism principle. B) Entries can be done at the beginning or end of the accounting period. C) They zero the balance of all income statement accounts. D) They are a necessary part of accrual-basis accounting. Answer: D Difficulty: 2 Medium Topic: Adjusting Entries - General Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 103) Prepayments occur when: A) Cash payment (or an obligation to pay cash) occurs before the expense recognition. B) Sales are delayed pending credit approval. C) Customers are unable to pay the full amount due when goods are delivered. D) Cash payment occurs after the expense is incurred and liability is recorded. Answer: A Difficulty: 2 Medium Topic: Adjusting Entries - Prepaid Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 104) Making insurance payments in advance is an example of: A) A prepaid expense transaction. B) A deferred revenue transaction. C) An accrued expense transaction. D) An accrued revenue transaction. Answer: A Difficulty: 2 Medium Topic: Adjusting Entries - Prepaid Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

105) Deferred revenues refer to: A) Customers paying cash in advance of the good or service to be provided. B) Revenue being recorded prior to cash collection from the customer. C) Revenue being recorded at the same time the cash is collected from the customer. D) Cash being collected from the customer after the revenue is recorded. Answer: A Difficulty: 2 Medium Topic: Adjusting Entries - Deferred Revenues Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 106) An accrued expense occurs when: A) Cash payment (or an obligation to pay cash) occurs before the expense recognition. B) An expense is recorded at the same time as the cash payment. C) The expense is recognized before the payment of cash. D) Cash is paid but an expense is never recorded. Answer: C Difficulty: 2 Medium Topic: Adjusting Entries - Accrued Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 107) An accrued revenue represents: A) Customers paying cash in advance of the good or service to be provided. B) Revenue being recorded prior to cash collection from the customer. C) Revenue being recorded at the same time the cash is collected from the customer. D) Cash being collected from the customer prior to the revenue being recorded. Answer: B Difficulty: 2 Medium Topic: Adjusting Entries - Accrued Revenues Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

108) Making rent payments in advance is an example of a(n): A) Accrued revenue. B) Accrued expense. C) Deferred revenue. D) Prepaid expense. Answer: D Difficulty: 2 Medium Topic: Adjusting Entries - Prepaid Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 109) A gym offers one-year memberships for $99 and requires customers to pay the full amount of cash at the beginning of the membership period. For the gym, this is an example of a(n): A) Accrued expense. B) Accrued revenue. C) Prepaid expense. D) Deferred revenue. Answer: D Difficulty: 2 Medium Topic: Adjusting Entries - Deferred Revenues Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 110) Receiving a utility bill for costs in the current period but delaying payment until the following period is an example of a(n): A) Accrued expense. B) Accrued revenue. C) Prepaid expense. D) Deferred revenue. Answer: A Difficulty: 2 Medium Topic: Adjusting Entries - Accrued Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

111) Providing goods or services to customers on account is an example of a(n): A) Accrued expense. B) Accrued revenue. C) Prepaid expense. D) Deferred revenue. Answer: B Difficulty: 2 Medium Topic: Adjusting Entries - Accrued Revenues Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 112) An example of an adjusting entry would not include: A) Recording interest earned on bank account balances. B) Recording the expiration of prepaid rent. C) Recording unpaid salaries. D) Recording the purchase of office supplies. Answer: D Difficulty: 2 Medium Topic: Adjusting Entries - General Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 113) The adjusting entry required when goods and services are provided to customer for amounts previously recorded as deferred revenues includes: A) A debit to a liability. B) A debit to an asset. C) A credit to a liability. D) A credit to an asset. Answer: A Difficulty: 3 Hard Topic: Adjusting Entries - Deferred Revenues Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

114) The adjusting entry required to record accrued expenses includes: A) A credit to Cash. B) A debit to an asset. C) A credit to an asset. D) A credit to liability. Answer: D Difficulty: 3 Hard Topic: Adjusting Entries - Accrued Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 115) Adjusting entries: A) Often include the Cash account. B) Usually are recorded at the beginning of the accounting period. C) Always involve at least one income statement account and one balance sheet account. D) Adjust the balance of revenue and expense accounts to zero. Answer: C Difficulty: 2 Medium Topic: Adjusting Entries - General Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 116) On July 1, 2021, Charlie Co. paid $18,000 to Rent-An-Office for rent covering 18 months from July 2021 through December 2022. What adjusting entry should Charlie Co. record on December 31, 2021? A) Debit Rent Expense and credit Cash for $18,000. B) Debit Rent Expense and credit Prepaid Rent for $18,000. C) Debit Prepaid Rent and credit Rent Expense for $6,000. D) Debit Rent Expense and credit Prepaid Rent for $6,000. Answer: D Explanation: 2021 Rent Expense = ($18,000/18 months) × 6 months = $6,000. Difficulty: 3 Hard Topic: Adjusting Entries - Prepaid Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

117) Allen Inc. took out a one-year, 8%, $100,000 loan on March 31, 2021. Interest is due upon maturity of the loan. What adjusting entry, if any, should Allen Inc. record on December 31, 2021? A) Debit Interest Expense and credit Interest Payable for $6,000. B) Debit Interest Expense and credit Interest Payable for $2,000. C) No adjusting entry is necessary. D) Debit Interest Expense and credit Interest Payable for $8,000. Answer: A Explanation: $100,000 × 8% × 9/12 = $6,000. Difficulty: 3 Hard Topic: Adjusting Entries - Accrued Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 118) On May 1, 2021, Townsley borrowed $250,000 from Prime Bank by signing a three-year, 6% note payable. Interest is due each May 1. What adjusting entry, if any, should Townsley record on December 31, 2021? A) Debit Interest Expense and credit Interest Payable for $5,000. B) Debit Interest Expense and credit Interest Payable for $10,000. C) Debit Interest Expense and credit Interest Payable for $15,000. D) No adjusting entry is necessary. Answer: B Explanation: $250,000 × 6% × 8/12 = $10,000. Difficulty: 3 Hard Topic: Adjusting Entries - Accrued Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

119) On May 1, 2021, Townsley borrowed $250,000 from Prime Bank by signing a three-year, 6% note payable. Interest is due each May 1. What adjusting entry, if any, should Prime Bank record on December 31, 2021? A) Debit Interest Receivable and credit Interest Revenue for $5,000. B) Debit Interest Receivable and credit Interest Revenue for $10,000. C) Debit Interest Receivable and credit Interest Revenue for $15,000. D) No adjusting entry is necessary. Answer: B Explanation: $250,000 × 6% × 8/12 = $10,000. Difficulty: 3 Hard Topic: Adjusting Entries - Accrued Revenues Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 120) Which of the following is a possible adjusting entry? A) Debit Cash, credit Accounts Payable. B) Debit Service Revenue, credit Cash. C) Debit Salaries Expense, credit Salaries Payable. D) Debit Utilities Expense, credit Retained Earnings. Answer: C Difficulty: 2 Medium Topic: Adjusting Entries - Accrued Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 121) When a company makes an end-of-period adjusting entry that includes a credit to Prepaid Rent, the debit is usually made to: A) Cash. B) Rent Expense. C) Rent Payable. D) Rent Receivable. Answer: B Difficulty: 3 Hard Topic: Adjusting Entries - Prepaid Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

122) When a company makes an end-of-period adjusting entry, which includes a debit to Supplies Expense, the usual credit entry is made to: A) Accounts Payable. B) Supplies. C) Cash. D) Retained Earnings. Answer: B Difficulty: 3 Hard Topic: Adjusting Entries - Prepaid Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 123) Which of the following would not typically be used as an adjusting entry? A) Debit Rent Expense and credit Prepaid Rent. B) Debit Cash and credit Deferred Revenue. C) Debit Interest Expense and credit Interest Payable. D) Debit Deferred Revenue and credit Service Revenue. Answer: B Difficulty: 2 Medium Topic: Adjusting Entries - General Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 124) Yummy Foods purchased a one-year hazard insurance policy on August 1 and recorded the $4,200 premium to prepaid insurance. At its December 31 year-end, Yummy Foods would record which of the following adjusting entries? A) Debit Insurance Expense and credit Prepaid Insurance for $1,750. B) Debit Prepaid Insurance and credit Insurance Expense for $1,750. C) Debit Insurance Expense and credit Accounts Payable for $4,200. D) Debit Insurance Expense and credit Prepaid Insurance for $2,450. Answer: A Explanation: $4,200/12 months = $350 per month. $350 × 5 months = $1,750. Difficulty: 3 Hard Topic: Adjusting Entries - Prepaid Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

125) At the beginning of the year, a company had a balance in its prepaid insurance account of $48,400. During the year, $86,000 was paid for insurance. At the end of the year, after adjusting entries were recorded, the balance in the prepaid insurance account was $42,000. Insurance expense for the year would be: A) $92,400. B) $86,000. C) $134,400. D) $6,400. Answer: A Explanation: $48,400 + $86,000 − $42,000 = $92,400. Difficulty: 3 Hard Topic: Adjusting Entries - Prepaid Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 126) A company purchased $270,000 in supplies during the year. The supplies account increased by $10,000 during the year to an ending balance of $66,000. For what amount was the adjusting entry to supplies expense? A) $300,000. B) $280,000. C) $260,000. D) $240,000. Answer: C Explanation: $56,000 + $270,000 − $66,000 = $260,000. Difficulty: 3 Hard Topic: Adjusting Entries - Prepaid Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

127) A company receives a utility bill each month for services received. The company's policy is to pay the utility bill within 30 days of receipt. On December 31, 2021, the company receives a utility bill of $4,200 for the month of December and plans to pay the bill by January 30, 2022. What adjusting entry, if any, will the company record on December 31, 2021? A) Debit Utilities Expense and credit Cash for $4,200. B) Debit Utilities Expense and credit Utilities Payable for $4,200. C) Debit Utilities Payable and credit Utilities Expense for $4,200. D) No adjusting entry is necessary at the end of the year. Answer: B Difficulty: 3 Hard Topic: Adjusting Entries - Accrued Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 128) A company owes employee salaries of $16,000 at the end of the year. These salaries will be paid in the following year. What adjusting entry, if any, does the company need to record at the end of the year? A) Debit Salaries Expense and credit Cash for $16,000. B) Debit Salaries Expense and credit Salaries Payable for $16,000. C) Debit Salaries Payable and credit Salaries Expense for $16,000. D) No adjusting entry is necessary at the end of the year. Answer: B Difficulty: 3 Hard Topic: Adjusting Entries - Accrued Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

129) The employees of Neat Clothes work Monday through Friday. Every other Friday the company issues payroll checks totaling $32,000 (or $3,200 per weekday). The current pay period ends on Friday, January 3. Neat Clothes is now preparing financial statements for the year ended December 31. What is the adjusting entry to record accrued salaries at the end of the year? A) Debit Salaries Payable and credit Salaries Expense for $22,400. B) Debit Salaries Expense and credit Salaries Payable for $6,400. C) Debit Salaries Expense and credit Salaries Payable for $9,600. D) Debit Salaries Expense and credit Salaries Payable for $22,400. Answer: D Explanation: $3,200 × 7 days = $22,400. Difficulty: 3 Hard Topic: Adjusting Entries - Accrued Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 130) A company has a policy of paying salaries for contract labor on the 15th of the month following the labor services received. In December 2021, the company recorded $15,000 paid in salaries for labor services received in November 2021. In addition, labor services received in December 2021 were $12,000 and will be paid by the company on January 15, 2022. What adjusting entry will the company record on December 31, 2021? A) Debit Salaries Expense and credit Salaries Payable for $27,000. B) Debit Salaries Expense and credit Cash for $15,000. C) Debit Salaries Expense and credit Salaries Payable for $12,000. D) Debit Salaries Expense and credit Salaries Payable for $3,000. Answer: C Difficulty: 3 Hard Topic: Adjusting Entries - Accrued Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

131) PrimeFlix sells one-year online subscriptions for viewing classic movies. Customers are required to pay for the subscription at the beginning of the subscription period. On April 1, 2021, total sales of one-year subscriptions are $12,000. What adjusting entry does PrimeFlix need to record on December 31, 2021? A) Debit Deferred Revenue and credit Service Revenue for $9,000. B) Debit Deferred Revenue and credit Service Revenue for $12,000. C) Debit Service Revenue and credit Deferred Revenue for $9,000. D) Debit Service Revenue and credit Deferred Revenue for $12,000. Answer: A Explanation: $12,000/12 months = $1,000. $1,000 × 9 months = $9,000. Difficulty: 3 Hard Topic: Adjusting Entries - Deferred Revenues Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 132) On September 1, 2021, Gold Gaming sold 400 one-year subscriptions to its online gaming website for $90 each. The total amount received was credited to Deferred Revenue. What would be the required adjusting entry at December 31, 2021? A) Debit Deferred Revenue and credit Service Revenue for $36,000. B) Debit Service Revenue and credit Deferred Revenue for $24,000. C) Debit Deferred Revenue and credit Service Revenue for $24,000. D) Debit Deferred Revenue and credit Service Revenue for $12,000. Answer: D Explanation: $90/12 months = $7.50 per month. $7.50 × 4 months × 400 subscriptions = $12,000. Difficulty: 3 Hard Topic: Adjusting Entries - Deferred Revenues Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

133) During the year, Cheng Company paid salaries of $24,000. In addition, $8,000 in salaries has accrued by the end of the year but has not been paid. The year-end adjusting entry would include which one of the following? A) Debit to Salaries Expense for $32,000. B) Credit to Salaries Expense of $8,000. C) Debit to Salaries Payable for $24,000. D) Credit to Salaries Payable for $8,000. Answer: D Difficulty: 3 Hard Topic: Adjusting Entries - Accrued Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 134) At the beginning of December, Global Corporation had $2,000 in supplies on hand. During the month, supplies purchased amounted to $3,000, but by the end of the month the supplies balance was only $800. What is the appropriate month-end adjusting entry? A) Debit Cash $4,200, credit Supplies $4,200. B) Debit Supplies $4,200, credit Supplies Expense $4,200. C) Debit Supplies Expense $4,200, credit Supplies $4,200. D) Debit Cash $800, credit Supplies $800. Answer: C Explanation: Beginning supplies ($2,000) + purchases ($3,000) − ending supplies ($800) = $4,200. Difficulty: 3 Hard Topic: Adjusting Entries - Prepaid Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

135) On October 1, 2021, a company purchases equipment for $72,000. The equipment is expected to be used for the next four years (48 months). What adjusting entry should the company record on December 31, 2021? A) Debit Depreciation Expense and credit Cash for $72,000. B) Debit Depreciation Expense and credit Accumulated Depreciation for $72,000. C) Debit Equipment and credit Depreciation Expense for $4,500. D) Debit Depreciation Expense and credit Accumulated Depreciation for $4,500. Answer: D Explanation: 2021 Depreciation Expense = ($72,000/48 months) × 3 months = $4,500. Difficulty: 3 Hard Topic: Adjusting Entries - Prepaid Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 136) On October 1, 2021, a company purchases equipment for $72,000. The equipment is expected to be used for the next four years (48 months). What adjusting entry should the company record on December 31, 2022? A) Debit Depreciation Expense and credit Accumulated Depreciation for $13,500. B) Debit Depreciation Expense and credit Accumulated Depreciation for $18,000. C) Debit Depreciation Expense and credit Accumulated Depreciation for $22,500. D) Debit Depreciation Expense and credit Accumulated Depreciation for $4,500. Answer: B Explanation: 2022 Depreciation Expense = ($72,000/48 months) × 12 months = $18,000. Difficulty: 3 Hard Topic: Adjusting Entries - Prepaid Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

137) On November 1, 2021, a company signs a one-year contract to provide services. The agreement specifies payments of $4,500 to be received every three months for a total of $18,000 over the entire year ($1,500 per month). No entry is made on November 1, 2021, at the time the contract is signed. What adjusting entry does the company need to record at the end of the year? A) Debit Accounts Receivable and credit Service Revenue for $15,000. B) Debit Service Revenue and credit Accounts Receivable for $12,000. C) Debit Accounts Receivable and credit Service Revenue for $3,000. D) Debit Accounts Receivable and credit Service Revenue for $18,000. Answer: C Explanation: $1,500 per month x 2 months = $3,000. Difficulty: 3 Hard Topic: Adjusting Entries - Accrued Revenues Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 138) A company provides maintenance services to customers. The company's policy is to provide services and then bill customers on the 10th of the following month. In December 2021, the company provided services of $14,000 and plans to bill customers on January 10, 2022. What adjusting entry, if any, will the company record on December 31, 2021? A) Debit Accounts Receivable and credit Deferred Revenue for $14,000. B) Debit Accounts Receivable and credit Service Revenue for $14,000. C) Debit Service Revenue and credit Accounts Receivable for $14,000. D) No adjusting entry is necessary at the end of the year. Answer: B Difficulty: 3 Hard Topic: Adjusting Entries - Accrued Revenues Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

139) Prior to adjusting entries, Prepaid Rent had a balance of $8,300. The following year-end adjusting entry was made by the company: Rent Expense

6,800

Prepaid Rent

6,800

What balance would be shown for Prepaid Rent in the adjusted trial balance? A) $1,500. B) $6,800. C) $8,300. D) $15,100. Answer: A Explanation: $8,300 − $6,800 = $1,500. Difficulty: 3 Hard Topic: Adjusted Trial Balance Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 140) Prior to adjusting entries, Salaries Expense had a balance of $22,300. The following year-end adjusting entry was made by the company: Salaries Expense Salaries Payable

4,400 4,400

What balance would be shown for Salaries Expense in the adjusted trial balance? A) $4,400. B) $17,900. C) $22,300. D) $26,700. Answer: D Explanation: $22,300 + $4,400 = $26,700. Difficulty: 3 Hard Topic: Adjusted Trial Balance Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

141) On November 1, $4,800 of rent on equipment for the next six months was paid and charged to Prepaid Rent. At the end of the year, the financial statements would report: A) Rent Expense, $4,800; Prepaid Rent $0. B) Rent Expense, $1,600; Prepaid Rent $3,200. C) Rent Expense, $1,600; Prepaid Rent $4,800. D) Rent Expense, $3,200; Prepaid Rent $1,600. Answer: B Explanation: $4,800/6 months = $800 per month. $800 × 2 months = $1,600 (Rent Expense). Four months ($3,200 = $800 × 4 months) of Prepaid Rent remain. Difficulty: 3 Hard Topic: Adjusted Trial Balance Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 142) Eve's Apples opened for business on January 1, 2021, and paid for two insurance policies effective that date. The liability policy was $36,000 for 18 months, and the crop damage policy was $12,000 for a two-year term. What was the balance in Eve's Prepaid Insurance account as of December 31, 2021? A) $9,000. B) $18,000. C) $30,000. D) $48,000. Answer: B Explanation: Prepaid liability insurance: $36,000 × 6/18 = $12,000. Prepaid crop insurance: $12,000 × 12/24 = $6,000. $12,000 + $6,000 = $18,000. Difficulty: 3 Hard Topic: Adjusted Trial Balance Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

143) PrimeFlix sells one-year online subscriptions for viewing classic movies. Customers are required to pay for the subscription at the beginning of the subscription period. On April 1, 2021, total sales of one-year subscriptions are $12,000. What is the adjusted balance of Deferred Revenue on December 31, 2021? A) $9,000. B) $3,000. C) $0. D) $12,000. Answer: B Explanation: $12,000 (April 1) − $9,000 (year-end adjustment)* = $3,000. * $12,000 × 9 months / 12 months = $9,000. Difficulty: 3 Hard Topic: Adjusted Trial Balance Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 144) A list of all accounts and their balances after updating account balances for adjusting entries is referred to as: A) A trial balance. B) An adjusted trial balance. C) A post-closing trial balance. D) An accounting trial balance. Answer: B Difficulty: 1 Easy Topic: Adjusted Trial Balance Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 145) An adjusted trial balance: A) Is a list of all accounts and their balances after adjusting entries. B) Is a list of all accounts and their balances before adjusting entries. C) Is a list of all accounts and their balances after closing entries. D) Is a trial balance adjusted for cash-basis accounting. Answer: A Difficulty: 1 Easy Topic: Adjusted Trial Balance Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 56 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

146) Consider the adjustment process at the end of the accounting period. 1. Record the adjusting entries in the journal. 2. Prepare an adjusted trial balance to check the equality of the debits and credits. 3. Determine the accounts requiring adjustment, using the unadjusted trial balance. 4. Post the adjusting entries to the general ledger. Place the actions above in the proper order. A) 1, 4, 3, 2. B) 1, 2, 4, 3. C) 3, 4, 2, 1. D) 3, 1, 4, 2. Answer: D Difficulty: 2 Medium Topic: Adjusted Trial Balance Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 147) The adjusted trial balance should be prepared ________ the financial statements are prepared in order to prove the ________ of the debits and credits. A) after; equality B) before; accuracy C) before; equality D) after; accuracy Answer: C Difficulty: 2 Medium Topic: Adjusted Trial Balance Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

148) Which of the following trial balances shows account balances that incorporate current year deferrals and accruals? A) Adjusted trial balance. B) Final trial balance. C) Unadjusted trial balance. D) Cash-basis trial balance. Answer: A Difficulty: 1 Easy Topic: Adjusted Trial Balance Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 149) A company's accountant is trying to prepare an adjusted trial balance from the list of accounts below. Cash Retained Earnings Prepaid Rent Salaries Expense Equipment Service Revenue Miscellaneous Expense Supplies Dividends Accounts Payable Common Stock

12,000 31,000 2,000 15,000 68,000 40,000 10,000 4,000 3,000 5,000 38,000

What is the total amount of debits? A) $114,000. B) $86,000. C) $81,000. D) $11,000. Answer: A Explanation: Cash ($12,000) + Prepaid Rent ($2,000) + Salaries Expense ($15,000) + Equipment ($68,000) + Miscellaneous Expense ($10,000) + Supplies ($4,000) + Dividends ($3,000) = $114,000. Difficulty: 3 Hard Topic: Adjusted Trial Balance Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance. Bloom's: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking 58 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

150) A company's accountant is trying to prepare an adjusted trial balance from the list of accounts below. Cash Retained Earnings Prepaid Rent Salaries Expense Equipment Service Revenue Miscellaneous Expense Supplies Dividends Accounts Payable Common Stock

12,000 31,000 2,000 15,000 68,000 40,000 10,000 4,000 3,000 5,000 38,000

What is the total amount of credits? A) $111,000. B) $81,000. C) $114,000. D) $86,000. Answer: C Explanation: Retained Earnings ($31,000) + Service Revenue ($40,000) + Accounts Payable ($5,000) + Common Stock ($38,000) = $114,000. Difficulty: 3 Hard Topic: Adjusted Trial Balance Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance. Bloom's: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking 151) Which of the following is true about an income statement? A) It reports activity for a period of time. B) It does not include dividends paid. C) It reports revenues and expenses. D) All of the other answers are true. Answer: D Difficulty: 2 Medium Topic: Financial Statements - Income Statement Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

152) Which of the following best describes the information reported in the income statement? A) The portion of profits paid in cash to stockholders. B) The current resources available to pay current obligations. C) The amount recognized from providing goods and services to customers compared to the cost of doing so. D) The extent to which cash inflows exceed cash outflows. Answer: C Difficulty: 2 Medium Topic: Financial Statements - Income Statement Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 153) The following table contains financial information for Trumpeter Inc. before closing entries: Cash Supplies Prepaid Rent Salaries Expense Equipment Service Revenue Miscellaneous Expense Dividends Accounts Payable Common Stock Retained Earnings

12,000 4,500 2,000 4,500 65,000 30,000 20,000 3,000 5,000 68,000 8,000

What is Trumpeter's net income? A) $3,500. B) $2,500. C) $5,000. D) $5,500. Answer: D Explanation: Revenues ($30,000) − Expenses ($4,500 + $20,000) = $5,500. Difficulty: 3 Hard Topic: Financial Statements - Income Statement Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

154) If a company incorrectly records a payment as an expense instead of an asset, how will this error affect net income in the current period? A) Net income will be too low. B) Net income will be correct. C) Net income will be too high. D) Not possible to determine. Answer: A Difficulty: 3 Hard Topic: Financial Statements - Income Statement Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 155) If a company records cash received for services to be provided in the future with a debit to Cash and a credit to Service Revenue, how will this error affect net income for the current period? A) Net income will be too low. B) Net income will be correct. C) Net income will be too high. D) Not possible to determine. Answer: C Difficulty: 3 Hard Topic: Financial Statements - Income Statement Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 156) The statement of stockholders' equity includes which of the following for the period? A) Details of a company's profitability that represents stockholders' claims. B) Changes in stockholders' equity accounts. C) Inflows and outflows of cash that benefit stockholders. D) Current assets available to pay current liabilities to reduce risk to stockholders. Answer: B Difficulty: 1 Easy Topic: Financial Statements - Statement of Stockholders' Equity Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting

157) The statement of stockholders' equity includes: A) Net income from the income statement. B) The amount of stock issued in the current period. C) Dividends declared to stockholders in the current period. D) All of the other answers are correct. Answer: D Difficulty: 1 Easy Topic: Financial Statements - Statement of Stockholders' Equity Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting 158) In the statement of stockholders' equity, Retained Earnings had a beginning balance of $25,000. During the period, the company reports a net income of $10,000 and a dividend of $4,000. The ending balance in the Retained Earnings account is: A) $10,000. B) $35,000. C) $39,000. D) $31,000. Answer: D Explanation: Beginning Retained Earnings ($25,000) + Net Income ($10,000) − Dividends ($4,000) = Ending Retained Earnings. Difficulty: 3 Hard Topic: Financial Statements - Statement of Stockholders' Equity Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

159) In the statement of stockholders' equity, Retained Earnings had a beginning balance of $60,000. During the period, the company reports a net loss of $10,000 and net cash outflows of $15,000. The ending balance in the Retained Earnings account is: A) $60,000. B) $35,000. C) $50,000. D) $45,000. Answer: C Explanation: Beginning Retained Earnings ($60,000) − Net Loss ($10,000) = Ending Retained Earnings. Difficulty: 3 Hard Topic: Financial Statements - Statement of Stockholders' Equity Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement 160) In the statement of stockholders' equity, the balance of Retained Earnings increased by $32,000. The company declared a dividend of $10,000 during the year. What was the net income for the year? A) $10,000. B) $32,000. C) $42,000. D) $22,000. Answer: C Explanation: Increase in Retained Earnings ($32,000) = Net Income − Dividends ($10,000). Difficulty: 3 Hard Topic: Financial Statements - Statement of Stockholders' Equity Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

161) A classified balance sheet ________. A) Shows only current assets and current liabilities B) Shows changes in assets, liabilities, revenues and expenses C) Contains confidential information D) Shows subtotals for current assets and current liabilities Answer: D Difficulty: 2 Medium Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 162) Which financial statement provides information for a point in time only? A) Statement of cash flows. B) Income statement. C) Statement of stockholders' equity. D) Balance sheet. Answer: D Difficulty: 1 Easy Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting 163) Current assets include: A) Assets that must be paid for within 12 months. B) Assets that will be used up or converted to cash within 12 months. C) Assets that will be used for many years. D) Any assets that were purchased for cash. Answer: B Difficulty: 2 Medium Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

164) With respect to current assets, liquidity refers to: A) How quickly the asset can be converted to cash. B) The magnitude of the asset's account balance. C) Whether cash was paid for the asset at the time of acquisition. D) The accuracy of the balance being reported. Answer: A Difficulty: 2 Medium Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 165) The following financial information is from Shovels Construction Company: Accounts Payable Buildings Cash Accounts Receivable Sales Tax Payable Retained Earnings Supplies Notes Payable (due in 18 months) Interest Payable Common Stock

$ 15,000 80,000 10,500 9,500 4,500 47,500 40,000 35,000 3,000 35,000

What is the amount of current assets, assuming the accounts above reflect normal activity? A) $20,000. B) $60,000. C) $140,000. D) $175,000. Answer: B Explanation: Cash ($10,500), Accounts Receivable ($9,500), and Supplies ($40,000) are normally current assets. Difficulty: 3 Hard Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

166) Consider the following items: Land Accounts Receivable Notes Payable (due in three years) Accounts Payable Retained Earnings Prepaid Rent Deferred Revenue Buildings Notes Payable (due in six months) Equipment How many of the items listed above are generally long-term assets? A) Two. B) Three. C) Four. D) Five. Answer: B Explanation: Long-term assets include Land, Buildings, and Equipment. Difficulty: 2 Medium Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 167) Resources owned by the company that will provide a benefit for more than one year are called: A) Current assets. B) Current liabilities. C) Long-term assets. D) Revenues. Answer: C Difficulty: 1 Easy Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting

168) Long-term productive assets used in the normal course of business are typically classified as: A) Current assets. B) Investments. C) Intangible assets. D) Property, plant, and equipment. Answer: D Difficulty: 1 Easy Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting 169) Patents, copyrights, franchises, and trademarks are examples of: A) Current assets. B) Investments. C) Intangible assets. D) Property, plant, and equipment. Answer: C Difficulty: 1 Easy Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting 170) A current liability is defined as: A) An amount borrowed less than one year ago. B) An amount due to an employee. C) An amount due within one year. D) A small amount due. Answer: C Difficulty: 1 Easy Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting

171) An advantage of a classified balance sheet is that it is easy to see: A) If the company is likely to be profitable in future periods. B) If the company is profitable in the current period. C) If current assets are large enough to pay current liabilities. D) If dividends have been paid to stockholders. Answer: C Difficulty: 2 Medium Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 172) Which of the following current liabilities does not involve the future payment of cash? A) Interest Payable. B) Deferred Revenue. C) Accounts Payable. D) Salaries Payable. Answer: B Difficulty: 2 Medium Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 173) The Deferred Revenue account is shown in which statement? A) Income statement. B) Statement of cash flows. C) Balance sheet. D) Statement of stockholders' equity. Answer: C Difficulty: 2 Medium Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

174) The following financial information is from Bronco Company. All debt is due within one year unless stated otherwise. Retained Earnings Supplies Equipment Accounts Receivable Deferred Revenue Accounts Payable Common Stock Notes Payable (due in 18 months) Interest Payable Cash

$ 52,000 37,000 72,000 8,600 6,000 15,000 25,000 35,000 7,000 22,400

What is the amount of current liabilities? A) $63,000. B) $28,000. C) $45,600. D) $22,000. Answer: B Explanation: Deferred Revenue ($6,000), Accounts Payable ($15,000), and Interest Payable ($7,000) are normally current liabilities. Difficulty: 3 Hard Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 175) Which of the following are reported as stockholders' equity in a classified balance sheet? A) Debits and Credits. B) Revenues and Expenses. C) Common Stock and Retained Earnings. D) Assets and Liabilities. Answer: C Difficulty: 2 Medium Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

176) The following table contains financial information for Trumpter Inc. before closing entries: Cash Supplies Prepaid Rent Salaries Expense Equipment Service Revenue Miscellaneous Expense Dividends Accounts Payable Common Stock Retained Earnings

12,000 4,500 2,000 4,500 65,000 30,000 20,000 3,000 5,000 68,000 8,000

What is the amount of Trumpter's total assets? A) $81,500. B) $82,500. C) $68,500. D) $83,500. Answer: D Explanation: Assets include Cash ($12,000), Supplies ($4,500), Prepaid Rent ($2,000), and Equipment ($65,000). Difficulty: 3 Hard Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

177) The following table contains financial information for Trumpeter Inc. before closing entries: Cash Supplies Prepaid Rent Salaries Expense Equipment Service Revenue Miscellaneous Expense Dividends Accounts Payable Common Stock Retained Earnings

12,000 4,500 2,000 4,500 65,000 30,000 20,000 3,000 5,000 68,000 8,000

What is the amount of Trumpeter's total liabilities? A) $5,000. B) $78,500. C) $68,500. D) $83,500. Answer: A Explanation: Liabilities include Accounts Payable ($5,000). Difficulty: 3 Hard Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

178) The following table contains financial information for Trumpeter Inc. before closing entries: Cash Supplies Prepaid Rent Salaries Expense Equipment Service Revenue Miscellaneous Expense Dividends Accounts Payable Common Stock Retained Earnings

12,000 4,500 2,000 4,500 65,000 30,000 20,000 3,000 5,000 68,000 8,000

What is the amount of Trumpeter's total stockholders' equity? A) $5,000. B) $78,500. C) $68,500. D) $83,500. Answer: B Explanation: Total stockholders' equity includes common stock plus (ending) retained earnings. Common stock is $68,000. Ending retained earnings = beginning retained earnings ($8,000) plus revenues ($30,000) less expenses ($24,500) less dividends ($3,000) = $10,500. Total stockholders' equity = $68,000 + $10,500 = $78,500. Difficulty: 3 Hard Topic: Financial Statements - Balance Sheet; Financial Statements - Statement of Stockholders' Equity Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

179) If a company records cash received for services to be provided in the future with a debit to Cash and a credit to Service Revenue, how will this error affect total assets for the current period? A) Total assets will be too low. B) Total assets will be correct. C) Total assets will be too high. D) Not possible to determine. Answer: B Difficulty: 3 Hard Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 180) Providing services to customers on account would affect the balances reported in which financial statement(s)? A) Income statement. B) Statement of stockholders' equity. C) Balance sheet. D) All of the financial statements in the other answers would be affected. Answer: D Difficulty: 3 Hard Topic: Financial Statements - Income Statement; Financial Statements - Balance Sheet; Financial Statements - Statement of Stockholders' Equity Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 181) If a company incorrectly records Service Revenue too high, which of the following is true? A) Net income in the income statement is overstated. B) Retained earnings in the statement of stockholders' equity is overstated. C) Total stockholders' equity in the balance sheet is overstated. D) All of the other answers are correct. Answer: D Difficulty: 3 Hard Topic: Financial Statements - Income Statement; Financial Statements - Balance Sheet; Financial Statements - Statement of Stockholders' Equity Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 182) When a company owes employee salaries at the end of the period but fails to make an 73 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

adjusting entry for that amount owed, which of the following is true? A) Net income in the income statement is overstated. B) Retained earnings in the statement of stockholders' equity is overstated. C) Total stockholders' equity in the balance sheet is overstated. D) All of the other answers are correct. Answer: D Difficulty: 3 Hard Topic: Financial Statements - Income Statement; Financial Statements - Balance Sheet; Financial Statements - Statement of Stockholders' Equity Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 183) Current assets in a classified balance sheet are typically listed in order of: A) Operational functionality. B) Lowest to highest amount. C) Importance to the company's profitability. D) Liquidity. Answer: D Difficulty: 1 Easy Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting 184) The liquidity of an asset in a classified balance sheet refers to: A) The dollar magnitude of the asset. B) How quickly the asset will be converted to cash. C) The length of time for which the company has owned the asset. D) The likelihood that the asset will help to increase the company's profitability. Answer: B Difficulty: 2 Medium Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Financial Reporting

185) Which of the following describes the purpose(s) of closing entries? A) Adjust the balances of asset and liability accounts for unrecorded activity during the period. B) Transfer the balances of temporary accounts to common stock. C) Reduce the balances of the temporary accounts to zero to prepare them for measuring activity in the next period. D) Transfer the balances of temporary accounts to common stock; reduce the balances of the temporary accounts to zero to prepare them for measuring activity in the next period. Answer: C Difficulty: 2 Medium Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 186) The primary purpose of closing entries is to: A) Prove the equality of the debit and credit entries in the general journal. B) Ensure that all assets and liabilities are recognized in the appropriate period. C) Update the balance of Retained Earnings and prepare revenue, expense, and dividend accounts for next period's transactions. D) Assure that adjusting entries balance. Answer: C Difficulty: 2 Medium Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 187) The closing process includes which of the following? A) Closing the balance of the retained earnings account to zero. B) Closing the balance of only the dividends account to zero. C) Closing the balances of only revenue and expense accounts to zero. D) Closing the balances of revenue, expense and dividend accounts to zero. Answer: D Difficulty: 2 Medium Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

188) The purpose of closing entries is to transfer: A) Accounts Receivable to Retained Earnings when an account is fully paid. B) Balances in temporary accounts to a permanent account. C) Inventory to Cost of Goods Sold when merchandise is sold. D) Assets and liabilities when operations are discontinued. Answer: B Difficulty: 2 Medium Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 189) Which of the following is a permanent account? A) Dividends. B) Service Revenue. C) Advertising Expense. D) Retained Earnings. Answer: D Difficulty: 2 Medium Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 190) Which of the following is true concerning temporary and permanent accounts? A) Cash is a temporary account. B) Permanent accounts represent activity over the entire life of the company. C) Permanent accounts must be closed at the end of every reporting period. D) Temporary accounts represent activity over the previous three years. Answer: B Difficulty: 2 Medium Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

191) The following table contains financial information for Fisher Inc. before closing entries: Cash Common Stock Supplies Advertising Expense Accounts Payable Service Revenue Salaries Expense Prepaid Rent Dividends Equipment

23,000 34,000 4,000 2,000 20,000 30,000 3,000 4,000 3,000 45,000

How many of the above accounts are permanent? A) Three. B) Four. C) Five. D) Six. Answer: D Explanation: Permanent accounts include Cash, Common Stock, Supplies, Accounts Payable, Prepaid Rent, and Equipment. Difficulty: 2 Medium Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Understand AACSB: Analytical Thinking AICPA: FN Measurement 192) Permanent accounts would not include: A) Interest Expense. B) Salaries Payable. C) Prepaid Rent. D) Deferred Revenues. Answer: A Difficulty: 2 Medium Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

193) Permanent accounts would not include: A) Accounts Payable. B) Office Supplies. C) Utilities Expense. D) Common Stock. Answer: C Difficulty: 2 Medium Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 194) Temporary accounts would not include: A) Salaries Payable. B) Advertising Expense. C) Supplies Expense. D) Dividends. Answer: A Difficulty: 2 Medium Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

195) Of the following six accounts, which ones have temporary balances: (1) Service Revenue (2) Dividends (3) Salaries Expense (4) Common Stock (5) Retained Earnings (6) Cash A) (1), (2), and (3). B) (4), (5), and (6). C) (2), (4), and (5). D) (1), (3), and (5). Answer: A Difficulty: 2 Medium Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 196) Which of the following accounts will NOT be involved in closing entries? A) Prepaid Insurance. B) Service Revenue. C) Utilities Expense. D) Retained Earnings. Answer: A Difficulty: 2 Medium Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

197) When a company prepares closing entries, which one of the following is NOT a correct closing entry? A) Debit Retained Earnings; credit Salaries Expense. B) Debit Dividends; credit Retained Earnings. C) Debit Service Revenue; credit Retained Earnings. D) All of the other answers are incorrect. Answer: B Difficulty: 2 Medium Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 198) The ending balance of Retained Earnings can best be described as: A) The amount of cash received from stockholders over the life of the company. B) The amount of net income over the life of the company not paid to owners in the form of dividends. C) The amount of dividends paid over the life of the company. D) The amount of net income over the life of the company. Answer: B Difficulty: 2 Medium Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 199) The ending Retained Earnings balance of Juan's Mexican Restaurant chain increased by $3.2 million from the beginning of the year. The company declared a dividend of $1.3 million during the year. What was the amount of net income during the year? A) $1.9 million. B) $3.2 million. C) $4.5 million. D) $1.3 million. Answer: C Explanation: Increase in Retained Earnings ($3.2 million) = Net Income − Dividends ($1.3 million). Net Income = $3.2 million + $1.3 million = $4.5 million. Difficulty: 3 Hard Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 80 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

200) The Retained Earnings account had a beginning credit balance of $26,000. During the period, the business had a net loss $12,000, and the company paid dividends of $8,000. The ending balance in the Retained Earnings account is: A) $6,000. B) $30,000. C) $22,000. D) $14,000. Answer: A Explanation: Beginning Retained Earnings ($26,000) − Net Loss ($12,000) − Dividends ($8,000) = Ending Retained Earnings ($6,000). Difficulty: 3 Hard Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement 201) In the first three years of operations, Lindsey Corporation reported net income(loss) of $(150,000), $100,000, and $250,000. At the end of the third year, Lindsey Corporation has a balance of $120,000 in its Retained Earnings account. What is the total amount of dividends Lindsey Corporation paid over the three years? A) $130,000. B) $120,000. C) $80,000. D) $380,000. Answer: C Explanation: Beginning Retained Earnings ($0) + Net Income(Loss) [$(150,000) + $100,000 + $250,000] − Ending Retained Earnings ($120,000) = Dividends ($80,000). Difficulty: 3 Hard Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

202) For the first three years of operations, the company reports net income of $1,000, $2,000, and $3,000, and pays dividends of $500, $1,000, and $1,000. What is the balance of retained earnings at the end of the third year? A) $2,000. B) $2,500. C) $3,500. D) $6,000. Answer: C Explanation: Beginning Retained Earnings ($0) + Net Income ($1,000 + $2,000 + $3,000) − Dividends ($500 + $1,000 + $1,000) = Ending Retained Earnings ($3,500). Difficulty: 3 Hard Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement 203) The closing entry for expenses includes: A) A debit to Dividends and a credit to all expense accounts. B) A debit to Retained Earnings and a credit to all expense accounts. C) A debit to Revenues and a credit to Retained Earnings. D) A debit to Revenues and a credit to all expense accounts. Answer: B Difficulty: 2 Medium Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 204) Which of the following is a possible closing entry? A) Debit Cash, credit Service Revenue. B) Debit Cash, credit Retained Earnings. C) Debit Service Revenue, credit Retained Earnings. D) Debit Dividends, credit Retained Earnings. Answer: C Difficulty: 2 Medium Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

205) Frosty Inc. has the following balances on December 31 prior to closing entries: Revenues Retained Earnings, Jan. 1 Cash Expenses Accounts Payable Dividends Supplies

35,000 10,000 7,000 23,000 4,000 1,000 18,000

Based upon the balances above, what net adjustment would be made to Retained Earnings due to closing entries? A) Increase of $11,000. B) Increase of $13,000. C) Increase of $12,000. D) Increase of $14,000. Answer: A Explanation: Revenues ($35,000) − Expenses ($23,000) − Dividends ($1,000) = $11,000. Difficulty: 3 Hard Topic: Closing Entries; Post-Closing Trial Balance Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries.; 03-07 Post closing entries and prepare a post-closing trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement 206) A list of all accounts and their balances after posting closing entries is referred to as: A) A trial balance. B) An adjusted trial balance. C) A post-closing trial balance. D) An accounting trial balance. Answer: C Difficulty: 1 Easy Topic: Post-Closing Trial Balance Learning Objective: 03-07 Post closing entries and prepare a post-closing trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking

207) A post-closing trial balance: A) Is a list of all accounts and their balances after adjusting entries. B) Is a list of all accounts and their balances before adjusting entries. C) Is a list of all accounts and their balances after closing entries. D) Is a trial balance adjusted for cash-basis accounting. Answer: C Difficulty: 1 Easy Topic: Post-Closing Trial Balance Learning Objective: 03-07 Post closing entries and prepare a post-closing trial balance. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 208) Which one of the following accounts would NOT have a balance after closing entries? A) Deferred Revenue. B) Supplies. C) Prepaid Rent. D) Dividends. Answer: D Difficulty: 2 Medium Topic: Post-Closing Trial Balance Learning Objective: 03-07 Post closing entries and prepare a post-closing trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 209) Which of the following accounts is(are) listed in a post-closing trial balance? A) Prepaid Rent. B) Accounts Payable. C) Salaries Expense. D) Two of these three accounts would be included in a post-closing trial balance. Answer: D Explanation: Prepaid Rent and Accounts Payable. Difficulty: 2 Medium Topic: Post-Closing Trial Balance Learning Objective: 03-07 Post closing entries and prepare a post-closing trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

210) Which of the following statements is true regarding the post-closing trial balance? A) The post-closing trial balance will be distributed to investors and other stakeholders along with the financial statements. B) The post-closing trial balance is a report prepared before the adjustments and the financial statements to prove that debits equal credits. C) The post-closing trial balance is an internal report prepared as the last step in the accounting cycle. D) The post-closing trial balance proves that all entries have been made correctly and accurately during the accounting period. Answer: C Difficulty: 2 Medium Topic: Post-Closing Trial Balance Learning Objective: 03-07 Post closing entries and prepare a post-closing trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

Match each term associated with accrual-basis and cash-basis accounting with its most appropriate description. A) A company pays cash for supplies in May and uses those supplies in June. The expense is recorded in June. B) A company receives cash from customers in May and performs services in June. The revenue is recorded in May. C) A company pays cash for supplies in May and uses those supplies in June. The expense is recorded in May. D) Formal concept which states that sales of products or services are recorded in the period they are provided to customers. E) Informal concept in accounting which states that expenses are recorded in the same period as the revenues they help to generate. F) A company receives cash from customers in May and performs services in June. The revenue is recorded in June. 211) Cash-basis expense Difficulty: 2 Medium Topic: Accrual-Basis Accounting; Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded.; 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 212) Accrual-basis expense Difficulty: 2 Medium Topic: Accrual-Basis Accounting; Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded.; 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 213) Cause-and-effect Difficulty: 2 Medium Topic: Accrual-Basis Accounting; Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded.; 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

214) Accrual-basis revenue Difficulty: 2 Medium Topic: Accrual-Basis Accounting; Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded.; 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 215) Revenue recognition principle Difficulty: 2 Medium Topic: Accrual-Basis Accounting; Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded.; 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 216) Cash basis revenue Difficulty: 2 Medium Topic: Accrual-Basis Accounting; Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded.; 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking Answers: 211) C 212) A 213) E 214) F 215) D 216) B

Match each type of adjusting entry with its definition. A) Record a revenue in the current period that will be collected in cash in a future period. B) Record an expense in the current period that will be paid in cash in a future period. C) Receive cash in the current period that will be recorded as a revenue in a future period. D) Pay cash (or have an obligation to pay cash) in the current period that will be recorded as an expense in a future period. 217) Deferred revenue Difficulty: 2 Medium Topic: Adjusting Entries - Prepaid Expenses; Adjusting Entries - Deferred Revenues; Adjusting Entries - Accrued Expenses; Adjusting Entries - Accrued Revenues Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 218) Accrued expenses Difficulty: 2 Medium Topic: Adjusting Entries - Prepaid Expenses; Adjusting Entries - Deferred Revenues; Adjusting Entries - Accrued Expenses; Adjusting Entries - Accrued Revenues Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 219) Accrued revenue Difficulty: 2 Medium Topic: Adjusting Entries - Prepaid Expenses; Adjusting Entries - Deferred Revenues; Adjusting Entries - Accrued Expenses; Adjusting Entries - Accrued Revenues Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 220) Prepaid expenses Difficulty: 2 Medium Topic: Adjusting Entries - Prepaid Expenses; Adjusting Entries - Deferred Revenues; Adjusting Entries - Accrued Expenses; Adjusting Entries - Accrued Revenues Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking Answers: 217) C 218) B 219) A 220) D

Match each term related to financial statements with its description. A) A list of accounts showing total assets equal total liabilities plus total stockholders' equity. B) The distinction between current and long-term activities. C) A list of all accounts and their balances after adjusting entries have been prepared. D) A list of accounts showing total revenues minus total expenses equal net income. E) A statement showing the change in the balance of common stock and retained earnings for the period. 221) Statement of stockholders' equity Difficulty: 2 Medium Topic: Adjusted Trial Balance; Financial Statements - Income Statement; Financial Statements-Statement of Stockholders Equity; Financial Statements - Balance Sheet Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance.; 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 222) Adjusted trial balance Difficulty: 2 Medium Topic: Adjusted Trial Balance; Financial Statements - Income Statement; Financial Statements-Statement of Stockholders Equity; Financial Statements - Balance Sheet Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance.; 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 223) Classified Difficulty: 2 Medium Topic: Adjusted Trial Balance; Financial Statements - Income Statement; Financial Statements-Statement of Stockholders Equity; Financial Statements - Balance Sheet Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance.; 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

224) Balance sheet Difficulty: 2 Medium Topic: Adjusted Trial Balance; Financial Statements - Income Statement; Financial Statements-Statement of Stockholders Equity; Financial Statements - Balance Sheet Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance.; 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 225) Income statement Difficulty: 2 Medium Topic: Adjusted Trial Balance; Financial Statements - Income Statement; Financial Statements-Statement of Stockholders Equity; Financial Statements - Balance Sheet Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance.; 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking Answers: 221) E 222) C 223) B 224) A 225) D

Match each term related to closing entries with its description. A) Revenues, expenses, and dividends. B) List of permanent accounts and their balances. C) List of permanent and temporary accounts and their balances. D) Assets, liabilities, and stockholders' equity. E) Transfer of temporary balances to retained earnings. 226) Temporary accounts Difficulty: 2 Medium Topic: Adjusted Trial Balance; Closing Entries; Post-Closing Trial Balance Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance.; 03-06 Demonstrate the purposes and recording of closing entries.; 03-07 Post closing entries and prepare a post-closing trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 227) Post-closing trial balance Difficulty: 2 Medium Topic: Adjusted Trial Balance; Closing Entries; Post-Closing Trial Balance Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance.; 03-06 Demonstrate the purposes and recording of closing entries.; 03-07 Post closing entries and prepare a post-closing trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 228) Closing entries Difficulty: 2 Medium Topic: Adjusted Trial Balance; Closing Entries; Post-Closing Trial Balance Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance.; 03-06 Demonstrate the purposes and recording of closing entries.; 03-07 Post closing entries and prepare a post-closing trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 229) Adjusted trial balance Difficulty: 2 Medium Topic: Adjusted Trial Balance; Closing Entries; Post-Closing Trial Balance Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance.; 03-06 Demonstrate the purposes and recording of closing entries.; 03-07 Post closing entries and prepare a post-closing trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 91 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

230) Permanent accounts Difficulty: 2 Medium Topic: Adjusted Trial Balance; Closing Entries; Post-Closing Trial Balance Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance.; 03-06 Demonstrate the purposes and recording of closing entries.; 03-07 Post closing entries and prepare a post-closing trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking Answers: 226) A 227) B 228) E 229) C 230) D 231) For each transaction below, calculate the amount of revenue to be recognized in the current period using accrual-basis accounting: (a) Performed $24,000 of services during the month and received full cash payment from customers at the time of service. (b) Performed $9,000 of services during the month and billed customers. Customers are expected to pay next month. (c) Received $12,000 cash from customers for services to be provided next month. Answer: (a) $24,000; (b) $9,000; (c) $0. Transaction (c) represents a liability, since revenue has not yet been recognized. Difficulty: 3 Hard Topic: Accrual-Basis Accounting; Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded.; 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

232) For each transaction below, calculate the amount of expense to be recognized in the current period using accrual-basis accounting: (a) Paid $3,500 on account for supplies purchased last period. All supplies were used last month. (b) Paid $5,000 cash for advertising in the current period. (c) Employees worked in the current period but will not be paid until the following period, $4,500. Answer: (a) $0; (b) $5,000; (c) $4,500. Transaction (a) represents the payment of a liability for expenses incurred in a previous period. Difficulty: 3 Hard Topic: Accrual-Basis Accounting; Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded.; 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 233) A company receives $2,500 cash from customers for services to be provided next month. Record the cash receipt using (a) accrual-basis accounting and (b) cash-basis accounting. Answer: (a) Cash

2,500 Deferred Revenue

(b)

Cash

2,500 2,500

Service Revenue 2,500 Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

234) A company performs $2,800 of services during the month and bills customers. The customers are expected to pay next month. Record the customer billing using (a) accrual-basis accounting and (b) cash-basis accounting. Answer: (a) Accounts Receivable 2,800 Service Revenue 2,800 (b) No Entry Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 235) A company performs $4,200 of services during the month and receives full cash payment from customers at the time of service. Record the cash receipt using (a) accrual-basis accounting and (b) cash-basis accounting. Answer: (a) Cash

4,200 Service Revenue

(b) Cash

4,200 4,200

Service Revenue 4,200 Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 236) A company pays $1,700 cash to employees for work performed during the month. Record the payment using (a) accrual-basis accounting and (b) cash-basis accounting. Answer: (a) Salaries Expense 1,700 Cash 1,700 (b) Salaries Expense 1,700 Cash 1,700 Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 94 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

237) A company receives a $700 utility bill for the current month but does not plan to pay the bill until early next month. Record the receipt of the utility bill using (a) accrual-basis accounting and (b) cash-basis accounting. Answer: (a) Utilities Expense 36,000 Utilities Payable 36,000 (b) No Entry Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 238) A company pays $1,200 on account for supplies purchased last month. All supplies were used last month. Record the payment using (a) accrual-basis accounting and (b) cash-basis accounting. Answer: (a) Accounts Payable 700 Cash 700 (b) Supplies Expense 700 Cash 700 Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

239) A company maintains its records using cash-basis accounting. During the year, the company received cash from customers, $34,000, and paid cash for salaries, $24,000. At the beginning of the year, customers owe the company $3,000. By the end of the year, customers owe $5,000. At the beginning of the year, the company owes salaries of $4,000. At the end of the year, the company owes salaries of $5,000. Determine cash-basis net income and accrual-basis net income for the year. Answer:

Revenues Expenses

Cash-basis net income $34,000 24,000 10,000

Accrual Accrual-basis net adjustment income +$2,000 $36,000 +1,000 25,000 $11,000

Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 240) The following data are taken from the cash-basis accounting records of Myerson Company for the year ended December 31, 2021: Selected Data as of December 31, 2021 Customers billed in 2021 for services provided Cash collections in 2021 for accounts billed in 2020 Cash collections in 2021 for accounts billed in 2021 Cash paid for supplies purchased in 2021 Supplies remaining at the end of 2021 Cash paid for salaries in 2021 Cash paid for annual rent on March 1, 2021

$400,000 20,000 300,000 12,000 2,000 10,000 18,000

Calculate the amount of revenues and expenses for 2021 under cash-basis accounting. Answer: Cash-basis revenues = $20,000 + $300,000 = $320,000. Cash-basis expenses = $12,000 + $10,000 + $18,000 = $40,000. Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

241) The following data are taken from the cash-basis accounting records of Myerson Company for the year ended December 31, 2021: Selected Data as of December 31, 2021 Customers billed in 2021 for services provided Cash collections in 2021 for accounts billed in 2020 Cash collections in 2021 for accounts billed in 2021 Cash paid for supplies purchased in 2021 Supplies remaining at the end of 2021 Cash paid for salaries in 2021 Cash paid for annual rent on March 1, 2021

$400,000 20,000 300,000 12,000 2,000 10,000 18,000

Calculate the amount of revenues and expenses for 2021 under accrual-basis accounting. Answer: Accrual-basis revenues = $400,000. Accrual-basis expenses = ($12,000 - $2,000) + $10,000 + [($18,000/12 months) = $1,500 × 10 months] = $35,000. Difficulty: 3 Hard Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 242) At the beginning of the period, a company reports a balance in office supplies of $500. During the period, the company purchases an additional $3,500 of office supplies for cash. By the end of the period, only $700 of office supplies remains. Record the period-end adjusting entry. Answer: Supplies Expense Supplies

3,300 3,300

Supplies expense = $500 + $3,500 -$700 = $3,300. Difficulty: 3 Hard Topic: Adjusting Entries - Prepaid Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

243) Suppose a company rents office space for one year, paying $12,000 ($1,000/month) in advance on September 1. Record the adjusting entry on December 31. Answer: Rent Expense Prepaid Rent

4,000 4,000

Rent expense = $1,000 × 4 months = $4,000. Difficulty: 3 Hard Topic: Adjusting Entries - Prepaid Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 244) A company purchases one year of flood insurance in advance on May 1, paying $24,000 ($2,000/month). Record the adjusting entry on December 31. Answer: Insurance Expense Prepaid Insurance

16,000 16,000

Insurance expense = $2,000 × 8 months = $16,000. Difficulty: 3 Hard Topic: Adjusting Entries - Prepaid Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

245) A company purchases new equipment for $24,000 cash on August 1, 2021. At the time of purchase, the equipment is expected to be used in operations for four years (48 months) and have no resale or scrap value at the end of the four years. The company depreciates the equipment evenly over the 48 months ($500/month). Record the adjusting entry for depreciation on December 31, 2021. Answer: Depreciation Expense Accumulated Depreciation

2,500 2,500

Depreciation expense = $500 × 5 months = $2,500. Difficulty: 3 Hard Topic: Adjusting Entries - Prepaid Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 246) Suppose a customer rents a vehicle for four months from Rent-A-Car on October 1, paying $4,000 ($1,000/month). Record Rent-A-Car's adjusting entry on December 31. Answer: Deferred Revenue Service Revenue

3,000 3,000

Service revenue = $1,000 × 3 months = $3,000. Difficulty: 3 Hard Topic: Adjusting Entries - Deferred Revenues Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

247) A company pays its employees $5,600 every two weeks ($400/day). The current two-week pay period ends on December 26, 2021, and employees are paid $5,600. The next two-week pay period ends on January 9, 2022, and employees will be paid $5,600. Record the adjusting entry on December 31, 2021. Answer: Salaries Expense Salaries Payable

2,000 2,000

Salaries expense = $400 × 5 days = $2,000. Difficulty: 3 Hard Topic: Adjusting Entries - Accrued Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 248) A company borrows $20,000 with 8% interest on October 1, 2021. This amount plus interest is due on September 30, 2022. Record the adjusting entry on December 31, 2021. Answer: Interest Expense Interest Payable

400 400

Interest expense = $20,000 × 8% × 3/12 = $400. Difficulty: 3 Hard Topic: Adjusting Entries - Accrued Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 249) A company lends $30,000 with 10% interest on May 1, 2021. This amount plus interest is due on April 30, 2022. Record the adjusting entry on December 31, 2021. Answer: Interest Receivable Interest Revenue

2,000 2,000

Interest revenue = $30,000 × 10% × 8/12 = $2,000. Difficulty: 3 Hard Topic: Adjusting Entries - Accrued Revenues Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 100 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

250) Prepare adjusting journal entries, as needed, for the following items. (a) The Supplies account shows a balance of $500, but a count of supplies reveals only $200 on hand at year-end. (b) The company initially records the payments of all insurance premiums as prepaid insurance. The unadjusted trial balance at year-end shows a balance of $500 in Prepaid Insurance. A review of insurance policies reveals that $100 of insurance is unexpired. (c) Employees work Monday through Friday, and salaries of $2,500 per week are paid each Friday. The company's year-end falls on Tuesday. (d) At year-end, the company received a utility bill for December's electricity usage of $200 that will be paid in early January. Answer: (a) Supplies Expense Supplies (b) Insurance Expense Prepaid Insurance (c) Salaries Expense Salaries Payable (d) Utilities Expense Utilities Payable

300 300 400 400 1,000 1,000 200 200

Difficulty: 3 Hard Topic: Adjusting Entries - Prepaid Expenses; Adjusting Entries - Accrued Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 251) A company reports the following amounts: Assets = $6,000; Liabilities = $2,000; Stockholders' equity = $4,000; Dividends = $500; Revenues = $5,000; and Expenses = $3,000. What amount is reported for net income? Answer: $2,000 Net income = Revenues ($5,000) -Expenses ($3,000) = $2,000. Difficulty: 3 Hard Topic: Financial Statements - Income Statement Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

252) For each of the following accounts, indicate whether the account is shown in the income statement or the balance sheet:

Accounts 1. Rent Expense 2. Accounts Payable 3. Service Revenue 4. Common Stock 5. Accounts Receivable 6. Retained Earnings

Financial Statement

Answer: Accounts 1. Rent Expense 2. Accounts Payable 3. Service Revenue 4. Common Stock 5. Accounts Receivable 6. Retained Earnings

Financial Statement Income Statement Balance Sheet Income Statement Balance Sheet Balance Sheet Balance Sheet

Difficulty: 2 Medium Topic: Financial Statements - Income Statement; Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

253) For each of the following accounts, indicate whether the account is shown in the income statement or the balance sheet:

Accounts 1. Service Revenue 2. Common Stock 3. Salaries Expense 4. Deferred Revenue 5. Accounts Payable 6. Cash

Financial Statement

Answer: Accounts 1. Service Revenue 2. Common Stock 3. Salaries Expense 4. Deferred Revenue 5. Accounts Payable 6. Cash

Financial Statement Income Statement Balance Sheet Income Statement Balance Sheet Balance Sheet Balance Sheet

254) The adjusted trial balance for Tom's Wiring at December 31, 2021, is presented below:

Cash Supplies Accounts Payable Salaries Payable Common Stock Retained Earnings Service Revenue Salaries Expense Advertising Expense Rent Expense Totals

Debit Credit $ 62,000 45,000 $ 2,000 4,000 40,000 32,000 210,000 140,000 23,000 18,000 _______ $288,000 $288,000

Prepare an income statement for Tom's Wiring for the year ended December 31, 2021: Answer:

Tom's Wiring Income Statement For the year ended December 31, 2021 Service revenue $210,000 Salaries Expense 140,000 Advertising Expense 23,000 Rent Expense 18,000 Total Expenses 181,000 Net income $29,000

Difficulty: 3 Hard Topic: Financial Statements - Income Statement Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

255) The adjusted trial balance for Tom's Wiring at December 31, 2021, is presented below:

Cash Supplies Accounts Payable Salaries Payable Common Stock Retained Earnings Service Revenue Salaries Expense Advertising Expense Rent Expense Totals

Debit $ 62,000 45,000

Credit

140,000 23,000 18,000 $288,000

2,000 4,000 40,000 32,000 210,000

_______ $288,000

Prepare a classified balance sheet for Tom's Wiring as of December 31, 2021: Answer:

Tom's Wiring Balance Sheet As of December 31, 2021

Current assets: Cash Supplies Total assets Liabilities and Stockholders' Equity: Current liabilities: Accounts payable Salaries payable Total liabilities Stockholders' equity: Common stock Retained earnings (1) Total stockholders' equity Total liabilities and stockholders' equity

45,000 $107,000

2,000 4,000 6,000 40,000 61,000 101,000 $107,000

(1) Beginning RE ($32,000) + NI ($29,000) = $61,000. Difficulty: 3 Hard Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

256) The adjusted trial balance for China Tea Company at December 31, 2021, is presented below: Debit Credit $11,000 150,000 5,000 25,000 300,000

Cash Accounts Receivable Prepaid Rent Supplies Equipment Accumulated Depreciation $135,000 Accounts Payable 20,000 Salaries Payable 4,000 Interest Payable 1,000 Notes Payable (due in two years) 30,000 Common Stock 200,000 Retained Earnings 50,000 Dividends 20,000 Service Revenue 400,000 Salaries Expense 180,000 Advertising Expense 70,000 Rent Expense 15,000 Depreciation Expense 30,000 Interest Expense 2,000 Utilities Expense 32,000 _______ Totals $840,000 $840,000 Prepare an income statement for China Tea Company for the year ended December 31, 2021:

Answer: China Tea Company Income Statement For the year ended December 31, 2021 Service revenue $400,000 Salaries expense 180,000 Advertising expense 70,000 Rent expense 15,000 Depreciation expense 30,000 Interest expense 2,000 Utilities expense 32,000 Total Expenses 329,000 Net income $71,000 Difficulty: 3 Hard Topic: Financial Statements - Income Statement Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

257) The adjusted trial balance for China Tea Company at December 31, 2021, is presented below: Debit Credit Cash $11,000 Accounts Receivable 150,000 Prepaid Rent 5,000 Supplies 25,000 Equipment 300,000 Accumulated Depreciation $135,000 Accounts Payable 20,000 Salaries Payable 4,000 Interest Payable 1,000 Notes Payable (due in two years) 30,000 Common Stock 200,000 Retained Earnings 50,000 Dividends 20,000 Service Revenue 400,000 Salaries Expense 180,000 Advertising Expense 70,000 Rent Expense 15,000 Depreciation Expense 30,000 Interest Expense 2,000 Utilities Expense 32,000 _______ Totals $840,000 $840,000 Prepare a classified balance sheet for China Tea Company as of December 31, 2021:

Answer:

China Tea Company Balance Sheet As of December 31, 2021

Current assets: Cash Accounts receivable Prepaid rent Supplies Total current assets Long-term assets: Equipment Less: Accumulated depreciation Total long-term assets Total assets Liabilities and Stockholders' Equity Current liabilities: Accounts payable Salaries payable Interest payable Total current liabilities Notes payable Total liabilities Stockholders' equity: Common stock Retained earnings (1) Total stockholders' equity Total liabilities and stockholders' equity

$11,000 150,000 5,000 25,000 $191,000 300,000 (135,000) 165,000 $356,000

20,000 4,000 1,000 25,000 30,000 55,000 200,000 101,000 301,000 $356,000

(1) Beginning RE ($50,000) + NI ($71,000) - Dividends ($20,000) = $101,000. Difficulty: 3 Hard Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

258) The December 31, 2021, post-closing trial balance for Strong Corporation is presented below: Debits $18,500

Cash Accounts Receivable Prepaid Insurance Supplies Long-Term Investments Land Buildings Accumulated Depreciation Accounts Payable Notes Payable, due 2022 Interest Payable Notes Payable, due 2031 Common Stock Retained Earnings Totals

Credits

26,500 4,500 100,000 55,000 45,000 277,500

$527,000

80,000 37,500 65,000 10,000 120,000 150,000 64,500 $527,000

Prepare a classified balance sheet for Strong Corporation at December 31, 2021.

Answer:

Strong Corporation Balance Sheet At December 31, 2021 Assets

Current Assets: Cash Accounts Receivable Supplies Prepaid insurance Total current assets Long-term assets: Investments Land Buildings Less: Accumulated depreciation Total long-term assets Total assets

$18,500 26,500 100,000 4,500 $149,500 55,000 45,000 277,500 (80,000) 242,500 447,000

Liabilities and Stockholders' Equity Current liabilities: Accounts payable $37,500 Notes payable 65,000 Interest payable 10,000 Total current liabilities 112,500 Long-term liabilities: Notes payable 120,000 Total liabilities 232,500 Stockholders' equity: Common stock 150,000 Retained earnings 64,500 Total stockholders' equity 214,500 Total liabilities and stockholders' equity $447,000 Difficulty: 3 Hard Topic: Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

259) The following account balances appear in the 2021 adjusted trial balance of Diamond Corporation: Common Stock, $21,000; Retained Earnings, $8,000; Dividends, $2,000; Service Revenue, $30,000; Salaries Expense, $13,000; and Utilities Expense, $7,000. No common stock was issued during the year. Prepare the statement of stockholders' equity for the year ended December 31, 2021. Answer:

Diamond Corporation Statement of Stockholders' Equity For the Year Ended December 31, 2021 Common Stock $21,000

Total Retained Stockholders' Earnings Equity $8,000 $29,000

Balance, January 1, 2021 Issuance of common stock -0-0Net income for 2021 10,000 10,000 Less: Dividends _______ (2,000) (2,000) Balance, December 31, 2021 $21,000 $16,000 $37,000 Difficulty: 3 Hard Topic: Financial Statements - Statement of Stockholders' Equity Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

260) The following is selected financial information for Osmond Dental Laboratories for 2021 and 2022:

Retained earnings, January 1 Net income Dividends Common stock

2021 $53,000 37,000 15,000 70,000

2022 ? 42,000 18,000 ?

Osmond issued 2,000 shares of additional common stock in 2022 for $20,000. There were no other stock transactions. Prepare a statement of stockholders' equity for the year ended December 31, 2022. Answer:

Osmond Dental Laboratories Statement of Stockholders' Equity For the Year Ended December 31, 2022

Balance, January 1, 2022 Issuance of common stock Net income for 2022 Less: Dividends Balance, December 31, 2021

Common Stock $70,000

Total Retained Stockholders' Earnings Equity *$75,000 $145,000

20,000 _______

42,000 (18,000)

20,000 42,000 (18,000)

$90,000

$99,000

$189,000

*$53,000 + $37,000 - $15,000 = $75,000 Difficulty: 3 Hard Topic: Financial Statements - Statement of Stockholders' Equity Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

261) The adjusted trial balance for Yondel Company at December 31, 2021 is presented below:

Cash Prepaid Rent Land Accounts Payable Salaries Payable Common Stock Retained Earnings Dividends Service Revenue Salaries Expense Rent Expense Utilities Expense Totals

Debit Credit $8,000 18,000 415,000 $10,000 14,000 250,000 64,000 10,000 350,000 190,000 21,000 26,000 _______ $688,000 $688,000

Prepare the closing entries for Yondel Company for the year ended December 31, 2021. Answer: (a) Service Revenue 350,000 Retained Earnings 350,000 (b) Retained Earnings 237,000 Salaries Expense 190,000 Rent Expense 21,000 Utilities Expense 26,000 (c) Retained Earnings 10,000 Dividends 10,000 Difficulty: 3 Hard Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

262) The adjusted trial balance for China Tea Company at December 31, 2021 is presented below:

Cash Accounts Receivable Prepaid Rent Supplies Equipment Accumulated Depreciation Accounts Payable Salaries Payable Interest Payable Notes Payable — due in two years Common Stock Retained Earnings Dividends Service Revenue Salaries Expense Advertising Expense Rent Expense Depreciation Expense Interest Expense Utilities Expense Totals

Debit $11,000 150,000 5,000 25,000 300,000

Credit

$135,000 20,000 4,000 1,000 30,000 200,000 50,000 20,000 400,000 180,000 70,000 15,000 30,000 2,000 32,000 $840,000

_______ $840,000

Prepare the closing entries for China Tea Company for the year ended December 31, 2021.

Answer: (a) Service Revenue 400,000 Retained Earnings 400,000 (b) Retained Earnings 329,000 Salaries Expense 180,000 Advertising Expense 70,000 Rent Expense 15,000 Depreciation Expense 30,000 Interest Expense 2,000 Utilities Expense 32,000 (c) Retained Earnings 20,000 Dividends 20,000 Difficulty: 3 Hard Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement 263) The year-end adjusted trial balance included the following account balances: Cash, $5,000; Equipment, $25,000; Accounts payable, $7,000; Common stock, $15,000; Retained earnings, $6,000; Dividends, $1,000; Service revenue, $18,000; Salaries expense, $9,000; and Utilities expense, $6,000. Prepare the post-closing trial balance, assuming closing entries have been posted to the respective accounts. Answer: Cash Equipment Accounts payable Common stock Retained earnings Totals

Debit $5,000 25,000

$30,000

Credit

7,000 15,000 8,000 $30,000

*Ending Retained Earnings = Beginning Retained Earnings ($6,000) + Revenues ($18,000) Expenses ($9,000 + $6,000) - Dividends ($1,000) = $8,000. Difficulty: 3 Hard Topic: Post-Closing Trial Balance Learning Objective: 03-07 Post closing entries and prepare a post-closing trial balance. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

264) Consider the following transactions.

Transaction 1. Record employees' salaries incurred but not yet paid, $800. 2. Pay rent for the current month, $700. 3. Pay utilities for the previous month, $750. 4. Receive cash from customers in advance, $1,500. 5. Purchase office supplies on account, $400.

Accrual-Basis Revenue Expense

Cash-Basis Revenue Expense

Transaction 1. Record employees' salaries incurred but not yet paid, $800. $0 $800 $0 $0 2. Pay rent for the current month, $700. $0 $700 $0 $700 3. Pay utilities for the previous month, $750. $0 $0 $0 $750 4. Receive cash from customers in advance, $1,500. $0 $0 $1,500 $0 5. Purchase office supplies on account, $400. $0 $0 $0 $0 Difficulty: 3 Hard Topic: Accrual-Basis Accounting; Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded.; 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

265) Consider the following transactions.

Transaction 1. Pay dividends to stockholders, $200. 2. Pay for supplies previously purchased on account, $400. 3. Pay for insurance one year in advance, $3,600. 4. Receive cash from customers for services performed in the current period, $1,800. 5. Provide services to customers on account, $2,100.

Accrual-Basis Revenue Expense

Cash-Basis Revenue Expense

Required: For each transaction, determine the amount of revenue or expense, if any, which is recorded under accrual-basis accounting and under cash-basis accounting. Answer: Accrual-Basis Cash-Basis Transaction Revenue Expense Revenue Expense 1. Pay dividends to stockholders, $200. $0 $0 $0 $0 2. Pay for supplies previously purchased on account, $400. $0 $0 $0 $400 3. Pay for insurance one year in advance, $3,600. $0 $0 $0 $3,600 4. Receive cash from customers for services performed in the current period, $1,800. $1,800 $0 $1,800 $0 5. Provide services to customers on account, $2,100. $2,100 $0 $0 $0 Difficulty: 3 Hard Topic: Accrual-Basis Accounting; Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded.; 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

266) Brink's International maintains its books using cash-basis accounting. However, the company plans to issue stock and must provide annual financial statements prepared using accrual-basis accounting. During 2021, the following cash flows were recorded: Cash collected from customers Cash paid for: Salaries Rent Supplies Cash-basis profit

$480,000 $290,000 24,000 108,000

422,000 $58,000

You are able to determine the following information:

Accounts receivable Supplies Salaries payable

January 1, 2021 $15,000 21,400 9,600

December 31, 2021 $8,000 27,800 12,500

Required: Prepare an accrual-basis income statement for December 31, 2021, by calculating accrual-basis revenues and expenses. Answer:

Brinker's International Income Statement For the year ended December 31, 2021 Service revenue $473,000a Expenses: Salaries 292,900b Rent 24,000c Supplies 101,600d Total expenses 418,500 Net income $ 54,500

a $480,000 (cash from customers) − $7,000 (decrease in accounts receivable) = $473,000. b $290,000 (cash paid for salaries) + $2,900 (increase in salaries payable) = $292,900. c $24,000 (cash paid for rent) +/- $0 (decrease/increase in prepaid rent) = $24,000. d $108,000 (cash paid for supplies) — 6,400 (increase in supplies) = $101,600. Difficulty: 3 Hard Topic: Accrual-Basis Accounting; Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded.; 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement 119 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

267) Follette's Accessories maintains its books using cash-basis accounting. However, the company recently borrowed $50,000 from a local bank and the bank requires Follette's to provide annual financial statements prepared using accrual-basis accounting as part of the credit worthiness verification. During 2021, the following cash flows were recorded: Cash collected from customers Cash paid for: Salaries Supplies Maintenance Insurance Advertising Cash-basis profit

$60,000 $25,000 6,000 5,000 7,000 4,000

47,000 $13,000

You are able to determine the following information:

Accounts receivable Prepaid insurance Supplies Salaries payable

January 1, December 31, 2021 2021 $15,000 $18,000 1,800 4,100 800 -02,200 2,000

Required: Prepare an accrual-basis income statement for December 31, 2021, by calculating accrual-basis revenues and expenses.

Answer:

Follette's Accessories Income Statement For the year ended December 31, 2021 Service revenue $63,000a Expenses: Salaries 24,800b Supplies 6,800c Maintenance 5,000d Insurance 4,700e Advertising 4,000f Total expenses Net income

45,300 $17,700

a $60,000 (cash from customers) + $3,000 (increase in accounts receivable) = $63,000. b $25,000 (cash paid for salaries) - $200 (decrease in salaries payable) = $24,800. c $6,000 (cash paid for supplies) + $800 (decrease in supplies) = $6,800. d $5,000 (cash paid for maintenance) +/- $0 (increase/decrease in maintenance payable) = $5,000. e $7,000 (cash paid for insurance) - $2,300 (increase in prepaid insurance) = $4,700. f $4,000 (cash paid for advertising) +/- $0 (decrease/increase in prepaid advertising) = $4,000. Difficulty: 3 Hard Topic: Accrual-Basis Accounting; Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded.; 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

268) The information necessary for preparing year-end adjusting entries appears below. The company's fiscal year-end is December 31. a. Utilities for the month of December are $6,100 but won't be paid until January of the following year. b. On April 1, the company collected $16,000 from customers for services to be provided over the next 12 months. At that time, the amount was credited to Deferred Revenue. By the end of the year, nine months of those services have been provided. c. On October 1, $12,000 was paid to rent space over the next nine months. At that time, the amount was debited to Prepaid Rent. d. On December 1, the company agrees to provide services for a three-month period and to receive payment of $6,000 at the end of that period. By the end of the year, one month of services have been provided. Required: Record the necessary year-end adjusting entries. No prior adjustments have been made during the year. Answer: (a) Debit Credit Utilities Expense 6,100 Utilities Payable 6,100 (Adjust utilities payable) (b) Debit Credit Deferred Revenue 12,000 Service Revenue 12,000 (Adjust deferred revenue) (c) Debit Credit Rent Expense 4,000 Prepaid Rent 4,000 (Adjust prepaid rent) (d) Debit Credit Accounts Receivable 2,000 Service Revenue 2,000 (Adjust accounts receivable) Difficulty: 3 Hard Topic: Adjusting Entries - Prepaid Expenses; Adjusting Entries - Deferred Revenues; Adjusting Entries - Accrued Expenses; Adjusting Entries - Accrued Revenues Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

269) The information necessary for preparing the 2021 year-end adjusting entries for Winter Storage appears below. Winter's fiscal year-end is December 31. a. Depreciation on the equipment for the year is $7,000. b. Salaries earned by employees (but not paid to them) from December 16 through December 31, 2021, are $3,400. c. On March 1, 2021, Winter lends an employee $12,000 and a note is signed requiring principal and interest at 6% to be paid on February 28, 2022. d. On April 1, 2021, Winter pays an insurance company $15,000 for a one-year fire insurance policy. The entire $15,000 is debited to prepaid insurance at the time of the purchase. e. $1,500 of supplies are used in 2021. f. A customer pays Winter $4,200 on October 31, 2021, for six months of storage to begin November 1, 2021. Winter credits deferred revenue at the time of cash receipt. g. On December 1, 2021, $4,000 rent is paid to a local storage facility. The payment represents storage for December 2021 through March 2022, at $1,000 per month. Prepaid rent is debited at the time of the payment. Required: Record the necessary adjusting entries at December 31, 2021. No prior adjustments have been made during 2021.

Answer: (a) Debit Credit Depreciation Expense 7,000 Accumulated Depreciation 7,000 (Adjust accumulated depreciation) (b) Debit Credit Salaries Expense 3,400 Salaries Payable 3,400 (Adjust salaries payable) (c) Debit Credit Interest Receivable 600 Interest Revenue 600 (Adjust interest receivable (d) Debit Credit Insurance Expense 11,250 Prepaid Insurance 11,250 (Adjust prepaid insurance) (e) Debit Credit Supplies Expense 1,500 Supplies 1,500 (Adjust supplies) (f) Debit Credit Deferred Revenue 1,400 Service Revenue 1,400 (Adjust deferred revenue) (g) Debit Credit Rent Expense 1,000 Prepaid Rent 1,000 (Adjust prepaid rent) Difficulty: 3 Hard Topic: Adjusting Entries - Prepaid Expenses; Adjusting Entries - Deferred Revenues; Adjusting Entries - Accrued Expenses; Adjusting Entries - Accrued Revenues Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

270) David's Services provides general home maintenance to customers. The company's fiscal year-end is December 31. The December 31, 2021, trial balance (before any adjusting entries) appears below. Accounts Cash Accounts Receivable Supplies Prepaid Rent Equipment Accumulated Depreciation Accounts Payable Salaries Payable Utilities Payable Interest Payable Notes Payable Common Stock Retained Earnings Dividends Service Revenue Salaries Expense Depreciation Expense Rent Expense Supplies Expense Utilities Expense Interest Expense Totals

Debits $18,100 16,200 20,400 15,000 95,000

Credits

$27,200 10,500 -0-0-040,000 24,000 10,500 2,500 224,900 158,500 -0-0-011,400 -0$337,100

________ $337,100

Information necessary to prepare the year-end adjusting entries appears below. a. Depreciation on the equipment for the year is $13,600. b. Employees' salaries are paid every two weeks. The last pay period ended on December 23. Salaries earned from December 24 through December 31, 2021, are $4,200. c. On August 1, 2021, David's borrows $40,000 from a local bank and signs a note. The note requires interest to be paid annually on August 31 at 12%. The principal is due in four years. d. On April 1, 2021, the company pays $15,000 for rental equipment for the next 12 months. The entire $15,000 was debited to Prepaid Rent on April 1. e. $3,000 of supplies remains on hand at December 31, 2021. f. On December 30, David's receives a utility bill of $1,900 for the month. The bill will not be paid until early January, 2022, and no entry was recorded when the bill was received. Required: Prepare the necessary adjusting entries on December 31, 2021.

Answer: (a) Debit Credit Depreciation Expense 13,600 Accumulated Depreciation 13,600 (Adjust accumulated depreciation) (b) Debit Credit Salaries Expense 4,200 Salaries Payable 4,200 (Adjust salaries payable) (c) Debit Credit Interest Expense 2,000 Interest Payable 2,000 (Adjust interest payable) (d) Debit Credit Rent Expense 11,250 Prepaid Rent 11,250 (Adjust prepaid rent) (e) Debit Credit Supplies Expense 17,400 Supplies 17,400 (Adjust supplies) (f) Debit Credit Utilities Expense 1,900 Utilities Payable 1,900 (Adjust utilities payable) Difficulty: 3 Hard Topic: Adjusting Entries - Prepaid Expenses; Adjusting Entries - Accrued Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

271) The general ledger of Advanced Health at January 1, 2021, includes the following account balances: Accounts Cash Accounts Receivable Supplies Equipment Accumulated Depreciation Accounts Payable Utilities Payable Deferred Revenue Common Stock Retained Earnings Totals

Debits Credits $4,500 8,300 3,700 26,400 $5,800 4,200 5,500 -019,000 8,400 $42,900 $42,900

The following is a summary of the transactions for the year: a. Provide health services for cash, $18,000, and on account, $62,000. b. Collect on accounts receivable, $45,000. c. Issue shares of common stock in exchange for $12,000 cash. d. Pay salaries for the current year, $36,000. e. Pay utilities, $13,000, of which $5,500 represents costs for 2020. f. Receive cash in advance from customers, $7,000. g. Pay $3,000 cash dividends to stockholders. Required: 1. Set up the necessary T-accounts and enter the beginning balances from the trial balance. In addition to the accounts shown, the company has accounts for Dividends, Service Revenue, Salaries Expense, Utilities Expense, Supplies Expense, and Depreciation Expense. 2. Record each of the summary transactions listed above. 3. Post the transactions to the accounts. 4. Prepare an unadjusted trial balance. 5. Record adjusting entries. Depreciation for the year on the equipment is $2,900. Supplies remaining on hand at the end of the year equal $1,200. Of the $7,000 paid in advance by customers, $4,000 of the work has been completed by the end of the year. 6. Post adjusting entries. 7. Prepare an adjusted trial balance. 8. Prepare an income statement for 2021 and a classified balance sheet as of December 31, 2021. 9. Record closing entries. 10. Post closing entries 11. Prepare a post-closing trial balance.

Answer: Requirement 1 Cash 4,500 4,500

Accounts Receivable 8,300 8,300

Equipment

Accumulated Depreciation 5,800 5,800

26,400 26,400 Utilities Payable 5,500 5,500

Deferred Revenue

Retained Earnings 8,400 8,400 0 Salaries Expense 0 0

Supplies 3,700 3,700

0 0 Dividends 0

Accounts Payable 4,200 4,200 Common Stock 19,000 19,000 Service Revenue 0 0

Utilities Expense 0 0

Supplies Expense 0 0

Depreciation Expense 0 0

Requirement 2 (a) Debit Credit Accounts Receivable 62,000 Cash 18,000 Service Revenue 80,000 (Provide services on account and for cash) (b) Debit Credit Cash 45,000 Accounts Receivable 45,000 (Collect on account) (c) Debit Credit Cash 12,000 Common Stock 12,000 (Issue common stock) (d) Debit Credit Salaries Expense 36,000 Cash 36,000 (Pay current salaries) (e) Debit Credit Utilities Payable 5,500 Utilities Expense 7,500 Cash 13,000 (Pay prior-year and current utilities) (f) Debit Credit Cash 7,000 Deferred Revenue 7,000 (Receive cash in advance) (g) Debit Credit Dividends 3,000 Cash 3,000 (Pay dividends)

Requirement 3 (entries posted in red) Cash 4,500 18,000 45,000 12,000 7,000 34,500

Accounts Receivable 8,300 36,000 62,000 45,000 13,000 3,000 25,300

Equipment

3,700

Accumulated Depreciation 5,800 5,800

26,400 26,400

Supplies 3,700

Accounts Payable 4,200 4,200

Utilities Payable 5,500 5,500 0

Deferred Revenue

Retained Earnings 8,400

Dividends 0 3,000 3,000

Service Revenue

Utilities Expense 0 7,500 7,500

Supplies Expense 0

8,400 Salaries Expense 0 36,000 36,000

0 7,000 7,000

Common Stock 19,000 12,000 31,000

0 80,000 80,000

Depreciation Expense 0 0

Requirement 4 Unadjusted Trial Balance Account Title Debit Cash $34,500 Accounts Receivable 25,300 Supplies 3,700 Equipment 26,400 Accumulated Depreciation Accounts Payable Utilities Payable Deferred Revenue Common Stock Retained Earnings Dividends 3,000 Service Revenue Salaries Expense 36,000 Utilities Expense 7,500 Supplies Expense 0 Depreciation Expense Total

0 $136,400

Credit

$5,800 4,200 0 7,000 31,000 8,400 80,000

$136,400

Requirement 5 Debit Credit Depreciation Expense 2,900 Accumulated Depreciation 2,900 (Adjust accumulated depreciation) Supplies Expense 2,500 Supplies 2,500 (Adjust supplies) Deferred Revenue 4,000 Service Revenue 4,000 (Adjust deferred revenue)

Requirement 6 (adjusted entries posted in red) Cash 4,500 18,000 45,000 12,000 7,000 34,500

Accounts Receivable 8,300 36,000 62,000 45,000 13,000 3,000 25,300

Equipment 26,400

Accounts Payable 5,800 2,900 8,700

26,400

5,500

Deferred Revenue

5,500

0 7,000

4,000 0

3,000

Retained Earnings 8,400

8,400 Salaries Expense 0 36,000 36,000

2,500

1,200

Accumulated Depreciation

Utilities Payable

Supplies 3,700

Dividends 0 3,000 3,000 Utilities Expense 0 7,500 7,500

4,200 4,200 Common Stock 19,000 12,000 31,000 Service Revenue 0 80,000 4,000 84,000 Supplies Expense 0 2,500 2,500

Depreciation Expense 0 2,900 2,900

Requirement 7 Account Title Cash Accounts Receivable Supplies Equipment Accumulated Depreciation Accounts Payable Utilities Payable Deferred Revenue Common Stock Retained Earnings Dividends Service Revenue Salaries Expense Utilities Expense Supplies Expense Depreciation Expense Total

Debit $34,500 25,300 1,200 26,400

Credit

$8,700 4,200 0 3,000 31,000 8,400 3,000 84,000 36,000 7,500 2,500 2,900 $139,300

________ $139,300

Requirement 8 Advanced Health Income Statement For the year ended December 31, 2021 Service revenue $84,000 Expenses: Salaries 36,000 Utilities 7,500 Supplies 2,500 Depreciation 2,900 Total expenses 48,900 Net income $35,100

Assets Cash Accts. Receivable Supplies Total current assets

Advanced Health Balance Sheet December 31, 2021 Liabilities Accounts $34,500 Payable Deferred 25,300 Revenue Total current 1,200 liabilities

$4,200 3,000 7,200

61,000

Stockholders’ Equity Equipment 26,400 Common Stock 31,000 Accum. Retained depreciation (8,700) Earnings 40,500* Total stockholders’ ______ equity 71,500 Total liabilities and stockholders’ Total assets $78,700 equity $78,700 Retained earnings = beginning retained earnings + net income - dividends = $8,400 + $35,100 * $3,000 = $40,500 Requirement 9 December 31, 2021 Debit Credit Service Revenue 84,000 Retained Earnings 84,000 (Close revenue accounts) Retained Earnings 48,900 Salaries Expense 36,000 Utilities Expense 7,500 Supplies Expense 2,500 Depreciation Expense 2,900 (Close expense accounts) Retained Earnings 3,000 Dividends 3,000 (Close dividends account)

Requirement 10 (closing entries posted in red) Cash 4,500 18,000 45,000 12,000 7,000 34,500

Accounts Receivable 8,300 36,000 62,000 45,000 13,000 3,000 25,300

Equipment

26,400 Utilities Payable 5,500

Deferred Revenue

5,500

4,200 4,200 Common Stock 19,000 12,000 31,000

3,000

Retained Earnings 48,900 3,000

Accounts Payable

0 7,000

4,000 0

2,500

1,200

Accumulated Depreciation 5,800 2,900 8,700

26,400

Supplies 3,700

Dividends

8,400 84,000

0 3,000

Service Revenue 0 80,000 4,000

3,000 84,000

40,500 Salaries Expense 0 36,000 36,000 0

0 Utilities Expense 0 7,500 7,500 0

0 Supplies Expense 0 2,500 2,500 0

Depreciation Expense 0 2,900 2,900 0

Requirement 11 Post-Closing Trial Balance Account Title Debit Cash $34,500 Accounts Receivable 25,300 Supplies 1,200 Equipment 26,400 Accumulated Depreciation Accounts Payable Utilities Payable Deferred Revenue Common Stock Retained Earnings Total $87,400

Credit

$8,700 4,200 0 3,000 31,000 40,500 $87,400

Difficulty: 3 Hard Topic: Adjusting Entries - Prepaid Expenses; Adjusting Entries - Deferred Revenues; Adjusted Trial Balance; Financial Statements - Income Statement; Financial Statements - Balance Sheet; Closing Entries; Post-Closing Trial Balance Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries.; 03-04 Post adjusting entries and prepare an adjusted trial balance.; 03-05 Prepare financial statements using the adjusted trial balance.; 03-06 Demonstrate the purposes and recording of closing entries.; 03-07 Post closing entries and prepare a post-closing trial balance. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement; FN Reporting

272) The general ledger of FastTrack Racing at January 1, 2021, includes the following account balances: Accounts Cash Accounts Receivable Land Accounts Payable Notes Payable Common Stock Retained Earnings Totals

Debits Credits $42,500 25,800 115,800 15,100 30,500 100,000 38,500 $184,100 $184,100

The following is a summary of the transactions for the year: a. Provide services to customers on account, $63,400. b. Provide services to customers for cash, $75,800. c. Collect on accounts receivable, $45,600. d. Issue shares of common stock in exchange for $32,000 cash. e. Purchase supplies on account, $12,700. f. Pay on accounts payable, $11,500. g. Pay salaries for employee work in the current year, $66,200. h. Pay advertising for the current year, $21,500. i. Pay $2,800 cash dividends to stockholders. Required: 1. Set up the necessary T-accounts and enter the beginning balances from the trial balance. In addition to the accounts shown, the company also has accounts for Supplies, Salaries Payable, Interest Payable, Dividends, Service Revenue, Salaries Expense, Advertising Expense, Interest Expense, and Supplies Expense. 2. Record each of the summary transactions listed above. 3. Post the transactions to the accounts. 4. Prepare an unadjusted trial balance. 5. Record adjusting entries. Accrued interest on the notes payable at year-end amounted to $2,800. Accrued salaries at year-end amounted to $2,500. Supplies remaining on hand at the end of the year equal $2,600. 6. Post adjusting entries. 7. Prepare an adjusted trial balance. 8. Prepare an income statement for 2021 and a classified balance sheet as of December 31, 2021. 9. Record closing entries. 10. Post closing entries 11. Prepare a post-closing trial balance.

Answer: Requirement 1 Cash 42,500 42,500

Accounts Receivable 25,800 25,800

Land 115,800 115,800

Accounts Payable 15,100 15,100

Interest Payable 0 0 Retained Earnings 38,500 38,500 Salaries Expense 0 0

Notes Payable 30,500 30,500 Dividends 0 0 Advertising Expense 0 0

Supplies 0 0 Salaries Payable 0 0 Common Stock 100,000 100,000 Service Revenue 0 0 Interest Expense 0 0

Supplies Expense 0 0

Requirement 2 (a) Debit Credit Accounts Receivable 63,400 Service Revenue 63,400 (Provide services on account) (b) Debit Credit Cash 75,800 Service Revenue 75,800 (Provide services for cash) (c) Debit Credit Cash 45,600 Accounts Receivable 45,600 (Receive cash on account) (d) Debit Credit Cash 32,000 Common Stock 32,000 (Issue common stock) (e) Debit Credit Supplies 12,700 Accounts Payable 12,700 (Purchase supplies on account) (f) Debit Credit Accounts Payable 11,500 Cash 11,500 (Pay cash on account) (g) Debit Credit Salaries Expense 66,200 Cash 66,200 (Pay salaries for work in the current period) (h) Debit Credit Advertising Expense 21,500 Cash 21,500 (Pay advertising for the current period) (h) Debit Credit Dividends 2,800 Cash 2,800 (Pay dividends)

Requirement 3 (entries posted in red) Cash 42,500 75,800 45,600 32,000 93,900

Accounts Receivable 11,500 25,800 66,200 63,400 45,600 21,500 2,800 43,600

Land 115,800

Accounts Payable 15,100 11,500 12,700 16,300

115,800 Interest Payable 0

Notes Payable 30,500

30,500

Retained Earnings 38,500

38,500 Salaries Expense 0 66,200 66,200

Dividends 0 2,800

Supplies 0 12,700

12,700 Salaries Payable 0 0 Common Stock 100,000 32,000 132,000 Service Revenue 0 63,400 75,800 139,200

2,800 Advertising Expense 0 21,500 21,500

Interest Expense 0 0

Supplies Expense 0 0

Requirement 4 FastTrack Racing Unadjusted Trial Balance December 31, 2021 Accounts Debit Cash $93,900 Accounts Receivable 43,600 Supplies 12,700 Land 115,800 Accounts Payable Salaries Payable Interest Payable Notes Payable Common Stock Retained Earnings Dividends 2,800 Service Revenue Salaries Expense 66,200 Advertising Expense 21,500 Interest Expense 0 Supplies Expense 0 Total $356,500

Credit

$16,300 0 0 30,500 132,000 38,500 139,200

_______ $356,500

Requirement 5 Debit Credit Interest Expense 2,800 Interest Payable 2,800 (Accrue interest on notes payable) Salaries Expense 2,500 Salaries Payable (Accrue salaries for current year) Supplies Expense 10,100 Supplies (Adjust supplies) ($0 + $12,700 $2,600)

2,500

10,100

Requirement 6 (adjusted entries posted in red) Cash 42,500 75,800 45,600 32,000 93,900

Accounts Receivable 11,500 25,800 66,200 63,400 45,600 21,500 2,800 43,600

Land 115,800

Accounts Payable 15,100 11,500 12,700 16,300

115,800 Interest Payable 0 2,800 2,800 Retained Earnings 38,500

38,500 Salaries Expense 0 66,200 2,500 68,700

Notes Payable 30,500 30,500 Dividends 0 2,800

Supplies 0 12,700 10,100 2,600 Salaries Payable 0 2,500 2,500 Common Stock 100,000 32,000 132,000 Service Revenue 0 63,400 75,800 139,200

2,800 Advertising Expense 0 21,500 21,500

Interest Expense 0 2,800 2,800

Supplies Expense 0 10,100 10,100

Requirement 7 Fast Track Racing Adjusted Trial Balance December 31, 2021 Accounts Debit Credit Cash $93,900 Accounts Receivable 43,600 Supplies 2,600 Land 115,800 Accounts Payable $16,300 Salaries Payable 2,500 Interest Payable 2,800 Notes Payable 30,500 Common Stock 132,000 Retained Earnings 38,500 Dividends 2,800 Service Revenue 139,200 Salaries Expense 68,700 Advertising Expense 21,500 Interest Expense 2,800 Supplies Expense 10,100 ________ Total $361,800 $361,800

Requirement 8 Fast Track Racing Income Statement For the year ended December 31, 2021 Service revenue $139,200 Expenses: Salaries 68,700 Advertising 21,500 Interest 2,800 Supplies 10,100 Total expenses 103,100 Net income $36,100

Assets Cash Accounts Receivable Supplies

Fast Track Racing Balance Sheet December 31, 2021 Liabilities Accounts $93,900 Payable Salaries 43,600 Payable Interest 2,600 Payable Total current _______ liabilities

$16,300 2,500 2,800 21,600

Total current assets

140,100 Notes Payable 30,500 Total liabilities 52,100 Stockholders’ Equity Common stock 132,000 Retained Land 115,800 earnings 71,800* Total stockholders’ _______ equity 203,800 Total liabilities and stockholders’ Total assets $255,900 equity $255,900 Retained earnings = Beginning retained earnings + Net income - Dividends = $38,500 * + $36,100 - $2,800 = $71,800

Requirement 9 December 31, 2021 Service Revenue Retained Earnings (Close revenue accounts)

Debit 139,200

Retained Earnings Salaries Expense Advertising Expense Interest Expense Supplies Expense (Close expense accounts)

103,100

Retained Earnings Dividends (Close dividends account)

2,800

Credit 139,200

68,700 21,500 2,800 10,100

2,800

Requirement 10 (closing entries posted in red) Cash 42,500 75,800 45,600 32,000 93,900

Accounts Receivable 11,500 25,800 66,200 63,400 45,600 21,500 2,800 43,600

Land 115,800

Accounts Payable 15,100 11,500 12,700 16,300

115,800 Interest Payable 0 2,800

Notes Payable 30,500

2,800

30,500

Retained Earnings 103,100 2,800

38,500 139,200

Dividends

10,100 2,600 Salaries Payable 0 2,500 2,500 Common Stock 100,000 32,000 132,000 Service Revenue

0 2,800 2,800

71,800

Supplies 0 12,700

Salaries Expense Advertising Expense 0 0 66,200 21,500 2,500 68,700 21,500 0 0

139,200

0 63,400 75,800 0

Interest Expense 0 2,800 2,800 0

Supplies Expense 0 10,100 10,100 0

Requirement 11 Fast Track Racing Post-Closing Trial Balance December 31, 2021 Accounts Debit Credit Cash $93,900 Accounts Receivable 43,600 Supplies 2,600 Land 115,800 Accounts Payable $16,300 Salaries Payable 2,500 Interest Payable 2,800 Notes Payable 30,500 Common Stock 132,000 Retained Earnings _______ 71,800 Total $255,900 $255,900 Difficulty: 3 Hard Topic: Adjusting Entries - Prepaid Expenses; Adjusting Entries - Accrued Expenses; Adjusted Trial Balance; Financial Statements - Income Statement; Financial Statements - Balance Sheet; Closing Entries; Post-Closing Trial Balance Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries.; 03-04 Post adjusting entries and prepare an adjusted trial balance.; 03-05 Prepare financial statements using the adjusted trial balance.; 03-06 Demonstrate the purposes and recording of closing entries.; 03-07 Post closing entries and prepare a post-closing trial balance. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement; FN Reporting

273) Randy's Services provides general home repairs to customers. The company's fiscal year-end is December 31. The December 31, 2021, adjusted trial balance appears below. Adjusted Trial Balance Account Title Debit Credit Cash $18,100 Accounts Receivable 16,200 Supplies 3,000 Prepaid Insurance 3,750 Equipment 95,000 Accumulated Depreciation $40,800 Accounts Payable 10,500 Salaries Payable 4,200 Utilities Payable 1,900 Interest Payable 2,000 Notes Payable 40,000 Common Stock 24,000 Retained Earnings 10,500 Dividends 2,500 Service Revenue 224,900 Salaries Expense 162,700 Depreciation Expense 13,600 Insurance Expense 11,250 Supplies Expense 17,400 Utilities Expense 13,300 Interest Expense Total

2,000 $358,800

$358,800

Required: Complete the following steps: 1. Using the adjusted trial balance, prepare an income statement and a statement of shareholders' equity for the year ended December 31, 2021, and a classified balance sheet as of December 31, 2021. Assume that no common stock is issued during the year. 2. Record closing entries. 3. Calculate account balances after closing entries and prepare a post-closing trial balance.

Answer: Requirement 1 Randy's Services Income Statement For the year ended December 31, 2021 Service revenue $224,900 Expenses: Salaries 162,700 Depreciation 13,600 Insurance 11,250 Supplies 17,400 Utilities 13,300 Interest 2,000 Total expenses 220,250 Net income $4,650 Randy's Services Statement of Stockholders' Equity For the year ended December 31, 2021 Common Stock Balance at January 1 Issuance of common stock Net income for 2021 Less: Dividends Balance at December 31

Retained Earnings

$24,000

$10,500

$24,000

Total Stockholders' Equity $34,500 0

4,650 (2,500)

$12,650

$36,650

Randy's Services Balance Sheet December 31, 2021 Assets Cash Accts. receivable Supplies Prepaid insurance

Equipment

Liabilities Accounts payable Salaries payable Utilities payable Interest payable Total current 41,050 liabilities Notes payable 95,000 Total liabilities

Accum. depreciation

(40,800) Stockholders' Equity

Total current assets

$18,100 16,200 3,000 3,750

Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity Total assets

$10,500 4,200 1,900 2,000 18,600 40,000 58,600

24,000 12,650 36,650 $95,250

$95,250

Requirement 2 December 31, 2021 Debit Credit Service Revenue 224,900 Retained Earnings 224,900 (Close revenue accounts) Retained Earnings 220,250 Salaries expense 162,700 Depreciation expense 13,600 Insurance expense 11,250 Supplies expense 17,400 Utilities expense 13,300 Interest expense 2,000 (Close expense accounts) Retained Earnings 2,500 Dividends 2,500 (Close dividends account)

Requirement 3 (closing entries posted in red) Retained Earnings Dividends 220,250 2,500

10,500 224,900

2,500

224,900 2,500

12,650

Service Revenue

224,900

Salaries Expense Depreciation Expense 158,500 0 4,200 162,700 13,600 13,600 0 0

Insurance Expense 0 11,250 11,250

Supplies Expense 0 17,400 17,400 0

Interest Expense 0 2,000 2,000 0

Utilities Expense 11,400 1,900 13,300 0

Post-Closing Trial Balance Account Title Debit Credit Cash $18,100 Accounts Receivable 16,200 Supplies 3,000 Prepaid Insurance 3,750 Equipment 95,000 Accumulated Depreciation $40,800 Accounts Payable 10,500 Salaries Payable 4,200 Utilities Payable 1,900 Interest Payable 2,000 Notes Payable 40,000 Common Stock 24,000 Retained Earnings 12,650 Total $136,050 $136,050 Difficulty: 3 Hard Topic: Financial Statements - Income Statement; Financial Statements-Statement of Stockholders Equity; Financial Statements - Balance Sheet; Closing Entries; Post-Closing Trial Balance; Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance.; 03-06 Demonstrate the purposes and recording of closing entries.; 03-07 Post closing entries and prepare a post-closing trial balance. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement; FN Reporting 151 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

274) Russell Engineering provides consulting services related to land development. Below is the year-end adjusted trial balance of Russell Engineering. Russell Engineering Adjusted Trial Balance December 31, 2021 Accounts Debits Credits Cash $5,500 Accounts Receivable 4,200 Supplies 2,300 Prepaid Rent 6,100 Equipment 114,000 Accumulated Depreciation $25,000 Accounts Payable 3,600 Salaries Payable 3,500 Utilities Payable 1,500 Notes Payable (due in 4 years) 20,000 Common Stock 44,800 Retained Earnings 20,200 Service Revenue 118,500 Salaries Expense 45,000 Rent Expense 17,600 Depreciation Expense 6,000 Supplies Expense 9,400 Advertising Expense 15,000 Utilities Expense 10,800 Interest Expense 1,200 Totals $237,100 $237,100 Required: Prepare an income statement, statement of stockholders' equity, and classified balance sheet. In preparing the statement of stockholders' equity, note that additional common stock was issued during the year for $8,000. This amount is included in the amount for Common Stock in the adjusted trial balance.

Answer:

Russell Engineering Income Statement For the year ended December 31, 2021 Service revenue $118,500 Expenses: Salaries 45,000 Rent 17,600 Depreciation 6,000 Supplies 9,400 Advertising 15,000 Utilities 10,800 Interest 1,200 Total expenses 105,000 Net income $13,500 Russell Engineering Statement of Stockholders' Equity For the year ended December 31, 2021 Common Stock Balance at January 1 Issuance of common stock Net income for 2021 Less: Dividends Balance at December 31

$36,800

Retained Earnings $20,200

8,000

$44,800

Total Stockholders' Equity $57,000 8,000

13,500 (0)

$33,700

$78,500

Assets Cash Accts. Receivable Supplies Prepaid Rent Total current assets Equipment Accum. Depreciation

Russell Engineering Balance Sheet December 31, 2021 Liabilities $5,500 Accounts Payable

$3,600

4,200 2,300

3,500 1,500

6,100

Salaries Payable Utilities Payable Total current liabilities

8,600

18,100

Notes Payable 20,000 Total liabilities 28,600 114,000 Stockholders' Equity (25,000)

Common Stock Retained Earnings Total stockholders' equity Total liabilities and stockholders' equity

44,800 33,700 78,500

$107,100 Total assets $107,100 Difficulty: 3 Hard Topic: Financial Statements - Income Statement; Financial Statements-Statement of Stockholders Equity; Financial Statements - Balance Sheet Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

275) The year-end financial statements are provided below. Income Statement Service revenue

Statement Of Stockholders' Equity $87,500

Expenses: Salaries Supplies Rent Delivery Net income

$47,100 9,600 7,700 5,200

January 1 Issue stock Net income 69,600 Dividends $17,900 December 31

Common Retained Stock Earnings $70,000 $34,500 12,000 17,900 ______ (5,000) $82,000

Balance Sheet Assets: Cash Accounts receivable Land

Liabilities: $7,500 Accounts payable Stockholders' 8,300 Equity: Common stock

Total assets

Retained earnings Total liabilities and $139,200 stockholder's equity

$47,400

Total $104,500 12,000 17,900 (5,000) $129,400

$9,800

$ 82,000 47,400 129,400 129,400

Required: 1. Record year-end closing entries. 2. Prepare a post-closing trial balance (Hint: the balance of retained earnings will be the amount shown in the balance sheet).

Answer: December 31, 2021 Debit Credit Service Revenue 87,500 Retained Earnings 87,500 (Close revenue accounts) Retained Earnings 69,600 Salaries Expense 47,100 Supplies Expense 9,600 Rent Expense 7,700 Delivery Expense 5,200 (Close expense accounts) Retained Earnings 5,000 Dividends 5,000 (Close dividends account) Post-Closing Trial Balance Account Title Debit Credit Cash $7,500 Accounts Receivable 8,300 Land 123,400 Accounts Payable $9,800 Common Stock 82,000 Retained Earnings _______ 47,400 Totals $139,200 $139,200 Difficulty: 3 Hard Topic: Closing Entries; Post-Closing Trial Balance Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries.; 03-07 Post closing entries and prepare a post-closing trial balance. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

276) Describe the revenue and expense recognition under accrual-basis accounting. Describe each of the following: (1) revenue recognized before cash is received, (2) revenue recognized after cash is received, (3) expense recognized before cash is paid, and (4) expense recognized after cash is paid. Answer: Under accrual-basis accounting, revenues are recognized at the time a company provides goods and services to its customers. Expenses generally are recognized as costs of running the company are used to help produce revenues. In this sense, there is an implied cause-and-effect relationship between revenues and expense. (1) When a company provides good or services on account, revenue is recognized immediately, even though cash is not collected from the customer until a later time. (2) When customers pay for goods or services in advance, a company defers recognition of revenue until those goods or services are provided to the customer at a later time. (3) When a company has a cost of running the business in the current period (salaries, utilities, or taxes) but does not pay for those costs immediately, an expense is recognized, even though cash is not paid until a later time. (4) When a company pays for costs that will be used for future operations (supplies, rent, insurance, or equipment), the company defers recognition of the expense until those costs are used at the later time. Difficulty: 2 Medium Topic: Accrual-Basis Accounting; Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-01 Understand when revenues and expenses are recorded.; 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 277) Describe the primary differences between revenue and expense recognition under accrual-basis accounting versus cash-basis accounting. Answer: Under accrual-basis accounting, revenues are recognized at the time a company provides goods and services to its customers. Expenses generally are recognized as costs of running the company are used to help produce revenues. In this sense, there is an implied cause-and-effect relationship between revenues and expense. Under cash-basis accounting, revenues are recognized at the time cash is received from customers, and expense are recognized at the time cash is paid for costs of running the company. Notice that the timing of revenue and expense recognition matches the timing of cash exchange. Cash-basis accounting is not allowed for financial reporting purposes for most major companies. Difficulty: 2 Medium Topic: Accrual-Basis Compared with Cash-Basis Accounting Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

278) Describe what is meant by deferred revenues and give two examples. Answer: Deferred revenues are inflows of resources before revenue is recognized at the time goods and services are provided to customers. Examples include payments received in advance of the subscription period by an online gaming site, rent payments received in advance of the rental period by a property leasing firm, or insurance payments received in advance of the coverage period by a car insurance company. A liability exists because of the obligation to provide the service after the cash has been received in advance. Difficulty: 2 Medium Topic: Adjusting Entries - Deferred Revenues Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 279) Describe what is meant by prepaid expenses and give two examples. Answer: Prepaid expenses are outflows of resources that create benefits that will last beyond the current reporting period. Examples include supplies or rent paid in advance of use. Difficulty: 2 Medium Topic: Adjusting Entries - Prepaid Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 280) What is an accrued expense? Give two examples. Answer: An accrued expense results from an expense being incurred and a liability recorded prior to cash payment. Examples include interest payable and salaries payable. Difficulty: 2 Medium Topic: Adjusting Entries - Accrued Expenses Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

281) What is the difference between permanent accounts and temporary accounts and why does an accounting system have both types of accounts? Answer: Permanent accounts represent assets, liabilities, and stockholders' equity at a point in time. Temporary accounts represent changes in retained earnings caused by changes in dividend, revenue and expense accounts. The temporary accounts are closed out annually to facilitate measuring income on an annual basis, but the permanent account balances are carried forward from period to period. Difficulty: 2 Medium Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 282) What are the purposes of closing entries? Answer: The closing process serves a dual purpose: (1) to reduce the balances of temporary accounts to zero so they are ready to measure activity in the next accounting period, and (2) to transfer the balances of these temporary accounts to the Retained Earnings account so it reflects the activity that has occurred in the temporary accounts during the period. Difficulty: 2 Medium Topic: Closing Entries Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

Financial Accounting, 5e (Spiceland) Chapter 4 Cash and Internal Controls 1) Managers of the company act as stewards or caretakers of the company's assets. Answer: TRUE Difficulty: 1 Easy Topic: Accounting Scandals and Response by Congress Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 2) Common types of financial statement fraud include creating fictitious revenues from a fake customer, improperly valuing assets, and mismatching revenues and expenses. Answer: TRUE Difficulty: 2 Medium Topic: Accounting Scandals and Response by Congress Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Bloom's: Understand AACSB: Ethics AICPA: BB Critical Thinking 3) In response to corporate accounting scandals and to public outrage over seemingly widespread unethical behavior of top executives, Congress passed the Sarbanes-Oxley Act. Answer: TRUE Difficulty: 1 Easy Topic: Accounting Scandals and Response by Congress Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking

4) The Sarbanes-Oxley Act is also known as Generally Accepted Accounting Principles. Answer: FALSE Explanation: The Sarbanes-Oxley Act is also known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly referred to as SOX. Difficulty: 1 Easy Topic: Accounting Scandals and Response by Congress Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 5) The Public Company Accounting Oversight Board (PCAOB) has the authority to establish standards dealing with auditing, quality control, ethics, independence, and other activities relating to the preparation of audited financial reports. Answer: TRUE Difficulty: 1 Easy Topic: Accounting Scandals and Response by Congress Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 6) Auditors of public companies can perform the full range of audit and nonaudit consulting services for their audit clients. Answer: FALSE Explanation: Auditors are prohibited from providing most nonaudit services, such as consulting, to their clients by the Sarbanes-Oxley Act. Difficulty: 1 Easy Topic: Accounting Scandals and Response by Congress Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking

7) Section 404 of the Sarbanes-Oxley Act requires that a company's management document and assess the effectiveness of all internal control processes that could affect financial reporting. Answer: TRUE Difficulty: 1 Easy Topic: Accounting Scandals and Response by Congress Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 8) Internal control is a company's plan to (1) improve the accuracy and reliability of accounting information and (2) safeguard the company's assets. Answer: TRUE Difficulty: 1 Easy Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 9) One benefit of internal control is greater reliance by investors on reported financial statements. Answer: TRUE Difficulty: 1 Easy Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking

10) A framework for designing an internal control system is provided by the Financial Accounting Standards Board (FASB). Answer: FALSE Explanation: A framework for designing an internal control system is provided by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Difficulty: 1 Easy Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 11) The control environment refers to the overall top-to-bottom attitude of the company with respect to internal control. Answer: TRUE Difficulty: 1 Easy Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 12) Risk assessment identifies and analyzes internal and external threats to achieving a company's objectives. Answer: TRUE Difficulty: 2 Medium Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

13) Separation of duties refers to auditors not being allowed to perform both audit and nonaudit services for the same client. Answer: FALSE Explanation: Separation of duties is where individuals who have physical responsibility for assets should not also have access to accounting records. Difficulty: 1 Easy Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 14) An example of separation of duties would be not allowing an employee who receives cash to also be responsible for depositing that cash in the bank account. Answer: TRUE Difficulty: 2 Medium Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 15) The internal control component of information and communication relates to the effectiveness of accurately measuring and communicating business transactions. Answer: TRUE Difficulty: 1 Easy Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting

16) Management needs to monitor the internal control system, just like any other system. Any control deficiencies spotted by employees should be reported immediately to management. Answer: TRUE Difficulty: 1 Easy Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 17) Separation of duties occurs when two or more people act in coordination to circumvent internal controls. Answer: FALSE Explanation: This is the act of collusion. Difficulty: 1 Easy Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 18) Effective internal controls ensure a company's success and survival. Answer: FALSE Explanation: Effective internal controls improve the company's likelihood of success and survival, but do not provide a guarantee. Difficulty: 1 Easy Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement

19) The amount of cash reported in a company's balance sheet includes currency, coins, and balances in savings and checking accounts, as well as items acceptable for deposit in these accounts, such as checks received from customers. Answer: TRUE Difficulty: 2 Medium Topic: Cash and Cash Equivalents Learning Objective: 04-03 Define cash and cash equivalents. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 20) The amount of cash reported in a company's balance sheet includes items acceptable for deposit in bank accounts, such as checks received from customers. Answer: TRUE Difficulty: 2 Medium Topic: Cash and Cash Equivalents Learning Objective: 04-03 Define cash and cash equivalents. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 21) The amount of cash reported in a company's balance sheet includes the balance of accounts receivable if cash collection is highly likely in the near future. Answer: FALSE Explanation: Accounts receivable is a separately reported asset from cash. Difficulty: 2 Medium Topic: Cash and Cash Equivalents Learning Objective: 04-03 Define cash and cash equivalents. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 22) The amount of cash reported in a company's balance sheet does not include cash equivalents, defined as short-term investments that have a maturity date no longer than three months from the date of purchase. Answer: FALSE Explanation: Cash equivalents are included in the cash balance. Difficulty: 2 Medium Topic: Cash and Cash Equivalents Learning Objective: 04-03 Define cash and cash equivalents. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 7 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

23) Common examples of cash equivalents are money market funds, Treasury bills, and certificates of deposit. Answer: TRUE Difficulty: 2 Medium Topic: Cash and Cash Equivalents Learning Objective: 04-03 Define cash and cash equivalents. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 24) Recording all cash receipts as soon as possible is considered a good internal control. Answer: TRUE Difficulty: 2 Medium Topic: Cash Controls - Receipts Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 25) Opening mail and making a list of checks received once per week is considered a good internal control over cash receipts. Answer: FALSE Explanation: These tasks should be performed each day. Difficulty: 2 Medium Topic: Cash Controls - Receipts Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 26) Whether a customer uses cash, a check, or a debit card to make a purchase, the company records the transaction as a cash sale. Answer: TRUE Difficulty: 1 Easy Topic: Cash Controls - Receipts Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement

27) When customers pay for services with a check, the company should debit Accounts Receivable and credit Service Revenue. Answer: FALSE Explanation: The debit should be to Cash. Difficulty: 2 Medium Topic: Cash Controls - Receipts Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 28) When customers pay for services with a debit card, the company should debit Cash and credit Service Revenue. Answer: TRUE Difficulty: 2 Medium Topic: Cash Controls - Receipts Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 29) When a company pays for services received using a check, it should credit Accounts Payable until the check is paid by the bank. Answer: FALSE Explanation: The credit is to the Cash account. Difficulty: 2 Medium Topic: Cash Controls - Disbursements Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 30) When a company pays for services received using a credit card, it should credit Accounts Payable. Answer: TRUE Difficulty: 2 Medium Topic: Cash Controls - Disbursements Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

31) Allowing the employee who authorizes purchases to also prepare the check is an example of good internal control. Answer: FALSE Explanation: A single employee should not perform both of these tasks. Difficulty: 2 Medium Topic: Cash Controls - Disbursements Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 32) Companies should set maximum purchase limits on debit cards and credit cards as part of internal controls. Answer: TRUE Difficulty: 1 Easy Topic: Cash Controls - Disbursements Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 33) A bank reconciliation matches the balance of cash in the bank account with the balance of cash in the company's own records. Answer: TRUE Difficulty: 1 Easy Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 34) Differences in the company's cash balance and the bank's cash balance occur because of either timing differences or errors. Answer: TRUE Difficulty: 2 Medium Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

35) An example of a bank error that causes the company's balance and bank's balance of cash to differ is the purchase of supplies with a check. Answer: FALSE Explanation: This is an example of a timing difference. Difficulty: 2 Medium Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 36) Cash receipts of the company that have not yet been recorded by the bank are referred to as checks outstanding. Answer: FALSE Explanation: These are referred to as deposits outstanding. Difficulty: 1 Easy Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 37) Checks outstanding are checks the company has written that have not yet been recorded by the bank. Answer: TRUE Difficulty: 1 Easy Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 38) A deposit outstanding will cause the bank's cash balance to be higher than the company's cash balance. Answer: FALSE Explanation: The company's balance will be higher. Difficulty: 2 Medium Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 11 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

39) A check outstanding will cause the bank's cash balance to be higher than the company's cash balance. Answer: TRUE Difficulty: 2 Medium Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 40) An NSF check is an example of a cash transaction that is initially recorded by the bank and later by the company after notification. Answer: TRUE Difficulty: 2 Medium Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 41) Interest earned on a bank account is an example of a cash transaction recorded by the company and then later by the bank after notification. Answer: FALSE Explanation: Interest earned is initially recorded by the bank. Difficulty: 2 Medium Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 42) The final step in reconciling the bank's cash balance and the company's cash balance is to update the company's cash balance for the items used to reconcile the bank's cash balance. Answer: FALSE Explanation: The cash balance needs to be updated for items used to reconcile the company's cash balance. Difficulty: 2 Medium Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 12 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

43) A petty cash fund represents cash on hand and is used to pay for minor purchases. Answer: TRUE Difficulty: 1 Easy Topic: Employee Purchases Learning Objective: 04-06 Account for employee purchases. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 44) A petty cash fund should have just enough cash to make minor expenditures over a reasonable period (such as a week or a month). Answer: TRUE Difficulty: 1 Easy Topic: Employee Purchases Learning Objective: 04-06 Account for employee purchases. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 45) A company's cash is reported in two financial statements-income statement and statement of cash flows. Answer: FALSE Explanation: Cash is reported in the balance sheet and in the statement of cash flows. Difficulty: 1 Easy Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting 46) A company's cash balance is typically reported as a current asset in the balance sheet and information about the company's cash receipts and cash payments during the period is reported in the statement of cash flows. Answer: TRUE Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

47) The statement of cash flows reports a company's cash inflows and cash outflows related to (1) operating activities, (2) investing activities, and (3) financing activities. Answer: TRUE Difficulty: 1 Easy Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting 48) Investing activities include cash transactions involving revenue and expense events during the period. Answer: FALSE Explanation: These are operating activities. Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 49) Investing activities include cash investments in long-term assets and investment securities. Answer: TRUE Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 50) Investing activities include transactions designed to raise cash or finance the business. Answer: FALSE Explanation: These are financing activities. Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

51) Only transactions involving cash affect a company's cash flows. Answer: TRUE Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 52) A company's ratio of cash to noncash assets is calculated as the total cash balance divided by all noncash assets. Answer: TRUE Difficulty: 1 Easy Topic: Analysis - Cash Holdings Learning Objective: 04-08 Demonstrate the link between cash reported in the balance sheet and cash reported in the statement of cash flows. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Measurement 53) Companies often have a high ratio of cash to noncash assets when they consistently pay cash dividends. Answer: FALSE Explanation: Cash dividends represent the return of cash to stockholders and therefore reduce the balance of cash. Difficulty: 3 Hard Topic: Analysis - Cash Holdings Learning Objective: 04-08 Demonstrate the link between cash reported in the balance sheet and cash reported in the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking 54) Typically, the more volatile the company's trend in operating cash flows, the higher the operating risk of the company. Answer: TRUE Difficulty: 3 Hard Topic: Analysis - Cash Holdings Learning Objective: 04-08 Demonstrate the link between cash reported in the balance sheet and cash reported in the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Decision Making 15 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

55) An advantage of a high ratio of cash to noncash assets is that the company has funds to pay obligations as they become due. Answer: TRUE Difficulty: 3 Hard Topic: Analysis - Cash Holdings Learning Objective: 04-08 Demonstrate the link between cash reported in the balance sheet and cash reported in the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Decision Making 56) Occupational fraud: A) Is the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employer's resources. B) Occurs in only a few organizations and generally involves minor amounts. C) Will be prevented when companies employ an auditor. D) Is committed only by lower-level employees. Answer: A Difficulty: 1 Easy Topic: Accounting Scandals and Response by Congress Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Bloom's: Remember AACSB: Ethics AICPA: BB Critical Thinking 57) The phrase "cooking the books" is commonly used to refer to: A) The company's accounting records being thoroughly audited at the end of the year. B) The company's financial statements being presented in a deceptive form. C) The company's ability to provide timely financial information under operating pressure. D) The inclusion of a variety of information in the financial statements. Answer: B Difficulty: 2 Medium Topic: Accounting Scandals and Response by Congress Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

58) The three elements of the fraud triangle are: A) Motivation. B) Rationalization. C) Opportunity. D) All of the other answers are elements of the fraud triangle. Answer: D Difficulty: 1 Easy Topic: Accounting Scandals and Response by Congress Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Bloom's: Remember AACSB: Ethics AICPA: BB Critical Thinking 59) The three elements present in every fraud are commonly referred to as the ________. A) Triple threat B) Three-way manipulation C) Fraud triangle D) Three-alarm fire Answer: C Difficulty: 1 Easy Topic: Accounting Scandals and Response by Congress Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Bloom's: Remember AACSB: Ethics AICPA: BB Critical Thinking 60) Which element of the fraud triangle do companies have the greatest ability to eliminate? A) Motivation. B) Rationalization. C) Opportunity. D) Intelligence. Answer: C Difficulty: 1 Easy Topic: Accounting Scandals and Response by Congress Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Bloom's: Remember AACSB: Ethics AICPA: BB Critical Thinking

61) Fraudulent reporting by management could include: A) Fictitious revenues from a fake customer. B) Improper asset valuation. C) Mismatching revenues and expenses. D) All of the other answers could involve fraudulent reporting. Answer: D Difficulty: 2 Medium Topic: Accounting Scandals and Response by Congress Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Bloom's: Understand AACSB: Ethics AICPA: BB Critical Thinking 62) A company's plans to minimize theft and enhance the accuracy of accounting information are referred to as: A) Corporate controls. B) Security controls. C) Internal controls. D) General controls. Answer: C Difficulty: 1 Easy Topic: Accounting Scandals and Response by Congress Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 63) What key piece of legislation was passed in response to corporate accounting scandals by Enron, WorldCom, and others? A) Sarbanes-Oxley Act. B) 1933 Securities Act. C) 1934 Securities Exchange Act. D) Regulation Fair Disclosure. Answer: A Difficulty: 1 Easy Topic: Accounting Scandals and Response by Congress Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 18 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

64) The Sarbanes-Oxley Act requires that companies must: A) Conduct customer surveys each year to ensure satisfaction with products and services. B) Document internal controls and assess their effectiveness each year. C) Pay taxes owed to the Internal Revenue Service by the tax filing date. D) Devise a budget each year to ensure cash outflows are not greater than cash inflows. Answer: B Difficulty: 1 Easy Topic: Accounting Scandals and Response by Congress Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 65) Under the Sarbanes-Oxley Act, management is responsible for: A) Analysts' having positive comments about the company's operations. B) The reliability of financial statements. C) Increasing the company's stock price. D) All of the other answers represent management responsibilities under the Sarbanes-Oxley Act. Answer: B Difficulty: 1 Easy Topic: Accounting Scandals and Response by Congress Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 66) Which of the following does not represent a major provision of the Sarbanes-Oxley Act? A) Nonaudit services. B) Quarterly financial statements. C) Auditor rotation. D) Corporate executive accountability. Answer: B Difficulty: 1 Easy Topic: Accounting Scandals and Response by Congress Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking

67) Under the provisions of the Sarbanes-Oxley Act, corporate executives: A) Have limited responsibility for financial statements. B) Must personally prepare the company's financial statements. C) Must personally certify the company's financial statements. D) Are not allowed to view the company's financial statements. Answer: C Difficulty: 1 Easy Topic: Accounting Scandals and Response by Congress Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 68) Under the provisions of the Sarbanes-Oxley Act, auditors must do which of the following? A) Provide nonaudit services for their clients. B) Audit public companies whose chief executives worked for the audit firm in the preceding year. C) Be hired by company management. D) Maintain working papers for at least seven years following an audit. Answer: D Difficulty: 2 Medium Topic: Accounting Scandals and Response by Congress Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 69) The Sarbanes-Oxley Act (SOX) mandates which of the following? A) Increased regulations related to auditor-client relations. B) Increased regulations related to internal control. C) Increased regulations related to corporate executive accountability. D) All of the other answers represent mandates of the Sarbanes-Oxley Act. Answer: D Difficulty: 2 Medium Topic: Accounting Scandals and Response by Congress Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

70) Which of the following best describes the goal of internal controls? A) Ensuring the business is profitable. B) Enhancing the health of employees. C) Improving the accuracy and the reliability of financial information. D) Ensuring the compliance with tax regulations. Answer: C Difficulty: 1 Easy Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 71) Which of the following is NOT a design feature of effective internal controls? A) Allow greater reliance by investors on reported financial statements. B) Prevent fraudulent or errant financial reporting. C) Ensure the company's price advantage over competitors. D) Prevent misuse of company funds by employees. Answer: C Difficulty: 2 Medium Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 72) A framework for designing an internal control system is provided by the: A) Committee of Sponsoring Organizations. B) Financial Accounting Standards Board. C) Securities and Exchange Commission. D) International Accounting Standards Board. Answer: A Difficulty: 1 Easy Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking

73) The component of internal control that includes the policies and procedures that help ensure that management's directives are being carried out is: A) Monitoring. B) Information and communication. C) Risk assessment. D) Control activities. Answer: D Difficulty: 2 Medium Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 74) The component of internal control that identifies internal and external factors that could prevent a company's objectives from being achieved is: A) Monitoring. B) Information and communication. C) Risk assessment. D) Control activities. Answer: C Difficulty: 2 Medium Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 75) The component of internal control that includes the formal procedures for reporting control deficiencies is: A) Monitoring. B) Information and communication. C) Risk assessment. D) Control activities. Answer: A Difficulty: 2 Medium Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 22 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

76) The components of internal control do not directly include: A) Risk assessment. B) Inflation adjustment. C) Monitoring. D) Control activities. Answer: B Difficulty: 1 Easy Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 77) Separation of duties refers to: A) Making each manager personally responsible for his/her department. B) Keeping functions across different departments separate. C) Preventing top management and lower-level employees from interacting. D) Individuals who have physical responsibility for assets should not also have access to accounting records. Answer: D Difficulty: 2 Medium Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

78) What is the concept behind separation of duties in establishing internal controls? A) The company's financial accountant should not share information with the company's tax accountant. B) Duties of middle-level managers should be clearly separated from those of top executives. C) Employee fraud is less likely to occur when access to assets and access to accounting records are separated. D) The external auditors of the company should have no contact with managers while the audit is taking place. Answer: C Difficulty: 2 Medium Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 79) Which of the following is not an example of preventive controls? A) Separation of duties. B) Physical controls. C) Proper authorization. D) Reconciliations. Answer: D Difficulty: 2 Medium Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 80) Which of the following is an example of detective controls? A) Separation of duties. B) Physical controls. C) Proper authorization. D) Reconciliations. Answer: D Difficulty: 2 Medium Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 24 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

81) Keeping supplies in a locked room with access allowed only to authorized personnel is an example of which preventive control? A) Separation of duties. B) Physical controls. C) Proper authorization. D) Employee management. Answer: B Difficulty: 2 Medium Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 82) Giving only management the right to make purchases over a certain amount is an example of which preventive control? A) Separation of duties. B) Physical controls. C) Proper authorization. D) Employee management. Answer: C Difficulty: 2 Medium Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

83) Providing employees with appropriate guidance to ensure they have the knowledge necessary to carry out their job duties is an example of which preventive control? A) Separation of duties. B) Physical controls. C) Proper authorization. D) Employee management. Answer: D Difficulty: 2 Medium Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 84) Allowing only certain individuals to have passwords to conduct online purchases is an example of which preventive control? A) Separation of duties. B) Physical controls. C) E-commerce controls. D) Employee management. Answer: C Difficulty: 2 Medium Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 85) Having management periodically determine whether the amount of physical assets of the company match the accounting records is an example of which detective control? A) Separation of duties. B) Reconciliations. C) Performance reviews. D) Employee management. Answer: B Difficulty: 2 Medium Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 26 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

86) Checking actual outcome of individuals or processes against their expected outcome is an example of which detective control? A) Separation of duties. B) Reconciliations. C) Performance reviews. D) Employee management. Answer: C Difficulty: 2 Medium Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 87) Having an independent party assess each year the adequacy of the company's internal control procedures is an example of which detective control? A) Separation of duties. B) Reconciliations. C) Performance reviews. D) Audits. Answer: D Difficulty: 2 Medium Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

88) Which employees are the ones who must take final responsibility for the establishment and success of internal controls? A) Top executives. B) Mid-level managers. C) Lower-level employees. D) All employees. Answer: A Difficulty: 1 Easy Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 89) Which employees have an impact on the operation and effectiveness of internal controls? A) Upper management. B) Mid-level managers. C) Lower-level employees. D) All employees. Answer: D Difficulty: 2 Medium Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 90) The act of collusion refers to: A) Top management and lower-level employees working together to share information necessary for effective internal controls. B) Two or more people acting in coordination to circumvent internal controls. C) Management working with an auditor to prevent occupational fraud. D) Middle-level managers taking full responsibility for effective internal controls. Answer: B Difficulty: 1 Easy Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 28 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

91) The asset most susceptible to theft is: A) Equipment. B) Accounts receivable. C) Building. D) Cash. Answer: D Difficulty: 1 Easy Topic: Cash and Cash Equivalents Learning Objective: 04-03 Define cash and cash equivalents. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 92) Which of the following is considered cash for financial reporting purposes? A) Accounts receivable. B) Investments with maturity dates greater than three months. C) Checks received from customers. D) Accounts payable. Answer: C Difficulty: 2 Medium Topic: Cash and Cash Equivalents Learning Objective: 04-03 Define cash and cash equivalents. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 93) Cash may not include: A) Foreign currency. B) Money orders. C) Accounts receivable. D) Undeposited customer checks. Answer: C Difficulty: 2 Medium Topic: Cash and Cash Equivalents Learning Objective: 04-03 Define cash and cash equivalents. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

94) The balance of cash reported in the balance sheet would include which of the following? A) Balance of savings account. B) Credit card sales. C) Currency. D) All of the other answers would be reported in the balance of cash. Answer: D Difficulty: 2 Medium Topic: Cash and Cash Equivalents Learning Objective: 04-03 Define cash and cash equivalents. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 95) The term commonly used to refer to short-term investments that have a maturity date no longer than three months from the date of purchase is: A) Accounts receivable. B) Cash equivalents. C) Accounts payable. D) Short-term investments. Answer: B Difficulty: 1 Easy Topic: Cash and Cash Equivalents Learning Objective: 04-03 Define cash and cash equivalents. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting 96) Cash equivalents refer to: A) Short-term investments that have a maturity date no longer than three months from the date of purchase. B) Amounts receivable from customers that have a very high probability of collection. C) Short-term investments that have increased in value since the date of purchase, and therefore have generated additional cash for the company. D) The total amount of cash a company would have if all assets were sold. Answer: A Difficulty: 1 Easy Topic: Cash and Cash Equivalents Learning Objective: 04-03 Define cash and cash equivalents. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting

97) Common examples of cash equivalents include all of the following except: A) Money market funds. B) Treasury bills. C) Certificates of deposit. D) Accounts receivable. Answer: D Difficulty: 2 Medium Topic: Cash and Cash Equivalents Learning Objective: 04-03 Define cash and cash equivalents. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 98) Which of the following sales would typically be reported as a cash sale? A) Sale in exchange for office supplies received. B) Sale in exchange for equipment received. C) Sale on account. D) Sale with credit card. Answer: D Difficulty: 2 Medium Topic: Cash and Cash Equivalents Learning Objective: 04-03 Define cash and cash equivalents. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 99) Which of the following would NOT be recorded as a cash sale? A) Customer who pays with a check. B) Customer who pays with a debit card. C) Customer who pays with a credit card. D) A customer who buys on account. Answer: D Difficulty: 2 Medium Topic: Cash and Cash Equivalents Learning Objective: 04-03 Define cash and cash equivalents. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

100) Which of the following would NOT represent good controls over cash receipts? A) Record all cash receipts as soon as possible. B) The employee that receives cash and checks should also deposit them in the bank. C) Open mail each day and make a list of checks received with the amount and payer's name. D) Verify cash receipts by comparing the bank deposit slip with the accounting records. Answer: B Difficulty: 2 Medium Topic: Cash Controls - Receipts Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 101) Which of the following would not be considered good internal control for cash receipts? A) Allowing customers to pay with a debit card. B) Requiring the employee receiving cash from customers to also deposit the cash into the company's bank account. C) Recording cash receipts as soon as they are received. D) Allowing customers to pay with a credit card. Answer: B Difficulty: 2 Medium Topic: Cash Controls - Receipts Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 102) When a sale is made to a customer who pays with a check, the company records: A) A debit to Cash. B) A debit to Accounts Payable. C) A debit to Accounts Receivable. D) No entry until the check clears the bank. Answer: A Difficulty: 2 Medium Topic: Cash Controls - Receipts Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

103) When a sale is made to a customer who pays with a debit card, the company records: A) A debit to Accounts Payable. B) A debit to Accounts Receivable. C) A debit to Cash. D) No entry until the debit card transaction clears the bank. Answer: C Difficulty: 2 Medium Topic: Cash Controls - Receipts Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 104) The amount of revenue recorded at the time of a sale will be greatest when the customer pays with a: A) Check. B) Cash. C) Credit card. D) The revenue will be the same amount for each of the above payment methods. Answer: D Difficulty: 2 Medium Topic: Cash Controls - Receipts Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 105) McGregor Company allows customers to pay with credit cards. The credit card company charges McGregor 3% of the sale. When a customer uses a credit card to pay McGregor $200 for services provided, McGregor would: A) Debit Cash for $200. B) Credit Service Revenue for $194. C) Debit Service Fee Expense for $6. D) Credit Service Revenue for $206. Answer: C Difficulty: 3 Hard Topic: Cash Controls - Receipts Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

106) A customer makes a $2,000 purchase at ApplianceWorld, paying with a credit card. ApplianceWorld is charged a 2% fee by the credit card company. When recording this sale, ApplianceWorld would: A) Debit Accounts Receivable for $2,000. B) Credit Sales Revenue for $2,000. C) Credit Sales Revenue for $1,960. D) Credit Deferred Revenue for $2,000. Answer: B Difficulty: 3 Hard Topic: Cash Controls - Receipts Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement 107) Which of the following would NOT represent good controls over cash disbursements? A) Make all disbursements, other than very small ones, by check, debit card, or credit card. B) Require only one signature for checks, especially larger ones. C) Authorize all expenditures before purchase and verify the accuracy of the purchase itself. D) The employee who authorizes payment should not also be the employee who prepares the check. Answer: B Difficulty: 2 Medium Topic: Cash Controls - Disbursements Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 108) Which of the following would NOT represent good controls over cash disbursements? A) Periodically verify amounts shown in the debit card and credit card statements against purchase receipts. B) The employee verifying the accuracy of the debit card and credit card statements should not also be the employee responsible for actual purchases. C) Set maximum purchase limits on debit cards and credit cards. D) Employees responsible for making cash disbursements should also be in charge of cash receipts. Answer: D Difficulty: 2 Medium Topic: Cash Controls - Disbursements Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 34 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

109) A bank reconciliation reconciles the bank statement with the company's: A) Cash from operating activities. B) Net cash flow in the statement of cash flows. C) Cash account in the balance sheet. D) Net income in the income statement. Answer: C Difficulty: 1 Easy Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 110) What is the primary purpose of a bank reconciliation? A) To ensure that debits equal credits for all cash transactions. B) To ensure that customers are paying amounts owed on a timely basis. C) To ensure the bank balance per reconciliation is equal to the company balance per reconciliation. D) To ensure cash receipts are greater than cash disbursements. Answer: C Difficulty: 2 Medium Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 111) Which of the following items would cause the balance of cash in the bank statement not to equal the balance of cash in the accounting records? A) Interest earned on the bank balance that the company has not recorded. B) Checks written by the company that have not cleared the bank. C) Cash receipts by the company that have not been deposited in the bank. D) All of the other answers would cause cash balances to differ. Answer: D Difficulty: 2 Medium Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

112) Which of the following items would cause the balance of cash in the bank statement not to equal the balance of cash in the accounting records? A) The company purchased supplies using a debit card. B) The company has cash receipts that have been deposited in the bank. C) The company deposited a customer check that was found by the bank to have insufficient funds. D) The company wrote checks that have cleared the bank. Answer: C Difficulty: 2 Medium Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 113) Which of the following items would cause the balance of cash in the bank statement to be greater than the balance of cash in the accounting records? A) The company wrote checks that have not cleared the bank. B) The company purchased supplies using a debit card. C) The company has cash receipts that have not been deposited in the bank. D) The company deposited a customer check that was found by the bank to have insufficient funds. Answer: A Difficulty: 3 Hard Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking 114) Which of the following is NOT a reason why a bank reconciliation is necessary? A) The company has transactions that the bank has not recorded. B) Petty cash has a low balance. C) The bank has transactions that the company has not recorded. D) Reconciliations provide a control over cash. Answer: B Difficulty: 1 Easy Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking

115) A good internal control system would require that the employee who handles cash must not be involved in: A) Reconciling the bank statement. B) The accounts payable function. C) Hiring decisions. D) Daily operations of the company. Answer: A Difficulty: 2 Medium Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 116) Which of the following is correct with respect to a bank reconciliation? A) Subtract interest earned from the bank's balance. B) Add service charge to the company's balance. C) Subtract NSF checks from the company's balance. D) Add deposits outstanding to the company's balance. Answer: C Difficulty: 3 Hard Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking 117) After preparing the bank reconciliation, an NSF check would result in which of the following when recording the adjustment to the company's cash balance? A) Debit to Service Fee Expense. B) Credit to Accounts Payable. C) Credit to Service Revenue. D) Debit to Accounts Receivable. Answer: D Difficulty: 2 Medium Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

118) The following information pertains to a company's cash balance and bank reconciliation as of August 31: Company balance before reconciliation Checks outstanding Notes collected by the bank Service fee Deposits outstanding

$ $ $ $ $

5,000 2,500 2,200 50 2,000

What is the correct cash balance for the company? A) $7,150. B) $5,150. C) $7,650. D) $7,250. Answer: A Explanation: Cash = $5,000 + $2,200 − $50 = $7,150. Difficulty: 3 Hard Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement 119) When preparing a bank reconciliation, a deposit outstanding would be: A) Added to the company's cash balance. B) Added to the bank's cash balance. C) Subtracted from the company's cash balance. D) Subtracted from the bank's cash balance. Answer: B Difficulty: 2 Medium Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

120) Regarding a bank reconciliation, which one of the following is an item recorded by the company but not by the bank? A) Checks outstanding. B) Interest earned. C) Service charges. D) NSF checks. Answer: A Difficulty: 2 Medium Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 121) Which of the following would NOT need to be accounted for in a bank reconciliation? A) Deposits recorded by the company but not the bank. B) Interest recorded by the bank but not the company. C) NSF checks recorded by the bank but not by the company. D) Checks written by the company and recorded by the bank. Answer: D Difficulty: 2 Medium Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

122) On May 31, Money Corporation's Cash account showed a balance of $10,000 before the bank reconciliation was prepared. After examining the May bank statement and items included with it, the company's accountant found the following items: Checks outstanding Deposits outstanding NSF check Service fees

$ 2,250 1,900 100 40

Error: Money Corp. wrote a check for $30 but recorded it incorrectly for $300. What is the amount of cash that should be reported in the company's balance sheet as of May 31? A) $9,860. B) $9,650. C) $10,130. D) $10,410. Answer: C Explanation: Cash balance = $10,000 − $100 − $40 + $270 = $10,130. Difficulty: 3 Hard Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 123) Cash transactions recorded by the bank but not yet recorded by the company include all of the following except A) Service fees. B) Interest earned. C) Checks outstanding. D) NSF checks. Answer: C Difficulty: 2 Medium Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Understand AACSB: Analytical Thinking AICPA: BB Critical Thinking

124) The following information was taken from a company's bank reconciliation at the end of the year: Bank balance Checks outstanding Note collected by the bank Service fee Deposits outstanding NSF check

$ $ $ $ $ $

8,000 5,800 1,500 20 4,000 300

What is the correct cash balance that should be reported in the company's balance sheet at the end of the year? A) $10,200. B) $7,400. C) $6,200. D) $6,160. Answer: C Explanation: Bank balance ($8,000) + deposits outstanding ($4,000) − checks outstanding ($5,800) = $6,200. Difficulty: 3 Hard Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 125) Cash transactions that have been recorded by the company but not the bank include: A) NSF checks. B) Interest earned. C) Service fees. D) Deposits outstanding. Answer: D Difficulty: 2 Medium Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Understand AACSB: Analytical Thinking AICPA: BB Critical Thinking

126) After preparing a bank reconciliation, the collection of a note by the bank on a company's behalf would be recorded with a: A) Credit to Notes Receivable. B) Credit to Cash. C) Debit to Notes Receivable. D) Credit to Accounts Receivable. Answer: A Difficulty: 2 Medium Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 127) After preparing a bank reconciliation, the service fee charged by the bank would be recorded with a: A) Credit to Service Fees Expense. B) Debit to Cash. C) Credit to Service Fees Revenue. D) Debit to Service Fees Expense. Answer: D Difficulty: 2 Medium Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement 128) After preparing a bank reconciliation, a check outstanding for the payment of advertising would be recorded with a: A) Debit to Advertising Expense. B) Debit to Cash. C) Credit to Advertising Expense. D) No entry is needed. Answer: D Difficulty: 2 Medium Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement

129) The following data were obtained from the bank statement and from the process of reconciling the bank balance with the company's cash balance: Bank service charges Deposit outstanding Interest earned on the bank account Checks outstanding

$ 20 $ 150 $ 10 $ 400

Which items should be deducted from and added to the bank balance in completing the reconciliation? A) Deduct checks outstanding; add service charges and deposit outstanding. B) Deduct interest earned; add deposit outstanding. C) Deduct checks outstanding; add deposit outstanding. D) Deduct deposit outstanding; add checks outstanding. Answer: C Difficulty: 3 Hard Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

130) The balance in a company's Cash account on August 31 was $19,700, before the bank reconciliation was prepared. After examining the August bank statement and items included with it, the company's accountant found: Checks outstanding NSF check Note collected by bank for the Colt Company Deposits outstanding Bank service fees

$ 4,300 140 1,200 1,800 60

What is the amount of cash that should be reported in the balance sheet as of August 31? A) $20,700. B) $17,200. C) $18,700. D) $22,200. Answer: A Explanation: Book balance ($19,700) + note collected ($1,200) − NSF check ($140) − bank service fees ($60) = $20,700. Difficulty: 3 Hard Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

131) The balance shown in the August bank statement of a company was $23,200. After examining the August bank statement and items included with it, the company's accountant found: Checks outstanding NSF check Note collected by bank for the Colt Company Deposits outstanding Bank service fees

$ 4,300 140 1,200 1,800 60

What is the amount of cash that should be reported in the balance sheet as of August 31? A) $20,700. B) $17,200. C) $18,700. D) $22,200. Answer: A Explanation: Bank balance ($23,200) + deposits outstanding ($1,800) − checks outstanding ($4,300) = $20,700. Difficulty: 3 Hard Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 132) A company-issued debit card or credit card is often referred to as a: A) Budget care. B) Allowance card. C) Purchase card. D) Receipt card. Answer: C Difficulty: 1 Easy Topic: Employee Purchases Learning Objective: 04-06 Account for employee purchases. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking

133) A minor amount of cash kept on hand to pay for small purchases is referred to as a: A) Petty cash fund. B) Cash receipts fund. C) Cash payments fund. D) Cookie jar fund. Answer: A Difficulty: 1 Easy Topic: Employee Purchases Learning Objective: 04-06 Account for employee purchases. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking 134) At the end of the month, employees have made the following expenditures from the petty cash fund and with company-issued credit cards. None of these transactions has been recorded previously. Supplies (petty cash) Delivery (petty cash) Advertising (credit card) Equipment (credit card)

$ 50 $ 75 $ 1,100 $ 4,200

Accounting for these employee purchases would include a: A) Credit to Cash for $125. B) Debit to Accounts Payable for $5,300. C) Credit to Cash for $1,225. D) Credit to Accounts Payable for $5,425. Answer: A Difficulty: 3 Hard Topic: Employee Purchases Learning Objective: 04-06 Account for employee purchases. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

135) At the end of the month, employees have made the following expenditures from the petty cash fund and with company-issued credit cards. None of these transactions has been recorded previously. Supplies (petty cash) Delivery (petty cash) Advertising (credit card) Equipment (credit card)

$ 50 $ 75 $ 1,100 $ 4,200

Accounting for these employee purchases would include a: A) Credit to Cash for $5,425. B) Credit to Accounts Payable for $5,300. C) Credit to Equipment for $4,200. D) Debit to Accounts Receivable for $5,300. Answer: B Difficulty: 3 Hard Topic: Employee Purchases Learning Objective: 04-06 Account for employee purchases. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement 136) Which of the following is NOT involved in the replenishment of the petty cash fund? A) Transactions related to vouchers will be recorded. B) Management will verify that the total of all vouchers equals the amount of cash missing from the petty cash fund. C) Weekly payroll checks will be recorded. D) Management will withdraw cash from the bank and place it in the petty cash fund. Answer: C Difficulty: 2 Medium Topic: Employee Purchases Learning Objective: 04-06 Account for employee purchases. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

137) At the time a $400 petty cash fund is being replenished, the company's accountant finds vouchers totaling $350 and petty cash of $50. The vouchers include: postage, $100; business lunches, $150; delivery fees, $75; and office supplies, $25. Which of the following is not recorded when recognizing expenditures from the petty cash fund? A) Debit Postage Expense, $100. B) Debit Supplies, $25. C) Credit Cash, $350. D) Debit Cash, $350. Answer: D Difficulty: 3 Hard Topic: Employee Purchases Learning Objective: 04-06 Account for employee purchases. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement 138) Which of the following is correct regarding a petty cash fund? A) A petty cash fund represents cash on hand at the business for quick access. B) A petty cash fund is used for minor purposes. C) When cash from this fund is taken out, it should be replaced with a voucher. D) All of the answers are correct regarding a petty cash fund. Answer: D Difficulty: 2 Medium Topic: Employee Purchases Learning Objective: 04-06 Account for employee purchases. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 139) When accounting for employee purchases, effective internal controls could include which of the following? A) Credit card receipts are reconciled to credit card statements. B) Employees should be required to provide receipts and justification for those receipts on a timely basis. C) A separate employee reviews receipts and supporting documents to ensure all expenditures are made appropriately. D) All of the other answers represent effective internal controls. Answer: D Difficulty: 2 Medium Topic: Employee Purchases Learning Objective: 04-06 Account for employee purchases. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 48 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

140) When accounting for employee purchases, effective internal controls could include which of the following? A) Employees should be required to provide receipts and justification for those receipts every six months. B) Only those employees that need to make timely business expenditures should receive authorization. C) The same employee should review receipts and supporting documents to ensure all expenditures are made appropriately. D) To ensure timely expenditures, no pre-approval should be required for major purchases. Answer: B Difficulty: 2 Medium Topic: Employee Purchases Learning Objective: 04-06 Account for employee purchases. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 141) A company's cash balance is reported in which two financial statements? A) Income statement and statement of cash flows. B) Balance sheet and statement of cash flows. C) Income statement and balance sheet. D) Balance sheet and statement of stockholders' equity. Answer: B Difficulty: 1 Easy Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting 142) Which of the following best describes restricted cash? A) Cash to be collected from customers from sales on account. B) Cash that is not available to be used for current operations. C) Cash that has been borrowed from a bank with a high interest rate. D) Dividends that are expected to be paid to common stockholders in the following year. Answer: B Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Remember; Understand AACSB: Reflective Thinking AICPA: FN Reporting 49 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

143) A common example of restricted cash includes cash set aside by the company for the specific purpose of: A) Repaying debt in the future. B) Purchasing equipment in the future. C) Making investments in the future. D) All of the other answers represent examples of restricted cash. Answer: D Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 144) The statement of cash flows reports cash flows from the activities of: A) Operating, purchasing, and investing. B) Borrowing, paying, and investing. C) Financing, investing, and operating. D) Using, investing, and financing. Answer: C Difficulty: 1 Easy Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Remember AACSB: Reflective Thinking AICPA: FN Reporting 145) Operating cash flows would exclude: A) Payment of employee salaries. B) Receipt of cash from customers. C) Payment of dividends. D) Payment for advertising. Answer: C Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

146) Cash flows from investing do not include cash flows from: A) Lending. B) The sale of equipment. C) Borrowing. D) The purchase of a building. Answer: C Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 147) Which of the following is NOT correct regarding the reporting of cash? A) Cash is reported in both the balance sheet and the statement of cash flows. B) Cash flows from buying and selling investments and long-term productive assets are called operating cash flows. C) Cash flows from transactions with stockholders and creditors are called financing cash flows. D) Net cash flows reported in the statement of cash flows should equal the change in cash reported in the balance sheet. Answer: B Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

148) Consider the following cash flow items: Pay amount owed to bank for previous borrowing. Pay utility costs. Purchase equipment to be used in operations. Purchase office supplies. Pay one year of rent in advance. Pay workers' salaries. Pay for research and development costs. Pay taxes to the IRS. Sell common stock to investors. How many of these cash flow items involve investing activities? A) Zero. B) One. C) Two. D) Three. Answer: B Explanation: Purchase equipment to be used in operations. Difficulty: 3 Hard Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

149) Consider the following cash flow items: Pay amount owed to bank for previous borrowing. Pay utility costs. Purchase equipment to be used in operations. Purchase office supplies. Purchase one year of rent in advance. Pay workers' salaries. Pay for research and development costs. Pay taxes to the IRS. Sell common stock to investors. How many of these cash flow items involve financing activities? A) Zero. B) One. C) Two. D) Three. Answer: C Explanation: (1) Pay amount owed to bank for previous borrowing and (2) Sell common stock to investors. Difficulty: 3 Hard Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 150) Investing cash flows would include which of the following? A) Payment of cash dividends to stockholders. B) Purchase of office supplies with cash. C) Purchase of a building with cash. D) Cash sales to customers. Answer: C Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

151) Cash flows from investing activities do not include: A) Borrowing. B) The purchase of equipment. C) The sale of land. D) The purchase of a building. Answer: A Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 152) Payment of dividends to stockholders is considered a(n): A) Operating cash flow. B) Investing cash flow. C) Financing cash flow. D) Not a cash flow. Answer: C Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 153) Issuing common stock for cash is considered a(n): A) Operating cash flow. B) Investing cash flow. C) Financing cash flow. D) Not a cash flow. Answer: C Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

154) Cash flows from financing activities include: A) Lending. B) Salaries paid. C) The sale of land. D) Dividends paid. Answer: D Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting 155) Providing services to customers on account is considered a(n): A) Operating cash flow. B) Investing cash flow. C) Financing cash flow. D) Not a cash flow. Answer: D Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

156) Consider the following list of transactions: Repay borrowing from the bank, $2,000. Pay employees' salaries of $1,500. Purchase equipment for cash, $10,000. Provide services to customers for cash, $4,500. Issue shares of common stock for cash, $5,000. Pay utilities, $1,000. Provide services to customers on account, $2,500. Sell old delivery truck for cash, $4,000. What amount would the company report for operating cash flows in the statement of cash flows? A) $5,000. B) $4,500. C) $1,000. D) $2,000. Answer: D Explanation: $4,500 − $1,500 − $1,000 = $2,000 Difficulty: 3 Hard Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

157) Consider the following list of transactions: Repay borrowing from the bank, $2,000. Pay employees' salaries of $1,500. Purchase equipment for cash, $10,000. Provide services to customers for cash, $4,500. Issue shares of common stock for cash, $5,000. Pay utilities, $1,000. Provide services to customers on account, $2,500. Sell old delivery truck for cash, $4,000. What amount would the company report for investing cash flows in the statement of cash flows? A) $(3,500). B) $(6,000). C) $(4,000). D) $(7,500). Answer: B Explanation: $4,000 − $10,000 = $(6,000) Difficulty: 3 Hard Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

158) Consider the following list of transactions: Repay borrowing from the bank, $2,000. Pay employees' salaries of $1,500. Purchase equipment for cash, $10,000. Provide services to customers for cash, $4,500. Issue shares of common stock for cash, $5,000. Pay utilities, $1,000. Provide services to customers on account, $2,500. Sell old delivery truck for cash, $4,000. What amount would the company report for financing cash flows in the statement of cash flows? A) $3,000. B) $6,000. C) $1,500. D) $4,500. Answer: A Explanation: $5,000 − $2,000 = $3,000 Difficulty: 3 Hard Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 159) A company might hold a large amount of cash relative to noncash assets for which of the following reasons? A) Part of its operations includes low-tax foreign jurisdictions. B) Operating risks are high. C) Dividends are not typically paid to shareholders. D) All of the other answers represent reasons for large cash holdings. Answer: D Difficulty: 2 Medium Topic: Analysis - Cash Holdings Learning Objective: 04-08 Demonstrate the link between cash reported in the balance sheet and cash reported in the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Decision Making

160) The company's ratio of cash to noncash assets increased in the current year from 20% to 30%? Which of the following represents the most likely reason for this increase? A) The company maintained operations only in the United States. B) The company declared a large dividend in the current year. C) Management forecasts additional operating volatility in future periods. D) The company acquired additional equipment and buildings for expansion of operations. Answer: C Difficulty: 3 Hard Topic: Analysis - Cash Holdings Learning Objective: 04-08 Demonstrate the link between cash reported in the balance sheet and cash reported in the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Decision Making 161) A potential risk of a company with a high ratio of cash to noncash assets is: A) Creditors are less likely to lend money to the company. B) Management may not foresee any growth opportunities. C) The company likely will not be able to pay dividends in the near future. D) The company likely is paying higher taxes than it should be. Answer: B Difficulty: 3 Hard Topic: Analysis - Cash Holdings Learning Objective: 04-08 Demonstrate the link between cash reported in the balance sheet and cash reported in the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Decision Making 162) A company's lower ratio of cash to noncash assets most likely represents which characteristic of management? A) Greater willingness to take risk. B) Lower ability to find profitable investment projects. C) Greater caution to ensure funds are available to pay debt as it becomes due. D) Greater willingness to be compensated with company stock than cash. Answer: A Difficulty: 3 Hard Topic: Analysis - Cash Holdings Learning Objective: 04-08 Demonstrate the link between cash reported in the balance sheet and cash reported in the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Decision Making 59 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

163) A company reports the following amounts: Cash $ 10,000

Total Assets $ 50,000

Total Liabilities $ 35,000

What is the ratio of cash to noncash assets? A) 75%. B) 20%. C) 25%. D) 67%. Answer: C Explanation: $10,000/($50,000 − $10,000) = 25% Difficulty: 3 Hard Topic: Analysis - Cash Holdings Learning Objective: 04-08 Demonstrate the link between cash reported in the balance sheet and cash reported in the statement of cash flows. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 164) Below are trends in operating cash flows for three companies.

Company 1 Company 2 Company 3

Year 1 $ 100,000 100,000 90,000

Year 2 $ 150,000 100,000 100,000

Year 3 50,000 100,000 110,000

Total $ 300,000 300,000 300,000

Based on an analysis of operating risk, which company's management is likely motivated to have the largest ratio of cash to noncash assets? A) Company 1. B) Company 2. C) Company 3. D) All companies are expected to have the same ratio. Answer: A Difficulty: 3 Hard Topic: Analysis - Cash Holdings Learning Objective: 04-08 Demonstrate the link between cash reported in the balance sheet and cash reported in the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Decision Making

Match each provision of the Sarbanes-Oxley Act with its description. A) PCAOB establishes standards related to the preparation of audited financial reports. B) Management must document the effectiveness of procedures that could affect financial reporting. C) Lead audit partners are required to change every five years. D) Audit firm cannot provide a variety of other services to its client, such as consulting. E) Company management must personally certify the financial statements. 165) Corporate executive accountability Difficulty: 2 Medium Topic: Accounting Scandals and Response by Congress Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 166) Auditor rotation Difficulty: 2 Medium Topic: Accounting Scandals and Response by Congress Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 167) Oversight board Difficulty: 2 Medium Topic: Accounting Scandals and Response by Congress Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 168) Nonaudit services Difficulty: 2 Medium Topic: Accounting Scandals and Response by Congress Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

169) Internal control Difficulty: 2 Medium Topic: Accounting Scandals and Response by Congress Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking Answers: 165) E 166) C 167) A 168) D 169) B

Match each term associated with components of internal control with its definition. A) Procedures for maintaining separation of duties. B) Transfer of data from lower managers to top executives for accurate financial reporting. C) Routine activities that are meant to continually observe internal control activities. D) Overall attitude of the company with respect to internal controls. E) Formal policies to evaluate internal and external threats to achieving company objectives. 170) Risk assessment Difficulty: 2 Medium Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 171) Control activities Difficulty: 2 Medium Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 172) Information and communication Difficulty: 2 Medium Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 173) Control environment Difficulty: 2 Medium Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

174) Monitoring Difficulty: 2 Medium Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking Answers: 170) E 171) A 172) B 173) D 174) C

Match each term associated with cash and cash controls with its definition. A) Matches the balance of cash in the bank account with the balance of cash in the company's own records. B) Minor amount of cash kept on hand. C) Withdraws funds directly from the user's account at the time of use. D) Short-term investments that have a maturity date no longer than three months from the date of purchase. E) Allows users to purchase items without having to pay cash immediately. 175) Credit card Difficulty: 2 Medium Topic: Cash and Cash Equivalents; Cash Controls — Receipts; Cash Controls - Disbursements Learning Objective: 04-03 Define cash and cash equivalents.; 04-04 Understand controls over cash receipts and cash disbursements. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 176) Bank reconciliation Difficulty: 2 Medium Topic: Cash and Cash Equivalents; Cash Controls — Receipts; Cash Controls - Disbursements Learning Objective: 04-03 Define cash and cash equivalents.; 04-04 Understand controls over cash receipts and cash disbursements. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 177) Cash equivalent Difficulty: 2 Medium Topic: Cash and Cash Equivalents; Cash Controls — Receipts; Cash Controls - Disbursements Learning Objective: 04-03 Define cash and cash equivalents.; 04-04 Understand controls over cash receipts and cash disbursements. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 178) Debit card Difficulty: 2 Medium Topic: Cash and Cash Equivalents; Cash Controls — Receipts; Cash Controls - Disbursements Learning Objective: 04-03 Define cash and cash equivalents.; 04-04 Understand controls over cash receipts and cash disbursements. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

179) Petty cash Difficulty: 2 Medium Topic: Cash and Cash Equivalents; Cash Controls — Receipts; Cash Controls - Disbursements Learning Objective: 04-03 Define cash and cash equivalents.; 04-04 Understand controls over cash receipts and cash disbursements. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking Answers: 175) E 176) A 177) D 178) C 179) B

Match each term related to bank reconciliations with its description. A) Cash receipts received by the company but not yet recorded by the bank. B) Checks written to the company that are returned by the bank as not having adequate funds. C) Money earned on the average daily balance of the checking account. D) Charges imposed by the bank to the company for providing routine services. E) The company recorded a deposit twice. F) Checks written by the company but not yet recorded by the bank. 180) Checks outstanding Difficulty: 2 Medium Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 181) NSF checks Difficulty: 2 Medium Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 182) Company error Difficulty: 2 Medium Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 183) Deposits outstanding Difficulty: 2 Medium Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

184) Bank service fees Difficulty: 2 Medium Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 185) Interest revenue Difficulty: 2 Medium Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking Answers: 180) F 181) B 182) E 183) A 184) D 185) C

Match each type of cash flow with its description. A) Pay dividends to stockholders. B) Pay salaries to employees. C) Issue common stock. D) Receive payment from customers. E) Purchase equipment. F) Sell office building. 186) Cash outflow from financing activities Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 187) Cash outflow from investing activities Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 188) Cash inflow from investing activities Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 189) Cash inflow from financing activities Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

190) Cash outflow from operating activities Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 191) Cash inflow from operating activities Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking Answers: 186) A 187) E 188) F 189) C 190) B 191) D

Match each type of cash flow with its description. A) Pay cash for utilities. B) Receive cash in advance from customers. C) Issue common stock. D) Purchase building. E) Sell land. F) Repay amount borrowed from bank. 192) Cash outflow from financing activities Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 193) Cash outflow from operating activities Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 194) Cash inflow from investing activities Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 195) Cash inflow from financing activities Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

196) Cash outflow from investing activities Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 197) Cash inflow from operating activities Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking Answers: 192) F 193) A 194) E 195) C 196) D 197) B 198) A company had the following sales transactions: 1. Total debit card sales = $200,000. 2. Total credit card sales = $400,000. 3. Total cash sales = $800,000. 4. Total check sales = $100,000. There is a charge of 2% on all credit card transactions. Calculate total sales revenue recorded for the year. Answer: $1,500,000 $200,000 + $400,000 + $800,000 + $100,000 = $1,500,000. Difficulty: 3 Hard Topic: Cash Controls - Receipts Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

199) A company had the following transactions: 1. Paid $150 for office supplies using a debit card. 2. Purchased office equipment costing $700 using a credit card. 3. Paid utilities bill of $400 by issuing a check. Record each transaction. Answer: 1. Supplies 150 Cash 150 2. Equipment 700 Accounts Payable 700 3. Utilities Expense 400 Cash 400 Difficulty: 3 Hard Topic: Cash Controls - Disbursements Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

200) Indicate whether the firm should add or subtract each item below from its balance of cash or the bank's balance of cash in preparing a bank reconciliation.

Reconciliation Items 1. Checks outstanding 2. NSF checks 3. Deposit recorded twice by company 4. Interest earned 5. Deposits outstanding 6. Bank service fees

Bank Balance

Company Balance

Answer: Company Reconciliation Items Bank Balance Balance 1. Checks outstanding Subtract 2. NSF checks Subtract 3. Deposit recorded twice by company Subtract 4. Interest earned Add 5. Deposits outstanding Add 6. Bank service fees Subtract Difficulty: 3 Hard Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement 201) A company's general ledger shows a cash balance of $4,570. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as checks outstanding of $2,840, bank service fees of $110, and interest earned of $15. Calculate the correct balance of cash. Answer: $4,475 $4,570 − $110 + $15 = $4,475. Difficulty: 3 Hard Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

202) A company's general ledger shows a cash balance of $2,380. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as deposits outstanding of $1,760, note collected by the bank on the company's behalf of $1,000, and interest earned of $20. The company also finds an error by the bank of an additional deposit of $100. Calculate the correct balance of cash. Answer: $3,400 $2,380 + $1,000 + $20 = $3,400. Difficulty: 3 Hard Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement 203) A company's bank statement shows a cash balance of $4,230. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as checks outstanding of $3,880, deposits outstanding of $1,230, NSF check of $300, and service fee of $50. Calculate the correct balance of cash. Answer: $1,580 $4,230 − $3,880 + $1,230 = $1,580. Difficulty: 3 Hard Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement 204) A company's bank statement shows a cash balance of $4,170. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as checks outstanding of $2,110, NSF check of $200, interest earned of $30, service fee of $40, and a check for $150 recorded twice by the company. Calculate the correct balance of cash. Answer: $2,060 $4,170 − $2,110 = $2,060. Difficulty: 3 Hard Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

205) A company's Cash account shows a balance of $3,450 at the end of the month. Comparing the company's Cash account with the monthly bank statement reveals several additional cash transactions such as bank service fees ($50), an NSF check from a customer ($300), a customer's note receivable collected by the bank ($1,000), and interest earned ($100). Prepare the necessary entries to adjust the balance of cash. Answer: Cash 1,100 Notes Receivable Interest Revenue (Record note collected and interest earned) Service Fees Expense 50 Accounts Receivable 300 Cash (Record bank service fees and NSF check) Difficulty: 3 Hard Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

1,000 100

350

206) A company's Cash account shows a balance of $5,680 at the end of the month. Comparing the company's Cash account with the monthly bank statement reveals several additional cash transactions such as deposits outstanding ($1,250), checks outstanding ($2,380), bank service fees ($40), an NSF check from a customer ($150), a customer's note receivable collected by the bank ($500), and interest earned ($60). Prepare the necessary entries to adjust the balance of cash. Answer: Cash 560 Notes Receivable Interest Revenue (Record note collected and interest earned) Service Fees Expense 40 Accounts Receivable 150 Cash (Record bank service fees and NSF check) Difficulty: 3 Hard Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

500 60

190

207) Peterson Company's general ledger shows a cash balance of $7,850 on May 31. May cash receipts of $1,250, included in the general ledger balance, are placed in the night depository at the bank on May 31 and processed by the bank on June 1. The bank statement dated May 31 shows an NSF check for $200 and a service fee of $50. The bank processes all checks written by the company by May 31 and lists them on the bank statement, except for one check totaling $1,640. The bank statement shows a balance of $7,990 on May 31. Prepare a bank reconciliation to calculate the correct ending balance of cash on May 31. Answer:

Peterson Company Bank Reconciliation May 31 Bank's Cash Balance Company's Cash Balance Per bank statement $7,990 Per general ledger $7,850 Deposits outstanding +1,250 Service charge −50 Checks outstanding −1,640 NSF Check −200 Bank balance per Company balance reconciliation $7,600 per reconciliation $7,600 Difficulty: 3 Hard Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

208) Madison Company's cash ledger reports the following for the month ending March 31.

Deposits:

Cash receipts

Balance on March 1 Receipts Disbursements Balance on March 31

Date Amount 3/4 $1,200 Checks: 3/11 1,200 3/18 3,700 3/25 3,400 3/26-3/31 2,100 $11,600

$5,400 11,600 (11,300)

No. 541 542 543 544 545 546 547

Date 3/2 3/8 3/12 3/19 3/27 3/28 3/30

Amount $5,100 800 2,200 1,100 200 600 1,300 $11,300

$5,700

Information from March's bank statement and company records reveals the following additional information: a. The ending cash balance recorded in the bank statement is $6,790. b. Cash receipts of $2,100 from 3/26 - 3/31 are outstanding. c. Checks 545 and 547 are outstanding. d. The deposit on 3/11 included a customer's check for $400 that did not clear the bank (NSF check). e. Check 543 was written for $2,800 for office supplies in March. The bank properly recorded the check for this amount. f. An automatic withdrawal for March rent was made on March 4 for $1,500. g. Madison's checking account earns interest based on the average daily balance. The amount of interest earned for March is $50. h. Last year, one of Madison's top executives borrowed $4,000 from Madison. On March 24, the executive paid $4,200 ($4,000 borrowed amount plus $200 interest) directly to the bank in payment for the borrowing. i. The bank charged the following service fees: $30 for NSF check, $10 for automatic withdrawal for rent payment, and $20 for collection of the loan amount from the executive. Prepare a bank reconciliation for March 31, and record the necessary cash adjustments.

Answer:

Bank's Cash Balance Per bank statement Deposits outstanding Checks outstanding

Bank balance per reconciliation

Madison Company Bank Reconciliation March 31 Company's Cash Balance $6,790 Per general ledger +2,100 NSF check −1,500 Company error EFT for rent Interest on account Note collected Interest on note Service fees Company balance $7,390 per reconciliation

$5,700 −400 −600 −1,500 +50 +4,000 +200 −60 $7,390

Cash

4,250 Notes Receivable 4,000 Interest Revenue 250 (Record note collected and interest earned) Accounts Receivable 400 Supplies 600 Rent Expense 1,500 Service Fees Expense 60 Cash 2,560 (Record NSF check, check correction for supplies, automatic rent payment, and bank service fees) Difficulty: 3 Hard Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

209) A company establishes a petty cash fund for $400. By the end of the month, employees had made the following expenditures from the fund: supplies, $150; fuel for deliveries, $120; postage, $75; miscellaneous, $35. Record the entry to recognize expenditures from the petty cash fund. Answer: Supplies 150 Delivery Expense 120 Postage Expense 75 Miscellaneous Expense 35 Cash 380 Difficulty: 3 Hard Topic: Employee Purchases Learning Objective: 04-06 Account for employee purchases. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

210) A company establishes a $300 petty cash fund on August 3 to pay for minor cash expenditures. The fund is replenished at the end of each month. In addition, the company has issued credit cards for more substantial employee purchases. These credit cards are issued to authorized managers. At the end of August, the following employee purchases have been made: Petty Cash Fund Delivery fees Plumbing maintenance Postage Flowers for the office

$100 70 40 50 $260

Credit Cards Equipment $1,400 Advertising 750 Supplies 360 $2,510

Record the establishment of the petty cash fund on August 3, employee expenditures related to the petty cash fund on August 31, and employee expenditures related to credit cards on August 31. Answer: August 3 Petty Cash Cash August 31 Delivery Expense Repairs and Maintenance Expense Postage Expense Miscellaneous Expense Cash

Debit

Credit 300 300

Debit

Credit 100 70 40 50 260

August 31 Debit Credit Equipment 1,400 Advertising Expense 750 Supplies 360 Accounts Payable 2,510 Difficulty: 3 Hard Topic: Employee Purchases Learning Objective: 04-06 Account for employee purchases. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

211) A company provides services on account during the current year totaling $400,000. By the end of the year, $350,000 of this amount had been received. In addition, $75,000 was received on account from customers for services provided in the prior year. Determine the amount of operating cash flows the company will report as received from customers in the current year. Answer: $425,000 $350,000 + $75,000 = $425,000. Difficulty: 3 Hard Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 212) During the current year, a company provides services on account for $100,000. By the end of the year, $60,000 of this amount had been received. In addition, cash payments for the year were employees' salaries, $50,000; office supplies, $10,000; and utilities $20,000. Determine the amount of operating cash flows the company will report in the current year. Answer: −$20,000 $60,000 − $50,000 − $10,000 − $20,000 = −$20,000. Difficulty: 3 Hard Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 213) During the current year, a company purchases equipment for $250,000, paying $50,000 immediately and promising to pay the remainder within 30 days after the end of the year. Determine the amount of investing cash flows the company will report in the current year. Answer: −$50,000 Difficulty: 3 Hard Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

214) At the beginning of the current year, a company issued stock for $100,000 and borrowed $50,000 from the bank. By the end of the year, the company had provided services of $80,000 for cash, paid employee salaries of $30,000, and paid utilities of $10,000. Determine the amount of financing cash flows the company will report in the current year. Answer: $150,000 $100,000 + $50,000 = $150,000 Difficulty: 3 Hard Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 215) During the year, a company issues common stock for $50,000 and repays previously borrowed amounts of $75,000. In addition, the company pays dividends of $5,000 to stockholders. Determine the amount of financing cash flows the company will report in the current year. Answer: −$30,000 $50,000 − $75,000 − $5,000 = −$30,000. Difficulty: 3 Hard Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

216) Consider the following transactions: 1. Pay employees' salaries. 2. Repay borrowing to the bank. 3. Purchase equipment with note payable. 4. Provide services to customers on account. 5. Pay dividends to stockholders. 6. Collect cash from customers for services provided. 7. Purchase supplies on account. 8. Pay for supplies purchased in transaction 7 above. For each transaction, indicate the type of cash flow involved based on the classifications in the statement of cash flows. If a transaction does not involve cash, write 'No Cash.' Answer: 1. Operating. 2. Financing. 3. No Cash. 4. No Cash. 5. Financing. 6. Operating. 7. No Cash. 8. Operating. Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

217) A company had the following transactions during the year: 1. Paid rent for the next two years, $8,000. 2. Purchased office supplies on account, $2,400. 3. Purchased equipment, paying $12,000 cash and issuing a note payable for $4,000. 4. Borrowed from the bank, $6,000. 5. Paid employee salaries, $7,200. 6. Paid $2,000 on account related to transaction 2 above. 7. Paid dividends to stockholders, $2,800. 8. Sold land for $10,000 that was purchased in a prior year for $7,500. 9. Collected cash from customers for services provided, $25,700. Calculate cash flows from operating activities, investing activities, and financing activities. Answer: Operating activities = $8,500; Investing activities = −$2,000; Financing activities = $3,200 Operating cash flows = $25,700 − $8,000 − $7,200 − $2,000 = $8,500. Investing cash flows = $10,000 − $12,000 = −$2,000. Financing cash flows = $6,000 − $2,800 = $3,200. Difficulty: 3 Hard Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

218) Below is a summary of all the transactions of Sampson Consulting for the month of April 2021. Cash Transactions Cash collections from: Customers Sale of unused office furniture Borrowing from the bank Cash payments for: Employee salaries Office building Utilities expense Office supplies Dividends to stockholders Advertising expense Noncash Transactions Services to customers on account Purchase supplies on account Issue note payable for equipment

$52,600 11,300 60,000 (22,500) (74,600) (2,600) (1,800) (4,000) (9,800) 11,800 5,800 23,700

Prepare a statement of cash flows for the month of April, properly classifying each of the transactions into operating, investing, and financing activities. The cash balance at the beginning of April is $14,800.

Answer:

Sampson Consulting Statement of Cash Flows For the month ended April 30, 2021 Cash Flows from Operating Activities Cash inflows: From customers $52,600 Cash outflows: For salaries (22,500) For advertising (9,800) For office supplies (1,800) For utilities (2,600) Net cash flows from operating activities $15,900 Cash Flows from Investing Activities Sale of unused office furniture 11,300 Purchase of office building (74,600) Net cash flows from investing activities (63,300) Cash Flows from Financing Activities Borrowing from the bank 60,000 Payment of dividends (4,000) Net cash flows from financing activities 56,000 Net increase in cash 8,600 Cash at the beginning of the month 14,800 Cash at the end of the month $23,400 Difficulty: 3 Hard Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

219) At the end of March, Weber Productions' accounting records reveal a balance for cash equal to $21,861. However, the balance of cash in the bank at the end of March is only $4,576. Weber is concerned and asks the company's accountant to reconcile the two balances. Examination of the bank statement and company records at the end of March reveals the following information: NSF checks Deposits outstanding

$6,783 7,348

Service fees Checks outstanding

$195 541

In addition, Weber owes one of its suppliers $200. During March, the company's accountant mistakenly wrote the check for $1,200. The check was recorded in the company's records for $200 but processed by the bank for $1,200. Weber has contacted the supplier who has agreed to send a $1,000 refund in April directly to the bank. Finally, a petty cash fund of $2,500 was established during March. This amount was withdrawn from the checking account but not recorded. Required: 1. Calculate the correct ending balance of cash at the end of March. 2. Discuss any problems you see with the company's cash procedures.

Answer: Requirement 1

Bank's Cash Balance Per bank statement Deposits outstanding Checks outstanding Expected refund Per reconciliation

Weber Productions Bank Reconciliation March 31 Company's Cash Balance $4,576 Per general ledger $21,861 +7,348 NSF checks −6,783 −541 Service fees −195 +1,000 Petty cash fund −2,500 $12,383 Per reconciliation $12,383

Requirement 2 The company has a large amount of NSF checks. This indicates that the company's procedures related to acceptance of customers' checks is not reliable. The company should tighten controls over the allowance of payment by check. Deposits outstanding are relatively high. The company should more frequently deposit cash to avoid theft or loss of cash. The amount established for the petty cash fund may be too high. Petty cash provides cash on hand for minor purchases. Having too much cash on hand creates the likelihood that a material amount of cash will be mishandled. Difficulty: 3 Hard Topic: Cash Controls - Receipts; Cash Controls - Disbursements; Bank Reconciliation; Employee Purchases Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements.; 0405 Reconcile a bank statement.; 04-06 Account for employee purchases. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

220) On October 31, 2021, the bank statement for the checking account of Hollybuster Video shows a balance of $11,570, while the company's records show a balance of $10,858. Information that might be useful in preparing a bank reconciliation is as follows: a. Outstanding checks are $1,120. b. The October 31 cash receipts of $575 are not deposited in the bank until November 2. c. One check written in payment of utilities for $115 is correctly recorded by the bank but is recorded by Hollybuster as a disbursement of $155. d. In accordance with prior authorization, the bank withdraws $500 directly from the checking account as payment on a note payable. The interest portion of that payment is $50 and the principal portion is $450. Hollybuster has not recorded the direct withdrawal. e. Bank service fees of $50 are listed on the bank statement. f. A deposit of $782 is recorded by the bank on October 13, but it did not belong to Hollybuster. The deposit should have been made to the checking account of Videos Unlimited, a separate company. g. The bank statement includes a charge of $105 for an NSF check. The check is returned with the bank statement and the company will seek payment from the customer. Required: 1. Prepare a bank reconciliation for the Hollybuster checking account on October 31, 2021. 2. Record the necessary cash adjustments.

Answer: Requirement 1 Hollybuster Video Bank Reconciliation October 31, 2021 Bank's Cash Balance Per bank statement $11,570 Deposits outstanding +575 Checks outstanding −1,120 Bank error −782 Per reconciliation

$10,243

Company's Cash Balance Per general ledger $10,858 Company error +40 EFT for note −500 Service fees −50 NSF check −105 Per reconciliation $10,243

Requirement 2 Debit Cash

Credit 40

Utilities Expense (Record cash increases per reconciliation) Notes Payable 450 Interest Expense 50 Service Fees Expense 50 Accounts Receivable 105 Cash (Record cash decreases per reconciliation) Difficulty: 3 Hard Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

655

221) The cash records and bank statement for the month of July for Jim Incorporated are shown below. Jim Incorporated Cash Account Records July 1, 2021 to July 31, 2021 Cash Balance Cash Cash Balance July 1, 2021 Cash Receipts Disbursements July 31, 2021 $7,250 $9,370 $8,950 $7,670 Cash Receipts Date Desc. 7/9 Sales 7/21 Sales 7/31 Sales

Amount $2,610 3,340 3,420

$9,370

Cash Disbursements Date No. Desc. 7/7 531 Rent 7/12 532 Salaries 7/19 533 Equipment 7/22 534 Utilities 7/30 535 Advertising

Amount $1,400 1,950 3,800 600 1,200 $8,950

P.O. Box 123878 Watonga, OK 73772 (580) 377-OKIE Account Holder:

Reliable Union You Can Bank On Us

Jim Incorporated 519 Main Street Watonga, OK 73772

Beginning Balance July 1, 2021 $7,750

Deposits and Credits No. 3

Deposits and Credits Date Amount Desc. 7/10 $2,610 DEP 7/22 3,340 DEP 7/31 60 INT

$6,010

Member FDIC

Account Number:

2252790471

Statement Date:

July 31, 2021

Withdrawals and Debits

Total $6,010

No. 7

Total $8,625

Withdrawals and Debits Date No. Amount Desc. 7/2 530 $500 CHK 7/10 531 1,400 CHK 7/14 532 1,950 CHK 7/18 300 NSF 7/22 533 4,000 CHK 7/26 400 EFT 7/30 7 5 SF $8,625

Desc.

DEP Customer deposit INT Interest earned

Desc.

NOTE Note collected

Desc.

EFT Electronic funds transfer

Daily Balance July 31, 2021 $5,135 Daily Balance Date Amount 7/2 $7,250 7/10 8,460 7/14 6,510 7/18 6,210 7/22 5,550 7/26 5,150 7/30 5,075 7/31 $5,135

SF Service fees NSF Non-sufficient CHK Customer check funds

Additional information: a. The difference in the beginning balances in the company's records and the bank statement relates to check #530, which is outstanding as of June 30, 2021. b. Check #533 is correctly processed by the bank. c. The EFT on July 26 relates to the purchase of office supplies. Required: 1. Prepare a bank reconciliation for Jim Incorporated's checking account on July 31, 2021. 2. Record the necessary cash adjustments. 93 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Answer: Requirement 1 Jim Incorporated Bank Reconciliation July 31, 2021 Bank's Cash Balance Company's Cash Balance Per bank statement $5,135 Per general ledger $7,670 Deposits outstanding +3,420 Company error −200 Checks outstanding −1,800 Interest earned +60 (#534 and #535) NSF check −300 Service fees −75 Office supplies −400 Per reconciliation $6,755 Per reconciliation $6,755 Requirement 2

Cash Interest Revenue (Record cash increases per reconciliation)

Debit Credit 60 60

Equipment 200 Accounts Receivable 300 Service Fees Expense 75 Supplies 400 Cash 975 (Record cash decreases per reconciliation) Difficulty: 3 Hard Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement

222) Below is a summary of all transactions of Mason Furniture for the month of August 2021. Cash Transactions Cash collections from: Customers Sale of unused land Issuance of common stock Interest earned on savings account Cash payments for: Employee salaries Delivery truck Advertising expense Office supplies Repayment of borrowing Fabric Noncash Transactions Sales to customers on account Purchase of fabric on account Exchange common stock for building

$82,300 11,500 25,000 400 (42,400) (30,000) (5,400) (2,200) (8,500) (6,300) 12,500 6,200 80,000

Required: Prepare a statement of cash flows for the month of August, properly classifying each of the transactions into operating, investing, and financing activities. The cash balance at the beginning of August is $6,900.

Answer:

Mason Furniture Statement of Cash Flows For the month ended August 31, 2021 Cash Flows from Operating Activities Cash inflows: From customers $82,300 From interest 400 Cash outflows: For salaries (42,400) For advertising (5,400) For office supplies (2,200) For fabric (6,300) Net cash flows from operating activities $26,400 Cash Flows from Investing Activities Sale of unused land 11,500 Purchase of delivery truck (30,000) Net cash flows from investing activities (18,500) Cash Flows from Financing Activities Issuance of common stock 25,000 Repayment of borrowing (8,500) Net cash flows from financing activities 16,500 Net increase in cash 24,400 Cash at the beginning of the month 6,900 Cash at the end of the month $31,300 Difficulty: 3 Hard Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

223) For the month of June, Thomson Services has the following transactions: June 2 June 3 June 7 June 11 June 17 June 22 June 25 June 28 June 30

Obtain cash by borrowing $22,000 from the bank. Pay rent for the current month, $1,800. Provide services to customers, $6,500 for cash and $2,900 on account. Purchase equipment necessary for operations, $18,500 cash. Pay employees' salaries for the first half of the month, $5,200. Pay dividends to stockholders, $2,300. Receive cash in advance from customers, $2,800. Pay utilities for the month, $1,900. Record salaries earned by employees for the second half of the month, $5,200. Payment will be made on July 2.

Required: 1. Record each transaction. 2. Identify the transactions involving cash. 3. Assuming the balance of cash at the beginning of June is $12,500, post each cash transaction to the Cash T-account and compute the ending cash balance. 4. Prepare a statement of cash flows for the month of June, properly classifying each of the cash transactions into operating, investing, and financing activities. 5. Verify that the net cash flows reported in the statement of cash flows equal the change in the cash balance for the month.

Answer: Requirement 1 June 2 Debit Credit Cash 22,000 Notes Payable 22,000 (Borrow from the bank) June 3 Debit Credit Rent Expense 1,800 Cash 1,800 (Pay current month rent) June 7 Debit Credit Cash 6,500 Accounts Receivable 2,900 Service Revenue 9,400 (Provide services for cash and on account) June 11 Debit Credit Equipment 18,500 Cash 18,500 (Purchase equipment) June 17 Debit Credit Salaries Expense 5,200 Cash 5,200 (Pay salaries) June 22 Debit Credit Dividends 2,300 Cash 2,300 (Pay dividends) June 25 Debit Credit Cash 2,800 Deferred Revenue 2,800 (Receive cash in advance) June 28 Debit Credit Utilities Expense 1,900 Cash 1,900 (Pay current month utilities bill) June 30 Debit Credit Salaries Expense 5,200 Salaries Payable 5,200 (Owe current month salaries)

Requirement 2 All transactions involve cash except for the salaries payable transaction on June 30. Requirement 3 Cash Debits Beginning balance June 2 June 7 June 25

Credits

12,500

1,800

June 3

22,000 6,500 2,800

18,500 5,200 2,300

June 11 June 17 June 22 June 28

1,900 14,100 Requirement 4

Thomson Services Statement of Cash Flows For the month ended June 30 Cash Flows from Operating Activities Cash inflows: From customers $9,300 Cash outflows: For rent (1,800) For salaries (5,200) For utilities (1,900) Net cash flows from operating activities Cash Flows from Investing Activities Purchase equipment (18,500) Net cash flows from investing activities Cash Flows from Financing Activities Borrow from bank 22,000 Pay dividends (2,300) Net cash flows from financing activities Net increase in cash Cash at the beginning of the month Cash at the end of the month

$400

(18,500)

19,700 1,600 12,500 $14,100

Requirement 5 Net cash flows on statement of cash flows = $1,600 Change in cash balance for the month = $14,100 (ending) − $12,500 (beginning) = $1,600 Difficulty: 3 Hard Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Measurement; FN Reporting 224) Discuss the events leading up to the passage of the Sarbanes-Oxley Act and its major provisions. Answer: Two of the highest-profile cases (Enron and WorldCom) of fraudulent financial reporting in 2001 and 2002, as well as other fraudulent reporting by many others, led Congress to pass the Sarbanes-Oxley Act. Fraudulent financial reporting was associated with poor social consequences such as bankruptcy, employee termination, reduced salaries, increased workloads, and loss of employee retirement funds, stock options, and health benefits. The major provisions of the Sarbanes-Oxley Act include formation of the Public Company Accounting Oversight Board (PCAOB), corporate executive accountability, limitation on nonaudit services, retention of work papers, auditor rotation, restrictions related to conflicts of interest, audit committee hires the auditor, and documentation of internal control. Difficulty: 2 Medium Topic: Accounting Scandals and Response by Congress Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Bloom's: Understand AACSB: Ethics AICPA: BB Critical Thinking

225) What is internal control? Briefly describe the five components of internal control outlined by the Committee of Sponsoring Organizations (COSO). Answer: Internal control is a company's plan to (1) improve the accuracy and reliability of accounting information and (2) safeguard the company's assets. 1. Control Environment - overall top-to-bottom attitude of the company with respect to internal controls. 2. Risk Assessment - development of formal policies to assess the risk that internal or external sources are preventing a company from achieving its objectives. 3. Control Activities - systems for approving cash payments, authorizing purchases, reviewing operating performance, and safeguarding assets. 4. Monitoring - Continuous observation of the internal control system. 5. Information and Communication - systems designed to ensure accurate measurement of business transactions and reliability of financial reports. Difficulty: 2 Medium Topic: Framework for Internal Control Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking 226) Explain the different types of cash, including cash equivalents, which would be reported as Cash in the balance sheet. Answer: Cash includes currency, coins, and balances in savings and checking accounts, as well as items acceptable for deposit in these accounts, such as checks received. In addition, when a company sells products or services to customers who use credit cards or debit cards, the cash to be collected from those sales is nearly always included in the total cash balances immediately. Cash equivalents are short-term investments that have a maturity date no longer than three months from the date of purchase. Common examples of such investments are money market funds, Treasury bills, and certificates of deposit. Difficulty: 2 Medium Topic: Cash and Cash Equivalents Learning Objective: 04-03 Define cash and cash equivalents. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

227) A company uses the following process for its cash receipts: At the end of each day, the secretary places all cash and checks received from customers in a desk drawer. Each Monday, the secretary totals all amounts received, records this in the accounting records, and deposits the money in the bank account. Then, once every three months, the office manager requests information from the bank necessary to prepare a bank reconciliation. Discuss the company's internal control procedures related to cash receipts. Answer: Cash should be recorded and deposited daily. The employee recording cash receipts should not also be the employee making the deposit. The bank reconciliation should be prepared monthly by a person with no other cash responsibilities. Difficulty: 3 Hard Topic: Cash Controls - Receipts Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Bloom's: Evaluate AACSB: Reflective Thinking AICPA: FN Measurement 228) Describe the procedures used to reconcile a company's cash balance. Answer: For the bank's cash balance, we determine which cash transactions have been recorded by the company but not yet recorded by the bank. Common reconciling items are deposits outstanding that should be added, checks outstanding that should be subtracted, and bank errors that are added or subtracted depending on the error. For the company's cash balance, we determine which cash transactions have been recorded by the bank but not yet recorded by the company. Common reconciling items are notes collected by the bank and interest earned that should be added, service fees and NSF checks that should be subtracted, and company errors that are added or subtracted depending on the error. As a final step in the reconciliation process, the company must update the Cash account in the general ledger to adjust for cash items used to reconcile the company's cash balance. Difficulty: 2 Medium Topic: Bank Reconciliation Learning Objective: 04-05 Reconcile a bank statement. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking

229) Discuss internal controls related to the use of debit cards, credit cards, and petty cash for employee purchases. Answer: • Employees should be required to provide receipts and justification for those receipts on a timely basis. • A separate employee reviews receipts and supporting documents to ensure all expenditures are made appropriately. • Credit card receipts are reconciled to credit card statements, just like we reconciled checks and debit card transactions to the bank statement. • Spending limits are placed on employees who are authorized to use a company credit card or have access to company cash. Major expenditures require pre-approval through formal purchasing procedures. • Only those employees that need to make timely business expenditures should receive authorization. Difficulty: 3 Hard Topic: Employee Purchases Learning Objective: 04-06 Account for employee purchases. Bloom's: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking 230) What is the purpose of the statement of cash flows? List the three major categories of cash flows and give an example of a cash transaction for each category. Answer: The purpose of the statement of cash flows is to summarize the transactions that caused cash to change during the reporting period. The statement of cash flows summarizes cash flows in three categories: operating, investing, and financing. Operating activities include cash flows related to transactions entering into the determination of net income, such as cash collections from customers, payments for operating expenses, and other receipts such as interest and dividends. Investing activities include purchasing and selling long-term assets or certain investment securities. Financing activities include borrowing or repaying loans, issuing stock, and payment of dividends. Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 04-07 Identify the major inflows and outflows of cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

231) What is the link between the balance sheet and the statement of cash flows? Describe the operating, investing, and financing sections of the statement of cash flows. Answer: The balance sheet reports the final balance of cash at the end of the reporting period. The statement of cash flows reports inflows and outflows of cash during the reporting period. The beginning balance of cash plus net cash flows reported in the statement of cash flows equals the ending balance of cash reported in the balance sheet. Operating activities include cash transactions involving revenue and expense events during the period. Investing activities include cash investments in long-term assets and investment securities. Financing activities include transactions designed to raise cash or finance the business. Difficulty: 2 Medium Topic: Statement of Cash Flows; Analysis - Cash Holdings Learning Objective: 04-07 Identify the major inflows and outflows of cash.; 04-08 Demonstrate the link between cash reported on the balance sheet and cash reported in the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Reporting

Financial Accounting, 5e (Spiceland) Chapter 5 Receivables and Sales 1) Credit sales transfer products and services to a customer today while bearing the risk of collecting payment from that customer in the future. Answer: TRUE Difficulty: 1 Easy Topic: Credit Sales and Accounts Receivable Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 2) At the time of a credit sale, a company would record an increase in assets and an increase in revenues. Answer: TRUE Difficulty: 2 Medium Topic: Credit Sales and Accounts Receivable Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 3) A sale on account is recorded as a debit to Service Revenue and a credit to Accounts Receivable. Answer: FALSE Explanation: A sale on account is recorded as a debit to Accounts Receivable and a credit to Service Revenue. Difficulty: 2 Medium Topic: Credit Sales and Accounts Receivable Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 4) Accounts receivable represent the amount of cash owed to the company by its customers from the sale of products or services on account. Answer: TRUE Difficulty: 1 Easy Topic: Credit Sales and Accounts Receivable Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 1 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

5) Trade discounts represent a discount offered to the purchaser for quick payment. Answer: FALSE Explanation: Trade discounts represent a reduction in the listed price of a good or service. Difficulty: 1 Easy Topic: Net Revenues - Trade Discounts Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 6) When a company sells a $100 service with a 20% trade discount, $80 of revenue is recognized. Answer: TRUE Difficulty: 3 Hard Topic: Net Revenues - Trade Discounts Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Apply AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 7) A sales discount represents a reduction, not in the selling price of a good or service, but in the amount to be paid by a credit customer if payment is made within a specified period of time. Answer: TRUE Difficulty: 1 Easy Topic: Net Revenues - Sales Discounts Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 8) A sale on account for $1,000 offered with terms 2/10, n/30 means that the customers will get a $2 discount if payment is made within 10 days; otherwise, full payment is due within 30 days. Answer: FALSE Explanation: 2/10 indicates a 2% discount (or $20 in this example) if payment is made within 10 days. Difficulty: 3 Hard Topic: Net Revenues - Sales Discounts Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Apply AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

9) The Sales Discounts account is an example of a contra revenue account. Answer: TRUE Difficulty: 2 Medium Topic: Net Revenues - Sales Discounts Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 10) The Sales Discounts account is an expense account. Answer: FALSE Explanation: Sales Discounts is a contra revenue account. Difficulty: 2 Medium Topic: Net Revenues - Sales Discounts Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 11) Sales returns and allowances occur when the buyer returns the goods or the seller reduces the customer's balance owed. Answer: TRUE Difficulty: 1 Easy Topic: Net Revenues - Sales Returns and Sales Allowances Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 12) A sales allowance is recorded as a debit to Accounts Receivable and a credit to Sales Allowances. Answer: FALSE Explanation: A sales allowance is recorded as a debit to Sales Allowances and a credit to Accounts Receivable. Difficulty: 2 Medium Topic: Net Revenues - Sales Returns and Sales Allowances Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

13) The Sales Returns account is an expense account. Answer: FALSE Explanation: Sales Returns is a contra revenue account. Difficulty: 2 Medium Topic: Net Revenues - Sales Returns and Sales Allowances Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 14) If a company has total revenues of $100,000, sales discounts of $3,000, sales returns of $4,000, and sales allowances of $2,000, the income statement will report net revenues of $91,000. Answer: TRUE Difficulty: 3 Hard Topic: Net Revenues - Sales Discounts; Net Revenues - Sales Returns and Sales Allowances Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 15) Accounts receivable are reported at the net amount expected to be collected. Answer: TRUE Difficulty: 1 Easy Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 16) The net amount of accounts receivable is the full amount owed by customers. Answer: FALSE Explanation: The net amount is the amount of cash we expect to collect. Difficulty: 1 Easy Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

17) Customers' accounts that we no longer consider collectible are referred to as uncollectible accounts (or bad debts). Answer: TRUE Difficulty: 1 Easy Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 18) The adjustment to account for future bad debts has the effect of (1) reducing assets and (2) increasing liabilities. Answer: FALSE Explanation: The adjustment has the effect of (1) reducing assets and (2) increasing expenses. An increase in expenses reduces net income and retained earnings. Difficulty: 3 Hard Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Apply AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 19) The adjustment for uncollectible accounts involves a debit to Bad Debt Expense and a credit to the Allowance for Uncollectible Accounts. Answer: TRUE Difficulty: 2 Medium Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 20) The Allowance for Uncollectible Accounts is a contra asset account representing the amount of accounts receivable that we do not expect to collect. Answer: TRUE Difficulty: 1 Easy Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

21) Bad debt expense represents the cost of the estimated future bad debts and is reported as an expense on the income statement. Answer: TRUE Difficulty: 1 Easy Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 22) If a company is owed $10,000 by its customers, but it expects that $1,000 will not be collected, accounts receivable in the balance sheet are reported at the net amount of $9,000. Answer: TRUE Difficulty: 3 Hard Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Apply AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 23) One disadvantage of the allowance method (over the direct write-off method) for recording uncollectible accounts is that it generally records accounts receivable for the net amount of cash expected to be collected. Answer: FALSE Explanation: This is generally an advantage of the allowance method. Difficulty: 2 Medium Topic: Allowance Method - Establishing the Allowance; Direct Write-Off Method Learning Objective: 05-03 Establish an allowance for uncollectible accounts.; 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

24) The percentage-of-receivables method for estimating uncollectible accounts is commonly referred to as the balance sheet method, because the estimate of bad debts is based on a balance sheet amount—accounts receivable. Answer: TRUE Difficulty: 2 Medium Topic: Allowance Method - Establishing the Allowance; Allowance Method - Estimating in Subsequent Year Learning Objective: 05-03 Establish an allowance for uncollectible accounts.; 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 25) Under the allowance method, when a company writes off an account receivable as an actual bad debt, it reduces total assets. Answer: FALSE Explanation: Writing off an account receivable has no effect on total assets. Difficulty: 2 Medium Topic: Allowance Method - Writing Off Accounts Receivable Learning Objective: 05-04 Write off accounts receivable as uncollectible. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 26) Under the allowance method, when a company writes off an account receivable as an actual bad debt, it records an expense. Answer: FALSE Explanation: Writing off an account receivable has no effect on expenses. Difficulty: 2 Medium Topic: Allowance Method - Writing Off Accounts Receivable Learning Objective: 05-04 Write off accounts receivable as uncollectible. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

27) Under the allowance method, the write-off of an actual bad debt is recorded with a debit to the Allowance for Uncollectible Accounts and a credit to Accounts Receivable. Answer: TRUE Difficulty: 2 Medium Topic: Allowance Method - Writing Off Accounts Receivable Learning Objective: 05-04 Write off accounts receivable as uncollectible. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 28) Under the allowance method, when a company collects cash from an account previously written off, total assets increase. Answer: FALSE Explanation: Collecting cash from an account previously written off has no effect on total assets. Difficulty: 2 Medium Topic: Allowance Method - Writing Off Accounts Receivable Learning Objective: 05-04 Write off accounts receivable as uncollectible. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 29) The aging method for estimating uncollectible accounts considers that a higher percentage of "older" accounts will not be collected compared to "newer" accounts. Answer: TRUE Difficulty: 2 Medium Topic: Allowance Method - Aging of Accounts Receivable Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 30) A company expects 5% of its newer accounts receivable to be uncollectible and 20% of its older accounts to be uncollectible. If the company has $40,000 of newer accounts and $5,000 of older accounts, the total estimate of uncollectible accounts is $2,000. Answer: FALSE Explanation: Estimated uncollectible accounts = ($40,000 × 5%) + ($5,000 × 20%) = $3,000. Difficulty: 3 Hard Topic: Allowance Method - Aging of Accounts Receivable Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 8 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

31) A credit balance in the Allowance for Uncollectible Accounts before adjustment indicates that last year's estimate of uncollectible accounts may have been too high. Answer: TRUE Difficulty: 2 Medium Topic: Allowance Method - Estimating in Subsequent Year Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 32) A debit balance in the Allowance for Uncollectible Accounts before adjustment indicates that last year's estimate of uncollectible accounts was too low. Answer: TRUE Difficulty: 2 Medium Topic: Allowance Method - Estimating in Subsequent Year Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 33) The direct write-off method involves recording an adjustment at the end of each period to account for the possibility of future uncollectible accounts. Answer: FALSE Explanation: The direct write-off method records an adjustment on the date the account is known to be uncollectible. Difficulty: 1 Easy Topic: Direct Write-Off Method Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 34) Under the direct write-off method, bad debt expense is recorded at the time accounts are known to be uncollectible. Answer: TRUE Difficulty: 1 Easy Topic: Direct Write-Off Method Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 9 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

35) The direct write-off method is used for tax purposes but is generally not permitted for financial reporting. Answer: TRUE Difficulty: 1 Easy Topic: Direct Write-Off Method Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 36) The direct write-off method violates the concept of timeliness. Answer: TRUE Difficulty: 1 Easy Topic: Direct Write-Off Method Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 37) Under the direct write-off method, recording an estimate of future uncollectible accounts includes a debit to Bad Debt Expense and a credit to the Allowance for Uncollectible Accounts. Answer: FALSE Explanation: Under the direct write-off method, future uncollectible accounts are not estimated. Difficulty: 2 Medium Topic: Direct Write-Off Method Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 38) Notes receivable are similar to accounts receivable but are more formal credit arrangements evidenced by a written debt instrument, or note. Answer: TRUE Difficulty: 2 Medium Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 10 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

39) Notes receivable typically arise from sales to customers. Answer: FALSE Explanation: Notes receivable typically arise from loans to other entities including affiliated companies; loans to stockholders and employees; and only occasionally from the sale of merchandise or services. Difficulty: 1 Easy Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 40) Notes receivable are assets and are reported in the balance sheet. Answer: TRUE Difficulty: 2 Medium Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement; FN Reporting/Keyboard Navigation 41) Interest on a note receivable is calculated as the face value of the note times the annual interest rate stated on the note times the fraction of the year the note is outstanding. Answer: TRUE Difficulty: 2 Medium Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 42) A $10,000 note that has a stated interest rate of 10% and is due in six months would have interest of $1,000. Answer: FALSE Explanation: Interest = face value ($10,000) × annual interest rate (10%) × fraction of year (6/12) = $500. Difficulty: 3 Hard Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 11 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

43) Accrued interest on a note receivable is interest earned by the end of the year but not yet received. Answer: TRUE Difficulty: 2 Medium Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 44) Accrued interest on a note receivable has the effects of increasing assets and increasing liabilities. Answer: FALSE Explanation: Accrued interest increases assets and increases revenues. Difficulty: 3 Hard Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation 45) Two important ratios that help in understanding the company's effectiveness in managing receivables are the receivables turnover ratio and the average collection period. Answer: TRUE Difficulty: 1 Easy Topic: Analysis - Receivables Turnover Ratio; Analysis - Average Collection Period Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 46) The receivables turnover ratio shows the number of times during a year that the average accounts receivable balance is collected (or "turns over"). Answer: TRUE Difficulty: 2 Medium Topic: Analysis - Receivables Turnover Ratio Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 12 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

47) The receivables turnover ratio equals average accounts receivable divided by net credit sales. Answer: FALSE Explanation: The receivables turnover ratio equals net credit sales divided by average accounts receivable. Difficulty: 1 Easy Topic: Analysis - Receivables Turnover Ratio Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 48) A lower receivables turnover ratio generally indicates more effective management of accounts receivable by company managers. Answer: FALSE Explanation: A higher receivables turnover ratio generally indicates more effective management of accounts receivable. Difficulty: 2 Medium Topic: Analysis - Receivables Turnover Ratio Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 49) The average collection period shows the approximate number of days the average accounts receivable balance is outstanding. Answer: TRUE Difficulty: 2 Medium Topic: Analysis - Average Collection Period Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation

50) The percentage-of-credit-sales method for estimating uncollectible accounts is commonly referred to as the income statement method, because it always results in a higher amount of net income being reported in the income statement. Answer: FALSE Explanation: This method is referred to as the income statement method because the estimate of bad debts is based on an income statement amount—credit sales. Difficulty: 2 Medium Topic: Percentage-of-Credit-Sales Method Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 51) Even though the percentage-of-receivables method and the percentage-of-credit-sales method use different accounts to estimate future uncollectible accounts, the amount of bad debt expense reported in the income statement will always be the same under the two methods. Answer: FALSE Explanation: Bad debt expense will typically differ between the two methods. Difficulty: 2 Medium Topic: Percentage-of-Credit-Sales Method Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 52) From an income statement perspective, the percentage-of-credit-sales method is typically preferable because it better matches the revenues (credit sales) with their related expenses (bad debts). Answer: TRUE Difficulty: 2 Medium Topic: Percentage-of-Credit-Sales Method Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

53) From a balance sheet perspective, the percentage-of-receivables method is typically preferred over the percentage-of-credit-sales method because assets (net accounts receivable) are reported closer to the amount of cash we expect to collect. Answer: TRUE Difficulty: 2 Medium Topic: Percentage-of-Credit-Sales Method Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 54) The percentage-of-credit-sales method (income statement method) is allowed only if amounts do not differ significantly from estimates using the percentage-of-receivables method. Answer: TRUE Difficulty: 2 Medium Topic: Percentage-of-Credit-Sales Method Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 55) Which of the following best describes credit sales? A) Cash sales to customers that are new to the company. B) Sales to customers using credit cards. C) Sales to customers on account. D) Sales with a high risk that the customer will return the product. Answer: C Difficulty: 1 Easy Topic: Credit Sales and Accounts Receivable Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

56) Credit sales are recorded as: A) Debit Cash, credit Deferred Revenue. B) Debit Service Revenue, credit Accounts Receivable. C) Debit Cash, credit Service Revenue. D) Debit Accounts Receivable, credit Service Revenue. Answer: D Difficulty: 2 Medium Topic: Credit Sales and Accounts Receivable Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 57) A company provides services on account. Indicate how this transaction would affect (1) assets, (2) stockholders' equity, and (3) revenues. A) (1) Increase, (2) No effect (3) Increase B) (1) No effect, (2) Increase (3) Increase C) (1) Increase, (2) Increase (3) Increase D) (1) No effect, (2) No effect (3) No effect Answer: C Difficulty: 3 Hard Topic: Credit Sales and Accounts Receivable Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 58) Which of the following best describes accounts receivable? A) The amount of cash owed by a company to its vendors for purchases of goods or services on account. B) The amount of cash collected by a company from its customers from the sale of goods or services on account. C) The amount of cash owed to a company by its customers from the sale of goods or services on account. D) The amount of cash not expected to be collected by a company from its customers from the sale of goods or services on account (bad debts). Answer: C Difficulty: 1 Easy Topic: Credit Sales and Accounts Receivable Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 16 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

59) The amount of cash owed to a company by its customers from the sale of goods or services on account is commonly referred to as: A) Cash. B) Accounts receivable. C) Revenue. D) Accounts payable. Answer: B Difficulty: 1 Easy Topic: Credit Sales and Accounts Receivable Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 60) Identify the primary disadvantage of extending credit to customers. A) Delay or failure to collect cash. B) Lower profitability. C) Lower revenues. D) Reduced operating efficiency. Answer: A Difficulty: 2 Medium Topic: Credit Sales and Accounts Receivable Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 61) Identify the likely advantage of extending credit to customers. A) Lower accounts receivable. B) Increased sales. C) Reduced amounts owed to creditors. D) Fewer expenses. Answer: B Difficulty: 2 Medium Topic: Credit Sales and Accounts Receivable Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

62) Identify the condition(s) that must exist for a sale and the related receivable to be recognized. A) Collection of cash is probable. B) The company must have collected cash from at least one previous sale to the customer. C) Goods or services have been provided to the customer. D) Two of the other answers are conditions that must exist. Answer: D Difficulty: 2 Medium Topic: Credit Sales and Accounts Receivable Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 63) When a company provides services on account, the transaction would be recorded with a debit to: A) Retained Earnings. B) Service Revenue. C) Accounts Receivable. D) Cash. Answer: C Difficulty: 2 Medium Topic: Credit Sales and Accounts Receivable Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 64) When a company provides services on account, the transaction would be recorded with a credit to: A) Accounts Payable. B) Service Revenue. C) Accounts Receivable. D) Cash. Answer: B Difficulty: 2 Medium Topic: Credit Sales and Accounts Receivable Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

65) Which of the following items are classified as receivables? A) Tax refund claims. B) Amounts owed by customers. C) Amounts loaned and expected to be collected. D) All of the other answers are classified as receivables. Answer: D Difficulty: 2 Medium Topic: Credit Sales and Accounts Receivable Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 66) A trade discount results in: A) A contra revenue account being recorded. B) A contra asset being recorded. C) Customers delaying cash payment. D) Revenue being recorded for the discounted price. Answer: D Difficulty: 2 Medium Topic: Net Revenues - Trade Discounts Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

67) Barton Health Services provided care to a patient worth $1,200. Because the patient was over the age of 65, Barton granted the patient a 20% discount and the customer paid the correct amount in cash. How would Barton record the service transaction? A. B.

C. D.

Cash Service Revenue Cash Trade Discount Service Revenue Cash Service Revenue Cash Trade Discount Service Revenue

960 960 960 240 1,200 1,200 1,200 1,200 240 960

A) Option A B) Option B C) Option C D) Option D Answer: A Difficulty: 3 Hard Topic: Net Revenues - Trade Discounts Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 68) When customers purchase goods on account, Spitz Manufacturing offers them a 2% reduction in the amount owed if they pay within 10 days. This is an example of a: A) Bad debt. B) Sales discount. C) Sales return. D) Sales allowance. Answer: B Difficulty: 2 Medium Topic: Net Revenues - Sales Discounts Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

69) Garber Plumbers offers a 20% trade discount when providing $2,000 or more of plumbing services to its customers. In March 2021, Garber provided $4,000 of plumbing services to Red Oak Inc., and $1,500 of services to Cyril Inc. Each of these customers was granted credit terms of 2/10, net 30. If both customers paid for the plumbing services within the discount period, what was the net revenues amount for these two transactions? A) $5,500. B) $4,312. C) $4,486. D) $4,606. Answer: D Explanation: Trade discount = $4,000 × 20% = $800. Sales revenue = ($4,000 − $800) + $1,500 = $4,700. Sales discount = $4,700 × 2% = $94. Net revenues = $4,700 − $94 = $4,606. Difficulty: 3 Hard Topic: Net Revenues - Trade Discounts; Net Revenues - Sales Discounts Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

70) On July 8, Ray Inc. sold 100 printers to Office Rental Company at $600 each and offered a 2% discount for payment within 10 days. On July 15, Office Rental Company paid the full amount in cash. What should Ray Inc. record on July 15? A.

Cash

60,000 Accounts Receivable

60,000 58,800

Accounts Receivable C.

Cash Sales Discounts Accounts Receivable Cash Sales Discounts Sales Revenue

58,800 58,800 1,200 60,000 60,000 1,200 58,800

A) Option A B) Option B C) Option C D) Option D Answer: C Explanation: Sales discount = $600 × 100 printers × 2% = $1,200. Difficulty: 3 Hard Topic: Net Revenues - Sales Discounts Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 71) On March 17, Jackal Lumber sold building materials to Fredo Limited for $15,000 with terms of 3/10, net 20. What amount did Jackal record as revenue on March 25 when Fredo paid for the building materials? A) $15,000. B) $14,550. C) $15,450. D) $0. Answer: D Explanation: No revenue recorded on March 25. The revenue would have been recorded on March 17. Difficulty: 3 Hard Topic: Net Revenues - Sales Discounts Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 22 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

72) A company collects a customer's account within the discount period. Indicate how this transaction would affect (1) assets, (2) stockholders' equity, and (3) revenues. A) (1) Decrease, (2) Decrease, (3) Decrease B) (1) Increase, (2) Increase, (3) Increase C) (1) Increase, (2) Increase, (3) No effect D) (1) No effect, (2) No effect, (3) No effect Answer: A Difficulty: 3 Hard Topic: Net Revenues - Sales Discounts Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 73) On November 10 of the current year, Flores Mills sold carpet to a customer for $8,000 with credit terms 2/10, n/30. How would Flores record the sale on November 10? A. B. C.

Accounts Receivable Sales Revenue Accounts Receivable Sales Revenue Accounts Receivable Cash Discounts Sales Revenue Accounts Receivable Cash Discounts Sales Revenue

7,840 7,840 8,000 8,000 7,840 160 8,000 8,000 160 7,840

A) Option A B) Option B C) Option C D) Option D Answer: B Difficulty: 2 Medium Topic: Net Revenues - Sales Discounts Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Understand AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

74) On November 10 of the current year, Flores Mills provides services to a customer for $8,000 with credit terms 2/10, n/30. The customer made the correct payment on November 17. How would Flores record the collection of cash on November 17? A. B.

Cash Accounts Receivable Cash Sales Discounts Accounts Receivable Cash Sales Revenue Accounts Receivable Cash Accounts Receivable

7,840 7,840 7,840 160 8,000 7,840 160 8,000 8,000 8,000

A) Option A B) Option B C) Option C D) Option D Answer: B Explanation: Sales discount = $8,000 × 2% = 160. Difficulty: 3 Hard Topic: Net Revenues - Sales Discounts Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

75) On November 10 of the current year, Flores Mills provides services to a customer for $8,000 with credit terms 2/10, n/30. The customer made the correct payment on December 5. How would Flores record the collection of cash on December 5? A. B.

Cash Accounts Receivable Cash Sales Discounts Accounts Receivable Cash Sales Revenue Accounts Receivable Cash Accounts Receivable

7,840 7,840 7,840 160 8,000 7,840 160 8,000 8,000 8,000

A) Option A B) Option B C) Option C D) Option D Answer: D Explanation: No sales discount is awarded because payment is not received within 10 days. Difficulty: 3 Hard Topic: Net Revenues - Sales Discounts Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

76) Oswego Clay Pipe Company provides services of $46,000 to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. What would Oswego record on April 12? A. Accounts Receivable Sales Revenue B. Accounts Receivable Sales Revenue Sales Discounts C. Accounts Receivable Sales Revenue D. Accounts Receivable Sales Discounts Sales Revenue

46,000 46,000 46,000 45,540 460 45,540 45,540 45,540 460 46,000

A) Option A B) Option B C) Option C D) Option D Answer: A Difficulty: 2 Medium Topic: Net Revenues - Sales Discounts Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Understand AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

77) Oswego Clay Pipe Company provides services of $46,000 to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. What would Oswego record on April 23, assuming the customer made the correct payment on that date? A.

Cash Sales Revenue Accounts Receivable Cash Sales Discounts Accounts Receivable Interest Revenue Cash Sales Discounts Accounts Receivable Cash Accounts Receivable Sales Revenue

45,540 460 46,000 46,000 460 46,000 460 45,540 460 46,000 46,000 45,540 460

A) Option A B) Option B C) Option C D) Option D Answer: C Explanation: $46,000 × 1% = 460; $46,000 − 460 = $45,540. Difficulty: 3 Hard Topic: Net Revenues - Sales Discounts Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

78) Oswego Clay Pipe Company provides services of $46,000 to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. What would Oswego record on June 10, assuming the customer made the correct payment on that date? A.

Cash

46,000 Accounts Receivable Discounts Receivable

Cash

45,540 460 46,000

Accounts Receivable Interest Revenue C.

Cash

45,540 460 46,000

Accounts Receivable D.

Cash

46,000 46,460

Accounts Receivable Interest Revenue

46,000 460

A) Option A B) Option B C) Option C D) Option D Answer: C Explanation: No discount is recorded because payment is made after 15 days. Difficulty: 3 Hard Topic: Net Revenues - Sales Discounts Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 79) Which of the following is recorded upon receipt of a payment on April 7, 2021, by a customer who pays a $900 invoice dated March 3, 2021, with terms 2/10, n/60? A) Debit Sales Discounts $18. B) Credit Purchase Discounts $18. C) Credit Accounts Receivable $882. D) Debit Cash $900. Answer: D Explanation: No discount is recorded because payment is made after 10 days. Difficulty: 3 Hard Topic: Net Revenues - Sales Discounts Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 28 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

80) Gershwin Wallcovering Inc. shipped the wrong shade of paint to a customer. The customer agreed to keep the paint upon being offered a 15% price reduction. The price reduction is an example of a: A) Sales revenue. B) Sales discount. C) Sales return. D) Sales allowance. Answer: D Difficulty: 2 Medium Topic: Net Revenues - Sales Returns and Sales Allowances Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 81) Gershwin Wallcovering Inc. shipped the wrong shade of paint to a customer. The customer agreed to keep the paint upon being offered a 15% price reduction. Gershwin would record this reduction by crediting Accounts Receivable and debiting: A) Sales Revenue. B) Sales Discounts. C) Sales Returns. D) Sales Allowances. Answer: D Difficulty: 2 Medium Topic: Net Revenues - Sales Returns and Sales Allowances Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 82) Tom's Textiles shipped the wrong material to a customer, who refused to accept the order. This is an example of a: A) Sales revenue. B) Sales discount. C) Sales return. D) Sales allowance. Answer: C Difficulty: 2 Medium Topic: Net Revenues - Sales Returns and Sales Allowances Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 29 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

83) Tom's Textiles shipped the wrong material to a customer, who refused to accept the order. Upon receipt of the material, Tom's Textiles would credit Accounts Receivable and debit: A) Sales Revenue. B) Sales Discounts. C) Sales Returns. D) Sales Allowances. Answer: C Difficulty: 2 Medium Topic: Net Revenues - Sales Returns and Sales Allowances Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 84) A company records a sales return from a credit customer. Indicate how this transaction would affect (1) assets, (2) stockholders' equity, and (3) revenues. A) (1) Decrease, (2) Decrease, (3) Decrease B) (1) Decrease, (2) No effect, (3) Decrease C) (1) Decrease, (2) Decrease, (3) No effect D) (1) No effect, (2) No effect, (3) No effect Answer: A Difficulty: 3 Hard Topic: Net Revenues - Sales Returns and Sales Allowances Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation

85) A company had the following information taken from various accounts at the end of the year: Sales discounts Deferred revenues Total revenues Purchase discounts Sales allowances Accounts receivable

$ 41,000 $ 32,000 $ 459,000 $ 15,000 $ 35,000 $ 205,000

What was the company's net revenues for the year? A) $368,000. B) $434,000. C) $383,000. D) $437,000. Answer: C Explanation: Net revenues = $459,000 − $41,000 − $35,000 = $383,000. Difficulty: 3 Hard Topic: Net Revenues - Sales Discounts; Net Revenues - Sales Returns and Sales Allowances Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 86) A company has the following information: Total revenues Sales returns and allowances Sales discounts Ending inventory

$ 860,000 $ 50,000 $ 30,000 $ 100,000

What is the amount of net revenues for the company? A) $330,000. B) $230,000. C) $680,000. D) $780,000. Answer: D Explanation: Net revenues = $860,000 − $50,000 − $30,000 = $780,000. Difficulty: 3 Hard Topic: Net Revenues - Sales Discounts; Net Revenues - Sales Returns and Sales Allowances Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

87) A company reported the following amounts at the end of the year: total sales revenue = $550,000; sales discounts = $12,000; sales returns = $44,000; sales allowances = $17,000. What was the company's net revenues for the year? A) $489,000. B) $485,000. C) $477,000. D) $499,000. Answer: C Explanation: Net revenues = $550,000 − $12,000 − $44,000 − $17,000 = $477,000. Difficulty: 3 Hard Topic: Net Revenues - Sales Discounts; Net Revenues - Sales Returns and Sales Allowances Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 88) A company reported the following amounts at the end of the year: total sales revenue = $500,000; sales discounts = $10,000; sales allowances = $15,000; net revenues = $440,000. What amount did the company report for sales returns for the year? A) $35,000. B) $475,000. C) $25,000. D) $415,000. Answer: A Explanation: Sales returns = $500,000 − $440,000 − $10,000 − $15,000 = $35,000. Difficulty: 3 Hard Topic: Net Revenues - Sales Discounts; Net Revenues - Sales Returns and Sales Allowances Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

89) A company reported the following amounts at the end of the year: total sales revenue = $624,000; sales allowances = $6,000; sales returns = $22,000; net revenues = $588,000. What amount did the company report for sales discounts for the year? A) $28,000. B) $8,000. C) $16,000. D) $22,000. Answer: B Explanation: Sales discounts = $624,000 − $588,000 − $6,000 − $22,000 = $8,000. Difficulty: 3 Hard Topic: Net Revenues - Sales Discounts; Net Revenues - Sales Returns and Sales Allowances Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 90) Which of the following amounts would be used to calculate net revenues for the current year? A) Total sales revenue for the current year. B) Actual sales returns, allowances, and discounts for the current year. C) Estimated sales returns, allowances, and discounts for the next year. D) All of the other answer choices are correct. Answer: D Difficulty: 2 Medium Topic: Net Revenues - Sales Discounts; Net Revenues - Sales Returns and Sales Allowances Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

91) At the end of the current year, a company has the following amounts:

Sales returns Sales allowances Sales discounts

During the current year $ 7,200 $ 12,500 $ 2,400

Estimated for next year $ 8,300 $ 9,100 $ 2,600

For what amount would the company report sales returns in its current-year income statement? A) $7,200. B) $9,500. C) $15,500. D) $22,100. Answer: C Explanation: Sales returns = $7,200 + $8,300 = $15,500. Difficulty: 3 Hard Topic: Net Revenues - Sales Returns and Sales Allowances Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 92) Ryerson Co. provides goods and services to customers during the year totaling $100,000. Also during the year, customers are granted discounts, returns, and allowance of $20,000. At the end of the year, Ryerson estimates that an additional $5,000 in discounts, returns, and allowances will occur next year as a result of sales transactions this year. What is the amount of net revenues Ryerson will report in its current-year income statement? A) $85,000. B) $75,000. C) $100,000. D) $80,000. Answer: B Explanation: Net revenues = $100,000 − $20,000 − $5,000 = $75,000. Difficulty: 3 Hard Topic: Net Revenues - Sales Discounts; Net Revenues - Sales Returns and Sales Allowances Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

93) Accounts receivable are normally reported at the: A) Present value of future cash receipts. B) Current value plus accrued interest. C) Amount expected to be collected. D) Current value less expected collection costs. Answer: C Difficulty: 2 Medium Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 94) The amount of cash that is actually expected to be collected on accounts receivable is referred to as: A) Net accounts receivable. B) Allowance for uncollectible accounts. C) Net income. D) Net revenue. Answer: A Difficulty: 1 Easy Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 95) The percentage-of-receivables method for estimating uncollectible accounts is sometimes described as: A) The balance sheet method. B) The sales method. C) The income statement method. D) The aging method. Answer: A Difficulty: 1 Easy Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

96) The percentage-of-receivables method for accounting for uncollectible accounts focuses on the: A) Total credit sales for the year. B) Ratio of accounts receivable to sales. C) Net amount of cash expected to be collected. D) Cash flows from sales. Answer: C Difficulty: 2 Medium Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 97) Using a balance sheet approach to estimate bad debts involves calculating the desired ending balance in which account? A) Accounts receivable. B) Allowance for uncollectible accounts. C) Bad debt expense. D) Credit sales. Answer: B Difficulty: 2 Medium Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 98) The purpose of recording an allowance for uncollectible accounts is to: A) Record the sales returns and allowances. B) Report net sales conservatively. C) Report accounts receivable at the net amount of cash expected to be collected. D) Report accounts receivable for the total amount of sales in the period. Answer: C Difficulty: 2 Medium Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

99) A company's adjustment for uncollectible accounts at year-end would include a: A) Debit to Bad Debt Expense. B) Credit to Accounts Receivable. C) Debit to Accounts Receivable. D) Debit to Allowance for Uncollectible Accounts. Answer: A Difficulty: 2 Medium Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 100) One advantage of the allowance method for accounting for uncollectible accounts is that the company reports: A) Bad debt expense in the same period as the credit sale. B) Greater total sales to customers. C) Fewer returns by customers. D) Greater total cash collected from customers. Answer: A Difficulty: 2 Medium Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 101) The account "Allowance for Uncollectible Accounts" is classified as a(n): A) Liability account in the balance sheet. B) Contra revenue to credit sales in the income statement. C) Expense in the income statement. D) Contra asset to accounts receivable in the balance sheet. Answer: D Difficulty: 2 Medium Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

102) Allowance for Uncollectible Accounts is: A) An expense account. B) A contra asset account. C) A contra revenue account. D) A liability account. Answer: B Difficulty: 2 Medium Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 103) The normal balance of the account "Allowance for Uncollectible Accounts" is a ________ because ________. A) Debit; it is a contra account to Revenue (a credit account) B) Credit; it is a contra account to Accounts Receivable (a debit account) C) Debit; it is an expense in the income statement D) Credit; it is a contra account to Bad Debt Expense (a debit account) Answer: B Difficulty: 2 Medium Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 104) Shupe Inc. estimates uncollectible accounts based on the percentage of accounts receivable. What effect will recording the estimate of uncollectible accounts have on the accounting equation? A) Increase liabilities and decrease stockholders' equity. B) Decrease assets and decrease liabilities. C) Decrease assets and decrease stockholders' equity. D) Increase assets and decrease stockholders' equity. Answer: C Difficulty: 3 Hard Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation

105) Under the allowance method, which of the following does not change the balance in the Accounts Receivable account? A) Returns on credit sales. B) Collections on customer accounts. C) Bad debt expense adjustment. D) Write-offs. Answer: C Difficulty: 2 Medium Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 106) At the end of its first year of operations, a company has accounts receivable of $250,000. The company expects to collect 90% of these accounts. The company's year-end adjusting entry for uncollectible accounts would be: A) Debit Bad Debt Expense; Credit Accounts Receivable for $25,000. B) Debit Allowance for Uncollectible Accounts; Credit Bad Debt Expense for $25,000. C) Debit Bad Debt Expense; Credit Allowance for Uncollectible Accounts for $25,000. D) Debit Allowance for Uncollectible Accounts; Credit Accounts Receivable for $25,000. Answer: C Difficulty: 3 Hard Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

107) During its first year of operations, a company has credit sales of $250,000 and cash sales of $100,000. By the end of the year, cash collections on credit sales total $180,000, and the company estimates uncollectible accounts to be 6% of accounts receivable. The amount to record for the year-end adjusting entry for uncollectible accounts would be: A) $15,000. B) $4,200. C) $6,000. D) $10,200. Answer: B Explanation: ($250,000 − $180,000) × 6% = $4,200. Difficulty: 3 Hard Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 108) When $2,500 of accounts receivable are determined to be uncollectible, which of the following should the company record to write off the accounts using the allowance method? A) A debit to Bad Debt Expense and a credit to Allowance for Uncollectible Accounts. B) A debit to Allowance for Uncollectible Accounts and a credit to Bad Debt Expense. C) A debit to Bad Debt Expense and a credit to Accounts Receivable. D) A debit to Allowance for Uncollectible Accounts and a credit to Accounts Receivable. Answer: D Difficulty: 2 Medium Topic: Allowance Method - Writing Off Accounts Receivable Learning Objective: 05-04 Write off accounts receivable as uncollectible. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 109) Using the allowance method, writing off an actual bad debt would include a: A) Debit to Bad Debt Expense. B) Credit to Accounts Receivable. C) Debit to Accounts Receivable. D) Credit to Allowance for Uncollectible Accounts. Answer: B Difficulty: 2 Medium Topic: Allowance Method - Writing Off Accounts Receivable Learning Objective: 05-04 Write off accounts receivable as uncollectible. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 40 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

110) A company accounts for possible bad debts using the allowance method. When an actual bad debt occurs, what effect does it have on the accounting equation? A) Increases assets and increases stockholders' equity. B) Decreases assets and decreases stockholders' equity. C) Decreases assets and decreases liabilities. D) No effect on the accounting equation. Answer: D Difficulty: 2 Medium Topic: Allowance Method - Writing Off Accounts Receivable Learning Objective: 05-04 Write off accounts receivable as uncollectible. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 111) Which of the following is recorded by a credit to Accounts Receivable? A) Sale of inventory on account. B) Estimating the annual allowance for uncollectible accounts. C) Estimating annual sales returns. D) Writing off of bad debts. Answer: D Difficulty: 2 Medium Topic: Allowance Method - Writing Off Accounts Receivable Learning Objective: 05-04 Write off accounts receivable as uncollectible. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 112) Lail Inc. accounts for bad debts using the allowance method. On June 1, Lail Inc. wrote off Andrew Green's $2,500 account. Based on Lail's estimation, Andrew Green will never pay any portion of the balance in his account. What effect will this write-off have on Lail Inc.'s balance sheet at the time of the write-off? A) An increase to stockholders' equity and a decrease to liabilities. B) No effect. C) An increase to assets and an increase to stockholders' equity. D) A decrease to assets and a decrease to stockholders' equity. Answer: B Difficulty: 3 Hard Topic: Allowance Method - Writing Off Accounts Receivable Learning Objective: 05-04 Write off accounts receivable as uncollectible. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation

113) At the beginning of 2021, the balance in Jackson Enterprises' Allowance for Uncollectible Accounts was $31,800. During 2021, the company wrote off $38,000 of accounts receivable. Writing off the individual bad debts would include a: A) Debit to Bad Debt Expense. B) Credit to Accounts Receivable. C) Credit to the Allowance for Uncollectible Accounts. D) Debit to Bad Debt Expense; credit to the Allowance for Uncollectible Accounts. Answer: B Difficulty: 2 Medium Topic: Allowance Method - Writing Off Accounts Receivable Learning Objective: 05-04 Write off accounts receivable as uncollectible. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 114) The current year's beginning and ending balances for Allowance for Uncollectible Accounts is $23,000 and $27,000, respectively. If the amount of Bad Debt Expense for the year is $18,000, what is the amount written off for the year? A) $14,000. B) $10,000. C) $18,000. D) $22,000. Answer: A Explanation: Beginning balance ($23,000) + Bad Debt Expense ($18,000) − Ending balance ($27,000) = Actual write-offs ($14,000). Difficulty: 3 Hard Topic: Allowance Method - Writing Off Accounts Receivable Learning Objective: 05-04 Write off accounts receivable as uncollectible. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 115) Collections of accounts receivable that previously have been written off are credited to: A) A Gain account. B) Accounts Receivable. C) Bad Debt Expense. D) Retained Earnings. Answer: B Difficulty: 2 Medium Topic: Allowance Method - Writing Off Accounts Receivable Learning Objective: 05-04 Write off accounts receivable as uncollectible. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 42 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

116) A company collects an account receivable previously written off. Indicate how this transaction would affect (1) assets, (2) stockholders' equity, and (3) revenues. A) (1) Increase, (2) Increase, (3) Decrease B) (1) Increase, (2) Increase, (3) Increase C) (1) Increase, (2) Decrease, (3) Increase D) (1) No effect, (2) No effect, (3) No effect Answer: D Difficulty: 3 Hard Topic: Allowance Method - Writing Off Accounts Receivable Learning Objective: 05-04 Write off accounts receivable as uncollectible. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 117) At December 31, Gill Co. reported accounts receivable of $238,000 and an allowance for uncollectible accounts of $600 (credit) before any adjustments. An analysis of accounts receivable suggests that the allowance for uncollectible accounts should be 3% of accounts receivable. The amount of the adjustment for uncollectible accounts would be: A) $6,540. B) $7,800. C) $7,140. D) $7,740. Answer: A Explanation: ($238,000 × 3%) − $600 = $6,540. Difficulty: 3 Hard Topic: Allowance Method - Estimating in Subsequent Year Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

118) At December 31, Gill Co. reported accounts receivable of $238,000 and an allowance for uncollectible accounts of $600 (debit) before any adjustments. An analysis of accounts receivable suggests that the allowance for uncollectible accounts should be 3% of accounts receivable. The amount of the adjustment for uncollectible accounts would be: A) $6,540. B) $7,800. C) $7,140. D) $7,740. Answer: D Explanation: ($238,000 × 3%) + $600 = $7,740. Difficulty: 3 Hard Topic: Allowance Method - Estimating in Subsequent Year Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 119) At December 31, Amy Jo's Appliances had account balances in Accounts Receivable of $311,000 and in Allowance for Uncollectible Accounts of $970 (credit) before any adjustments. An analysis of Amy Jo's December 31 accounts receivable suggests that the allowance for uncollectible accounts should be 2% of accounts receivable. Bad debt expense for the year should be: A) $6,220. B) $6,450. C) $5,250. D) $7,190. Answer: C Explanation: ($311,000 × 2%) − $970 = $5,250. Difficulty: 3 Hard Topic: Allowance Method - Estimating in Subsequent Year Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

120) At December 31, Amy Jo's Appliances had account balances in Accounts Receivable of $311,000 and in Allowance for Uncollectible Accounts of $970 (debit) before any adjustments. An analysis of Amy Jo's December 31 accounts receivable suggests that the allowance for uncollectible accounts should be 2% of accounts receivable. Bad debt expense for the year should be: A) $6,220. B) $6,450. C) $5,250. D) $7,190. Answer: D Explanation: ($311,000 × 2%) + $970 = $7,190. Difficulty: 3 Hard Topic: Allowance Method - Estimating in Subsequent Year Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 121) At the end of 2021, Murray State Lenders had a balance in its Allowance for Uncollectible Accounts of $4,500 (credit) before any adjustment. The company estimated its future uncollectible accounts to be $12,000 using the percentage-of-receivables method. Murray State's adjustment on December 31, 2021, to record its estimated uncollectible accounts included a: A) Credit to Allowance for Uncollectible Accounts of $12,000. B) Credit to Bad Debt Expense of $7,500. C) Debit to Allowance for Uncollectible Accounts of $7,500. D) Debit to Bad Debt Expense of $7,500; credit to Allowance for Uncollectible Accounts of $7,500. Answer: D Explanation: Bad Debt Expense = $12,000 − $4,500 = $7,500. Difficulty: 3 Hard Topic: Allowance Method - Estimating in Subsequent Year Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

122) At the end of 2021, Murray State Lenders had a balance in its Allowance for Uncollectible Accounts of $4,500 (debit) before any adjustment. The company estimated its future uncollectible accounts to be $12,000 using the percentage-of-receivables method. Murray State's adjustment on December 31, 2021, to record its estimated uncollectible accounts included a: A) Credit to Allowance for Uncollectible Accounts of $12,000. B) Credit to Bad Debt Expense of $16,500. C) Debit to Allowance for Uncollectible Accounts of $16,500. D) Debit to Bad Debt Expense of $16,500; credit to Allowance for Uncollectible Accounts of $16,500. Answer: D Explanation: Bad Debt Expense = $12,000 + $4,500 = $16,500. Difficulty: 3 Hard Topic: Allowance Method - Estimating in Subsequent Year Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 123) At December 31, Tremble Music had account balances in Accounts Receivable of $300,000 and in Allowance for Uncollectible Accounts of $1,000 (debit) before any adjustments. An analysis of Tremble's December 31 accounts receivable suggests that 5% of the account balances are not expected to be collected. The balance of Allowance for Uncollectible Accounts after adjustment will be: A) $1,000. B) $16,000. C) $14,000. D) $15,000. Answer: D Explanation: ($300,000 × 5%) = $15,000. Difficulty: 3 Hard Topic: Allowance Method - Estimating in Subsequent Year Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

124) At December 31, Tremble Music had account balances in Accounts Receivable of $300,000 and in Allowance for Uncollectible Accounts of $1,000 (credit) before any adjustments. An analysis of Tremble's December 31 accounts receivable suggests that 5% of the account balances are not expected to be collected. The balance of Allowance for Uncollectible Accounts after adjustment will be: A) $1,000. B) $15,000. C) $16,000. D) $14,000. Answer: B Explanation: ($300,000 × 5%) = $15,000. Difficulty: 3 Hard Topic: Allowance Method - Estimating in Subsequent Year Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 125) At the end of the year, Mark Inc. estimates future bad debts to be $6,500. The Allowance for Uncollectible Accounts has a credit balance of $2,500 before any year-end adjustment. What adjustment should Mark Inc. record for the estimated bad debts at the end of the year? A) Debit Bad Debt Expense, $6,500; credit Allowance for Uncollectible Accounts, $6,500. B) Debit Bad Debt Expense, $4,000; credit Allowance for Uncollectible Accounts $4,000. C) Debit Allowance for Uncollectible Accounts, $9,000; credit Bad Debt Expense, $9,000. D) Debit Bad Debt Expense, $9,000; credit Allowance for Uncollectible Accounts, $9,000. Answer: B Explanation: Bad Debt Expense = $6,500 − $2,500 = $4,000. Difficulty: 3 Hard Topic: Allowance Method - Estimating in Subsequent Year Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

126) Suppose that the balance of a company's Allowance for Uncollectible Accounts was $6,200 (credit) at the end of the year, prior to any adjustments. The company estimated that the total of uncollectible accounts in its accounts receivable was $44,300 at the end of the year. What amount of bad debt expense would appear in the company's year-end income statement? A) $38,100. B) $105,700. C) $33,000. D) $50,500. Answer: A Explanation: Bad Debt Expense = $44,300 − $6,200 = $38,100. Difficulty: 3 Hard Topic: Allowance Method - Estimating in Subsequent Year Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 127) Prior to year-end adjusting entries, what would explain the Allowance for Uncollectible Accounts having a debit balance? A) The amount of cash collections from customers in the current year was less the amount of cash collections from customers in the prior year. B) The amount of actual uncollectible accounts in the current year was less than the estimate of uncollectible accounts made at the end of the prior year. C) The amount of credit sales in the current year was greater than the amount of credit sales made in the prior year. D) The amount of actual uncollectible accounts in the current year was greater than the estimate of uncollectible accounts made at the end of the prior year. Answer: D Difficulty: 3 Hard Topic: Allowance Method - Estimating in Subsequent Year Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

128) Suppose at the end of the year before any adjusting entries, a company has a balance in Allowance for Uncollectible Accounts of $5,000 (debit). During the year, the company reported the following amounts: Credit sales to customers = $550,000 Cash collections from customers = $540,000 Actual bad debts = $20,000 What was the balance of Allowance for Uncollectible Accounts at the beginning of the year? A) $10,000. B) $20,000. C) $15,000. D) $25,000. Answer: C Explanation: Beginning ($15,000) = Ending before adjustment (−$5,000) + Actual bad debts ($20,000). Difficulty: 3 Hard Topic: Allowance Method - Estimating in Subsequent Year; Allowance Method - Writing Off Accounts Receivable Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.; 05-04 Write off accounts receivable as uncollectible. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 129) If the estimate of uncollectible accounts at the end of the current year is too high, which of the following is true in the following year? A) Cash collections from customers will be greater than expected. B) The balance of Allowance for Uncollectible Accounts will be a credit prior to its year-end adjustment. C) The amount reported for Bad Debt Expense will be less than the ending balance of Allowance for Uncollectible Accounts after its year-end adjustment. D) All of the other answers are true in the following year. Answer: D Difficulty: 3 Hard Topic: Allowance Method - Estimating in Subsequent Year Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement; FN Reporting/Keyboard Navigation

130) On December 31, 2021, Coolwear Inc. had balances in Accounts Receivable and Allowance for Uncollectible Accounts of $48,400 and $940, respectively. During 2022, Coolwear wrote off $820 in accounts receivable and determined that there should be an allowance for uncollectible accounts of $1,140 at December 31, 2022. Bad debt expense for 2022 would be: A) $320. B) $1,140. C) $820. D) $1,020. Answer: D Explanation: Bad debt expense = $1,140 − ($940 − $820) = $1,020. Difficulty: 3 Hard Topic: Allowance Method - Estimating in Subsequent Year; Allowance Method - Writing Off Accounts Receivable Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.; 05-04 Write off accounts receivable as uncollectible. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 131) On December 31, 2021, Larry's Used Cars had balances in Accounts Receivable and Allowance for Uncollectible Accounts of $53,600 and $1,325, respectively. During 2022, Larry's wrote off $1,465 in accounts receivable and determined that there should be an allowance for uncollectible accounts of $1,280 at December 31, 2022. Bad debt expense for 2022 would be: A) $1,280. B) $1,465. C) $1,420. D) $1,140. Answer: C Explanation: Bad debt expense = $1,280 − ($1,325 − $1,465) = $1,420. Difficulty: 3 Hard Topic: Allowance Method - Estimating in Subsequent Year; Allowance Method - Writing Off Accounts Receivable Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.; 05-04 Write off accounts receivable as uncollectible. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

132) For accounts receivable, the longer an account is outstanding, the: A) Better the customer. B) More likely it will prove uncollectible. C) More likely the customer will return. D) Higher probability of it being collected. Answer: B Difficulty: 1 Easy Topic: Allowance Method - Aging of Accounts Receivable Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 133) The method of estimating uncollectible accounts based on the length of time the amount is owed by the customer is referred to as the: A) Activity method. B) Realization method. C) Direct write-off method. D) Aging method. Answer: D Difficulty: 1 Easy Topic: Allowance Method - Aging of Accounts Receivable Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 134) When using an aging method for estimating uncollectible accounts: A) Older accounts are considered less likely to be collected. B) The number of days the account is past due is not considered. C) Older accounts are considered more likely to be collected. D) No estimate of uncollectible accounts is made. Answer: A Difficulty: 1 Easy Topic: Allowance Method - Aging of Accounts Receivable Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

135) Compared to other methods of estimating uncollectible accounts, the aging of accounts receivables method tends to: A) Be more accurate. B) Result in the highest net income. C) Result in the lowest net income. D) Recognize bad debts earlier. Answer: A Difficulty: 2 Medium Topic: Allowance Method - Aging of Accounts Receivable Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 136) On December 31, 2021, Andy Inc. has a debit balance of $1,500 for the Allowance for Uncollectible Accounts before any year-end adjustment. Andy Inc. also has the following information for its accounts receivable and the estimated percentages of bad debts for different past-due amounts: Age Group (days past due) 0-30 31-60 61-90

Accounts Receivable $ 50,000 $ 20,000 $ 10,000

Estimated Percent Uncollectible 5% 10% 20%

What is the amount of bad debt expense to be reported on Andy Inc.'s financial statements for 2021 using the aging method? A) $6,500. B) $1,500. C) $5,000. D) $8,000. Answer: D Explanation: Estimated uncollectible = ($50,000 × 5%) + ($20,000 × 10%) + ($10,000 × 20%) = $6,500. Bad Debt Expense = $6,500 + $1,500 = $8,000. Difficulty: 3 Hard Topic: Allowance Method - Aging of Accounts Receivable Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

137) McConnell's Bakeries had the following balances on December 31, 2021, before any adjustment: Accounts Receivable = $100,000; Allowance for Uncollectible Accounts = $4,100 (credit). McConnell's estimates uncollectible accounts based on an aging of accounts receivable as shown below: Age Group (days past due) Not yet due 0-30 31-60 More than 60

Accounts Receivable $ 50,000 $ 20,000 $ 18,000 $ 12,000

Estimated Percent Uncollectible 4% 8% 10% 40%

What amount of bad debt expense did McConnell's record in its December 31, 2021, adjustment to the allowance account? A) $10,200. B) $12,800. C) $15,300. D) $6,100. Answer: D Explanation: Estimated uncollectible = ($50,000 × 4%) + ($20,000 × 8%) + ($18,000 × 10%) + ($12,000 × 40%) = $10,200. Bad debt expense = $10,200 − $4,100 = $6,100. Difficulty: 3 Hard Topic: Allowance Method - Aging of Accounts Receivable Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

138) A company creates the following accounts receivable aging report at the end of the year:

Age Less than 30 days 31-60 days 61+ days

Amount $ 6,000 $ 4,000 $ 2,000

Estimated Uncollec tible 5% 10% 25%

Prior to adjusting entries, the Allowance for Uncollectible Accounts has a debit balance of $500. The year-end adjustment would include a: A) Credit to Allowance for Uncollectible Accounts for $1,200. B) Debit to Bad Debt Expense for $700. C) Debit to Bad Debt Expense for $1,700. D) Debit to Bad Debt Expense for $1,200. Answer: C Explanation: Estimated uncollectible = ($6,000 × 5%) + ($4,000 × 10%) + ($2,000 × 25%) = $1,200. Bad Debt Expense = $1,200 + $500 = $1,700. Difficulty: 3 Hard Topic: Allowance Method - Aging of Accounts Receivable Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 139) Crimson Inc. recorded credit sales of $750,000, of which $600,000 is not yet due, $100,000 is past due for up to 180 days, and $50,000 is past due for more than 180 days. Under the aging of receivables method, Crimson Inc. expects it will not collect 1% of the amount not yet due, 10% of the amount past due for up to 180 days, and 20% of the amount past due for more than 180 days. The allowance account had a debit balance of $1,000 before adjustment. After adjusting for bad debt expense, what is the ending balance of the allowance account? A) $29,000. B) $28,000. C) $27,000. D) $26,000. Answer: D Explanation: ($600,000 × 1%) + ($100,000 × 10%) + ($50,000 × 20%) = $26,000. Difficulty: 3 Hard Topic: Allowance Method - Aging of Accounts Receivable Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

140) During the year, Bears Inc. recorded credit sales of $500,000. Before adjustments at year-end, Bears has accounts receivable of $300,000, of which $50,000 is past due, and the allowance account had a credit balance of $2,500. Using the aging of receivables method, what would be the adjustment assuming Bears expects it will not collect 5% of the amount not yet past due and 20% of the amount past due? A. B. C. D.

Bad Debt Expense Allowance for Uncollectible Accounts Bad Debt Expense Allowance for Uncollectible Accounts Bad Debt Expense Allowance for Uncollectible Accounts Allowance for Uncollectible Accounts Bad Debt Expense

22,500 22,500 25,000 25,000 20,000 20,000 20,000 20,000

A) Option A B) Option B C) Option C D) Option D Answer: C Explanation: ($250,000 × 5%) + ($50,000 × 20%) − $2,500 = $20,000. Difficulty: 3 Hard Topic: Allowance Method - Aging of Accounts Receivable Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

141) The following information pertains to Lightning Inc., at the end of December: Credit Sales Accounts Payable Accounts Receivable Allowance for Uncollectible Accounts Cash Sales

$ 60,000 10,000 7,000 400 credit 20,000

Lightning uses the aging method and estimates it will not collect 2% of accounts receivable not yet due, 10% of receivables up to 30 days past due, and 40% of receivables greater than 30 days past due. The accounts receivable balance of $7,000 consists of $3,500 not yet due, $2,000 up to 30 days past due, and $1,500 greater than 30 days past due. What is the appropriate amount of Bad Debt Expense? A) $400. B) $470. C) $870. D) $1,270. Answer: B Explanation: Bad Debt Expense = ($3,500 × 2%) + ($2,000 × 10%) + ($1,500 × 40%) − $400 = $470. Difficulty: 3 Hard Topic: Allowance Method - Aging of Accounts Receivable Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 142) The direct write-off method is used when: A) Uncollectible accounts are not anticipated or are immaterial. B) A company elects to use this method as one of several alternatives. C) A company has greater cash outflows than cash inflows. D) A company expects excessive sales returns. Answer: A Difficulty: 2 Medium Topic: Direct Write-Off Method Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

143) Which method is not allowed under Generally Accepted Accounting Principles for the purpose of accounting for uncollectible accounts? A) Allowance method. B) Direct write-off method. C) Aging method. D) Percentage-of-receivables method. Answer: B Difficulty: 1 Easy Topic: Direct Write-Off Method Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 144) The direct write-off method is not normally an acceptable method for GAAP because it fails to report: A) Revenue from the sale of goods or services to customers. B) Cash collected from customers. C) Accounts receivable for the net amount of cash expected to be collected. D) The amounts receivable from customers. Answer: C Difficulty: 2 Medium Topic: Direct Write-Off Method Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

145) The direct write-off method is generally not permitted for financial reporting purposes because: A) Compared to the allowance method, it would allow greater flexibility to managers in manipulating reported net income. B) This method is primarily used for tax purposes. C) It is too difficult to accurately estimate future bad debts. D) Accounts receivable are not reported for the net amount of cash expected to be collected. Answer: D Difficulty: 2 Medium Topic: Direct Write-Off Method Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 146) Which accounting concept does the direct write-off method violate? A) Total assets equal total liabilities plus total stockholders' equity. B) Recording amount owed within one year as current liabilities. C) Recognizing revenue when goods or services are provided to customers. D) Timeliness in recognizing uncollectible accounts. Answer: D Difficulty: 2 Medium Topic: Direct Write-Off Method Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 147) If the direct write-off method is used to account for uncollectible accounts, which of the following statements is false? A) An allowance account is not used. B) No adjustment is made at the end of the year to estimate future uncollectible accounts. C) Accounts receivable will be reported at the net amount of cash expected to be collected. D) Bad debt expense is recorded at the time an actual bad debt is written-off. Answer: C Difficulty: 2 Medium Topic: Direct Write-Off Method Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 58 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

148) Under the direct write-off method, what adjustment is made at the end of the year to account for possible future bad debts? A) Debit Bad Debt Expense. B) Debit Allowance for Uncollectible Accounts. C) Credit Accounts Receivable. D) No adjustment is made. Answer: D Difficulty: 2 Medium Topic: Direct Write-Off Method Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 149) Under the direct write-off method, what adjustment is made at the time an actual bad debt occurs? A) Debit Bad Debt Expense, credit Allowance for Uncollectible Accounts. B) Debit Allowance for Uncollectible Accounts, credit Accounts Receivable. C) Debit Bad Debt Expense, credit Accounts Receivable. D) No adjustment is made. Answer: C Difficulty: 2 Medium Topic: Direct Write-Off Method Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 150) The distinction between the direct write-off method and the allowance method is: A) The year in which cash is collected from customers. B) The cumulative amount of bad debt expense reported across years. C) The customers to which goods or services are provided. D) The amount of bad debt expense reported in each year. Answer: D Difficulty: 2 Medium Topic: Direct Write-Off Method Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 59 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

151) The direct write-off method is an acceptable method for what purpose? A) Issuing financial statements to stockholders. B) Tax reporting. C) Compliance with Generally Accepted Accounting Principles. D) Financial reporting. Answer: B Difficulty: 1 Easy Topic: Direct Write-Off Method Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 152) The primary difference between a note receivable and an account receivable is: A) A note receivable cannot be classified as a current asset. B) Borrowers have the option of not paying a note receivable. C) An account receivable is more likely to be collected. D) A note receivable is evidenced by a written debt instrument. Answer: D Difficulty: 2 Medium Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 153) A(n) ________ receivable is an informal credit arrangement with trade customers, whereas a(n) ________ receivable is a formal signed credit arrangement between a creditor and a debtor. A) Account; Note B) Revenue; Note C) Note; Account D) Allowance; Stock Answer: A Difficulty: 1 Easy Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

154) A note receivable is reported in the balance sheet: A) Always as a current asset. B) Always as a long-term asset. C) As either a current asset or long-term asset depending on the expected collection date. D) As a contra asset. Answer: C Difficulty: 2 Medium Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 155) Suppose a customer is unable to pay its account on time, so the company accepts a six-month interest-bearing note receivable to replace the customer's account receivable. What effect will accepting the note receivable have on the company's financial statements at the time of acceptance? A) Total assets increase. B) Total assets decrease. C) No change in total assets. D) Total revenues increase. Answer: C Difficulty: 2 Medium Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 156) Suppose a customer is unable to pay its account on time, so the company accepts a six-month interest-bearing note receivable to replace the customer's account receivable. Over the next six months, what effect will accepting the note receivable have on the company's financial statements? A) Total assets increase. B) Total revenues increase. C) Net income increases. D) All of the other answers are financial statement effects that will occur. Answer: D Difficulty: 3 Hard Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 61 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

157) Hughes Aircraft sold a four-passenger airplane for $380,000, accepting a 12% note for the purchase price. This transaction would include a: A) Credit to Cash. B) Debit to Sales Discount. C) Debit to Notes Receivable. D) Credit to Notes Receivable. Answer: C Difficulty: 2 Medium Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 158) On February 1, 2021, Miter Corp. lends cash and accepts a $1,000 note receivable that offers 12% interest and is due in six months. How much interest revenue will Miter Corp. report during 2021? A) $120. B) $240. C) $100. D) $60. Answer: D Explanation: Interest revenue = $1,000 × 12% × 6 / 12 = $60. Difficulty: 3 Hard Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

159) On February 1, 2021, Sanger Corp. lends cash and accepts a $2,000 note receivable that offers 10% interest and is due in six months. What would Sanger record on August 1, 2021, when the borrower pays Sanger the correct amount owed? A.

B. C.

Cash Interest Revenue Notes Receivable Cash Notes Receivable Cash Interest Revenue Notes Receivable Cash Notes Receivable

2,000 100 2,100 2,100 2,100 2,100 100 2,000 2,200 2,200

A) Option A B) Option B C) Option C D) Option D Answer: C Explanation: Interest Revenue = $2,000 × 10% × 6 / 12 = $100. Difficulty: 3 Hard Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 160) On September 1, 2021, Middleton Corp. lends cash and accepts a $1,000 note receivable that offers 12% interest and is due in six months. How much interest revenue will Middleton Corp. report during 2021? A) $20. B) $40. C) $30. D) $60. Answer: B Explanation: Interest revenue = $1,000 × 12% × 4 / 12 = $40. Difficulty: 3 Hard Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 63 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

161) On September 1, 2021, Middleton Corp. lends cash and accepts a $1,000 note receivable that offers 12% interest and is due in six months. How much interest revenue will Middleton Corp. report during 2022? A) $20. B) $40. C) $30. D) $60. Answer: A Explanation: Interest revenue = $1,000 × 12% × 2 / 12 = $20. Difficulty: 3 Hard Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 162) On August 1, 2021, Turner Manufacturing lends cash and accepts a $6,000 note receivable that offers 8% interest and is due in nine months. How would Turner record the year-end adjustment to accrue interest in 2021? A. B. C. D.

Interest Revenue Interest Receivable Interest Receivable Interest Revenue Interest Receivable Interest Revenue Interest Receivable Interest Revenue

360 360 480 480 360 360 200 200

A) Option A B) Option B C) Option C D) Option D Answer: D Explanation: Interest revenue = $6,000 × 8% × 5 / 12 = $200. Difficulty: 3 Hard Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

163) On July 1, 2021, Herzog Mining lends cash and accepts a $9,000 note receivable that offers 10% interest and is due in nine months. How would Herzog record the transaction on April 1, 2022, when the borrower pays Herzog the correct amount owed? Assume the company has a December 31 year end. A.

Cash

9,675 Notes Receivable Interest Revenue

Cash

9,000 675 9,675

Notes Receivable Interest Revenue Interest Receivable C.

Cash

9,000 225 450 9,675

Notes Receivable Interest Receivable D.

Cash

9,000 675 9,675

Notes Receivable

9,675

A) Option A B) Option B C) Option C D) Option D Answer: B Explanation: Interest Revenue = $9,000 × 10% × 3 / 12 = $225. Interest Receivable = $9,000 × 10% × 6 / 12 = $450. Difficulty: 3 Hard Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

164) On January 1, 2021, Alice & Co. lends $5,000 to an employee and accepts a 24-month, 10% note. At the end of 2021, what effect will the adjustment for accrued interest revenue have on the Alice & Co.'s financial statements? A) Decreases assets. B) Decreases revenue. C) Increases expense. D) Increases stockholders' equity. Answer: D Difficulty: 3 Hard Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 165) On October 1, 2021, Stripes Inc. lends $100,000 to another company and accepts a 24-month, 6% note. What is the amount of interest revenue Stripes will report in its 2021 income statement? A) $750. B) $1,500. C) $4,500. D) $6,000. Answer: B Explanation: $100,000 × 6% × 3 / 12 = $1,500. Difficulty: 3 Hard Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement; FN Reporting/Keyboard Navigation 166) On October 1, 2021, Stripes Inc. lends $100,000 to another company and accepts a 24-month, 6% note. What is the amount of interest revenue Stripes will report in its 2022 income statement? A) $0. B) $1,500. C) $4,500. D) $6,000. Answer: D Explanation: $100,000 × 6% × 12 / 12 = $6,000. Difficulty: 3 Hard Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement; FN Reporting/Keyboard Navigation 66 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

167) On October 1, 2021, Stripes Inc. lends $100,000 to another company and accepts a 24-month, 6% note. What is the amount of interest revenue Stripes will report in its 2023 income statement? A) $0. B) $4,500. C) $6,000. D) $12,000. Answer: B Explanation: $100,000 × 6% × 9 / 12 = $4,500. Difficulty: 3 Hard Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement; FN Reporting/Keyboard Navigation 168) On September 1, 2021, a company accepts a $9,000, 12-month note receivable. For 2021, the company reports interest revenue of $240. How much interest revenue will the company report in 2022? A) $240. B) $480. C) $720. D) The answer cannot be determined with the information given. Answer: B Explanation: Interest revenue in 2022 = $240 × (8 months in 2022 / 4 months in 2021) = $480. There are twice as many months occurring in 2022 (8 months) as in 2021 (4 months) on the 12-month note, so interest revenue will be twice as much in 2022. Difficulty: 3 Hard Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

169) On August 1, 2021, a company accepts an $8,000, 9-month note receivable. For 2021, the company reports interest revenue of $200. What is the interest rate on the note? A) 5%. B) 6%. C) 7%. D) 8%. Answer: B Explanation: Interest = $8,000 × Rate × 5 / 12 = $200. Rate = 6% Difficulty: 3 Hard Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 170) On September 1, 2021, a company lends $50,000 to a customer with 10% interest. The note and interest are due in twelve months. The note receivable is recorded for $50,000 on September 1, but no other adjustments are made in 2021. At the end of 2021, which of the following is true? A) Assets are overstated. B) Revenues are understated. C) Expenses are understated. D) All amounts are accurately stated. Answer: B Difficulty: 3 Hard Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

171) On September 1, 2021, a company lends $50,000 to a customer with 9% interest. The note and interest are due in twelve months. The note receivable is recorded for $50,000 on September 1, and the following year-end adjusting entry is made on December 31, 2021: Interest Receivable Interest Revenue

4,500 4,500

At the end of 2021, which of the following is true? A) Revenues are understated. B) Liabilities are understated. C) Assets are overstated. D) All amounts are accurately stated. Answer: C Difficulty: 3 Hard Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 172) The amount of a company's receivables is influenced by several variables, including all of the following except: A) The level of credit sales. B) The nature of the good or service sold. C) The credit and collection policies. D) Dividend payments to stockholders. Answer: D Difficulty: 2 Medium Topic: Analysis - Receivables Turnover Ratio Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation

173) The formula for the receivables turnover ratio is: A) Average accounts receivable divided by average total assets. B) Net credit sales divided by average accounts receivable. C) Net credit sales divided by average total assets. D) Average accounts receivable divided by net credit sales. Answer: B Difficulty: 1 Easy Topic: Analysis - Receivables Turnover Ratio Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 174) The receivables turnover ratio indicates: A) How efficient the company is at managing sales and inventory. B) The relationship between sales and cost of goods sold. C) The number of times during a year that the average accounts receivables were collected. D) The relationship between cash sales and credit sales. Answer: C Difficulty: 1 Easy Topic: Analysis - Receivables Turnover Ratio Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 175) An increase in a company's receivables turnover ratio typically means the company is: A) Having trouble paying debts as they become due. B) Less profitable. C) More effectively granting credit to and collecting cash from customers. D) Losing customers to its competitors. Answer: C Difficulty: 2 Medium Topic: Analysis - Receivables Turnover Ratio Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation

176) At the beginning of the year, Vici Ventures had accounts receivable of $220,000. At the end of the year, the company had accounts receivable of $340,000. During the year, Vici had total sales of $1,000,000, 70% of which were credit sales. What was Vici's receivables turnover ratio for the year? A) 2.50. B) 3.57. C) 2.94. D) 146 days. Answer: A Explanation: [($1,000,000 × .70) / ($220,000 + $340,000) / 2] = 2.50. Difficulty: 3 Hard Topic: Analysis - Receivables Turnover Ratio Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 177) A company reports the following information for the year: Net credit sales Average accounts receivable Cash collections on credit sales

$ 120,000 20,000 100,000

What is the company's receivables turnover ratio? A) 6.0. B) 5.0. C) 1.2. D) 0.2. Answer: A Explanation: Receivables turnover ratio = net credits sales ($120,000) / average accounts receivable ($20,000) = 6.0. Difficulty: 3 Hard Topic: Analysis - Receivables Turnover Ratio Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation

178) Beverage International reports net credit sales for the year of $240,000. The company's accounts receivable balance at the beginning of the year equaled $20,000 and the balance at the end of the year equaled $30,000. What is Beverage International's receivables turnover ratio? A) 12.0. B) 9.6. C) 8.0. D) 1.5. Answer: B Explanation: Receivables turnover ratio = net credit sales ($240,000) / average accounts receivable [($20,000 + $30,000) / 2] = 9.6. Difficulty: 3 Hard Topic: Analysis - Receivables Turnover Ratio Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 179) A company reports a receivables turnover ratio of 14.5. The industry average is 10.7. What most likely is causing this difference? A) The company is selling to high-risk customers. B) The company has effective procedures related to selling goods on account. C) The company provides superior goods and services. D) The company allows customers too long to pay. Answer: B Difficulty: 3 Hard Topic: Analysis - Receivables Turnover Ratio Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Bloom's: Evaluate AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation

180) A company's ratio of net sales (cash and credit sales) to average accounts receivable can be interpreted as management's ability to: A) Collect cash from all sales to customers. B) Effectively market its goods and services. C) Generate profits for investors. D) Reduce costs of selling goods and services to customers. Answer: A Difficulty: 3 Hard Topic: Analysis - Receivables Turnover Ratio Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 181) The formula for average collection period is: A) 365 days divided by the receivable turnover ratio. B) 365 days divided by net credit sales. C) 365 days divided by average accounts receivable. D) Net credit sales divided by average accounts receivable. Answer: A Difficulty: 1 Easy Topic: Analysis - Average Collection Period Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 182) What is the most likely reason for a company to have an increase in average collection period? A) The company has incurred additional marketing expenses to attract customers. B) Customers are paying in a timelier manner. C) The company has tightened its credit policies for its customers. D) The company has become more lenient in its credit policies and is extending credit terms to maintain customers. Answer: D Difficulty: 3 Hard Topic: Analysis - Average Collection Period Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 73 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

183) A company has the following information: Net credit sales = $400,000 Net income = $100,000 Average total assets = $80,000 Average accounts receivable = $20,000 What is the company's average collection period (rounded to the nearest whole day)? A) 73 days. B) 18 days. C) 9 days. D) 5 days. Answer: B Explanation: Turnover ratio = $400,000 / $20,000 = 20 Collection period = 365 days / 20 = 18 days (rounded) Difficulty: 3 Hard Topic: Analysis - Average Collection Period Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 184) The percentage-of-credit-sales method for estimating uncollectible accounts is sometimes described as: A) The balance sheet method. B) The method most used by companies. C) The income statement method. D) The percentage-of-receivables method. Answer: C Difficulty: 1 Easy Topic: Percentage-of-Credit-Sales Method Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

185) The income statement method for estimating bad debts uses a percentage of: A) Credit sales. B) Accounts receivable. C) Allowance for uncollectible accounts. D) Bad debt expense. Answer: A Difficulty: 1 Easy Topic: Percentage-of-Credit-Sales Method Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 186) Which of the following statements is true with respect to the percentage-of-credit-sales method for estimating uncollectible accounts? A) The amount recorded for bad debt expense does not depend on the balance of the allowance for uncollectible accounts. B) This method is referred to as the balance sheet method. C) This method does not allow for future uncollectible accounts. D) Under this method, bad debt expense is recorded at the time of an actual bad debt. Answer: A Difficulty: 2 Medium Topic: Percentage-of-Credit-Sales Method Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 187) Which of the following provides an accurate match? A) Percentage-of-receivables method ~ Assets are reported closer to the net amount of cash expected to be collected. B) Allowance method ~ Receivables are reported net of estimated uncollectible accounts. C) Percentage-of-credit-sales method ~ Revenues and expenses are better matched. D) All of the other answers provide an accurate match. Answer: D Difficulty: 3 Hard Topic: Percentage-of-Credit-Sales Method Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 75 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

188) The following information pertains to Lindsey Corp. at the end of the year: Credit Sales Accounts Payable Accounts Receivable Allowance for Uncollectible Accounts Cash Sales

$ 150,000 20,000 30,000 800 debit 5,500

Lindsey Corp. uses the percentage-of-credit-sales method and estimates that 2% of the credit sales are uncollectible. After the year-end adjustment, what amount of bad debt expense would Lindsey report for the year? A) $1,200. B) $2,200. C) $3,000. D) $3,800. Answer: C Explanation: Bad debt expense = $150,000 × 2% = $3,000. Difficulty: 3 Hard Topic: Percentage-of-Credit-Sales Method Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

189) The following information pertains to Lightning Inc., at the end of the year: Credit Sales Accounts Payable Accounts Receivable Allowance for Uncollectible Accounts Cash Sales

$ 60,000 10,000 7,000 400 credit 20,000

Lightning uses the percentage-of-credit-sales method and estimates 1% of sales are uncollectible. What is the ending balance of the allowance account after the year-end adjustment? A) $600. B) $1,000. C) $200. D) $1,200. Answer: B Explanation: Allowance for Uncollectible Accounts = $400 + ($60,000 × 1%) = $1,000. Difficulty: 3 Hard Topic: Percentage-of-Credit-Sales Method Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 190) Using the income statement method for accounting for uncollectible accounts, a company estimates that 2.5% of credit sales will eventually become uncollectible. If credit sales during the year are $400,000 and accounts receivable at the end of the year are $80,000, the adjustment for estimated uncollectible accounts will require a: A) Credit to Accounts Receivable for $2,000. B) Debit to Bad Debt Expense for $10,000. C) Debit to Allowance for Uncollectible Accounts for $10,000. D) Credit to Bad Debt Expense for $8,000. Answer: B Difficulty: 3 Hard Topic: Percentage-of-Credit-Sales Method Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

Match each term related to net revenues with its description. A) Sales allowances B) Contra revenues C) Net revenues D) Sales discounts E) Trade discounts F) Sales returns 191) Total revenues less contra revenues. Difficulty: 2 Medium Topic: Learning Objective: Net Revenues - Trade Discounts; Net Revenues - Sales Returns and Sales Allowances; Net Revenues - Sales Discounts 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 192) Reduction in revenue because the product or service is sold below the listed price. Difficulty: 2 Medium Topic: Net Revenues - Trade Discounts; Net Revenues - Sales Returns and Sales Allowances; Net Revenues - Sales Discounts Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 193) Reduction in revenue because the customer brings back products to the company after the original purchase. Difficulty: 2 Medium Topic: Net Revenues - Trade Discounts; Net Revenues - Sales Returns and Sales Allowances; Net Revenues - Sales Discounts Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 194) Reduction in revenue because of some deficiency in the company's good or service. Difficulty: 2 Medium Topic: Net Revenues - Trade Discounts; Net Revenues - Sales Returns and Sales Allowances; Net Revenues - Sales Discounts Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 78 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

195) Reduction in revenue when the customer pays within a specified period. Difficulty: 2 Medium Topic: Net Revenues - Trade Discounts; Net Revenues - Sales Returns and Sales Allowances; Net Revenues - Sales Discounts Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 196) Accounts with balances opposite of revenue. Difficulty: 2 Medium Topic: Net Revenues - Trade Discounts; Net Revenues - Sales Returns and Sales Allowances; Net Revenues - Sales Discounts Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 191) C 192) E 193) F 194) A 195) D 196) B

Match each term related to the allowance method for uncollectible accounts with its description. A) No effect B) Allowance method C) Allowance for Uncollectible Accounts D) Accounts receivable E) Bad debt expense F) Net accounts receivable G) Increase H) Decrease 197) The account used to record sales on account to customers. Difficulty: 3 Hard Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-04 Establish an allowance for uncollectible accounts. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking 198) The procedure required for financial reporting purposes to account for uncollectible accounts. Difficulty: 3 Hard Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-04 Establish an allowance for uncollectible accounts. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking 199) The difference between total accounts receivable and the estimate of future bad debts. Difficulty: 3 Hard Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-04 Establish an allowance for uncollectible accounts. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking 200) The effect on total assets when estimating future bad debts. Difficulty: 3 Hard Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-04 Establish an allowance for uncollectible accounts. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking

201) The account to credit when estimating future bad debts. Difficulty: 3 Hard Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-04 Establish an allowance for uncollectible accounts. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking 202) The effect on total expenses when estimating future bad debts. Difficulty: 3 Hard Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-04 Establish an allowance for uncollectible accounts. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking 203) The account to debit when estimating future bad debts. Difficulty: 3 Hard Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-04 Establish an allowance for uncollectible accounts. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking 204) The effect on total liabilities when estimating future bad debts. Difficulty: 3 Hard Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-04 Establish an allowance for uncollectible accounts. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking Answers: 197) D 198) B 199) F 200) H 201) C 202) G 203) E 204) A

Match each term related to the comparison between the allowance method and direct write-off method for uncollectible accounts with its description. A) Direct write-off method B) Allowance method C) Bad debt expense D) No effect E) Allowance for Uncollectible Accounts F) Decrease G) Increase H) Accounts receivable 205) The procedure commonly used for financial reporting purposes to account for uncollectible accounts. Difficulty: 3 Hard Topic: Allowance Method - Writing Off Accounts Receivable; Direct Write-Off Method Learning Objective: 5-04 Write off accounts receivable as uncollectible.; 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking 206) The procedure commonly used for tax reporting purposes to account for uncollectible accounts. Difficulty: 3 Hard Topic: Allowance Method - Writing Off Accounts Receivable; Direct Write-Off Method Learning Objective: 05-04 Write off accounts receivable as uncollectible.; 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking 207) The account to credit when writing off an actual bad debt under the allowance method. Difficulty: 3 Hard Topic: Allowance Method - Writing Off Accounts Receivable; Direct Write-Off Method Learning Objective: 05-04 Write off accounts receivable as uncollectible.; 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking

208) The account to debit when writing off an actual bad debt under the direct write-off method. Difficulty: 3 Hard Topic: Allowance Method - Writing Off Accounts Receivable; Direct Write-Off Method Learning Objective: 05-04 Write off accounts receivable as uncollectible.; 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking 209) The account to debit when writing off an actual bad debt under the allowance method. Difficulty: 3 Hard Topic: Allowance Method - Writing Off Accounts Receivable; Direct Write-Off Method Learning Objective: 05-04 Write off accounts receivable as uncollectible.; 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking 210) The effect on total expenses when writing off an actual bad debt under the direct write-off method. Difficulty: 3 Hard Topic: Allowance Method - Writing Off Accounts Receivable; Direct Write-Off Method Learning Objective: 05-04 Write off accounts receivable as uncollectible.; 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking 211) The effect on total assets when estimating future bad debts under the allowance method. Difficulty: 3 Hard Topic: Allowance Method - Writing Off Accounts Receivable; Direct Write-Off Method Learning Objective: 05-04 Write off accounts receivable as uncollectible.; 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking 212) The effect on total expenses when estimating future bad debts under the direct write-off method. Difficulty: 3 Hard Topic: Allowance Method - Writing Off Accounts Receivable; Direct Write-Off Method Learning Objective: 05-04 Write off accounts receivable as uncollectible.; 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking 83 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Answers: 205) B 206) A 207) H 208) C 209) E 210) G 211) F 212) D Match each account with its description. A) Cash B) Interest receivable C) Notes receivable D) Accounts receivable E) Interest revenue 213) Informal credit arrangements with trade customers. Difficulty: 2 Medium Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 214) Account to debit when interest accrues at the end of the year. Difficulty: 2 Medium Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 215) Account to credit when interest accrues at the end of the year. Difficulty: 2 Medium Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 216) Formal signed credit arrangements between a creditor and a debtor. Difficulty: 2 Medium Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

217) Account to debit when receivables and interest are collected. Difficulty: 2 Medium Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 213) D 214) B 215) E 216) C 217) A

Match each term related to receivables analysis with its description. A) Increase B) Decrease C) Receivables turnover ratio D) More E) Average collection period F) Less 218) The approximate number of days the average accounts receivable balance is outstanding. Difficulty: 3 Hard Topic: Analysis - Receivables Turnover Ratio; Analysis - Average Collection Period Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking 219) An increase in the receivables turnover ratio generally indicates the company manages its receivables ________ efficiently. Difficulty: 3 Hard Topic: Analysis - Receivables Turnover Ratio; Analysis - Average Collection Period Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking 220) Reducing the length of time in which customers are required to pay will typically ________ the receivables turnover ratio. Difficulty: 3 Hard Topic: Analysis - Receivables Turnover Ratio; Analysis - Average Collection Period Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking 221) The number of times during a year that the average accounts receivable balance is collected. Difficulty: 3 Hard Topic: Analysis - Receivables Turnover Ratio; Analysis - Average Collection Period Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking 86 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

222) An increase in the average collection period indicates the company manages its receivables ________ efficiently. Difficulty: 3 Hard Topic: Analysis - Receivables Turnover Ratio; Analysis - Average Collection Period Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking 223) Allowing riskier customers to purchase goods or services on account will typically ________ the receivables turnover ratio. Difficulty: 3 Hard Topic: Analysis - Receivables Turnover Ratio; Analysis - Average Collection Period Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking Answers: 218) E 219) D 220) A 221) C 222) F 223) B 224) A company offers a 20% trade discount when providing services of $5,000 or more to its customers. Record the transaction when the company provides services of $8,000 (not including the trade discount) on account. Answer: Accounts Receivable Service Revenue

6,400 6,400

Trade discount = $8,000 × 20% = $1,600. Sale price = $8,000 - $1,600 = $6,400. Difficulty: 3 Hard Topic: Credit Sales and Accounts Receivable; Net Revenues - Trade Discounts Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales.; 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

225) On February 23, a company provides services on account to a customer for $4,500. The customer pays in full for those services on March 4. Record the transactions for the company when the services are provided on February 23 and when the cash is collected on March 4. Answer: February 23 Accounts Receivable Service Revenue March 4 Cash Accounts Receivable

4,500 4,500 4,500 4,500

Difficulty: 2 Medium Topic: Credit Sales and Accounts Receivable Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales. Bloom's: Understand AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 226) Suppose Casey Title Company normally charges $500 for services related to selling a house. As part of a summer special, Casey offers customers a trade discount of 20%. On July 9, Linda Holmes uses the services of Casey and pays cash equal to the discounted price. Record the revenue recognized by Casey on July 9. Answer: July 9 Cash Service Revenue

400 400

Trade discount = $500 × 20% = $100. Sale price = $500 − $100 = $400. Difficulty: 3 Hard Topic: Credit Sales and Accounts Receivable; Net Revenues - Trade Discounts Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales.; 05-02 Calculate net revenues using returns, allowances, and discounts Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

227) On September 8, a company provides services on account to a customer for $1,500, terms 2/10, n/30. The customer pays for those services on September 15. Record the transactions for the company when the services are provided on September 8 and when the cash is collected on September 15. Answer: September 8 Accounts Receivable Service Revenue September 15 Cash Sales Discounts Accounts Receivable

1,500 1,500

1,470 30 1,500

Sales discounts = $1,500 × 2% = $30. Difficulty: 3 Hard Topic: Credit Sales and Accounts Receivable; Net Revenues - Sales Discounts Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales.; 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 228) On October 22, a company provides services on account to a customer for $1,800, terms 3/15, n/30. The customer pays for those services on December 19. Record the transactions for the company when the services are provided on October 22 and when cash is collected on December 19. Answer: October 22 Accounts Receivable Service Revenue December 19 Cash Accounts Receivable

1,800 1,800 1,800 1,800

No sales discount of 3% is awarded because the customer did not pay within 15 days as set forth by the terms of the service agreement. Difficulty: 3 Hard Topic: Credit Sales and Accounts Receivable; Net Revenues - Sales Discounts Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales.; 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 89 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

229) On August 12, a company provides services on account to a customer for $3,000. However, on August 16, the customer is not completely satisfied with the service and the company grants an allowance on the amount owed of $400. On August 20, the customer makes full payment of the balance owed, excluding the allowance. Record the services provided on August 12, the sales allowance on August 16, and the cash collection on August 20. Answer: August 12 Accounts Receivable Service Revenue

3,000 3,000

August 16 Sales Allowances Accounts Receivable

400

August 20 Cash Accounts Receivable

2,600

400

2,600

Difficulty: 3 Hard Topic: Credit Sales and Accounts Receivable; Net Revenues - Sales Returns and Sales Allowances Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales.; 05-02 Calculate net revenues using returns, allowance, and discounts. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 230) A company reports the following amounts at the end of the year: Total sales revenue = $500,000; sales discounts = $10,000; sales returns = $30,000; sales allowances = $20,000. Compute net revenues. Answer: $440,000 Net revenues = $500,000 − $10,000 − $30,000 − $20,000 = $440,000. Difficulty: 3 Hard Topic: Net Revenues - Sales Discounts; Net Revenues - Sales Returns and Sales Allowances Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation

231) A company reports the following amounts at the end of the year: Total sales revenue = $400,000; cash = $35,000; sales discounts = $10,000; accounts receivable = $20,000; sales returns = $15,000; operating expenses = $70,000; sales allowances = $25,000. Compute net revenues. Answer: $350,000 Net revenues = $400,000 − $10,000 − $15,000 − $25,000 = $350,000. Difficulty: 3 Hard Topic: Net Revenues - Sales Discounts; Net Revenues - Sales Returns and Sales Allowances Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 232) During 2021, its first year of operations, a company ends the year with accounts receivable of $100,000. The company estimates that 20% of accounts receivable will be uncollectible. Record the adjustment for uncollectible accounts on December 31, 2021. Answer: Bad Debt Expense Allowance for Uncollectible Accounts

20,000 20,000

Adjustment = $100,000 × 20% = $20,000. Difficulty: 3 Hard Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 233) During 2021, its first year of operations, a company provides services on account of $250,000. By the end of 2021, cash collections on these accounts total $130,000. The company estimates that 10% of accounts receivable will be uncollectible. Record the adjustment for uncollectible accounts on December 31, 2021. Answer: Bad Debt Expense Allowance for Uncollectible Accounts

12,000 12,000

Adjustment = ($250,000 − $130,000) × 10% = $12,000. Difficulty: 3 Hard Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 91 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

234) A company has the following balances on December 31, 2021, after year-end adjustments: Accounts Receivable = $62,000; Allowance for Uncollectible Accounts = $6,000. Calculate net accounts receivable. Answer: $56,000 Net accounts receivable = $62,000 − $6,000 = $56,000. Difficulty: 2 Medium Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Understand AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 235) A company has the following balances on December 31, 2021, after year-end adjustments: Accounts Receivable = $75,000; Service Revenue = $400,000; Allowance for Uncollectible Accounts = $5,000; Cash = $20,000. Calculate net accounts receivable. Answer: $70,000 Net accounts receivable = $75,000 − $5,000 = $70,000. Difficulty: 3 Hard Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 236) A company uses the allowance method to account for uncollectible accounts. During the year, the company has actual bad debts of $25,000. Record the write-off of the uncollectible accounts. Answer: Allowance for Uncollectible Accounts Accounts Receivable

25,000 25,000

Difficulty: 2 Medium Topic: Allowance Method - Writing Off Accounts Receivable Learning Objective: 05-04 Write off accounts receivable as uncollectible. Bloom's: Understand AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

237) At the beginning of the year, a company had an Allowance for Uncollectible Accounts of $22,000. By the end of the year, actual bad debts total $24,000. What is the balance of the Allowance for Uncollectible Accounts after the write-offs (before any year-end adjustment)? Answer: −$2,000 (or $2,000 debit) Difficulty: 2 Medium Topic: Allowance Method - Writing Off Accounts Receivable Learning Objective: 05-04 Write off accounts receivable as uncollectible. Bloom's: Understand AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 238) On March 13, a company writes off a customer's account of $3,800. On June 3, the customer unexpectedly pays the $3,800 balance. Using the allowance method, record the write-off on March 13 and the cash collection on June 3. Answer: March 13 Allowance for Uncollectible Accounts Accounts Receivable June 3 Accounts Receivable Allowance for Uncollectible Accounts Cash Accounts Receivable

3,800 3,800 3,800 3,800 3,800 3,800

Difficulty: 3 Hard Topic: Allowance Method - Writing Off Accounts Receivable Learning Objective: 05-04- Write off accounts receivable as uncollectible. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation

239) At the end of the year, a company has a balance in Allowance for Uncollectible Accounts of $200 (credit) before any year-end adjustment. The balance of Accounts Receivable is $15,000. The company estimates that 10% of accounts receivable will not be collected over the next year. Record the adjustment for uncollectible accounts. Answer: Bad Debt Expense Allowance for Uncollectible Accounts

1,300 1,300

Adjustment = ($15,000 × 10%) − $200 = $1,300. Difficulty: 3 Hard Topic: Allowance Method - Estimating in Subsequent Year Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 240) At the end of the year, a company has a balance in Allowance for Uncollectible Accounts of $2,000 (credit) before any year-end adjustment. The balance of Accounts Receivable is $180,000. The company estimates that 5% of accounts receivable will not be collected over the next year. Record the adjustment for uncollectible accounts. Answer: Bad Debt Expense Allowance for Uncollectible Accounts

7,000 7,000

Adjustment = ($180,000 × 5%) − $2,000 = $7,000. Difficulty: 3 Hard Topic: Allowance Method - Estimating in Subsequent Year Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

241) At the end of the year, a company has a balance in Allowance for Uncollectible Accounts of $2,000 (debit) before any year-end adjustment. The balance of Accounts Receivable is $180,000. The company estimates that 5% of accounts receivable will not be collected over the next year. Record the adjustment for uncollectible accounts. Answer: Bad Debt Expense Allowance for Uncollectible Accounts

11,000 11,000

Adjustment = ($180,000 × 5%) + $2,000 = $11,000. Difficulty: 3 Hard Topic: Allowance Method - Estimating in Subsequent Year Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

242) A company reports the following amounts at the end of the year (before any year-end adjustment). Credit sales for the year Accounts receivable Allowance for uncollectible accounts

$120,000 36,000 1,500 (credit)

Record the adjustment for uncollectible accounts (1) using the percentage-of-receivables method, assuming the company estimates 10% of receivables will not be collected, and (2) using the percentage-of-credit-sales method, assuming the company estimates 2% of credit sales will not be collected. Answer: (1) Bad Debt Expense Allowance for Uncollectible Accounts

2,100 2,100

(1) Adjustment = ($36,000 × 10%) − $1,500 = $2,100. (2) Bad Debt Expense Allowance for Uncollectible Accounts

2,400 2,400

(2) Adjustment = $120,000 × 2% = $2,400. Difficulty: 3 Hard Topic: Allowance Method - Estimating in Subsequent Year; Percentage-of-Credit-Sales Method Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.; 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

243) A company has the following accounts receivable and estimates of uncollectible accounts: 1. Accounts not yet due = $60,000; estimated uncollectible = 3%. 2. Accounts 1-30 days past due = $20,000; estimated uncollectible = 20%. 3. Accounts more than 30 days past due = $10,000; estimated uncollectible = 50%. Compute the total estimated uncollectible accounts. Answer: $10,800 Estimated uncollectible accounts = ($60,000 × 3%) + ($20,000 × 20%) + ($10,000 × 50%) = $10,800. Difficulty: 3 Hard Topic: Allowance Method - Aging of Accounts Receivable Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 244) At the end of the year, a company has the following accounts receivable and estimates of uncollectible accounts: 1. Accounts not yet due = $80,000; estimated uncollectible = 2%. 2. Accounts 1-30 days past due = $20,000; estimated uncollectible = 25%. 3. Accounts more than 30 days past due = $4,000; estimated uncollectible = 60%. Record the year-end adjustment for uncollectible accounts, assuming the current balance of the Allowance for Uncollectible Accounts is $900 (credit). Answer: Bad Debt Expense Allowance for Uncollectible Accounts

8,100 8,100

Adjustment = ($80,000 × 2%) + ($20,000 × 25%) + ($4,000 × 60%) − $900 = $8,100. Difficulty: 3 Hard Topic: Allowance Method - Aging of Accounts Receivable Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

245) At the end of the year, a company has the following accounts receivable and estimates of uncollectible accounts: 1. Accounts not yet due = $70,000; estimated uncollectible = 4%. 2. Accounts 1-30 days past due = $30,000; estimated uncollectible = 15%. 3. Accounts more than 30 days past due = $5,000; estimated uncollectible = 40%. Record the year-end adjustment for uncollectible accounts, assuming the current balance of the Allowance for Uncollectible Accounts is $1,200 (debit). Answer: Bad Debt Expense Allowance for Uncollectible Accounts

10,500 10,500

Adjustment = ($70,000 × 4%) + ($30,000 × 15%) + ($5,000 × 40%) + $1,200 = $10,500. Difficulty: 3 Hard Topic: Allowance Method - Aging of Accounts Receivable Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

246) A company has the following balances on December 31, 2021, before any year-end adjustments: Accounts Receivable = $80,000; Allowance for Uncollectible Accounts = $1,100 (credit). The company estimates uncollectible accounts based on an aging of accounts receivable as shown below:

Age Group Not yet due 0-30 days past due 31-90 days past due More than 90 days past due Total

Amount Estimated Percent Receivable Uncollectible $48,000 5% 18,000 15% 10,000 40% 4,000 80% $80,000

Record the adjustment for uncollectible accounts on December 31, 2021. Answer: Bad Debt Expense Allowance for Uncollectible Accounts

11,200 11,200

Adjustment = ($48,000 × 5%) + ($18,000 × 15%) + ($10,000 × 40%) + ($4,000 × 80%) − $1,100 = 11,200. Difficulty: 3 Hard Topic: Allowance Method - Aging of Accounts Receivable Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

247) Calculate the missing amount for each of the following notes receivable. Annual Fraction of Face Value Interest rate the Year $15,000 4% 8 months $25,000 8% (b) $30,000 (c) 4 months (d) 6% 6 months

Interest (a) $500 $500 $600

Answer: (a) $400; (b) 3 months; (c) 5%; (d) $20,000 $15,000 × 4% × 8/12 = (a) $400. $25,000 × 8% × (b) 3/12 = $500. $30,000 × (c) 5% × 4/12 = $500. (d) $20,000 × 6% × 6/12 = $600. Difficulty: 3 Hard Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 248) On February 1, 2021, a company loans one of its employees $20,000 and accepts a nine-month, 8% note receivable. Calculate the amount of interest revenue the company will recognize in 2021. Answer: $1,200 $20,000 × 8% × 9/12 = $1,200. Difficulty: 3 Hard Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

249) On July 1, 2021, a company loans one of its employees $20,000 and accepts a nine-month, 8% note receivable. Calculate the amount of interest revenue the company will recognize in 2021 and 2022. Answer: 2021 = $800; 2022 = $400 2021: $20,000 × 8% × 6/12 = $800. 2022: $20,000 × 8% × 3/12 = $400. Difficulty: 3 Hard Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 250) On April 1, 2021, a company loans one of its suppliers $50,000 and accepts a 24-month, 12% note receivable. Calculate the amount of interest revenue the company will recognize in 2021, 2022, and 2023. Answer: 2021 = $4,500; 2022 = $6,000; 2023 = $1,500 2021: $50,000 × 12% × 9/12 = $4,500. 2022: $50,000 × 12% × 12/12 = $6,000. 2023: $50,000 × 12% × 3/12 = $1,500. Difficulty: 3 Hard Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 251) On April 14, a company lends $10,000 cash to one of its employees and accepts a six-month, 12% note in return. Record the acceptance of the note receivable. Answer: Notes Receivable Cash

10,000 10,000

Difficulty: 2 Medium Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

252) On April 1, a company provides services to one of its customers for $12,000. As payment for the services, the company accepts a six-month, 10% note from the customer. Record the acceptance of the note receivable on April 1 and the cash collection on October 1. Answer: April 1 Notes Receivable Service Revenue October 1 Cash Notes Receivable Interest Revenue

Debit 12,000

Credit 12,000

12,600 12,000 600

Interest revenue = $12,000 × 10% × 6/12 = $600. Difficulty: 3 Hard Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 253) On May 1, 2021, a company lends $100,000 to one of its main suppliers and accepts a 12-month, 6% note. Record the acceptance of the note on May 1, 2021, the adjustment on December 31, 2021, and the cash collection on May 1, 2022. Answer: May 1, 2021 Notes Receivable Cash December 31, 2021 Interest Receivable Interest Revenue May 1, 2022 Cash Notes Receivable Interest Receivable Interest Revenue

Debit 100,000

Credit 100,000

4,000 4,000 106,000 100,000 4,000 2,000

Interest revenue 2021 = $100,000 × 6% × 8/12 = $4,000. Interest revenue 2022 = $100,000 × 6% × 4/12 = $2,000. Difficulty: 3 Hard Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 102 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

254) Below are amounts for two companies:

Company 1 Company 2

Beginning Accounts Receivable (net) $1,500 3,100

Ending Accounts Receivable (net) $1,200 3,300

Net Sales $29,700 80,000

For each company, calculate the receivables turnover ratio. Which company appears more efficient in collecting cash from sales? Answer: Company 1 = 22; Company 2 = 25; Company 2 is more efficient. Company 1 = $29,700/[($1,500 + $1,200)/2] = 22. Company 2 = $80,000/[($3,100 + $3,300)/2] = 25. Difficulty: 3 Hard Topic: Analysis - Receivables Turnover Ratio Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Bloom's: Evaluate AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 255) At the end of the year, a company reports a balance in its Allowance for Uncollectible Accounts of $1,400 (credit) before any year-end adjustment. The company estimates future uncollectible accounts to be 3% of credit sales for the year. Credit sales for the year total $280,000. Record the adjustment for the allowance for uncollectible accounts using the percentage-of-credit-sales method. Answer: Bad Debt Expense Allowance for Uncollectible Accounts

8,400 8,400

Feedback: Adjustment = $280,000 × 3% = 8,400. Difficulty: 3 Hard Topic: Percentage-of-Credit-Sales Method Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

256) At the end of the year, a company reports a balance in its Allowance for Uncollectible Accounts of $1,400 (debit) before any year-end adjustment. The company estimates future uncollectible accounts to be 3% of credit sales for the year. Credit sales for the year total $280,000. Record the adjustment for the allowance for uncollectible accounts using the percentage-of-credit-sales method. Answer: Bad Debt Expense Allowance for Uncollectible Accounts

8,400 8,400

Adjustment = $280,000 × 3% = $8,400. Difficulty: 3 Hard Topic: Percentage-of-Credit-Sales Method Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

257) Assume the following scenarios. Scenario 1. During 2021, Makers Consulting provides services of $100,000. The company receives an initial payment of $75,000 with the balance to be received the following year. Scenario 2. People-R-Us typically charges $75 for a one-year subscription. On January 1, 2021, Georgette, age 72, purchases a one-year subscription to the magazine and receives a 20% senior citizen discount. Scenario 3. During 2021, Waste Control provides services on account for $15,000. The customer pays for those services in 2022. Scenario 4. During 2021, Tasty Foods sells grocery items to one of its customers for $125,000 on account. Cash collections on those sales are $80,000 in 2021 and $30,000 in 2022. The remaining $15,000 is written off as uncollectible in 2022. Required: For each scenario, calculate the amount of revenue to be recognized in 2021. Answer: Revenue recognized in 2021 Scenario 1: $100,000 Scenario 2: $60 = ($75 × 80%) Scenario 3: $15,000 Scenario 4: $125,000 Difficulty: 3 Hard Topic: Credit Sales and Accounts Receivable Learning Objective: 05-01 Recognize accounts receivable at the time of credit sales. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation

258) Recovery Experts (RE) specializes in data recovery from crashed hard drives. The price charged varies based on the extent of damage and the amount of data being recovered. RE offers a 10% discount to students and faculty at educational institutions. Consider the following transactions during the month of June. June 10 June 12

Luke's hard drive crashes and he sends it to RE. After initial evaluation, RE e-mails Luke to let him know that full data recovery will cost $1,600. Luke informs RE that he would like them to recover the data and that he is a student at USC, qualifying him for a 10% educational discount and reducing the cost by $160 ($1,600 × 10%). RE performs the work and claims to be successful in recovering all data. RE asks Luke to pay within 30 days of today's date, offering a 5% discount for payment within 10 days. When Luke receives the hard drive, he notices that RE did not successfully recover all data. Approximately 25% of the data has not been recovered and he informs RE. RE reduces the amount Luke owes by 25%. Luke pays the amount owed.

June 13

June 16

June 19

June 20 June 30 Required:

1. Record the necessary transactions(s) for Recovery Experts on each date. 2. Calculate net revenues. 3. Show how net revenues would be presented in the income statement. 4. Calculate net revenues if Luke had paid his bill on June 25.

Answer: Requirement 1 June 10 No entry June 12 No entry June 13 No entry June 16 Accounts Receivable Service Revenue

Debit

Credit

1,440 1,440

(Provide services of $1,600 on account with a 10% discount) June 19 No entry June 20 Sales Allowances Accounts Receivable

360 360

(Sales allowance for services on account) June 30 Cash Accounts Receivable

1,080 1,080

(Receive cash on account) Requirement 2 Total Service Revenue Less: Sales Allowances Net Revenues

$1,440 360 $1,080

Requirement 3 Recovery Experts Partial Income Statement Total Service Revenue $1,440 Less: Sales Allowances (360) Net Revenues

$1,080

Requirement 4 June 25 Cash Sales Discounts Accounts Receivable

Debit 1,026 54

Credit

1,080

(Receive cash on account with 5% sales discount) (Sales discount = 1,080 × 5%) Total Service Revenue Less: Sales Allowances Sales Discounts Net Revenues

$1,440 360 54 $1,026

Difficulty: 3 Hard Topic: Credit Sales and Accounts Receivable; Net Revenues - Sales Discounts; Net Revenues Sales Returns and Sales Allowances Learning Objective: 05-01 Recognize accounts receivable at time of credit sales.; 05-02 Calculate net revenues using returns, allowance, and discounts. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement; FN Reporting/Keyboard Navigation

259) By the end of its first year of operations, Gallen Corporation has credit sales of $580,000 and accounts receivable of $200,000. Given it's the first year of operations, Gallen's management is unsure how much allowance for uncollectible accounts it should establish. One of the company's competitors, which has been in the same industry for an extended period, estimates uncollectible accounts to be 3% of ending accounts receivable, so Gallen decides to use that same amount. However, actual write-offs in the following year were 10% of the $200,000 ($20,000). Gallen's inexperience in the industry led to making sales to high credit risk customers. Required: 1. Record the adjustment for uncollectible accounts at the end of the first year of operations using the 3% estimate of accounts receivable. 2. By the end of the second year, Gallen has the benefit of hindsight to know that estimates of uncollectible accounts in the first year were too low. By how much did Gallen underestimate uncollectible accounts in the first year? How did this underestimation affect the reported amounts of total assets and expenses at the end of the first year? Ignore tax effects. 3. Should Gallen prepare new financial statements for the first year of operations to show the correct amount of uncollectible accounts? Explain. Answer: Requirement 1 Bad Debt Expense Allowance for Uncollectible Accounts

Debit 6,000

Credit 6,000

(Estimate future bad debts) ($200,000 × 3% = $6,000) Requirement 2 Gallen underestimated uncollectible accounts by $14,000. Actual bad debts in the second year were $20,000 and the company estimated bad debts to be only $6,000. Because of this, total assets will be overstated and total expenses will be understated by $14,000 in the first year. Requirement 3 Gallen should not prepare new financial statements for the first year. The fact that actual bad debts in the second year turned out to be different than the amount estimated at the end of the first year does not constitute a reason for re-issuing prior financial statements. Estimation error is an issue inherent in financial reporting. Difficulty: 3 Hard Topic: Allowance Method - Establishing the Allowance; Allowance Method - Writing Off Accounts Receivable Learning Objective: 05-03 Establish an allowance for uncollectible accounts.; 05-04 Write off accounts receivable as uncollectible. Bloom's: Analyze; Evaluate AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 109 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

260) The following events occur for Wortham Landscape Design during 2021 and 2022, its first two years of operations. February 2, 2021 July 23, 2021 December 31, 2021 April 12, 2022 June 28, 2022

Provide services to customers on account for $26,000. Receive $20,000 from customers on account. Estimate that 10% of uncollected accounts will not be received. Provide services to customers on account for $40,000. Receive $5,000 from customers for services provided in 2021. Write off the remaining amounts owed from services provided in September 13, 2022 2021. October 5, 2022 Receive $33,000 from customers for services provided in 2022. December 31, 2022 Estimate that 10% of uncollected accounts will not be received. Required: 1. Record transactions for each date. 2. Post transactions to the following accounts: Cash, Accounts Receivable, and Allowance for Uncollectible Accounts. 3. Calculate net accounts receivable at the end of 2021 and 2022.

Answer: Requirement 1 February 2, 2021 Accounts Receivable Service Revenue (Provide services on account) July 23, 2021 Cash Accounts Receivable (Receive cash on account) December 31, 2021 Bad Debt Expense Allowance for Uncollectible Accounts (Estimate future bad debts) ($6,000 × 10% = $600) April 12, 2022 Accounts Receivable Service Revenue (Provide services on account) June 28, 2022 Cash Accounts Receivable (Receive cash on account) September 13, 2022 Allowance for Uncollectible Accounts Accounts Receivable (Write off actual bad debts) October 5, 2022 Cash Accounts Receivable (Receive cash on account) December 31, 2022 Bad Debt Expense Allowance for Uncollectible Accounts (Estimate future bad debts) ($7,000 × 10% + $400 = $1,100)

Debit 26,000

Credit 26,000

20,000 20,000

600 600

40,000 40,000

5,000 5,000

1,000 1,000

33,000 33,000

1,100 1,100

Requirement 2

Requirement 3

Total accounts receivable Less: Allowance for uncollectible accounts Net accounts receivable

2021 $6,000 600 $5,400

2022 $7,000 700 $6,300

Difficulty: 3 Hard Topic: Allowance Method - Establishing the Allowance; Allowance Method - Writing Off Accounts Receivable; Allowance Method - Estimating in Subsequent Year Learning Objective: 05-03 Establish an allowance for uncollectible accounts.; 05-04 Write off accounts receivable as uncollectible.; 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze AACSB: Analytical Thinking; Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

261) Gable Incorporated provides legal services. During 2021, the company provides services of $500,000 on account. Of this amount, $70,000 remains uncollected at the end of the year. An aging schedule as of December 31, 2021, is provided below.

Age Group Not yet due 0-30 days past due 31-60 days past due More than 60 days past due Total

Amount Estimated Percent Receivable Uncollectible $40,000 5% 19,000 10% 9,000 20% 6,000 40% $74,000

Required: 1. Calculate the allowance for uncollectible accounts. 2. Record the December 31, 2021 adjustment, assuming the balance of Allowance for Uncollectible Accounts before adjustment is $500 (debit). 3. On April 3, 2022, a customer's account balance of $600 is written off as uncollectible. Record the write-off. 4. On July 17, 2022, the customer whose account was written off in Requirement 3 unexpectedly pays $200 of the amount but does not expect to pay any additional amounts. Record the cash collection.

Answer: Requirement 1

Age Group Not yet due 0-90 days past due 91-180 days past due More than 180 days past due Total

Estimated Amount Percent Receivable Uncollectible $40,000 5% 19,000 10% 9,000 20% 6,000 40% $74,000

Estimated Amount Uncollectible $2,000 1,900 1,800 2,400 $8,100

Requirement 2 December 31, 2021 Debit Bad Debt Expense 8,600 Allowance for Uncollectible Accounts (Estimate future bad debts) ($8,100 + $500 = $8,600)

Credit 8,600

Requirement 3 April 3, 2022 Allowance for Uncollectible Accounts Accounts Receivable (Write off actual bad debts)

Debit

Credit 600 600

Requirement 4 July 17, 2022 Debit Accounts Receivable 200 Allowance for Uncollectible Accounts (Re-establish portion of account previously written off)

Credit

July 17, 2022 Cash Accounts Receivable (Receive cash on account)

Credit

Debit

200

200 200

Difficulty: 3 Hard Topic: Allowance Method - Writing Off Accounts Receivable; Allowance Method - Aging of Accounts Receivable Learning Objective: 05-04 Write off accounts receivable as uncollectible.; 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze AACSB: Analytical Thinking; Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 114 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

262) Tatsuo is the CEO of Ginjo Gallery. At the end of the year, the company's accountant provides Tatsuo with the following information, before any adjusting entries. Accounts receivable Estimated percentage uncollectible Allowance for uncollectible accounts Operating income

$1,000,000 5% $10,000 (credit) $240,000

Accounts receivable $1,000,000 Estimated percentage uncollectible 5% Allowance for uncollectible accounts $10,000 (credit) Operating income $240,000 Tatsuo has significant stock ownership in the company; and therefore, would like to keep the stock price high. Analysts on Wall Street expected the company to have operating income of $170,000. The fact that actual operating income is well above this amount will make investors happy and help maintain a high stock price. Meeting analysts' expectations will also help Tatsuo keep his job. Required: 1. Record the adjustment for uncollectible accounts using the accountant's estimate of 5% of accounts receivable. 2. After the adjustment is recorded in Requirement 1, what is the revised amount of operating income? Will Ginjo Gallery still meet analysts' expectations? 3. Tatsuo instructs the accountant to instead record $70,000 as bad debt expense so that operating income will exactly meet analysts' expectations. By how much would total assets and operating income be misstated if the accountant records this amount? 4. Why would Tatsuo be motivated to manage operating income in this way?

Answer: Requirement 1

Bad Debt Expense Allowance for Uncollectible Accounts

Debit 40,000

Credit 40,000

(Estimate future bad debts) ($1,000,000 × 5% - $10,000 = $40,000) Requirement 2 Revised operating income = $240,000 − $40,000 (bad debt expense) = $200,000. Ginjo Gallery will meet analysts' expectations because the revised operating income of $200,000 is greater than the $170,000 expectations. Requirement 3 Revised operating income = $240,000 − $70,000 (bad debt expense) = $170,000 If Ginjo Gallery records bad debt expense for $70,000 instead of $40,000, assets will be understated and operating income will be understated by $30,000. Requirement 4 By managing operating income downward, Tatsuo is "saving" reported income for the future. If bad debt expense is overestimated this year, then it can be understated next year. Understating bad debt expense next year will overstate operating income in that year. Difficulty: 3 Hard Topic: Allowance Method - Estimating in Subsequent Year Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years. Bloom's: Analyze; Evaluate AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making; FN Measurement/Keyboard Navigation

263) Power Corporation engages in the manufacture and sale of equipment related to alternative sources of energy. During the past year, operating revenues remained relatively flat compared to the prior year but management notices a big increase in accounts receivable. The increase in receivables is largely due to the recent economic slowdown in the commodities market. Many of the company's customers are having financial difficulty, lengthening the period of time it takes to collect on account. Below are year-end amounts.

Age Group Two years ago Last year Current year

Operating Revenue $2,300,000 3,100,000 3,000,000

Accounts Accounts Receivable Average Age Written Off $80,000 13 days $10,000 100,000 11 days 15,000 350,000 27 days 0

Peter, the CEO of Power, notices that accounts written off over the past three years have been minimal; and therefore, suggests that no allowance for uncollectible accounts be established in the current year. Any account proving uncollectible can be charged to next year's financial statements (the direct write-off method). Required: 1. Do you agree with Peter's reasoning? Explain. 2. Suppose that other companies in these industries had similar increasing trends in accounts receivable aging. These companies also had very successful collections in the past but now estimate uncollectible accounts to be 30% because of the significant downturn in the industries. If Power uses the allowance method estimated at 30% of accounts receivable, what should be the balance of the allowance for uncollectible accounts at the end of the current year? 3. Based on your answer in Requirement 2, for what amount will total assets and expenses be misstated in the current year if Power uses the direct write-off method? Ignore tax effects.

Answer: Requirement 1 Power should not use the direct write-off method. Even if no accounts are known to be uncollectible at the time, Peter should estimate future bad debts and record those estimates as an expense (bad debt expense) and reduction in total assets (allowance for uncollectible accounts) in the current year. Requirement 2 Allowance for uncollectible accounts = $350,000 × 30% = $105,000. Requirement 3 If Power uses the direct write-off method, total assets will be overstated and total expenses will be understated by $105,000. Difficulty: 3 Hard Topic: Allowance Method - Estimating in Subsequent Year; Direct Write-Off Method Learning Objective: 05-05 Adjust the allowance for uncollectible accounts in subsequent years.; 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Bloom's: Analyze; Evaluate AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making; FN Measurement/Keyboard Navigation

264) On June 1, 2021, Demer Consulting provides services to a customer for $150,000. To pay for the services, the customer signs a three-year, 12% note. The face amount is due at the end of the third year, while annual interest is due each June 1. Required: 1. Record the acceptance of the note on June 1, 2021. 2. Record the interest collected on June 1 for 2022 and 2023, and the adjustment for interest revenue on December 31, 2021, 2022, and 2023. 3. Record the cash collection on June 1, 2023. Answer: Requirement 1 June 1, 2021 Notes Receivable Service Revenue

Debit 150,000

Credit 150,000

(Provide services and issue note) Requirement 2 December 31, 2021 Interest Receivable Interest Revenue

Debit 10,500

Credit 10,500

(Adjust interest receivable) (Interest revenue = $150,000 × 12% × 7/12) June 1, 2022 Cash Interest Receivable Interest Revenue

Debit 18,000

Credit 10,500 7,500

(Collect annual interest payment) (Interest revenue = $150,000 × 12% × 5/12) December 31, 2022 Interest Receivable Interest Revenue

Debit 10,500

Credit 10,500

(Adjust interest receivable) (Interest revenue = $150,000 × 12% × 7/12)

June 1, 2023 Cash Interest Receivable Interest Revenue

Debit 18,000

Credit 10,500 7,500

(Collect annual interest payment) (Interest revenue = $150,000 × 12% × 5/12) December 31, 2023 Interest Receivable Interest Revenue

Debit 10,500

Credit 10,500

(Adjust interest receivable) (Interest revenue = $150,000 × 12% × 7/12) Requirement 3 June 1, 2023 Cash Notes Receivable Interest Receivable Interest Revenue

Debit 168,000

Credit 150,000 10,500 7,500

(Receive cash on note and interest) (Interest revenue = $150,000 × 12% × 5/12) Difficulty: 3 Hard Topic: Accounting for Notes Receivable Learning Objective: 05-07 Account for notes receivable and interest revenue. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

265) Selected financial data for Strong Health Group and Sturdy Medical Corporation, two companies in the health-care industry, are as follows:

($ in millions) Strong Health Sturdy Medical

Net Sales $1,850 2,100

Beginning Accounts Ending Accounts Receivable Receivable $200 $230 400 380

Required: 1. Calculate the receivables turnover ratio and average collection period for Strong Health and Sturdy Medical. Round your answers to one decimal place. Compare your calculations with those for Tenet Healthcare and LifePoint Hospitals reported in the chapter text. Which of the four companies maintains a higher receivables turnover? 2. How does the receivables turnover ratio reflect the efficiency of management? Discuss factors that affect the receivables turnover ratio.

Answer: Requirement 1

Compared to Sturdy Medical, Strong Health has a higher receivables turnover ratio and a lower average collection period, which means it collects cash more quickly from its customers. The receivables turnover ratio and average collection period for Tenet Healthcare in the most recent year reported in the text are 5.6 times and 65.2 days, respectively. The receivables turnover ratio and average collection period for LifePoint Hospitals in the most recent year reported in the text are 4.3 times and 84.9 days, respectively. Strong Health has the most favorable (highest) receivables turnover ratio of the four companies.

Requirement 2 The receivables turnover ratio and average collection period provide an indication of management's ability to collect cash from customers in a timely manner. A high receivables turnover ratio suggests that managers are selling to customers that have the ability to pay their accounts in a timely manner. The more quickly a company can collect its receivables, the more quickly it can use that cash to generate even more cash by reinvesting in the business and generating additional sales. Factors that could affect the receivables turnover ratio would be managers failing to recognize the financial situation of lower-quality customers, being too aggressive in selling to customers on account, or encountering weak business conditions in the industry which would affect all companies. Difficulty: 3 Hard Topic: Analysis - Receivables Turnover Ratio; Analysis - Average Collection Period Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Bloom's: Analyze; Evaluate AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making; FN Measurement/Keyboard Navigation 266) Give three examples of contra revenue accounts and the transactions with which they are associated. Answer: A sales discount represents a reduction, not in the selling price of a product or service, but in the amount to be paid by a credit customer if paid within a specified period of time. Sales returns occur when a customer returns a product. Sales allowances occur when the seller reduces the customer's balance owed or provides at least a partial refund because of some deficiency in the company's product or service. Difficulty: 2 Medium Topic: Net Revenues - Sales Discounts; Net Revenues - Sales Returns and Sales Allowances Learning Objective: 05-02 Calculate net revenues using returns, allowances, and discounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 267) Explain how companies account for uncollectible accounts receivable (bad debts) for financial reporting purposes. Answer: Companies should account for uncollectible accounts receivable using the allowance method. Under this method, a company estimates future bad debts and records those estimates as an expense and a contra asset in the current period. Difficulty: 2 Medium Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 123 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

268) What does it mean to report accounts receivable at the net amount of cash expected to be collected. Answer: Net accounts receivable is the amount of cash a company expects to collect from its accounts receivable, and it is calculated as total accounts receivable minus an allowance for uncollectible accounts. Net accounts receivable is the amount reported in the balance sheet. Difficulty: 2 Medium Topic: Allowance Method - Establishing the Allowance Learning Objective: 05-03 Establish an allowance for uncollectible accounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 269) Discuss the differences between the allowance method and the direct write-off method for recording uncollectible accounts. Which of the two is acceptable for financial reporting purposes? Answer: The allowance method requires companies to estimate future bad debts and record those estimates in the current period as a reduction in accounts receivable (using a contra asset account) and an increase in bad debt expense. The direct write-off method makes no attempt to estimate future bad debts. Instead, the reduction in accounts receivable and increase in expense associated with bad debts is recorded only when the bad debt actually occurs. Only the allowance method is allowed for financial reporting purposes. Difficulty: 2 Medium Topic: Allowance Method - Establishing the Allowance; Direct Write-Off Method Learning Objective: 05-03 Establish an allowance for uncollectible accounts.; 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement; FN Reporting/Keyboard Navigation

270) Explain why the percentage-of-receivables method is referred to as the balance sheet method and the percentage-of-credit-sales method is referred to as the income statement method. Which method is typically used in practice? Why? Answer: The percentage-of-receivables method estimates future bad debts based on a balance sheet amount - accounts receivable. The percentage-of-credit-sales method estimates future bad debts based on an income statement amount - credit sales. The current emphasis on better measurement of assets (balance sheet focus) outweighs the emphasis on better measurement of net income (income statement focus). This is why the percentage-of-receivables method (balance sheet method) is the preferable method and most commonly used in practice, while the percentage-of-credit-sales method (income statement method) is allowed only if amounts do not differ significantly from estimates using the percentage-of-receivables method. Difficulty: 2 Medium Topic: Allowance Method - Establishing the Allowance; Percentage-of-Credit-Sales Method Learning Objective: 05-03 Establish an allowance for uncollectible accounts.; 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 271) How is the receivables turnover ratio measured? What does this ratio indicate? Is a higher or lower receivables turnover preferable? Answer: The receivables turnover ratio equals net credit sales divided by average accounts receivable. The ratio shows the number of times during a year that the average accounts receivable balance is collected (or "turns over"). Typically, a higher ratio is a good indicator of a company's effectiveness in managing receivables. Difficulty: 2 Medium Topic: Analysis - Receivables Turnover Ratio Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation

Financial Accounting, 5e (Spiceland) Chapter 6 Inventory and Cost of Goods Sold 1) Inventory is usually reported as a long-term asset in the balance sheet. Answer: FALSE Explanation: Inventory is typically reported as a current asset because companies expect to convert it to cash in the near term. Difficulty: 2 Medium Topic: Types of Inventory Learning Objective: 06-01 Understand that inventory flows from manufacturing companies to merchandising companies and is reported as an asset on the balance sheet. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 2) Cost of goods sold is an asset reported in the balance sheet and inventory is an expense reported in the income statement. Answer: FALSE Explanation: Cost of goods sold is an expense reported in the income statement and inventory is an asset reported in the balance sheet. Difficulty: 2 Medium Topic: Types of Inventory Learning Objective: 06-01 Understand that inventory flows from manufacturing companies to merchandising companies and is reported as an asset on the balance sheet. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 3) Merchandising companies purchase inventories that are primarily in finished form for resale to customers. Answer: TRUE Difficulty: 1 Easy Topic: Types of Inventory Learning Objective: 06-01 Understand that inventory flows from manufacturing companies to merchandising companies and is reported as an asset on the balance sheet. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

4) Cost of goods sold is an expense reported in the income statement and represents the cost of inventory sold during the period. Answer: TRUE Difficulty: 2 Medium Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 5) If a company has beginning inventory of $15,000, purchases during the year of $75,000, and ending inventory of $20,000, cost of goods sold equals $70,000. Answer: TRUE Difficulty: 3 Hard Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation 6) A multiple-step income statement reports multiple levels of profitability, such as gross profit, operating income, income before income taxes, and net income. Answer: TRUE Difficulty: 1 Easy Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 7) Gross profit equals net sales of inventory less cost of goods sold. Answer: TRUE Difficulty: 1 Easy Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 2 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

8) Sales revenue minus cost of goods sold is referred to as operating income. Answer: FALSE Explanation: Sales revenue minus cost of goods sold equals gross profit. Difficulty: 1 Easy Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 9) Income before income taxes equals operating income plus nonoperating revenues less nonoperating expenses. Answer: TRUE Difficulty: 1 Easy Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 10) If a company has ending inventory of $25,000, purchases during the year of $95,000, and beginning inventory of $30,000, cost of goods sold equals $90,000. Answer: FALSE Explanation: Beginning Inventory ($30,000) + Purchases ($95,000) − Ending Inventory ($25,000) = Cost of Goods Sold ($100,000). Difficulty: 3 Hard Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation

11) Companies are not allowed to report inventory costs by assuming which units of inventory are sold and which units still remain on hand. Answer: FALSE Explanation: Companies can assume which inventory units are sold and still remain on hand using a variety of methods (FIFO, LIFO, and weighted-average cost). Difficulty: 2 Medium Topic: Inventory Cost Methods-Weighted-Average; Inventory Cost Methods-FIFO; Inventory Cost Methods-LIFO Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 12) Using the first-in, first-out method (FIFO), the first units purchased are assumed to be the first ones sold. Answer: TRUE Difficulty: 1 Easy Topic: Inventory Cost Methods-FIFO Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 13) Using the weighted-average cost method, the average cost of inventory is calculated as the average unit cost of inventory purchased during the year. Answer: FALSE Explanation: The average is a weighted-average cost which includes both beginning inventory and purchases and is equal to total cost of goods available for sale divided by the total number of units available for sale. Difficulty: 2 Medium Topic: Inventory Cost Methods-Weighted-Average Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

14) Companies are free to choose FIFO, LIFO, or weighted-average cost to report inventory and cost of goods sold. Answer: TRUE Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 15) For most companies, actual physical flow of their inventory follows LIFO. Answer: FALSE Explanation: Most often, the actual physical flow of goods follows FIFO. Difficulty: 1 Easy Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 16) During periods of rising costs, FIFO generally results in a higher ending inventory balance. Answer: TRUE Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 17) During periods of rising costs, FIFO generally results in a higher cost of goods sold. Answer: FALSE Explanation: During periods of rising costs, FIFO generally results in a lower cost of goods sold. Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 5 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

18) During periods of rising costs, LIFO generally results in a higher cost of goods sold. Answer: TRUE Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 19) During periods of rising costs, LIFO generally results in a higher ending inventory balance. Answer: FALSE Explanation: During periods of rising costs, LIFO generally results in a lower ending inventory balance. Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 20) Accountants often call FIFO the balance-sheet approach because the amount it reports for ending inventory better approximates the current cost of inventory. Answer: TRUE Difficulty: 1 Easy Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

21) One of the primary benefits of using FIFO when inventory costs are rising is that it results in greater tax savings. Answer: FALSE Explanation: When inventory costs are rising, LIFO provides greater tax savings. Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 22) The LIFO conformity rule requires a company that uses LIFO for tax reporting to use FIFO for financial reporting. Answer: FALSE Explanation: The LIFO conformity rule requires a company that uses LIFO for tax reporting to also use it for financial reporting. Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 23) The LIFO difference (reserve) is the additional amount of inventory a company would report if it used FIFO instead of LIFO. Answer: TRUE Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

24) Companies can choose which inventory cost method they prefer, even if the method does not match the actual physical flow of goods. Answer: TRUE Difficulty: 1 Easy Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 25) Companies are allowed to switch each year from one inventory cost method to another, depending on economic circumstances. Answer: FALSE Explanation: Once a company chooses an inventory cost method, it is not allowed to frequently change to another one. Difficulty: 1 Easy Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 26) Using a perpetual inventory system, the purchase of inventory is recorded with a debit to the Purchases account, which is a temporary account closed to cost of goods sold at the end of the period. Answer: FALSE Explanation: The debit is to the Inventory account. Difficulty: 2 Medium Topic: Recording Transactions Using a Perpetual Inventory System; Recording Transactions Using a Periodic Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system.; 06-08 Record inventory transactions using a periodic inventory system. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

27) For inventory that is shipped FOB destination, title transfers from the seller to the buyer once the seller ships the inventory. Answer: FALSE Explanation: For FOB destination, title transfers once the inventory reaches the buyer (destination). Difficulty: 1 Easy Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 28) For inventory that is shipped FOB shipping point, title transfers from the seller to the buyer once the seller ships the inventory. Answer: TRUE Difficulty: 1 Easy Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 29) Freight-in is included in the cost of inventory. Answer: TRUE Difficulty: 2 Medium Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 30) At the time inventory is sold, cost of goods sold is recorded under the perpetual inventory system. Answer: TRUE Difficulty: 2 Medium Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

31) Using LIFO, the amount reported for ending inventory does not differ depending on whether a company uses a periodic system or a perpetual system. Answer: FALSE Explanation: The amount reported for ending inventory (or cost of goods sold) will differ. Difficulty: 2 Medium Topic: Recording Transactions Using a Perpetual Inventory System; Recording Transactions Using a Periodic Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system.; 06-08 Record inventory transactions using a periodic inventory system. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 32) When the value of inventory falls below its cost, companies other than those that use LIFO have the option of recording the inventory at cost or the lower net realizable value. Answer: FALSE Explanation: Companies must report inventory at the lower of cost and net realizable value. Difficulty: 2 Medium Topic: Lower of Cost and Net Realizable Value Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 33) When the net realizable value of inventory falls below its cost, no adjustment to the accounting records is needed. Answer: FALSE Explanation: Companies are required to record an adjustment when net realizable value falls below cost. The adjustment has the effect of reducing assets and increasing expenses. Difficulty: 2 Medium Topic: Lower of Cost and Net Realizable Value Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

34) The adjustment to write down inventory from cost to its lower net realizable value includes a debit to Cost of Goods Sold and a credit to Inventory. Answer: TRUE Difficulty: 2 Medium Topic: Lower of Cost and Net Realizable Value Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 35) The use of the lower of cost and net realizable value to report inventory is an example of conservatism in financial reporting. Answer: TRUE Difficulty: 1 Easy Topic: Lower of Cost and Net Realizable Value Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 36) The inventory turnover ratio equals cost of goods sold divided by average inventory. Answer: TRUE Difficulty: 1 Easy Topic: Analysis-Inventory Turnover Ratio Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 37) Generally, a higher inventory turnover ratio reflects positively on a company's ability to manage its inventory. Answer: TRUE Difficulty: 2 Medium Topic: Analysis-Inventory Turnover Ratio Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation

38) A company that has average inventory of $500 and cost of goods sold of $2,000 would have an inventory turnover ratio of 0.25. Answer: FALSE Explanation: The inventory turnover ratio equals cost of goods sold ($2,000) divided by average inventory ($500), which equals 4.0 in this example. Difficulty: 3 Hard Topic: Analysis-Inventory Turnover Ratio Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation 39) The gross profit ratio measures the amount by which the sale price of inventory exceeds its cost per dollar of sales. Answer: TRUE Difficulty: 2 Medium Topic: Analysis-Gross Profit Ratio Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 40) Generally, a lower gross profit ratio reflects positively on a company's ability to manage its inventory. Answer: FALSE Explanation: A higher ratio is generally a stronger signal about the company's successful management of inventory. Difficulty: 2 Medium Topic: Analysis-Gross Profit Ratio Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation

41) A periodic inventory system does not continually modify inventory amounts, but instead adjusts for purchases and sales of inventory at the end of the reporting period based on a physical count of inventory on hand. Answer: TRUE Difficulty: 2 Medium Topic: Recording Transactions Using a Periodic Inventory System Learning Objective: 06-08 Record inventory transactions using a periodic inventory system. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 42) Overstating ending inventory in the current year causes net income in the current year to be overstated. Answer: TRUE Difficulty: 3 Hard Topic: Inventory Errors Learning Objective: 06-09 Determine the financial statement effects of inventory errors. Bloom's: Evaluate AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 43) Understating ending inventory in the current year causes cost of goods sold in the current year to be understated. Answer: FALSE Explanation: Understating ending inventory in the current year will cause cost of goods sold in the current year to be overstated. Difficulty: 3 Hard Topic: Inventory Errors Learning Objective: 06-09 Determine the financial statement effects of inventory errors. Bloom's: Evaluate AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

44) Companies that purchase inventories that are primarily in finished form for resale to customers are known as: A) Delivering companies. B) Service companies. C) Merchandising companies. D) Manufacturing companies. Answer: C Difficulty: 1 Easy Topic: Types of Inventory Learning Objective: 06-01 Understand that inventory flows from manufacturing companies to merchandising companies and is reported as an asset on the balance sheet. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 45) One of the major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for: A) Current assets. B) Inventory. C) Selling expenses. D) Deferred revenue. Answer: B Difficulty: 1 Easy Topic: Types of Inventory Learning Objective: 06-01 Understand that inventory flows from manufacturing companies to merchandising companies and is reported as an asset on the balance sheet. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 46) The cost of unsold inventory at the end of the year is classified as a(n) ________ in the ________. A) Asset; Balance sheet B) Expense; Income statement C) Liability; Balance sheet D) Revenue; Income statement Answer: A Difficulty: 1 Easy Topic: Types of Inventory Learning Objective: 06-01 Understand that inventory flows from manufacturing companies to merchandising companies and is reported as an asset on the balance sheet. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 14 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

47) What type of company purchases raw materials and makes goods to sell? A) Wholesaler. B) Retailer. C) Merchandiser. D) Manufacturer. Answer: D Difficulty: 1 Easy Topic: Types of Inventory Learning Objective: 06-01 Understand that inventory flows from manufacturing companies to merchandising companies and is reported as an asset on the balance sheet. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 48) A manufacturer's inventory consists of what type of inventory? A) Raw materials. B) Finished goods. C) Work-in-process. D) All of the other answers are included in a manufacturer's inventory. Answer: D Difficulty: 1 Easy Topic: Types of Inventory Learning Objective: 06-01 Understand that inventory flows from manufacturing companies to merchandising companies and is reported as an asset on the balance sheet. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 49) For a manufacturing company, the combination of the cost of raw materials, direct labor, and overhead for inventory that has not yet completed production is known as: A) Work-in-process. B) Finished goods. C) Merchandise. D) Retail goods. Answer: A Difficulty: 1 Easy Topic: Types of Inventory Learning Objective: 06-01 Understand that inventory flows from manufacturing companies to merchandising companies and is reported as an asset on the balance sheet. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 15 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

50) Inventory does not include: A) Materials used in the production of goods to be sold. B) Assets intended to be sold in the normal course of business. C) Equipment used in the manufacturing of assets for sale. D) Assets currently in production for normal sales. Answer: C Difficulty: 2 Medium Topic: Types of Inventory Learning Objective: 06-01 Understand that inventory flows from manufacturing companies to merchandising companies and is reported as an asset on the balance sheet. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 51) The cost of the goods that a company sold during a period is shown in its financial statements as ________ and the cost of the goods that a company still has on hand at the end of the year is shown in the financial statements as ________. A) Cost of goods sold; inventory B) Goods on hand; inventory expense C) Inventory; cost of goods sold D) Sales revenue; cost of goods sold Answer: A Difficulty: 2 Medium Topic: Types of Inventory; Multiple-Step Income Statement Learning Objective: 06-01 Understand that inventory flows from manufacturing companies to merchandising companies and is reported as an asset on the balance sheet.; 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 52) Cost of Goods Sold is: A) An asset account. B) A revenue account. C) An expense account. D) A permanent equity account. Answer: C Difficulty: 1 Easy Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 16 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

53) The balance of the Cost of Goods Sold account at the end of the year represents: A) The cost of inventory not sold in the current year. B) The total sales revenue to customers. C) The cost of inventory sold in the current year. D) Total purchases of inventory for the year. Answer: C Difficulty: 1 Easy Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 54) The cost of inventory sold during the current year is classified as a(n) ________ in the ________. A) Asset; Balance sheet B) Expense; Income statement C) Liability; Balance sheet D) Revenue; Income statement Answer: B Difficulty: 1 Easy Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 55) The largest expense on a retailer's income statement is typically: A) Salaries. B) Cost of goods sold. C) Income tax expense. D) Depreciation expense. Answer: B Difficulty: 2 Medium Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 17 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

56) Cost of goods sold equals: A) Beginning inventory – net purchases + ending inventory. B) Beginning inventory – accounts payable – net purchases. C) Net purchases + ending inventory – beginning inventory. D) Beginning inventory + net purchases – ending inventory. Answer: D Difficulty: 1 Easy Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 57) A company has beginning inventory for the year of $12,000. During the year, the company purchases inventory for $150,000 and ends the year with $20,000 of inventory. The company will report cost of goods sold equal to: A) $150,000. B) $158,000. C) $142,000. D) $170,000. Answer: C Explanation: Cost of goods sold = beginning inventory ($12,000) + purchases ($150,000) – ending inventory ($20,000) = $142,000. Difficulty: 3 Hard Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation

58) Tyler Toys has beginning inventory for the year of $18,000. During the year, Tyler purchases inventory for $230,000 and has cost of goods sold equal to $233,000. Tyler's ending inventory equals: A) $15,000. B) $18,000. C) $21,000. D) $19,000. Answer: A Explanation: Ending inventory = beginning inventory ($18,000) + purchases ($230,000) − cost of goods sold ($233,000) = $15,000. Difficulty: 3 Hard Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation 59) Beginning inventory is $40,000. Purchases of inventory during the year are $200,000. Ending inventory is $100,000. What is cost of goods sold? A) $340,000. B) $240,000. C) $260,000. D) $140,000. Answer: D Explanation: $40,000 + $200,000 − $100,000 = $140,000 Difficulty: 3 Hard Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation

60) Beginning inventory is $30,000. Purchases of inventory during the year are $50,000. Cost of goods sold is $60,000. What is ending inventory? A) $20,000. B) $30,000. C) $10,000. D) $50,000. Answer: A Explanation: $30,000 + $50,000 − $60,000 = $20,000 Difficulty: 3 Hard Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation 61) Purchases of inventory during the year were $450,000. At the end of the year, ending inventory is $200,000 and cost of goods sold is $400,000. What was beginning inventory? A) $250,000. B) $300,000. C) $150,000. D) $100,000. Answer: C Explanation: Beginning Inventory + $450,000 − $200,000 = $400,000 Beginning Inventory = $150,000 Difficulty: 3 Hard Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation

62) The type of income statement that classifies items as operating and nonoperating is the ________ income statement. A) Consolidated. B) Multiple-step. C) Classified. D) Single-step. Answer: B Difficulty: 1 Easy Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 63) The type of income statement that reports a series of subtotals such as gross profit, operating income, and income before taxes is a ________ income statement. A) Single-step. B) Subtotaled. C) Multiple-step. D) Classified. Answer: C Difficulty: 1 Easy Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 64) The primary distinction between operating activities and nonoperating activities in a multiple-step income statement is whether the activity is: A) A large or small dollar amount. B) Part of primary business operations. C) Related to current versus long-term assets. D) Reported as a revenue or an expense. Answer: B Difficulty: 2 Medium Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 21 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

65) The distinction between operating and nonoperating income relates to: A) Current versus noncurrent. B) Primary versus peripheral activities of the reporting entity. C) Revenues versus expenses. D) Reliability of measurements. Answer: B Difficulty: 2 Medium Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 66) Which of the following items may be classified as nonoperating revenues and expenses? A) Interest expense. B) Loss on the sale of equipment. C) Interest revenue. D) All of the other answers are classified as nonoperating revenues and expenses. Answer: D Difficulty: 1 Easy Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 67) Gross profit is calculated as net sales minus: A) Nonoperating expenses and income tax expense. B) Operating expenses. C) Cost of goods sold. D) All of the other answers are subtracted from net sales to calculate gross profit. Answer: C Difficulty: 1 Easy Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

68) A company has net sales of $200,000, cost of goods sold of $120,000, selling expenses of $6,000, and nonoperating expenses of $2,000. What is the company's gross profit? A) $76,000. B) $80,000. C) $74,000. D) $72,000. Answer: B Explanation: $200,000 − $120,000 = $80,000 Difficulty: 3 Hard Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 69) Given the information below, what is the gross profit? Sales revenue Accounts receivable Ending inventory Cost of goods sold Sales returns

$ 320,000 50,000 100,000 250,000 20,000

A) $250,000. B) $70,000. C) $220,000. D) $50,000. Answer: D Explanation: Sales revenue ($320,000) − Sales returns ($20,000) − Cost of goods sold ($250,000) = $50,000. Difficulty: 3 Hard Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

70) Given the information in the table below, what is the company's gross profit? Sales revenue Accounts receivable Ending inventory Cost of goods sold Sales returns Sales discounts

$ 350,000 $ 280,000 $ 230,000 $ 180,000 $ 50,000 $ 20,000

A) $280,000. B) $170,000. C) $50,000. D) $100,000. Answer: D Explanation: Net sales = $350,000 − $50,000 − $20,000 = $280,000. Gross profit = $280,000 − $180,000 = $100,000. Difficulty: 3 Hard Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 71) A company reports the following information for June: Sales revenue Operating expenses Deferred revenues

$ 104,000 Income tax expense 22,000 Cost of goods sold 15,000 Nonoperating revenues

$ 11,000 65,000 12,000

What is the company's gross profit for June? A) $18,000. B) $39,000. C) $104,000. D) $17,000. Answer: B Explanation: Gross profit = $104,000 − $65,000 = $39,000. Difficulty: 3 Hard Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 24 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

72) Operating income is calculated as net sales minus: A) Utilities expense. B) Salaries expense. C) Cost of goods sold. D) All of the other answers are subtracted from net sales to calculate operating income. Answer: D Difficulty: 1 Easy Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 73) Which measure reflects profitability from normal operations and a key performance measure for predicting the future profit-generating ability of a company? A) Gross profit. B) Operating income. C) Income before income taxes. D) Net income. Answer: B Difficulty: 1 Easy Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

74) Consider the following year-end information for a company: Cost of goods sold Sales revenue Nonoperating expenses Operating expenses Income tax expense

$ 420,000 800,000 10,000 170,000 80,000

What amount will the company report for operating income? A) $200,000. B) $210,000. C) $380,000. D) $120,000. Answer: B Explanation: Operating income = $800,000 − $420,000 − $170,000 = $210,000. Difficulty: 3 Hard Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

75) LeGrand Corporation reported the following amounts in its income statement: Sales revenue Advertising expense Interest expense Salaries expense Utilities expense Income tax expense Cost of goods sold

$ 440,000 60,000 10,000 55,000 25,000 45,000 180,000

What was LeGrand's gross profit? A) $260,000. B) $180,000. C) $220,000. D) $120,000. Answer: A Explanation: Gross profit = $440,000 − $180,000 = $260,000. Difficulty: 3 Hard Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

76) LeGrand Corporation reported the following amounts in its income statement: Sales revenue Advertising expense Interest expense Salaries expense Utilities expense Income tax expense Cost of goods sold

$ 440,000 60,000 10,000 55,000 25,000 45,000 180,000

What was LeGrand's operating income? A) $120,000. B) $260,000. C) $110,000. D) $65,000. Answer: A Explanation: Operating income = $440,000 − $180,000 − ($60,000 + $55,000 + $25,000) = $120,000. Difficulty: 3 Hard Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

77) LeGrand Corporation reported the following amounts in its income statement: Sales revenue Advertising expense Interest expense Salaries expense Utilities expense Income tax expense Cost of goods sold

$ 440,000 60,000 10,000 55,000 25,000 45,000 180,000

What was LeGrand's net income? A) $120,000. B) $60,000. C) $110,000. D) $65,000. Answer: D Explanation: Net income = $440,000 − $180,000 − ($60,000 + $55,000 + $25,000) – $10,000 − $45,000 = $65,000. Difficulty: 3 Hard Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 78) The inventory costing method that matches each unit of inventory with its actual cost is referred to as the ________ method. A) Weighted-average. B) Specific identification. C) Actual cost. D) Matching unit. Answer: B Difficulty: 1 Easy Topic: Inventory Cost Methods-Specific Identification Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

79) A company is most likely to utilize the specific identification method if its inventory consists of: A) Unique products. B) Very expensive products. C) A relatively small number of products. D) All of the other answers are reasons to utilize the specific identification method. Answer: D Difficulty: 2 Medium Topic: Inventory Cost Methods-Specific Identification Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 80) The inventory cost flow assumption that generally best matches the physical flow of inventory is: A) FIFO. B) LIFO. C) Weighted-average. D) Lower of cost and net realizable value. Answer: A Difficulty: 2 Medium Topic: Inventory Cost Methods-FIFO Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 81) The inventory cost flow assumption that results in a random mixture of goods being included in the balance of inventory and cost of goods sold is: A) FIFO. B) LIFO. C) Weighted-average. D) Lower of cost and net realizable value. Answer: C Difficulty: 2 Medium Topic: Inventory Cost Methods-Weighted-Average Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 30 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

82) The inventory cost flow assumption that is least likely to match the physical flow of inventory for most companies is: A) FIFO. B) LIFO. C) Weighted-average. D) Specific identification. Answer: B Difficulty: 2 Medium Topic: Inventory Cost Methods-LIFO Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 83) The following information relates to inventory for Shoeless Joe Inc. Date March March March March

1Beginning Inventory 7Purchase 11Sale 12Purchase

Quantity 20 15 25 20

Price $ 2 3 7 4

At what amount would Shoeless report ending inventory using FIFO cost flow assumptions? A) $55. B) $170. C) $110. D) $70. Answer: C Explanation: Ending inventory = ($3 × 10) + ($4 × 20) = $110. Difficulty: 3 Hard Topic: Inventory Cost Methods-FIFO Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

84) The following information relates to inventory for Shoeless Joe Inc. Date March March March March

1Beginning Inventory 7Purchase 11Sale 12Purchase

Quantity 20 15 25 20

Price $ 2 3 7 4

At what amount would Shoeless report gross profit using LIFO cost flow assumptions? A) $105. B) $80. C) $175. D) $120. Answer: B Explanation: Sales revenue = $25 × 7 = $175. Cost of goods sold = ($4 × 20) + ($3 × 5) = $95. Gross profit = $175 − $95 = $80. Difficulty: 3 Hard Topic: Inventory Cost Methods-LIFO Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

85) The following information relates to inventory for Shoeless Joe Inc. Date March March March March

1Beginning Inventory 7Purchase 11Sale 12Purchase

Quantity 20 15 30 15

Price $ 2 3 7 6

At what amount would Shoeless report cost of goods sold using the weighted-average cost flow assumption? A) $110. B) $73. C) $70. D) $105. Answer: D Explanation: Total cost = [($2 × 20) + ($3 × 15) + ($6 × 15)] = $175. Total units = 20 + 15 + 15 = 50. Weighted-average = $175 / 50 = $3.50. Cost of goods sold = $3.50 × 30 = $105. Difficulty: 3 Hard Topic: Inventory Cost Methods-Weighted-Average Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

86) Inventory records for Dunbar Incorporated revealed the following:

Date Apr. Apr.

Transaction 1Beginning Inventory 20Purchase

Number of Units Unit Cost 500 $ 2.40 400 2.50

Dunbar sold 700 units of inventory during the month. Ending inventory assuming FIFO would be: A) $500. B) $490. C) $470. D) $480. Answer: A Explanation: Ending inventory = 200 × $2.50 = $500. Difficulty: 3 Hard Topic: Inventory Cost Methods-FIFO Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 87) Inventory records for Dunbar Incorporated revealed the following:

Date Apr. Apr.

Transaction 1Beginning Inventory 20Purchase

Number of Units Unit Cost 500 $ 2.40 400 2.50

Dunbar sold 700 units of inventory during the month. Cost of goods sold assuming FIFO would be: A) $1,730. B) $1,700. C) $1,720. D) $1,710. Answer: B Explanation: Cost of goods sold = (500 × $2.40) + (200 × $2.50) = $1,700. Difficulty: 3 Hard Topic: Inventory Cost Methods-FIFO Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 34 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

88) Inventory records for Dunbar Incorporated revealed the following:

Date Apr. Apr.

Transaction 1Beginning Inventory 20Purchase

Number of Units Unit Cost 500 $ 2.40 400 2.50

Dunbar sold 700 units of inventory during the month. Ending inventory assuming LIFO would be: A) $500. B) $490. C) $470. D) $480. Answer: D Explanation: Ending inventory = 200 × $2.40 = $480. Difficulty: 3 Hard Topic: Inventory Cost Methods-LIFO Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 89) Inventory records for Dunbar Incorporated revealed the following:

Date Apr. Apr.

Transaction 1Beginning Inventory 20Purchase

Number of Units Unit Cost 500 $ 2.40 400 2.50

Dunbar sold 700 units of inventory during the month. Cost of goods sold assuming LIFO would be: A) $1,730. B) $1,700. C) $1,720. D) $1,710. Answer: C Explanation: Cost of goods sold = (400 × $2.50) + (300 × $2.40) = $1,720. Difficulty: 3 Hard Topic: Inventory Cost Methods-LIFO Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 35 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

90) Inventory records for Dunbar Incorporated revealed the following:

Date Apr. Apr.

Transaction 1Beginning Inventory 20Purchase

Number of Units Unit Cost 500 $ 2.40 400 2.50

Dunbar sold 700 units of inventory during the month. Ending inventory assuming weighted-average cost would be: (Round weighted-average unit cost to 4 decimals) A) $502. B) $490. C) $489. D) $480. Answer: C Explanation: Weighted-average cost = [(500 × $2.40) + (400 × $2.50)] / 900 = $2.4444. Ending inventory = 200 × $2.4444 = $489 (rounded). Difficulty: 3 Hard Topic: Inventory Cost Methods-Weighted-Average Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

91) Inventory records for Dunbar Incorporated revealed the following:

Date Apr. Apr.

Transaction 1Beginning Inventory 20Purchase

Number of Units Unit Cost 500 $ 2.40 400 2.50

Dunbar sold 700 units of inventory during the month. Cost of goods sold assuming weighted-average cost would be: (Round weighted-average unit cost to 4 decimals) A) $1,711. B) $1,700. C) $1,720. D) $1,708. Answer: A Explanation: Weighted-average cost = [(500 × $2.40) + (400 × $2.50)] / 900 = $2.4444. Cost of goods sold = 700 × $2.4444 = $1,711 (rounded). Difficulty: 3 Hard Topic: Inventory Cost Methods-Weighted-Average Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

92) Inventory records for Marvin Company revealed the following:

Date Mar. Mar. Mar. Mar.

Transaction 1Beginning Inventory 10Purchase 16Purchase 23Purchase

Number of Units Unit Cost 1,000 $ 7.20 600 7.25 800 7.30 600 7.35

Marvin sold 2,300 units of inventory during the month. Ending inventory assuming FIFO would be: A) $5,140. B) $5,080. C) $5,060. D) $5,050. Answer: A Explanation: Ending inventory = (100 × $7.30) + (600 × $7.35) = $5,140. Difficulty: 3 Hard Topic: Inventory Cost Methods-FIFO Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

93) Inventory records for Marvin Company revealed the following:

Date Mar. Mar. Mar. Mar.

Transaction 1Beginning Inventory 10Purchase 16Purchase 23Purchase

Number of Units Unit Cost 1,000 $ 7.20 600 7.25 800 7.30 600 7.35

Marvin sold 2,300 units of inventory during the month. Cost of goods sold assuming FIFO would be: A) $16,800. B) $16,760. C) $16,540. D) $16,660. Answer: D Explanation: Cost of goods sold = (1,000 × $7.20) + (600 × $7.25) + (700 × $7.30) = $16,660. Difficulty: 3 Hard Topic: Inventory Cost Methods-FIFO Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

94) Inventory records for Marvin Company revealed the following:

Date Mar. Mar. Mar. Mar.

Transaction 1Beginning Inventory 10Purchase 16Purchase 23Purchase

Number of Units Unit Cost 1,000 $ 7.20 600 7.25 800 7.30 600 7.35

Marvin sold 2,300 units of inventory during the month. Ending inventory assuming LIFO would be: A) $5,040. B) $5,055. C) $5,075. D) $5,135. Answer: A Explanation: Ending inventory = 700 × $7.20 = $5,040. Difficulty: 3 Hard Topic: Inventory Cost Methods-LIFO Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

95) Inventory records for Marvin Company revealed the following:

Date Mar. Mar. Mar. Mar.

Transaction 1Beginning Inventory 10Purchase 16Purchase 23Purchase

Number of Units Unit Cost 1,000 $ 7.20 600 7.25 800 7.30 600 7.35

Marvin sold 2,300 units of inventory during the month. Cost of goods sold assuming LIFO would be: A) $16,800. B) $16,760. C) $16,540. D) $16,660. Answer: B Explanation: Cost of goods sold = (600 × $7.35) + (800 × $7.30) + (600 × $7.25) + (300 × $7.20) = $16,760. Difficulty: 3 Hard Topic: Inventory Cost Methods-LIFO Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

96) Inventory records for Marvin Company revealed the following:

Date Mar. Mar. Mar. Mar.

Transaction 1Beginning Inventory 10Purchase 16Purchase 23Purchase

Number of Units Unit Cost 1,000 $ 7.20 600 7.25 800 7.30 600 7.35

Marvin sold 2,300 units of inventory during the month. Ending inventory assuming weighted-average cost would be: (Round weighted-average unit cost to 4 decimals) A) $5,087. B) $5,107. C) $5,077. D) $5,005. Answer: A Explanation: Weighted-average cost = [(1,000 × $7.20) + (600 × $7.25) + (800 × $7.30) + (600 × $7.35)] / 3,000 = $7.2667. Ending inventory = 700 × $7.2667 = $5,087 (rounded). Difficulty: 3 Hard Topic: Inventory Cost Methods-Weighted-Average Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

97) Inventory records for Marvin Company revealed the following:

Date Mar. Mar. Mar. Mar.

Transaction 1Beginning Inventory 10Purchase 16Purchase 23Purchase

Number of Units Unit Cost 1,000 $ 7.20 600 7.25 800 7.30 600 7.35

Marvin sold 2,300 units of inventory during the month. Cost of goods sold assuming weighted-average cost would be: (Round weighted-average unit cost to 4 decimals) A) $16,733. B) $17,408. C) $16,713. D) $16,089. Answer: C Explanation: Weighted-average cost = [(1,000 × $7.20) + (600 × $7.25) + (800 × $7.30) + (600 × $7.35)] / 3,000 = $7.2667. Cost of goods sold = 2,300 × $7.2667 = $16,713 (rounded). Difficulty: 3 Hard Topic: Inventory Cost Methods-Weighted-Average Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

98) The following information pertains to Julia & Company: March March March

1 3 9

Beginning inventory = 30 units @ $5 Purchased 15 units @ $4 Sold 25 units @ $8

What is the ending inventory balance for Julia & Company assuming that it uses FIFO? A) $125. B) $100. C) $110. D) $85. Answer: D Explanation: Ending inventory = (15 × $4) + (5 × $5) = $85. Difficulty: 3 Hard Topic: Inventory Cost Methods-FIFO Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 99) The following information pertains to Julia & Company: March March March

1 3 9

Beginning inventory = 30 units @ $5 Purchased 15 units @ $4 Sold 25 units @ $8

What is the cost of goods sold for Julia & Company assuming it uses LIFO? A) $125. B) $100. C) $110. D) $85. Answer: C Explanation: Cost of goods sold = (15 × $4) + (10 × $5) = $110. Difficulty: 3 Hard Topic: Inventory Cost Methods-LIFO Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

100) A company has the following inventory information for the year: January 1 Beginning inventory = 100 units @ $10 March 15 Purchased 500 units @ $12 September 20 Purchased 800 units @ $15 Total sales for the year = 1,200 units The company reports cost of goods sold of $16,000. Which inventory cost method is the company using? A) FIFO. B) LIFO. C) Weighted-average. D) The answer cannot be determined with the information given. Answer: A Explanation: Cost of goods sold (first 1,200 unit) = (100 × $10) + (500 × $12) + (600 × $15) = $16,000. Difficulty: 3 Hard Topic: Inventory Cost Methods-Weighted-Average; Inventory Cost Methods-FIFO; Inventory Cost Methods-LIFO Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

101) Consider the following inventory transactions for September:

Beginning inventory Purchase on September 12 Purchased on September 23

15 20 10

units units units

@ @ @

$ 3.00 $ 3.50 $ 4.00

For the month of September, the company sold 35 units. What is cost of goods sold under the weighted-average cost method? (Round weighted-average unit cost to 4 decimals) A) $121. B) $116. C) $124. D) $131. Answer: A Explanation: Weighted-average cost = [(15 × $3.00) + (20 × $3.50) + (10 × $4.00)] / 45 = 3.4444. Cost of goods sold = 35 × $3.4444 = $121 (rounded). Difficulty: 3 Hard Topic: Inventory Cost Methods-Weighted-Average Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 102) FIFO is considered a balance-sheet approach for reporting inventory because it: A) Better approximates the value of ending inventory. B) Always results in a lower amount of inventory being reported. C) Better approximates inventory cost necessary to generate revenue. D) Always results in a higher amount of inventory being reported. Answer: A Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

103) Which inventory method is better described as having a balance-sheet focus and why is it considered as such? A) FIFO; better approximates the value of ending inventory. B) LIFO; better approximates the value of ending inventory. C) LIFO; better approximates inventory cost necessary to generate revenue. D) FIFO; better approximates inventory cost necessary to generate revenue. Answer: A Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 104) LIFO is considered an income-statement approach for reporting inventory because it: A) Always results in a higher amount of net income being reported. B) Better approximates the value of ending inventory. C) Better approximates inventory cost necessary to generate revenue. D) Always results in a lower amount of net income being reported. Answer: C Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 105) Which inventory method is better described as having an income-statement focus and why is it considered as such? A) FIFO; better approximates the value of ending inventory. B) LIFO; better approximates the value of ending inventory. C) LIFO; better approximates inventory cost necessary to generate revenue. D) FIFO; better approximates inventory cost necessary to generate revenue. Answer: C Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 47 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

106) Which inventory cost flow assumption more realistically matches the current cost of inventory with current sales revenue? A) FIFO. B) LIFO. C) Weighted-average. D) Lower of cost and net realizable value. Answer: B Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 107) The choice of inventory cost flow assumptions affects which of the following amounts? A) Inventory. B) Cost of goods sold. C) Gross profit. D) All of the other answers are affected by the inventory cost flow assumption. Answer: D Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 108) In a period when inventory costs are rising, the inventory method that most likely results in the highest ending inventory is: A) Lower of cost and net realizable value. B) Weighted-average cost. C) FIFO. D) LIFO. Answer: C Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 48 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

109) In a period when inventory costs are falling, the lowest taxable income is most likely reported by using the inventory method of: A) Weighted-average. B) LIFO. C) Moving-average. D) FIFO. Answer: D Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 110) Which of the following is true regarding LIFO and FIFO? A) In a period of decreasing costs, LIFO results in lower total assets than FIFO. B) In a period of decreasing costs, LIFO results in lower net income than FIFO. C) In a period of rising costs, LIFO results in lower net income than FIFO. D) The amount reported for COGS is based on net realizable value of inventory if LIFO is used. Answer: C Difficulty: 3 Hard Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 111) During periods when inventory costs are rising, cost of goods sold will most likely be: A) Higher under FIFO than LIFO. B) Higher under FIFO than average cost. C) Lower under average cost than LIFO. D) Lower under LIFO than FIFO. Answer: C Difficulty: 3 Hard Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

112) In a period of rising costs, which inventory valuation method would a company likely choose if they want to have the highest possible balance of inventory on the balance sheet? A) Weighted-average cost. B) FIFO. C) LIFO. D) Straight-line. Answer: B Difficulty: 3 Hard Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 113) During periods when inventory costs are rising, ending inventory will most likely be: A) Greater under LIFO than FIFO. B) Less under average cost than LIFO. C) Greater under average cost than FIFO. D) Greater under FIFO than LIFO. Answer: D Difficulty: 3 Hard Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 114) The LIFO conformity rule states that if LIFO is used for: A) One class of inventory, it must be used for all classes of inventory. B) Tax purposes, it must be used for financial reporting. C) One company in an affiliated group, it must be used by all companies in an affiliated group. D) Domestic companies, it must be used by foreign partners. Answer: B Difficulty: 1 Easy Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

115) The primary reason for the popularity of LIFO is that it gives: A) Better matching of physical flow and cost flow. B) A lower income tax obligation when inventory costs are rising. C) Simplified recordkeeping. D) A simpler method to apply. Answer: B Difficulty: 1 Easy Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 116) Which of the following is true concerning inventory cost flow assumptions? A) LIFO produces higher net income than FIFO in a period of rising costs. B) FIFO is an income-statement focus. C) LIFO is a balance-sheet focus. D) None of the other answers are true. Answer: D Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 117) Which of the following is incorrect regarding LIFO and FIFO? A) In a period of decreasing costs, FIFO will result in lower total assets than LIFO. B) In a period of increasing costs, net income will be greater under FIFO than LIFO. C) In a period of increasing costs, assets will be greater under LIFO than FIFO. D) In a period of decreasing costs, LIFO will result in greater net income than FIFO. Answer: C Difficulty: 3 Hard Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

118) Which inventory cost flow assumption generally results in the highest reported amount for cost of goods sold when inventory costs are falling? A) FIFO. B) LIFO. C) Weighted-average cost. D) Straight-line. Answer: A Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 119) The disclosure that shows the difference in the cost of inventory between LIFO and FIFO is referred to as the: A) FIFO adjustment. B) Inventory allowance. C) LIFO reserve. D) Net realizable value. Answer: C Difficulty: 1 Easy Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

120) A company uses LIFO and reports ending inventory of $220,000. The company calculates its LIFO reserve to be $70,000. For what amount would the company report ending inventory if it instead had used FIFO? A) $220,000. B) $150,000. C) $290,000. D) $255,000. Answer: C Explanation: $220,000 + $70,000 = $290,000. Difficulty: 3 Hard Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 121) A company uses FIFO for internal recordkeeping but LIFO for reporting ending inventory. Ending inventory under FIFO is $80,000, and ending inventory under LIFO is $60,000. What is the company's LIFO reserve? A) $20,000. B) $60,000. C) $80,000. D) $140,000. Answer: A Explanation: $80,000 − $60,000 = $20,000. Difficulty: 3 Hard Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation

122) Which of the following considerations may influence a manager's choice of the inventory cost flow assumption for a company that experiences rising prices? A) Compensation/bonus tied to reported income. B) Meeting earnings targets. C) Increase stock prices. D) All of the other answers are considerations for the choice of inventory cost flow assumptions. Answer: D Difficulty: 3 Hard Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 123) Which of the following accurately describes a company's choice of inventory cost method? A) A company can choose which inventory method it prefers, even if the method does not match the actual physical flow of goods. B) Once a company chooses a method, it is not allowed to frequently change to another one. C) A company need not use the same method for all of its inventory. D) All of the other answers are correct. Answer: D Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 124) A perpetual inventory system measures cost of goods sold by: A) Estimating the amount of inventory sold. B) Making entries to the inventory account for each purchase and sale. C) Counting inventory at the end of the period. D) Debiting cost of goods sold for all purchases of inventory. Answer: B Difficulty: 2 Medium Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

125) Using a perpetual inventory system, the purchase of inventory on account is recorded with a: A) Debit to Inventory. B) Debit to Cost of Goods Sold. C) Debit to Accounts Payable. D) Credit to Sales Revenue. Answer: A Difficulty: 2 Medium Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 126) Using a perpetual inventory system, the sale of inventory on account is recorded with a: A) Debit to Cost of Goods Sold. B) Credit to Inventory. C) Credit to Sales Revenue. D) All of the other answers are recorded with the sale of inventory on account. Answer: D Difficulty: 2 Medium Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 127) Beginning inventory is $142,000. During the period, a company has three purchases of inventory with a cost of $75,000, $80,000, and $56,000. Also during the period, inventory with a cost of $190,000 was sold to customers for $260,000. What is the ending balance of inventory? A) $163,000. B) $21,000. C) $93,000. D) $353,000. Answer: A Explanation: $142,000 + $75,000 + $80,000 + $56,000 − $190,000 = $163,000 Difficulty: 3 Hard Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation

128) Below is a T-account for inventory.

Jan 1. Mar. 25 Sep. 30

Inventory 25,000 58,000 72,000 ?

62,000 69,000

Apr. 24 Oct. 5

Which of the following is true? A) Inventory sold during the year had a cost of $131,000. B) The ending balance of inventory is $24,000. C) Inventory purchases during the year had a cost of $130,000. D) All of the other answer choices are correct. Answer: D Explanation: Inventory sold = ($62,000 + $69,000) = $131,000. Ending inventory = ($25,000 + $58,000 + $72,000) − ($62,000 + $69,000) = $24,000. Inventory purchases = ($58,000 + $72,000) = $130,000. Difficulty: 3 Hard Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 129) In the first year of a company's operations, it uses FIFO for internal recordkeeping but LIFO for reporting ending inventory. Ending inventory under FIFO is $90,000, and ending inventory under LIFO is $80,000. The company's year-end LIFO adjustment would include: A) A debit to inventory for $10,000. B) A debit to cost of goods sold for $10,000. C) A debit to inventory for $80,000. D) A credit to cost of goods sold for $10,000. Answer: B Difficulty: 3 Hard Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

130) Using a perpetual inventory system, the entry to record the return of inventory previously purchased on account includes a: A) Debit to Cost of Goods Sold. B) Debit to Inventory. C) Debit to Accounts Payable. D) Credit to Sales Returns. Answer: C Difficulty: 2 Medium Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 131) On May 1, a company purchased inventory costing $2,000 on account with terms 2/10, n/30. On May 18, the company pays for this inventory and records which of the following using a perpetual inventory system? 1. 2.

Accounts Payable Cash Accounts Payable Inventory Cash Accounts Payable Inventory Cash Cash Accounts Payable

2,000 2,000 1,960 40 2,000 2,000 40 1,960 2,000 2,000

A) Option 1 B) Option 2 C) Option 3 D) Option 4 Answer: A Explanation: There is no purchase discount because payment is not within the 10-day discount period. Difficulty: 3 Hard Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation

132) On May 1, a company purchased inventory costing $2,000 on account with terms 2/10, n/30. On May 8, the company pays for this inventory and records which of the following using a perpetual inventory system? 1. 2.

Accounts Payable Cash Accounts Payable Inventory Cash Accounts Payable Inventory Cash Cash Accounts Payable

2,000 2,000 1,960 40 2,000 2,000 40 1,960 2,000 2,000

A) Option 1 B) Option 2 C) Option 3 D) Option 4 Answer: C Explanation: Purchase discount = $2,000 × 2% = $40. Difficulty: 3 Hard Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation

133) Danton Hardware Company uses a perpetual inventory system. How should Danton record the return of inventory previously purchased on account for $200? 1. 2. 3. 4.

Inventory Accounts Payable Accounts Payable Inventory Purchase Returns Accounts Payable Accounts Payable Purchase Returns

200 200 200 200 200 200 200 200

A) Option 1 B) Option 2 C) Option 3 D) Option 4 Answer: B Difficulty: 2 Medium Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 134) In a perpetual inventory system, the purchase of inventory is debited to: A) Purchases. B) Cost of Goods Sold. C) Inventory. D) Accounts Payable. Answer: C Difficulty: 2 Medium Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

135) In a perpetual inventory system, the entry at the time of a sale to record the cost of the inventory sold includes a: A) Debit to Accounts Receivable. B) Credit to Cost of Goods Sold. C) Debit to Cost of Goods Sold. D) Not recorded at the time of the sale. Answer: C Difficulty: 2 Medium Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 136) A company sold inventory for $1,200 that was purchased for $700. The company records which of the following when it sells the inventory using a perpetual inventory system? A) No entry is required for cost of goods sold and inventory. B) Debit Cost of Goods Sold $700; credit Inventory $700. C) Debit Cost of Goods Sold $1,200; credit Inventory $1,200. D) Debit Inventory $700; credit Cost of Goods Sold $700. Answer: B Difficulty: 3 Hard Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation

137) Using a perpetual inventory system, how should a company record the sale of inventory costing $620 for $960 on account? 1.

Inventory Cost of Goods Sold Sales Revenue Accounts Receivable Accounts Receivable Sales Revenue Cost of Goods Sold Inventory Inventory Gain Sales Revenue Accounts Receivable Sales Revenues Gain

620 620 960 960 960 960 620 620 620 340 960 960 620 340

A) Option 1 B) Option 2 C) Option 3 D) Option 4 Answer: B Difficulty: 3 Hard Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation

138) A company purchased inventory on account. The inventory costs $2,000 and is expected to sell for $3,000. How should the company record the purchase using a perpetual inventory system? 1. 2.

3. 4.

Inventory Accounts Payable Cost of Goods Sold Deferred Revenue Sales Revenue Cost of Goods Sold Accounts Payable Cost of Goods Sold Gain Accounts Payable

2,000 2,000 2,000 1,000 3,000 2,000 2,000 2,000 1,000 3,000

A) Option 1 B) Option 2 C) Option 3 D) Option 4 Answer: A Difficulty: 3 Hard Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation 139) Merchandise sold FOB destination indicates that: A) The seller holds title until the merchandise is received at the buyer's location. B) The merchandise has not yet been shipped. C) The merchandise will not be shipped until payment has been received. D) The seller transfers title to the buyer once the merchandise is shipped. Answer: A Difficulty: 1 Easy Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

140) Merchandise sold FOB shipping point indicates that: A) The seller holds title until the merchandise is received at the buyer's location. B) The merchandise has not yet been shipped. C) The merchandise will not be shipped until payment has been received. D) The seller transfers title to the buyer once the merchandise is shipped. Answer: D Difficulty: 1 Easy Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 141) If A sells to B, and B obtains title while goods are in transit, the goods were shipped ________. If C sells to D, and C maintains title until the goods arrive at D's door, then the goods were shipped ________. A) FOB shipping point; FOB destination B) FOB destination; FOB shipping point C) FOB destination; FOB destination D) FOB shipping point; FOB shipping point Answer: A Difficulty: 2 Medium Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 142) From the seller's perspective, ending inventory is equal to the cost of items on hand plus: A) Items in transit sold FOB shipping point. B) Sales discounts. C) Items in transit sold FOB destination. D) Advertising expense. Answer: C Difficulty: 2 Medium Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

143) Suppose Company A places an order with Company B on May 12. On May 14, Company B ships the ordered goods to Company A with terms FOB destination. The goods arrive at Company A on May 17. Company A begins selling the goods to customers on May 19 and pays Company B on May 20. When would Company B record the sale of goods to Company A? A) May 12. B) May 14. C) May 19. D) May 17. Answer: D Difficulty: 3 Hard Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation 144) Kelton Inc. purchases inventory for $2,000 and incurs shipping costs of $100. To record this transaction, the company debits Inventory for $2,000, debits Selling Expenses for $100, and credits Cash for $2,100. Which of the following statements is correct? A) All accounts are accurately stated. B) Assets are understated. C) Net income is overstated. D) Revenues are understated. Answer: B Difficulty: 3 Hard Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

145) A company had sales revenue of $900,000 for the year. In addition, the following information is available related to the cost of the units sold: Total purchase cost Freight charges Purchase discounts Purchase returns Operating expenses

$ 480,000 10,000 25,000 50,000 200,000

For what amount would the company report gross profit? A) $285,000. B) $485,000. C) $420,000. D) $410,000. Answer: B Explanation: Cost of goods sold = $480,000 + $10,000 − $25,000 − $50,000 = $415,000. Gross profit = $900,000 – $415,000 = $485,000. Difficulty: 3 Hard Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

146) A company had sales revenue of $800,000 for the year. In addition, the following information is available related to the cost of the units sold: Gross profit Total purchase cost Freight charges Purchase returns Operating expenses Purchase discounts

$ 340,000 ? 20,000 80,000 150,000 40,000

What was the total purchase cost of the units sold? A) $310,000. B) $460,000. C) $410,000. D) $560,000. Answer: D Explanation: Gross profit = Sales revenue − Cost of goods sold. $340,000 = $800,000 − Cost of goods sold. Cost of goods sold = $460,000. Cost of goods sold = Total purchase cost + Freight-in − Purchase discounts − Purchase returns. $460,000 = Total purchase cost + $20,000 − $40,000 − $80,000. Total purchase cost = $560,000. Difficulty: 3 Hard Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

147) The inventory method that will always produce the same amount for cost of goods sold in a periodic inventory system as in a perpetual inventory system would be: A) FIFO. B) LIFO. C) Weighted-average. D) Each method always produces a different amount. Answer: A Difficulty: 2 Medium Topic: Recording Transactions Using a Perpetual Inventory System; Recording Transactions Using a Periodic Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system.; 06-08 Record inventory transactions using a periodic inventory system. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 148) The primary difference between the periodic and perpetual inventory systems is: A) The reported amount of ending inventory is higher under the periodic system. B) The perpetual system maintains a continual record of inventory transactions, whereas the periodic system records these transactions only at the end of the period. C) The reported amount of sales revenue is higher under the periodic inventory system. D) The reported amount of cost of goods sold is higher under the perpetual inventory system. Answer: B Difficulty: 1 Easy Topic: Recording Transactions Using a Perpetual Inventory System; Recording Transactions Using a Periodic Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system.; 06-08 Record inventory transactions using a periodic inventory system. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 149) In accounting for inventory, net realizable value equals: A) Estimated selling price less expected returns by customers. B) Original purchase cost minus the estimated profit on the sale of inventory. C) Estimated selling price less any costs of completion, disposal, and transportation. D) Estimated cost to replace the inventory. Answer: C Difficulty: 1 Easy Topic: Lower of Cost and Net Realizable Value Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 67 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

150) The lower of cost and net realizable value rule causes losses in the value of inventory to be recognized in the period when: A) The inventory is purchased. B) Cash collection from the customer fails to occur. C) The inventory is sold. D) The value of inventory declines below cost. Answer: D Difficulty: 2 Medium Topic: Lower of Cost and Net Realizable Value Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 151) The lower of cost and net realizable value method for inventory was developed to: A) Avoid reporting inventory at an amount that exceeds the benefits it provides. B) Provide an alternative to the FIFO, LIFO, and weighted-average methods. C) Prevent the company from selling the inventory below its original cost. D) Prevent the company from selling inventory to customers who are not likely to pay. Answer: A Difficulty: 2 Medium Topic: Lower of Cost and Net Realizable Value Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

152) A company has the following information for its inventories A, B, C, and D:

A B C D

Quantity 15 20 40 25

Historical Cost $20 35 25 50

Net Realizable Value $25 30 40 35

The necessary adjustment associated with the lower of cost and net realizable value would be: 1. 2. 3. 4.

Inventory Cost of Goods Sold Cost of Goods Sold Inventory Inventory Cost of Goods Sold Cost of Goods Sold Inventory

675 675 675 675 475 475 475 475

A) Option 1 B) Option 2 C) Option 3 D) Option 4 Answer: D Explanation: Need to reduce inventory cost to the lower net realizable value for items B and D. (20 × $5) + (25 × $15) = $475. Difficulty: 3 Hard Topic: Lower of Cost and Net Realizable Value Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

153) On April 1, a company purchased two units of inventory, A and B. The cost of unit A was $650, and the cost of unit B was $625. On April 30, the company had not sold the inventory. The net realizable value of unit A was now $685 while the net realizable value of unit B was $550. The adjustment associated with the lower of cost and net realizable value on April 30 will be: 1. 2. 3. 4.

Cost of Goods Sold Inventory Inventory Cost of Goods Sold Cost of Goods Sold Inventory Inventory Cost of Goods Sold

40 40 40 40 75 75 75 75

A) Option 1 B) Option 2 C) Option 3 D) Option 4 Answer: C Explanation: Need to reduce inventory cost to the lower net realizable value for unit B. $625 − $550 = $75. Difficulty: 3 Hard Topic: Lower of Cost and Net Realizable Value Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

154) Consider the following information pertaining to OldWest's inventory:

Product Revolvers Spurs Hats

Quantity 16 23 12

Cost $ 120 27 56

Net Realizable Value $ 150 22 40

At what amount should OldWest report its inventory? A) $3,213. B) $3,386. C) $2,996. D) $2,906. Answer: D Explanation: (16 × $120) + (23 × $22) + (12 × $40) = $2,906. Difficulty: 3 Hard Topic: Lower of Cost and Net Realizable Value Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 155) Under the principle of lower of cost and net realizable value, when a company has 10 units of inventory A with net realizable value of $50 and a cost of $60, what is the adjustment? A) Debit Inventory $100; credit Cost of Goods Sold $100. B) Debit Inventory $500; credit Cost of Goods Sold $500. C) Debit Cost of Goods Sold $100; credit Inventory $100. D) Debit Cost of Goods Sold $500; credit Inventory $500. Answer: C Explanation: Need to reduce inventory cost to the lower net realizable value. 10 × $10 = $100 Difficulty: 3 Hard Topic: Lower of Cost and Net Realizable Value Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

156) A company has four types of products in its inventory. The company applies the rules under lower of cost and net realizable value to its inventory at the end of each year as shown below: Product A B C D

Quantity 15 10 20 15

Cost 7 15 8 11

Net Realizable Value $ 8 14 6 10

The year-end adjustment based upon the information above would include a: A) Debit to Cost of Goods Sold $65. B) Credit to Inventory $50. C) Debit to Inventory $65. D) Debit to Cost of Goods Sold $50. Answer: A Explanation: Product B = ($15 − $14) × 10 = $10. Product C = ($8 − $6) × 20 = $40. Product D = ($11 − $10) × 15 = $15. Total adjustment to cost of goods sold = $10 + $40 + $15 = $65. Difficulty: 3 Hard Topic: Lower of Cost and Net Realizable Value Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 157) At the end of a reporting period, a company determines that its ending inventory has a cost of $300,000 and a net realizable value of $230,000. What would be the effect(s) of the adjustment to write down inventory to net realizable value? A) Decrease total assets. B) Decrease net income. C) Increase retained earnings. D) Decrease total assets and net income. Answer: D Difficulty: 3 Hard Topic: Lower of Cost and Net Realizable Value Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

158) Using the information below, determine the ending inventory value applying the lower of cost and net realizable value.

Inventory Item Cutlets Chops Shanks

Quantity 200 400 300

Cost $ 12 $ 16 $ 15

Net Realizable Value $ 14 $ 14 $ 12

A) $13,300. B) $12,000. C) $11,600. D) $13,700. Answer: C Explanation: Cutlets = $12 × 200 = $2,400. Chops = $14 × 400 = $5,600. Shanks = $12 × 300 = $3,600. Ending inventory = $2,400 + $5,600 + $3,600 = $11,600. Difficulty: 3 Hard Topic: Lower of Cost and Net Realizable Value Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 159) What effect would an adjustment to record inventory at the lower of cost and net realizable value have on the company's financial statements? A) An increase to assets. B) An increase to stockholders' equity. C) A decrease to revenue. D) An increase to expense. Answer: D Difficulty: 3 Hard Topic: Lower of Cost and Net Realizable Value Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

160) The practice of using the lower of cost and net realizable value to evaluate inventory reflects which of the following accounting principles? A) Matching principle. B) Revenue recognition. C) Conservatism. D) Materiality. Answer: C Difficulty: 1 Easy Topic: Lower of Cost and Net Realizable Value Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 161) After evaluating the lower of cost and net realizable value of inventory, the accountant prepares a year-end adjustment. That adjustment would: A) Decrease the company's cost of goods sold. B) Reduce the company's stockholders' equity. C) Increase the company's inventory. D) Increase the company's total assets. Answer: B Difficulty: 3 Hard Topic: Lower of Cost and Net Realizable Value Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 162) The inventory turnover ratio is measured as: A) Cost of goods sold divided by average inventory. B) Average inventory divided by gross profit. C) Gross profit divided by net sales. D) Net sales divided by average inventory. Answer: A Difficulty: 1 Easy Topic: Analysis-Inventory Turnover Ratio Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

163) The inventory turnover ratio measures: A) The portion of inventory that becomes obsolete each period. B) How many times the company purchases inventory during the current reporting period. C) The times per period the average inventory balance is sold. D) How many days it takes to collect its sales of inventory sold on account. Answer: C Difficulty: 1 Easy Topic: Analysis-Inventory Turnover Ratio Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 164) A company's sales equal $60,000 and cost of goods sold equals $20,000. Its beginning inventory was $1,600 and its ending inventory is $2,400. The company's inventory turnover ratio equals: A) 5 times. B) 10 times. C) 20 times. D) 30 times. Answer: B Explanation: $20,000 / [($1,600 + $2,400) / 2] = 10 times Difficulty: 3 Hard Topic: Analysis-Inventory Turnover Ratio Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation

165) A company's beginning inventory is $2,000 and its ending inventory is $1,000. The inventory turnover is 6 times. Cost of goods sold for the year must equal: A) $9,000. B) $6,000. C) $12,000. D) $18,000. Answer: A Explanation: $X / [($2,000 + $1,000) / 2] = 6 times $X = $9,000 Difficulty: 3 Hard Topic: Analysis-Inventory Turnover Ratio Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 166) Truman Co. sells a large number of common household items, while Stapleton sells a small number of expensive items. The two companies report the same dollar amount for ending inventory and gross profit for the year. Which of the following is most likely true? A) Truman has a higher inventory turnover ratio and higher gross profit ratio. B) Truman has a higher inventory turnover ratio, and Stapleton has a higher gross profit ratio. C) Truman has a higher inventory turnover ratio, and Stapleton has a lower gross profit ratio. D) Stapleton has a higher inventory turnover ratio and higher gross profit ratio. Answer: B Difficulty: 3 Hard Topic: Analysis-Inventory Turnover Ratio; Analysis-Gross Profit Ratio Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Evaluate AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation

167) Consider the following inventory data for two companies:

Beginning inventory Ending inventory Purchases

Nichols Inc. $ 120,000 80,000 240,000

Winters Inc. $ 150,000 100,000 310,000

Which of these companies had the higher inventory turnover ratio? A) Nichols. B) Winters. C) The ratios are the same for both companies. D) Cannot determine with the information given. Answer: B Explanation: Nichols' cost of goods sold = $120,000 + $240,000 − $80,000 = $280,000. Nichols' inventory turnover ratio = $280,000 / [($120,000 + $80,000) / 2] = 2.80. Winters' cost of goods sold = $150,000 + $310,000 − $100,000 = $360,000. Winters' inventory turnover ratio = $360,000 / [($150,000 + $100,000) / 2] = 2.88. Difficulty: 3 Hard Topic: Analysis-Inventory Turnover Ratio Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation

168) The following balances come from the financial statements of a company:

Sales revenue Accounts receivable Beginning inventory Ending inventory Net purchases Sales returns Sales discount

$ 850,000 280,000 50,000 30,000 460,000 50,000 20,000

Given this information, what is the company's inventory turnover ratio and average days in inventory? A) 21.25 times; 17 days. B) 28.33 times; 13 days. C) 16.0 times; 23 days. D) 12.0 times; 30 days. Answer: D Explanation: Cost of goods sold = $50,000 + $460,000 − $30,000 = $480,000. Inventory turnover ratio = $480,000 / [($50,000 + $30,000) / 2] = 12.0. Average days in inventory = 365 / 12.0 = 30 days (rounded) Difficulty: 3 Hard Topic: Analysis-Inventory Turnover Ratio; Analysis-Average Days in Inventory Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 169) Company A is identical to Company B in every regard except that Company A uses FIFO and Company B uses LIFO. In an extended period of rising inventory costs, which of the following is true of Company A compared to Company B? A) Company A's gross profit is lower and inventory turnover is lower. B) Company A's gross profit is higher and inventory turnover is higher. C) Company A's gross profit is higher and inventory turnover is lower. D) Company A's gross profit is lower and inventory turnover is higher. Answer: C Difficulty: 3 Hard Topic: Analysis-Inventory Turnover Ratio; Analysis-Gross Profit Ratio Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Evaluate AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 78 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

170) Anthony Corporation reported the following amounts for the year: Net sales Cost of goods sold Average inventory

$ 296,000 138,000 50,000

Anthony's inventory turnover ratio is: A) 2.42. B) 2.76. C) 3.21. D) 2.14. Answer: B Explanation: Inventory turnover ratio = $138,000 / $50,000 = 2.76. Difficulty: 3 Hard Topic: Analysis-Inventory Turnover Ratio Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation 171) Anthony Corporation reported the following amounts for the year: Net sales Cost of goods sold Average inventory

$ 296,000 138,000 50,000

Anthony's average days in inventory is: (Round to the nearest whole day.) A) 170 days. B) 114 days. C) 132 days. D) 151 days. Answer: C Explanation: Inventory Turnover Ratio = $138,000 / $50,000 = 2.76. Average days in inventory = 365 / 2.76 = 132 (rounded). Difficulty: 3 Hard Topic: Analysis-Inventory Turnover Ratio; Analysis-Average Days in Inventory Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

172) Anthony Corporation reported the following amounts for the year: Net sales Cost of goods sold Average inventory

$ 296,000 138,000 50,000

Anthony's gross profit ratio is: A) 53.4%. B) 51.9%. C) 50.3%. D) 46.6%. Answer: A Explanation: Gross profit ratio = ($296,000 − $138,000) / $296,000 = 53.4% (rounded). Difficulty: 3 Hard Topic: Analysis-Gross Profit Ratio Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation 173) Consider the following inventory data: Beginning inventory Ending inventory Purchases

$ 150,000 100,000 310,000

What is the average days in inventory for the year? A) 126.7 days. B) 101.4 days. C) 152.0 days. D) 111.7 days. Answer: A Explanation: Cost of goods sold = $150,000 + $310,000 – $100,000 = $360,000. Inventory turnover ratio = $360,000 / [($150,000 + $100,000) / 2] = 2.88. Average days in inventory = 365 / 2.88 = 126.7 days (rounded). Difficulty: 3 Hard Topic: Analysis-Inventory Turnover Ratio; Analysis-Average Days in Inventory Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

174) The gross profit ratio measures: A) The ratio of net income to net sales. B) How quickly the company receives inventory from its suppliers. C) The amount by which the sale of inventory exceeds its cost per dollar of sales. D) How many times during the year a company sells its average inventory balance. Answer: C Difficulty: 1 Easy Topic: Analysis-Gross Profit Ratio Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 175) Which of the following would increase the gross profit ratio? A) The company reduces operating expenses. B) The cost of inventory increases. C) The number of units sold increases. D) The sales price of a product increases by a higher percentage than does its cost of goods sold. Answer: D Difficulty: 3 Hard Topic: Analysis-Gross Profit Ratio Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 176) The gross profit ratio will typically be higher for companies that: A) Collect cash more quickly from customers. B) Purchase inventory more frequently during the year. C) Sell products that are more highly specialized. D) Sell a greater number of units. Answer: C Difficulty: 3 Hard Topic: Analysis-Gross Profit Ratio Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation

177) A company reported the following data for its first year of operations: Net sales Cost of goods sold Operating expenses Ending inventories

$ 2,800 1,680 880 820

What is the company's gross profit ratio? A) 80%. B) 49%. C) 40%. D) 5%. Answer: C Explanation: Gross Profit Ratio = ($2,800 − $1,680) / $2,800 = 0.40. Difficulty: 3 Hard Topic: Analysis-Gross Profit Ratio Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation 178) In a periodic inventory system, the purchase of inventory is debited to: A) Purchases. B) Cost of Goods Sold. C) Inventory. D) Accounts Payable. Answer: A Difficulty: 2 Medium Topic: Recording Transactions Using a Periodic Inventory System Learning Objective: 06-08 Record inventory transactions using a periodic inventory system. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

179) Northwest Fur Co. started the year with $94,000 of merchandise inventory on hand. During the year, $400,000 in merchandise was purchased on account with credit terms of 1/15, n/45. All discounts were taken. Northwest paid freight-in charges of $7,500. Merchandise with an invoice amount of $5,000 was returned for credit. Cost of goods sold for the year was $380,000. What is ending inventory? A) $112,490. B) $112,550. C) $116,500. D) $120,300. Answer: B Explanation: Ending Inventory = $94,000 + $400,000 + $7,500 − $5,000 − $3,950* − $380,000 = $112,500. *Purchase discounts = ($400,000 − $5,000) × 1% = $3,950. Difficulty: 3 Hard Topic: Recording Transactions Using a Perpetual Inventory System; Recording Transactions Using a Periodic Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system.; 06-08 Record inventory transactions using a periodic inventory system. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

180) A company reports the following amounts at the end of the year: Sales revenue Beginning inventory Total purchases Freight charges Purchase discounts Purchase returns Ending inventory Operating expenses

$ 900,000 100,000 500,000 10,000 25,000 50,000 120,000 200,000

For what amount would the company report gross profit? A) $285,000. B) $485,000. C) $465,000. D) $400,000. Answer: B Explanation: Cost of Goods Sold = $100,000 + ($500,000 + $10,000 − $25,000 − $50,000) − $120,000 = $415.000. Gross Profit = $900,000 − $415,000 − $485,000. Difficulty: 3 Hard Topic: Recording Transactions Using a Periodic Inventory System Learning Objective: 06-08 Record inventory transactions using a periodic inventory system. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

181) On May 1, Ace Bonding Company purchased inventory costing $2,000 on account with terms 2/10, n/30. On May 18, Ace pays for this inventory and records which of the following using a periodic inventory system? 1. 2.

Accounts Payable Cash Accounts Payable Purchase Discounts Cash Accounts Payable Purchase Discounts Cash Cash Accounts Payable

2,000 2,000 1,960 40 2,000 2,000 40 1,960 2,000 2,000

A) Option 1 B) Option 2 C) Option 3 D) Option 4 Answer: A Explanation: There is no purchase discount because payment is not within the 10-day discount period. Difficulty: 3 Hard Topic: Recording Transactions Using a Periodic Inventory System Learning Objective: 06-08 Record inventory transactions using a periodic inventory system. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation

182) On May 1, Ace Bonding Company purchased inventory costing $2,000 on account with terms 2/10, n/30. On May 8, Ace pays for this inventory and records which of the following using a periodic inventory system? 1. 2.

Accounts Payable Cash Accounts Payable Purchase Discounts Cash Accounts Payable Purchase Discounts Cash Cash Accounts Payable

2,000 2,000 1,960 40 2,000 2,000 40 1,960 2,000 2,000

A) Option 1 B) Option 2 C) Option 3 D) Option 4 Answer: C Explanation: Purchase discount = $2,000 × 2% = $40. Difficulty: 3 Hard Topic: Recording Transactions Using a Periodic Inventory System Learning Objective: 06-08 Record inventory transactions using a periodic inventory system. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation

183) Steelman Company purchased inventory on account. The inventory costs $2,000 and is expected to sell for $3,000. How should Steelman record the purchase using a periodic inventory system? 1. 2.

3. 4.

Purchases Accounts Payable Cost of Goods Sold Deferred Revenue Sales Revenue Cost of Goods Sold Accounts Payable Cost of Goods Sold Gain Accounts Payable

2,000 2,000 2,000 1,000 3,000 2,000 2,000 2,000 1,000 3,000

A) Option 1 B) Option 2 C) Option 3 D) Option 4 Answer: A Difficulty: 3 Hard Topic: Recording Transactions Using a Periodic Inventory System Learning Objective: 06-08 Record inventory transactions using a periodic inventory system. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation

184) Davis Hardware Company uses a periodic inventory system. How should Davis record the sale of inventory costing $620 for $960 on account? 1.

2. 3.

Cost of Goods Sold Purchases Accounts Receivable Sales Revenue Accounts Receivable Sales Revenue Purchases Gain Sales Revenue Accounts Receivable Sales Revenue Gain

620 620 960 960 960 960 620 340 960 960 620 340

A) Option 1 B) Option 2 C) Option 3 D) Option 4 Answer: B Difficulty: 3 Hard Topic: Recording Transactions Using a Periodic Inventory System Learning Objective: 06-08 Record inventory transactions using a periodic inventory system. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation

185) Danton Company uses a periodic inventory system. How should Danton record the return of inventory previously purchased on account for $200? 1. 2. 3. 4.

Inventory Accounts Payable Accounts Payable Inventory Purchase Returns Accounts Payable Accounts Payable Purchase Returns

200 200 200 200 200 200 200 200

A) Option 1 B) Option 2 C) Option 3 D) Option 4 Answer: D Difficulty: 3 Hard Topic: Recording Transactions Using a Periodic Inventory System Learning Objective: 06-08 Record inventory transactions using a periodic inventory system. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation 186) In a periodic inventory system, the entry at the time of a sale to record the cost of inventory sold includes a: A) Debit to Accounts Receivable. B) Credit to Cost of Goods Sold. C) Debit to Cost of Goods Sold. D) Not recorded at this time of the sale. Answer: D Difficulty: 2 Medium Topic: Recording Transactions Using a Periodic Inventory System Learning Objective: 06-08 Record inventory transactions using a periodic inventory system. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

187) A company sold inventory for $1,200 that was purchased for $700. The company records which of the following when it sells inventory using a periodic inventory system? A) No entry is required for cost of goods sold and inventory. B) Debit Cost of Goods Sold $700; credit Inventory $700. C) Debit Cost of Goods Sold $1,200; credit Inventory $1,200. D) Debit Inventory $700; credit Cost of Goods Sold $700. Answer: A Difficulty: 3 Hard Topic: Recording Transactions Using a Periodic Inventory System Learning Objective: 06-08 Record inventory transactions using a periodic inventory system. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation 188) Suppose a company overstates its ending inventory for 2021. What effect will this have on the reported amount of cost of goods sold for 2021? A) Overstate cost of goods sold. B) Understate cost of goods sold. C) Have no effect on cost of goods sold. D) Cannot be determined given the information provided. Answer: B Difficulty: 3 Hard Topic: Inventory Errors Learning Objective: 06-09 Determine the financial statement effects of inventory errors. Bloom's: Evaluate AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 189) A company's correct ending balance for the inventory account at the end of 2021 should be $5,000, but the company incorrectly stated it as $3,000. In 2022, the company correctly recorded its ending balance of the inventory account. Which one of the following is true? A) Gross profit is overstated by $2,000 in 2021. B) Retained earnings are understated by $2,000 in 2022. C) Gross profit is overstated by $2,000 in 2022. D) Cost of goods sold is understated by $2,000 in 2021. Answer: C Difficulty: 3 Hard Topic: Inventory Errors Learning Objective: 06-09 Determine the financial statement effects of inventory errors. Bloom's: Evaluate AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

190) If a company overstates its ending balance of inventory in year 1 and it records inventory correctly in year 2, which one of the following is true? A) Net income is overstated in year 2. B) Cost of goods sold is overstated in year 1. C) Net income is understated in year 1. D) Retained earnings is overstated in year 1. Answer: D Difficulty: 3 Hard Topic: Inventory Errors Learning Objective: 06-09 Determine the financial statement effects of inventory errors. Bloom's: Evaluate AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 191) If a company understates its ending balance of inventory in year 1 and it records inventory correctly in year 2, which one of the following is true? A) Net income is overstated in year 1. B) Cost of goods sold is understated in year 2. C) Net income is understated in year 2. D) Retained earnings is understated in year 2. Answer: B Difficulty: 3 Hard Topic: Inventory Errors Learning Objective: 06-09 Determine the financial statement effects of inventory errors. Bloom's: Evaluate AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 192) If a company understates its count of ending inventory in Year 1, which of the following is true? A) Costs of goods sold is understated at the end of Year 1. B) Profit is correct in Year 2. C) The balance of retained earnings is overstated at the end of Year 1. D) The balance of retained earnings is correct at the end of Year 2. Answer: D Difficulty: 3 Hard Topic: Inventory Errors Learning Objective: 06-09 Determine the financial statement effects of inventory errors. Bloom's: Evaluate AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

Match each term with its description. A) Raw materials B) Work-in-process inventory C) Merchandise inventory D) Finished goods E) Service companies F) Manufacturing companies G) Merchandising companies 193) Products that have started the production process but are not yet complete at the end of the period. Difficulty: 2 Medium Topic: Types of Inventory Learning Objective: 06-01 Understand that inventory flows from manufacturing companies to merchandising companies and is reported as an asset on the balance sheet. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 194) Companies that purchase inventories that are primarily in finished form for resale to customers. Difficulty: 2 Medium Topic: Types of Inventory Learning Objective: 06-01 Understand that inventory flows from manufacturing companies to merchandising companies and is reported as an asset on the balance sheet. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 195) Inventory items for which the manufacturing process is complete. Difficulty: 2 Medium Topic: Types of Inventory Learning Objective: 06-01 Understand that inventory flows from manufacturing companies to merchandising companies and is reported as an asset on the balance sheet. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

196) Cost of components that will become part of the finished product but have not yet been used in production. Difficulty: 2 Medium Topic: Types of Inventory Learning Objective: 06-01 Understand that inventory flows from manufacturing companies to merchandising companies and is reported as an asset on the balance sheet. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 197) Companies that produce the inventories they sell, rather than buying them from suppliers in finished form. Difficulty: 2 Medium Topic: Types of Inventory Learning Objective: 06-01 Understand that inventory flows from manufacturing companies to merchandising companies and is reported as an asset on the balance sheet. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 198) Companies that generate revenues by providing services to their customers rather than selling inventory. Difficulty: 2 Medium Topic: Types of Inventory Learning Objective: 06-01 Understand that inventory flows from manufacturing companies to merchandising companies and is reported as an asset on the balance sheet. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 199) Inventory that has been purchased in its finished form but has not yet been sold to customers. Difficulty: 2 Medium Topic: Types of Inventory Learning Objective: 06-01 Understand that inventory flows from manufacturing companies to merchandising companies and is reported as an asset on the balance sheet. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 193) B 194) G 195) D 196) A 197) F 198) E 199) C

Match each term used in a multiple-step income statement with its description. A) Nonoperating expenses B) Operating expenses C) Net income D) Sales revenue E) Gross profit F) Operating income G) Income before income taxes H) Cost of goods sold 200) Amount recorded from the sale of products and services to customers. Difficulty: 2 Medium Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 201) Amount of profit after including nonoperating revenues and expenses. Difficulty: 2 Medium Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 202) Expenses arising from activities that are not part of a company's primary operations. Difficulty: 2 Medium Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 203) Cost of inventory sold during the period. Difficulty: 2 Medium Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 94 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

204) Profit from normal operations that is a key performance measure for predicting future profit. Difficulty: 2 Medium Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 205) All revenues minus all expenses. Difficulty: 2 Medium Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 206) Expenses arising from activities that are part of a company's normal operations. Difficulty: 2 Medium Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 207) Profit most directly related to the sale of inventory. Difficulty: 2 Medium Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 200) D 201) G 202) A 203) H 204) F 205) C 206) B 207) E

Match each inventory method with its definition. A) Weighted-average B) LIFO C) Specific identification D) FIFO 208) Assume inventory sold for the year includes the items that were purchased first. Difficulty: 2 Medium Topic: Inventory Cost Methods - Specific Identification; Inventory Cost Methods - FIFO; Inventory Cost Methods - LIFO; Inventory Cost Methods - Weighted-Average Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 209) Ending inventory represents the actual units not sold during the year. Difficulty: 2 Medium Topic: Inventory Cost Methods - Specific Identification; Inventory Cost Methods - FIFO; Inventory Cost Methods - LIFO; Inventory Cost Methods - Weighted-Average Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 210) Assume ending inventory for the year includes the items that were purchased first. Difficulty: 2 Medium Topic: Inventory Cost Methods - Specific Identification; Inventory Cost Methods - FIFO; Inventory Cost Methods - LIFO; Inventory Cost Methods - Weighted-Average Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 211) Assume ending inventory for the year includes a random mixture of all goods available for sale. Difficulty: 2 Medium Topic: Inventory Cost Methods - Specific Identification; Inventory Cost Methods - FIFO; Inventory Cost Methods - LIFO; Inventory Cost Methods - Weighted-Average Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 96 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Answers: 208) D 209) C 210) B 211) A Match each term related to inventory methods with its description. A) LIFO reserve B) LIFO conformity rule C) LIFO D) Consistency E) FIFO 212) Results in higher ending inventory during periods of rising prices. Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 213) LIFO must be used for financial reporting if elected for tax reporting. Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 214) Additional amount of inventory a company would report if it used FIFO instead of LIFO. Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 215) Once a company chooses an inventory method, it is not allowed to frequently change to another one. Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 97 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

216) Best matches cost of inventory sold with its related revenue. Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 212) E 213) B 214) A 215) D 216) C

Match each term related to recording inventory transactions with its description. A) Sales revenue B) Inventory C) FOB destination D) FOB shipping point E) Perpetual inventory system F) Freight-out G) Periodic inventory system H) Cost of goods sold I) Freight-in 217) Account to credit when inventory is sold. The amount to credit equals the selling price to customer. Difficulty: 2 Medium Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 218) Recording inventory transactions as they occur. Difficulty: 2 Medium Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 219) Record inventory purchases at the time inventory departs from the supplier. Difficulty: 2 Medium Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 220) Account to debit when inventory is sold. Difficulty: 2 Medium Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

221) Record inventory purchases at the time inventory arrives at the company. Difficulty: 2 Medium Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 222) The cost of shipping inventory from suppliers. Difficulty: 2 Medium Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 223) Calculate the balance of inventory once per period. Difficulty: 2 Medium Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 224) Account to credit when inventory is sold. The amount to credit equals the original cost of inventory. Difficulty: 2 Medium Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 225) The cost of shipping inventory to customers. Difficulty: 2 Medium Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 217) A 218) E 219) D 220) H 221) C 222) I 223) G 224) B 225) F

Match each term related to inventory analysis with its description. A) Increases B) Inventory turnover ratio C) Higher D) Average days in inventory E) Decreases F) Gross profit ratio G) Lower 226) The number of times a firm sells its average inventory balance during a reporting period. Difficulty: 3 Hard Topic: Analysis - Inventory Turnover Ratio; Analysis - Average Days in Inventory; Analysis Gross Profit Ratio Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking 227) If a company's cost of inventory decreases and its selling price remains the same, the gross profit ratio ________. Difficulty: 3 Hard Topic: Analysis - Inventory Turnover Ratio; Analysis - Average Days in Inventory; Analysis Gross Profit Ratio Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking 228) The approximate length of time the average inventory is held. Difficulty: 3 Hard Topic: Analysis - Inventory Turnover Ratio; Analysis - Average Days in Inventory; Analysis Gross Profit Ratio Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking

229) When a company purchases inventory at the end of the year and does not sell it, the inventory turnover ratio ________. Difficulty: 3 Hard Topic: Analysis - Inventory Turnover Ratio; Analysis - Average Days in Inventory; Analysis Gross Profit Ratio Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking 230) Typically, the more specialized the inventory item, the ________ gross profit ratio. Difficulty: 3 Hard Topic: Analysis - Inventory Turnover Ratio; Analysis - Average Days in Inventory; Analysis Gross Profit Ratio Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking 231) A measure of the amount by which the sale of inventory exceeds its cost per dollar of sales. Difficulty: 3 Hard Topic: Analysis - Inventory Turnover Ratio; Analysis - Average Days in Inventory; Analysis Gross Profit Ratio Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking 232) The less frequently a company sells its inventory, the ________ its inventory turnover ratio. Difficulty: 3 Hard Topic: Analysis - Inventory Turnover Ratio; Analysis - Average Days in Inventory; Analysis Gross Profit Ratio Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking Answers: 226) B 227) A 228) D 229) E 230) C 231) F 232) G

233) At the beginning of 2021, Calston Incorporated reports inventory of $9,000. During 2021, the company purchases additional inventory for $25,000. At the end of 2021, the cost of inventory remaining is $8,000. Calculate cost of goods sold for 2021. Answer: Beginning inventory + Purchases Cost of goods available for sale - Ending inventory Cost of goods sold

$9,000 25,000 34,000 8,000 $26,000

Difficulty: 3 Hard Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 234) For each company, calculate the missing amount.

Company Lennon Harrison McCartney Starr

Cost of Operating Sales Goods Sold Gross Profit Expenses Net Income $8,000 (a) $4,000 $3,000 $1,000 9,000 3,000 (b) 2,000 4,000 8,000 3,000 5,000 (c) 2,000 7,000 2,000 5,000 3,000 (d)

Answer: Company Lennon Harrison McCartney Starr

Cost of Sales Goods Sold $8,000 4,000 9,000 3,000 8,000 3,000 7,000 2,000

Gross Operating Profita Expenses Net Incomeb $4,000 $3,000 $1,000 6,000 2,000 4,000 5,000 3,000 2,000 5,000 3,000 2,000

a Gross profit = Sales revenue - Cost of goods sold b Net income = Gross profit - Operating expenses Difficulty: 3 Hard Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 103 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

235) Below are some of the items found in a multiple-step income statement: a. Sales revenue b. Net income c. Operating income d. Income before income taxes e. Gross profit Place these items in the order they would appear from first to last. Answer: a, e, c, d, b Difficulty: 2 Medium Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Understand AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

236) Beasley Inc., reports the following amounts in its December 31, 2021, income statement. Sales revenue Interest expense Salaries expense Utilities expense

$300,000 12,000 35,000 41,000

Income tax expense Cost of goods sold Advertising expense

$38,000 125,000 24,000

Prepare a multiple-step income statement. Answer: Beasley Inc., Multiple-Step Income Statement For the year ended December 31, 2021 Sales revenue Cost of goods sold Gross profit Salaries Expense Utilities Expense Advertising Expense Total operating expenses Operating income Interest expense Income before income taxes Income tax expense Net income

$300,000 125,000 $175,000 35,000 41,000 24,000 100,000 75,000 12,000 63,000 38,000 $25,000

237) During 2021, a company sells 20 units of inventory. The company has the following inventory purchase transactions for 2021:

Date Jan. 1 Sep. 8

Transaction Beginning inventory Purchase

Number of Units Unit Cost Total Cost 15 $60 $900 10 62 620 25 $1,520

Calculate ending inventory and cost of goods sold for 2021 assuming the company uses FIFO. Answer: Ending inventory = $310; Cost of goods sold = $1,210 Ending inventory: Date Sep. 8

Transaction Purchase

Number of Units

Ending Unit Cost Inventory 5 $62 $310

Cost of goods sold: Date Jan. 1 Sep. 8

Transaction Beginning inventory Purchase

Number of Cost of Goods Units Unit Cost Sold 15 $60 $900 5 62 310 20 $1,210

Difficulty: 3 Hard Topic: Inventory Cost Methods - FIFO Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

238) During 2021, a company sells 20 units of inventory. The company has the following inventory purchase transactions for 2021:

Date Jan. 1 Sep. 8

Transaction Beginning inventory Purchase

Number of Units Unit Cost Total Cost 15 $60 $900 10 62 620 25 $1,520

Calculate ending inventory and cost of goods sold for 2021 assuming the company uses LIFO. Answer: Ending inventory = $300; Cost of goods sold = $1,220 Ending inventory: Date Sep. 8

Transaction Purchase

Number of Units

Ending Unit Cost Inventory 5 $60 $300

Cost of goods sold: Date Jan. 1 Sep. 8

Transaction Beginning inventory Purchase

Number of Cost of Goods Units Unit Cost Sold 10 $60 $600 10 62 620 20 $1,220

Difficulty: 3 Hard Topic: Inventory Cost Methods - LIFO Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

239) During 2021, a company sells 20 units of inventory. The company has the following inventory purchase transactions for 2021:

Date Jan. 1 Sep. 8

Transaction Beginning inventory Purchase

Number of Units Unit Cost Total Cost 15 $60 $900 10 62 620 25 $1,520

Calculate ending inventory and cost of goods sold for 2021 assuming the company uses the weighted-average cost method. Answer: Ending inventory = $304; Cost of goods sold = $1,216 Weighted-average cost = $1,520/25 units = $60.80/unit. Ending inventory = 5 × $60.80 = $304. Cost of goods sold = 20 × $60.80 = $1,216. Difficulty: 3 Hard Topic: Inventory Cost Methods - Weighted-Average Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

240) During 2021, a company sells 300 units of inventory for $85 each. The company has the following inventory purchase transactions for 2021:

Date Jan. 1 May 5 Nov. 3

Transaction Beginning inventory Purchase Purchase

Number of Units Unit Cost Total Cost 60 $71 $4,260 170 72 12,240 180 74 13,320 410 $29,820

Calculate ending inventory and cost of goods sold for 2021 assuming the company uses FIFO. Answer: Ending inventory = $8,140; Cost of goods sold = $21,680 Ending inventory: Date Nov. 3

Transaction Purchase

Number of Ending Units Unit Cost Inventory 110 $74 $8,140

Cost of goods sold: Date Jan. 1 May 5 Nov. 3

Transaction Beginning inventory Purchase Purchase

Number of Cost of Goods Units Unit Cost Sold 60 $71 $4,260 170 72 12,240 70 74 5,180 300 $21,680

241) During 2021, a company sells 400 units of inventory for $85 each. The company has the following inventory purchase transactions for 2021:

Date Jan. 1 May 5 Nov. 3

Transaction Beginning inventory Purchase Purchase

Number of Units Unit Cost Total Cost 60 $70 $4,200 180 72 12,960 190 75 14,250 430 $31,410

Calculate ending inventory and cost of goods sold for 2021 assuming the company uses LIFO. Answer: Ending inventory = $2,100; Cost of goods sold = $29,310 Ending inventory: Date Nov. 3

Transaction Purchase

Number of Ending Units Unit Cost Inventory 30 $70 $2,100

Cost of goods sold: Date Jan. 1 May 5 Nov. 3

Transaction Beginning inventory Purchase Purchase

Number of Cost of Goods Units Unit Cost Sold 30 $70 $2,100 180 72 12,960 190 75 14,250 400 $29,310

242) During 2021, a company sells 500 units of inventory for $90 each. The company has the following inventory purchase transactions for 2021:

Date Jan. 1 May 5 Nov. 3

Transaction Beginning inventory Purchase Purchase

Number of Units Unit Cost Total Cost 80 $79 $6,320 270 80 21,600 190 82 15,580 540 $43,500

Calculate cost of goods sold and ending inventory for 2021 assuming the company uses the weighted-average cost method (round weighted-average unit cost to four decimals, if necessary). Answer: Ending inventory = $3,222 (rounded); Cost of goods sold = $40,278 (rounded). Weighted-average unit cost = $43,500/540 units = $80.5556/unit Ending inventory = 40 × $80.5556 = $3,222 (rounded) Cost of goods sold = 500 × $80.5556 = $40,278 (rounded) Difficulty: 3 Hard Topic: Inventory Cost Methods - Weighted-Average Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

243) During 2021, a company sells 200 units of inventory for $50 each. The company has the following inventory purchase transactions for 2021:

Date Jan. 1 May 5 Nov. 3

Transaction Beginning inventory Purchase Purchase

Number of Units Unit Cost Total Cost 50 $39 $1,950 100 38 3,800 80 37 2,960 230 $8,710

Actual sales by the company include its entire beginning inventory, 80 units of inventory from the May 5 purchase, and 70 units from the November 3 purchase. Calculate cost of goods sold and ending inventory for 2021 assuming the company uses specific identification. Answer: Ending inventory = $1,130; Cost of goods sold = $7,580 Ending inventory: Date May 5 Nov. 3

Transaction Purchase Purchase

Number of Ending Units Unit Cost Inventory 20 $38 $760 10 $37 370 30 $1,130

Cost of goods sold: Date Jan. 1 May 5 Nov. 3

Transaction Beginning inventory Purchase Purchase

Number of Cost of Goods Units Unit Cost Sold 50 $39 $1,950 80 38 3,040 70 37 2,590 200 $7,580

Difficulty: 3 Hard Topic: Inventory Cost Methods - Specific Identification Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

244) For each item below, indicate whether FIFO or LIFO will generally result in a higher reported amount when inventory costs are rising versus falling.

Inventory Costs Rising Falling

Higher Total Assets

Higher Cost of Goods Sold

Higher Net Income

Higher Total Assets FIFO LIFO

Higher Cost of Goods Sold LIFO FIFO

Higher Net Income FIFO LIFO

Answer: Inventory Costs Rising Falling

Difficulty: 3 Hard Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 245) When inventory costs are rising, __________ generally results in a higher amount of reported net income. Answer: FIFO Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 246) When inventory costs are declining, __________ generally results in a lower amount of reported cost of goods sold. Answer: LIFO Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 113 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

247) When inventory costs are declining, __________ generally results in a lower amount of reported inventory. Answer: FIFO Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 248) When inventory costs are rising, __________ generally results in a lower amount of reported cost of goods sold. Answer: FIFO Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 249) When inventory costs are declining, __________ generally results in a higher amount of reported net income. Answer: LIFO Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 250) __________ is commonly referred to as the balance-sheet approach. Answer: FIFO Difficulty: 1 Easy Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 114 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

251) __________ is commonly referred to as the income-statement approach. Answer: LIFO Difficulty: 1 Easy Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 252) When inventory costs are rising, __________ generally results in a lower income tax obligation. Answer: LIFO Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 253) A company uses a perpetual system to record inventory transactions. The company purchases inventory on account on February 9, 2021, for $50,000 and then sells this inventory on account on March 7, 2021, for $70,000. Record the transactions for the purchase and sale of the inventory. Answer: February 9, 2021 Inventory Accounts Payable March 7, 2021 Accounts Receivable Sales Revenue Cost of Goods Sold Inventory

50,000 50,000

70,000 70,000 50,000 50,000

Difficulty: 3 Hard Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation 115 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

254) A company has the following transactions during March: March 3 Purchases inventory on account for $3,500, terms 2/10, n/30. March 5 Pays freight costs of $200 on inventory purchased on March 3. March 6 Returns inventory with a cost of $500. March 12 Pays the full amount due on March 3 purchase. March 29 Sells all inventory purchased on March 3 (less those returned on March 6) for $5,000 on account. Record all transactions, assuming the company uses a perpetual inventory system. Answer: March 3 Inventory Accounts Payable

3,500 3,500

March 5 Inventory Cash

200

March 6 Accounts Payable Inventory

500

March 12 Accounts Payable Inventory Cash March 29 Accounts Receivable Sales Revenue Cost of Goods Sold Inventory

200

500

3,000 60 2,940

5,000 5,000 3,140 3,140

Purchase discount = ($3,500 - $500) × 2% = $60. Cost of goods sold = $3,500 (purchase) + $200 (freight-in) - $500 (return) - $60 (discount) = $3,140. Difficulty: 3 Hard Topic: Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

255) A company reports inventory using the lower of cost and net realizable value (NRV). Below is information related to its year-end inventory: Inventory Ski Jackets Skis

Quantity 10 25

Cost per Unit NRV per Unit $130 $110 250 300

Calculate the amount to be reported for ending inventory. Answer: Inventory Ski Jackets Skis

Quantity 10 25

Lower of Cost and NRV $110 250

Ending Inventory $1,100 6,250 $7,350

Difficulty: 3 Hard Topic: Lower of Cost and Net Realizable Value Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 256) A company reports inventory using the lower of cost and net realizable value. Below is information related to its year-end inventory: Inventory Item A Item B

Quantity 100 50

Cost

NRV $25 30

$30 20

Calculate ending inventory under the lower of cost and net realizable value and record any necessary adjustment to inventory. Answer: Ending inventory = $3,500. Cost of Goods Sold Inventory

500 500

Ending inventory = (100 × $25) + (50 × $20) = $3,500. Write-down = $4,000 (total cost) - $3,500 (LCM) = $500. Difficulty: 3 Hard Topic: Lower of Cost and Net Realizable Value Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 117 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

257) A company reports inventory using the lower of cost and net realizable value. Below is information related to its year-end inventory: Inventory Unit A Unit B Unit C Unit D

Quantity 10 18 12 15

Cost

NRV $30 43 23 18

$32 40 27 17

Calculate ending inventory under the lower of cost and net realizable value and record any necessary adjustment to inventory. Answer: Ending inventory = $1,551 Cost of Goods Sold Inventory

69 69

Ending inventory = (10 × $30) + (18 × $40) + (12 × $23) + (15 × $17) = $1,551. Write-down = $1,620 (total cost) - $1,551 (LCM) = $69. Difficulty: 3 Hard Topic: Lower of Cost and Net Realizable Value Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

258) A company reports the following amounts for 2021: Inventory (beginning) Inventory (ending) Purchases Purchase returns

$20,000 30,000 160,000 10,000

Calculate cost of goods sold, the inventory turnover ratio, and the average days in inventory for 2021. Answer: Cost of goods sold = $140,000; Inventory turnover ratio = 5.6 times; Average days in inventory = 65.2 days Cost of goods sold = $20,000 + $160,000 - $10,000 - $30,000 = $140,000. Inventory turnover ratio = $140,000/[( $20,000 + $30,000)/2] = 5.6 times. Average days in inventory = 365/5.6 = 65.2 days. Difficulty: 3 Hard Topic: Analysis - Inventory Turnover Ratio; Analysis - Average Days in Inventory Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 259) A company reports the following amounts at the end of the year: Sales revenue Cost of goods sold Net income

$300,000 225,000 50,000

Compute the company's gross profit ratio. Answer: 25% Gross profit ratio = ($300,000 - $225,000)/$300,000 = 0.25. Difficulty: 3 Hard Topic: Analysis - Gross Profit Ratio Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

260) A company begins the year with inventory of $50,000 and ends the year with inventory of $55,000. During the year, the following amounts are recorded: Purchases Purchase returns Purchase discounts Freight-in

$210,000 25,000 15,000 40,000

Calculate cost of goods sold for the year. Answer: Beginning inventory Add: Purchases Freight-in Less: Purchase returns Purchase discounts Cost of goods available for sale Less: Ending inventory Cost of goods sold

$50,000 210,000 40,000 (25,000) (15,000) 260,000 (55,000) $205,000

50,000

March 7, 2021 Accounts Receivable Sales Revenue

70,000

50,000

70,000

262) A company has the following transactions during March: March 3 March 5 March 6 March 12 March 29

Purchases inventory on account for $3,500, terms 2/10, n/30. Pays freight costs of $200 on inventory purchased on March 3. Returns inventory with a cost of $500. Pays the full amount due on March 3 purchase. Sells all inventory purchased on March 3 (less those returned on March 6) for $5,000 on account.

Record all transactions, including the month-end adjustment to cost of goods sold, assuming the company uses a periodic inventory system and has no beginning inventory. Answer: March 3 Purchases Accounts Payable

3,500 3,500

March 5 Freight-In Cash

200

March 6 Accounts Payable Purchase Returns

500

March 12 Accounts Payable Purchase Discounts Cash March 29 Accounts Receivable Sales Revenue March 31 Cost of Goods Sold Purchase Returns Purchase Discounts Inventory (ending) Inventory (beginning) Purchases Freight-In

200

500

3,000 60 2,940

5,000 5,000

3,140 500 60 0 0 3,500 200

Purchase discount = ($3,500 - $500) × 2% = $60. Cost of goods sold = $3,500 (purchase) + $200 (freight-in) - $500 (return) - $60 (discount) = $3,140. 121 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 3 Hard Topic: Recording Transactions Using a Periodic Inventory System Learning Objective: 06-08 Record inventory transactions using a periodic inventory system. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 263) A company understated its ending inventory balance by $8,000 in 2021. What impact will this error have on cost of goods sold and gross profit in 2021 and 2022? Answer: 2021: Cost of goods sold is overstated by $8,000. Gross profit is understated by $8,000. 2022: Cost of goods sold is understated by $8,000. Gross profit is overstated by $8,000. Difficulty: 3 Hard Topic: Inventory Errors Learning Objective: 06-09 Determine the financial statement effects of inventory errors. Bloom's: Evaluate AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 264) A company overstated its ending inventory balance by $6,000 in 2021. What impact will this error have on cost of goods sold and gross profit in 2021 and 2022? Answer: 2021: Cost of goods sold is understated by $6,000. Gross profit is overstated by $6,000. 2022: Cost of goods sold is overstated by $6,000. Gross profit is understated by $6,000. Difficulty: 3 Hard Topic: Inventory Errors Learning Objective: 06-09 Determine the financial statement effects of inventory errors. Bloom's: Evaluate AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

265) A company understated its ending inventory balance by $5,000 in 2021. What impact will this error have on total assets and retained earnings in 2021 and 2022 (ignoring tax effects)? Answer: 2021: Total assets are understated by $5,000. Retained earnings is understated by $5,000. 2022: Total assets are stated correctly. Retained earnings is stated correctly. Difficulty: 3 Hard Topic: Inventory Errors Learning Objective: 06-09 Determine the financial statement effects of inventory errors. Bloom's: Evaluate AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 266) A company overstated its ending inventory balance by $9,000 in 2021. What impact will this error have on total assets and retained earnings in 2021 and 2022 (ignoring tax effects)? Answer: 2021: Total assets are overstated by $9,000. Retained earnings is overstated by $9,000. 2022: Total assets are stated correctly. Retained earnings is stated correctly. Difficulty: 3 Hard Topic: Inventory Errors Learning Objective: 06-09 Determine the financial statement effects of inventory errors. Bloom's: Evaluate AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

267) Giles Manufacturing has the following transactions for the month of June 2021: Date June 1 June 7 June 12 June 15 June 24 June 27 June 29

Transactions Beginning inventory Sale Purchase Sale Purchase Sale Purchase

Units 17 12 13 11 14 15 8

Cost per Unit $240

Total Cost $4,080

230

2,990

220

3,080

210

1,680 $11,830

Required: 1. Calculate ending inventory and cost of goods sold at June 30, 2021, using the specific identification method. The June 7 sale consists of beginning inventory, the June 15 sale consists of three units from beginning inventory and eight from the June 12 purchase, and the June 27 sale consists of one unit from beginning inventory and fourteen units from the June 24 purchase. 2. Using FIFO, calculate ending inventory and cost of goods sold at June 30, 2021. 3. Using LIFO, calculate ending inventory and cost of goods sold at June 30, 2021. 4. Using weighted-average cost, calculate ending inventory and cost of goods sold at June 30, 2021. Answer: Requirement 1

Date Jun. 1 Jun. 12 Jun. 24 Jun. 29

Transaction Beginning inventory Purchase Purchase Purchase

Number of Units 1 5 0 8 14

Unit Cost $240 230 220 210

Ending Inventory $240 1,150 0 1,680 $3,070

Date Jun. 1 Jun. 1 Jun. 12 Jun. 1 Jun. 24

Transaction Beginning inventory Beginning inventory Purchase Beginning inventory Purchase

Number of Units 12a 3b 8b 1c 14c 38

Unit Cost $240 240 230 240 220

Cost of Goods Sold $2,880 720 1,840 240 3,080 $8,760

a From the June 7 sale; b From the June 15 sale; c From the June 27 sale. 124 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Requirement 2

Date Jun. 24 Jun. 29

Date Jun. 1 Jun. 12 Jun. 24

Transaction Purchase Purchase

Number of Units 6 8 14

Ending Inventory $1,320 1,680 $3,000

Unit Cost $220 210

Transaction Beginning inventory Purchase Purchase

Number of Units 17 13 8 38a

Cost of Goods Unit Cost Sold $240 $4,080 230 2,990 220 1,760 $8,830

a First 38 units purchased are assumed sold Requirement 3

Date Jun. 1

Date Jun. 1 Jun. 12 Jun. 24 Jun. 29

Transaction Beginning inventory

Transaction Beginning inventory Purchase Purchase Purchase

Number of Units 14

Number of Units 3 13 14 8 38*

Unit Cost $240

Unit Cost $240 230 220 210

Ending Inventory $3,360

Cost of Goods Sold $720 2,990 3,080 1,680 $8,470

* Last 38 units purchased are assumed sold

Requirement 4

Date Jun. 1 Jun. 12 Jun. 24 Jun. 29

Transaction Beginning inventory Purchase Purchase Purchase

Number of Units 17 13 14 8 52

Unit Cost $240 230 220 210

Total Cost $4,080 2,990 3,080 1,680 $11,830

Weighted-average per cost = $11,830/52 units = $227.50. Ending inventory = 14 units × $227.50 = $3,185. Cost of goods sold = 38 units × $227.50 = 8,645. Difficulty: 3 Hard Topic: Inventory Cost Methods - Specific Identification; Inventory Cost Methods - FIFO; Inventory Cost Methods - LIFO; Inventory Cost Methods - Weighted-Average Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

268) Nadal Athletic has the following transactions related to its inventory for the month of August 2021: Date Aug. 1 Aug. 4 Aug. 11 Aug. 13 Aug. 20 Aug. 26 Aug. 29

Transactions Beginning inventory Sale ($150 each) Purchase Sale ($160 each) Purchase Sale ($170 each) Purchase

Units 7 5 9 7 12 10 12

Cost per Unit $130

Total Cost $910

120

1,080

110

1,320

100

1,200 $4,510

Required: 1. Calculate ending inventory and cost of goods sold at August 31, 2021, using the specific identification method. The August 4 sale consists of units from beginning inventory, the August 13 sale consists of units from the August 11 purchase, and the August 26 sale consists of two units from beginning inventory and eights units from the August 20 purchase. 2. Using FIFO, calculate ending inventory and cost of goods sold at August 31, 2021. 3. Using LIFO, calculate ending inventory and cost of goods sold at August 31, 2021. 4. Using weighted-average cost, calculate ending inventory and cost of goods sold at August 31, 2021. 5. Calculate sales revenue and gross profit under each of the four methods. 6. Comparing FIFO and LIFO, which one provides the more meaningful measure of ending inventory? Explain. 7. If Nadal chooses to report inventory using LIFO, record the LIFO adjustment. Answer: Requirement 1 Date Aug. 11 Aug. 20 Aug. 29

Transaction Purchase Purchase Purchase

Number of Units 2 4 12 18

Unit Cost $120 110 100

Ending Inventory $240 440 1,200 $1,880

Date Aug. 1 Aug. 11 Aug. 1 Aug. 20

Transaction Beginning inventory Purchase Beginning Inventory Purchase

Number of Units 5a 7b 2c 8c 22

Unit Cost $130 120 130 110

Cost of Goods Sold $650 840 260 __880 $2,630

a From the August 4 sale; b From the August 13 sale; c From the August 26 sale. 127 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Requirement 2 Date Aug. 20 Aug. 29

Transaction Purchase Purchase

Number of Units 6 12 18

Date Aug. 1 Aug. 11 Aug. 20

Transaction Beginning inventory Purchase Purchase

Number of Units 7 9 6 22*

Ending Inventory

Unit Cost 110 100

660 1,200 $1,860

Unit Cost $130 120 110

Cost of Goods Sold $910 1,080 __660 $2,650

Unit Cost $130 120 110

Ending Inventory $910 1,080 __220 $2,210

* First 22 units purchased are assumed sold Requirement 3 Date Aug. 1 Aug. 11 Aug. 20

Transaction Beginning inventory Purchase Purchase

Number of Units 7 9 2 18

Date Aug. 20 Aug. 29

Transaction Purchase Purchase

Number of Units 10 12 22*

Unit Cost

Cost of Goods Sold 110 1,100 100 1,200 $2,300

* Last 22 units purchased are assumed sold Requirement 4 Date Aug. 1 Aug. 11 Aug. 20 Aug. 29

Transactions Beginning inventory Purchase Purchase Purchase

Number of Units 7 9 12 12 40

Unit Cost $130 120 110 100

Total Cost $910 1,080 1,320 1,200 $4,510

Weighted-average unit cost = $4,510/40 units = $112.75. Ending inventory = 18 units × $112.75 = $2,029.50. Cost of goods sold = 22 units × $112.75 = $2,480.50. 128 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Requirement 5

Sales revenue Cost of Goods Sold Gross Profit

Specific Identification $3,570 2,630 $940

FIFO $3,570 2,650 $920

LIFO Average Cost $3,570 $3,570 2,300 2,480.50 $1,270 $1,089.50

Requirement 6 FIFO provides the more meaningful measure of ending inventory. The amount of ending inventory reported using FIFO ($1,860) compared to LIFO ($2,210) better approximates the current cost of inventory at the end of the period ($100 per unit × 18 units = $1,800). Requirement 7 The LIFO reserve equals the difference in inventory reported using FIFO ($1,860) versus using LIFO ($2,210). The LIFO reserve equals —$350. Inventory Cost of Goods Sold

350 350

Difficulty: 3 Hard Topic: Inventory Cost Methods - Specific Identification; Inventory Cost Methods - FIFO; Inventory Cost Methods - LIFO; Inventory Cost Methods - Weighted-Average; Effects of Inventory Cost Methods; Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods.; 06-04 Explain the financial statement effects and tax effects of inventory cost methods.; 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

269) At the beginning of June, Chow Company has a balance in inventory of $2,100. The following transactions occur during the month of June. June 2 June 4 June 8 June 10 June 11 June 18 June 20 June 23 June 26 June 28

Purchase radios on account from Air One for $2,400, terms 3/15, n/45. Pay freight charges related to the June 2 purchase from Air One, $400. Return defective radios to Air One and receive credit, $600. Pay Air One in full. Sell radios to customers on account, $5,000, that had a cost of $3,300. Receive payment on account from customers, $3,100. Purchase radios on account from Motion Unlimited for $3,300, terms 3/10, n/30. Sell radios to customers for cash, $4,800, that had a cost of $3,200. Return damaged radios to Motion Unlimited and receive credit of $300. Pay Motion Unlimited in full.

Required: 1. Record the transactions above, assuming Chow Company uses a perpetual inventory system. 2. Prepare the top section of the multiple-step income statement through gross profit for the month of June. Answer: June 2 Inventory Accounts Payable (Purchase inventory on account)

Debit 2,400

Credit 2,400

June 4 Inventory Cash (Pay freight-in)

Debit

June 8 Accounts Payable Inventory (Return inventory on account)

Debit

Credit 400 400

Credit 600 600

June 10 Debit Credit Accounts Payable 1,800 Inventory 54 Cash 1,746 (Pay on account less 3% discount) ($54 = $1,800 × 3%)

June 11 Accounts Receivable Sales Revenue (Sell inventory on account) Cost of Goods Sold Inventory (Record cost of inventory sold)

Debit 5,000

June 18 Cash Accounts Receivable (Receive cash on account)

Debit 3,100

June 20 Inventory Accounts Payable (Purchase inventory on account)

Debit 3,300

June 23 Cash Sales Revenue (Sell inventory for cash) Cost of Goods Sold Inventory (Record cost of inventory sold)

Debit 4,800

June 26 Accounts Payable Inventory (Return inventory on account)

Debit

Credit 5,000

3,300 3,300

Credit 3,100

Credit 3,300

Credit 4,800

3,200 3,200

Credit 300 300

June 28 Debit Credit Accounts Payable 3,000 Cash 2,910 Inventory 90 (Pay on account less 3% discount) ($90 = $3,000 × 3%)

Requirement 2 Chow Company Multiple-Step Income Statement (partial) For the month of June Net sales Cost of goods sold Gross profit

$9,800 6,500 $3,300

Difficulty: 3 Hard Topic: Multiple-Step Income Statement; Recording Transactions Using a Perpetual Inventory System Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement.; 06-05 Record inventory transactions using a perpetual inventory system. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement; FN Reporting/Keyboard Navigation

270) A home improvement store carries the following items:

Inventory Items Hammers Saws Screwdrivers Drills 1-gallon paint cans Paint brushers

Quantity 110 60 120 50 150 170

Cost per Unit NRV per unit $6 $7 11 9 3 2 22 21 5 6 7 8

Lower of Cost and NRV _______ _______ _______ _______ _______ _______

Required: 1. Compute the total cost of inventory. 2. Determine whether each inventory item would be reported at cost or net realizable value. Multiply the quantity of each inventory item by the appropriate cost or NRV amount and place the total in the "Lower of Cost and NRV" column. Then determine the total of that column. 3. Compare your answers in Requirement 1 and Requirement 2 and then prepare any necessary adjustment to write down inventory from cost to net realizable value. 4. Discuss the financial statement effects of using lower of cost and net realizable value to report inventory.

Answer: Requirement 1 Inventory Items Hammers Saws Screwdrivers Drills 1-gallon paint cans Paint brushers

Quantity 110 60 120 50 150 170

Cost per Unit Total Cost $6 $660 11 660 3 360 22 1,100 5 750 7 1,190 $4,720

Requirement 2

Inventory Items Hammers Saws Screwdrivers Drills 1-gallon paint cans Paint brushers Total

Quantity 110 60 120 50 150 170

Cost per Unit NRV per unit $6 $7 11 9 3 2 22 21 5 6 7 8

Lower of Cost and NRV $660 540 240 1,050 750 1,190 $4,430

Requirement 3 Because the total of lower of cost and net realizable value ($4,430) is less than total cost ($4,720), inventory is written down for the difference ($290). Debit Cost of Goods Sold Inventory

Credit 290 290

(Write down inventory to net realizable value) Requirement 4 The write-down of inventory from cost to net realizable value reduces total assets and increases total expenses, leading to lower net income and lower retained earnings. Difficulty: 3 Hard Topic: Lower of Cost and Net Realizable Value Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement; FN Reporting/Keyboard Navigation

271) During 2021, Liberty Company has the following inventory transactions. Date Jan. 1 Apr. 9 Oct. 4

Transaction Beginning inventory Purchase Purchase

Jan. 1-Dec. 31 Sales

Units 10 22 18 50 44

Cost

Total Cost $430 $4,300 470 10,340 400 7,200 $21,840

Because trends change frequently, Liberty estimates that the remaining six units have a net realizable value at December 31 of only $300 each. Required: 1. Using FIFO, calculate ending inventory and cost of goods sold. 2. Using LIFO, calculate ending inventory and cost of goods sold. 3. Determine the amount of ending inventory to report using the lower of cost and net realizable value under FIFO. Record any necessary adjustment. Answer: Requirement 1

Date Oct. 4

Transaction Purchase

Date Jan. 1 Apr. 9 Oct. 4

Transaction Beginning inventory Purchase Purchase

Number of Units 6

Ending Unit Cost Inventory $400 $2,400

Number of Units 10 22 12 44a

Unit Cost $430 470 400

Cost of Goods Sold $4,300 10,340 4,800 $19,440

a First 44 units purchased are assumed sold

Requirement 2

Date Jan. 1

Transaction Beginning Inventory

Date Jan. 1 Apr. 9 Oct. 4

Transaction Beginning inventory Purchase Purchase

Number of Units 6

Ending Unit Cost Inventory $430 $2,580

Number of Units 4 22 18 44a

Unit Cost $430 470 400

Cost of Goods Sold $1,720 10,340 7,200 $19,260

a Last 44 units purchased are assumed sold Requirement 3 Ending Inventory

FIFO

Cost $2,400a

Lower of cost NRV and NRV $1,800 $1,800

a Ending inventory from Requirement 1 above. FIFO Debit Cost of Goods Sold 600 Inventory (Write down inventory to net realizable value)

Credit 600

Difficulty: 3 Hard Topic: Inventory Cost Methods - FIFO; Inventory Cost Methods - LIFO; Lower of Cost and Net Realizable Value Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods.; 06-06 Apply the lower of cost and net realizable value rule for inventories. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

272) At the beginning of November, Donkey Inc.'s inventory consists of 50 units with a cost per unit of $100. The following transactions occur during the month of November. Nov. 2

Purchase 80 units of inventory on account from Kong Inc. for $110 per unit, terms 2/10, n/30. Pay freight charges related to the November 2 purchase, $240. Return 20 defective units from the November 2 purchase and receive credit. Pay Kong Inc. in full. Sell 100 units of inventory to customers on account, $14,000. [Hint: The cost of units sold from the November 2 purchase includes $110 unit cost plus $3 per unit for freight less $2.20 per unit for the purchase discount, or $111.80 per unit.] Receive full payment from customers related to the sale on November 16. Purchase 70 units of inventory from Kong Inc. for $120 per unit, terms 1/10, n/30. Sell 50 units of inventory to customers for cash, $9,000.

Nov. 3 Nov. 9 Nov. 11 Nov.16

Nov. 20 Nov. 21 Nov. 24 Required:

1. Assuming that Donkey Inc. uses a FIFO perpetual inventory system to maintain its internal inventory records, record the transactions. 2. Suppose by the end of November that the remaining inventory is estimated to have a net realizable value per unit of $90, record any necessary adjustment for the lower of cost and net realizable value. 3. Prepare the top section of the multiple-step income statement through gross profit for the month of November after the adjustment for lower of cost and net realizable value.

Answer: Requirement 1 November 2 Inventory Accounts Payable (Purchase inventory on account)

Debit 8,800

November 3 Inventory Cash (Pay freight-in)

Debit

November 9 Accounts Payable Inventory (Return inventory on account)

Debit 2,200

Credit 8,800

Credit 240 240

Credit 2,200

November 11 Debit Credit Accounts Payable 6,600 Inventory 132 Cash 6,468 (Pay on account less 2% discount) ($132 = $6,600 × 2%) November 16 Debit Credit Accounts Receivable 14,000 Sales Revenue 14,000 (Sell inventory on account) Cost of Goods Sold 10,590 Inventory 10,590 (Record cost of inventory sold) ($10,590 = ($100 × 50 units) + ($111.80 × 50 units)) November 20 Cash Accounts Receivable (Receive cash on account)

Debit 14,000

November 21 Inventory Accounts Payable (Purchase inventory on account)

Debit 8,400

Credit 14,000

Credit 8,400

November 24 Debit Credit Cash 9,000 Sales Revenue 9,000 (Sell inventory for cash) Cost of Goods Sold 5,918 Inventory 5,918 (Record cost of inventory sold) ($5,918 = ($111.80 × 10 units) + ($120 × 40 units)) Requirement 2 November 30 November 30 Debit Cost of Goods Sold 900 Inventory (Adjust inventory down to net realizable value)

Credit 900*

* The net realizable value of ending inventory ($2,700 = $90 net realizable value × 30 units) is $900 less than FIFO ending inventory ($3,600 from Requirement 1). FIFO ending inventory is calculated as: November 1 November 2 November 3 November 9 November 11 November 16 November 21 November 24 November 30

$5,000 8,800 240 (2,200) (132) (10,590) 8,400 (5,918) $3,600

(50 units × $100)

Requirement 3 Donkey Inc. Multiple-Step Income Statement (partial) For the month of November Net sales Cost of goods sold* Gross Profit

$23,000 17,408 $5,592

* Cost of goods sold equals the cost of the units sold ($10,590 + $5,918) + write down to net realizable value ($900).

Difficulty: 3 Hard Topic: Inventory Cost Methods - FIFO; Effects of Inventory Cost Methods; Recording Transactions Using a Perpetual Inventory System; Lower of Cost and Net Realizable Value Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods.; 06-04 Explain the financial statement effects and tax effects of inventory cost methods.; 06-05 Record inventory transactions using a perpetual inventory system.; 06-06 Apply the lower of cost and net realizable value rule for inventories. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement; FN Reporting/Keyboard Navigation

273) Assume Party Store has the following account balances for the month of March 2021, and that the company uses a perpetual inventory system. Sales revenue Advertising expense Rent expense Gain on sale of building Inventory (Mar. 1, 2021)

$75,800 5,200 3,300 6,900 2,200

Cost of goods sold Inventory (Mar. 31, 2021) Insurance expense Sales discounts Salaries expense Income tax expense

$38,500 1,800 1,700 2,900 8,200 6,100

Required: 1. Prepare a multiple-step income statement for the month ended March 31, 2021. 2. Calculate the inventory turnover ratio for the month of March. Would you expect this ratio to be higher or lower in December 2021? Explain. 3. Calculate the gross profit ratio for the month of March. Answer: Requirement 1 Party Store Multiple-Step Income Statement For the month ended March 31, 2021 Net sales: Total sales revenue Less: Sales discounts Net sales Cost of goods sold Gross Profit Operating expenses: Advertising Rent Insurance Salaries Total Operating income Nonoperating items: Gain on sale of building Income before income taxes Income tax expense Net income

$75,800 (2,900) $72,900 38,500 34,400 5,200 3,300 1,700 8,200 18,400 16,000 6,900 22,900 6,100 $16,800

Requirement 2

This ratio will likely be higher in December when inventory is being sold at a much faster pace due to the holiday season. Requirement 3

Difficulty: 3 Hard Topic: Multiple-Step Income Statement; . Analysis - Inventory Turnover Ratio; Analysis - Gross Profit Ratio Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement.; 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making; FN Reporting/Keyboard Navigation

274) Fancy Incorporated and Thrift Specialty both offer men's formal footwear. Thrift offers lower-to-middle priced footwear, whereas Fancy offers more specialized, higher-end footwear. The average price for a pair of shoes in Thrift may be about $40, whereas the average price in Fancy may be about $200. The types of shoes offered by Fancy are not sold by many other stores. Suppose Thrift and Fancy report the following amounts for men's shoes in the same year (company names are disguised):

Net sales Cost of goods sold Gross profit Average inventory

Company 1 $120,000 46,000 $74,000 $23,000

Company 2 $120,000 80,000 $40,000 $20,000

Required: 1. For Company 1 and Company 2, calculate the inventory turnover ratio. 2. For Company 1 and Company 2, calculate the gross profit ratio. 3. After comparing the inventory turnover ratios and gross profit ratios, which company do you think is Thrift and which is Fancy? Explain. Answer: Requirement 1

Requirement 2

Requirement Company 1 is likely Fancy and Company 2 is likely Thrift. The reason is that common, lower-to-middle priced footwear is likely to sell more quickly than is more specialized, higher-end footwear. In addition, higher-end footwear is likely to be more profitable due to less competition. Difficulty: 3 Hard Topic: Analysis - Inventory Turnover Ratio; Analysis - Gross Profit Ratio Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making; FN Measurement/Keyboard Navigation

275) At the beginning of June, Chow Company has a balance in inventory of $2,100. The following transactions occur during the month of June. June 2 June 4 June 8 June 10 June 11 June 18 June 20 June 23 June 26 June 28

Required: 1. Record the transactions, assuming Chow Company uses a periodic inventory system. 2. Record the month-end adjustment to inventory, assuming that a final count reveals ending inventory with a cost of $656. 3. Prepare the top section of the multiple-step income statement through gross profit for the month of June. Answer: Requirement 1 June 2 Purchases Accounts Payable (Purchase inventory on account)

Debit 2,400

June 4 Freight-In Cash (Pay freight-in)

Debit

June 8 Accounts Payable Purchase Returns (Return inventory on account)

Debit

Credit 2,400

Credit 400 400

Credit 600 600

June 10 Debit Credit Accounts Payable 1,800 Purchase Discounts 54 Cash 1,746 (Pay on account less 3% discount) ($54 = $1,800 × 3%) 145 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

June 11 Accounts Receivable Sales Revenue (Sell inventory on account)

Debit 5,000

June 18 Cash Accounts Receivable (Receive cash on account)

Debit 3,100

June 20 Purchases Accounts Payable (Purchase inventory on account)

Debit 3,300

June 23 Cash Sales Revenue (Sell inventory for cash)

Debit 4,800

June 26 Accounts Payable Purchase Returns (Return inventory on account)

Debit

Credit 5,000

Credit 3,100

Credit 3,300

Credit 4,800

Credit 300 300

June 28 Debit Accounts Payable 3,000 Cash Purchase Discounts (Pay on account less 3% discount) ($90 = $3,000 × 3%)

Credit 2,910 90

Requirement 2 June 30 Inventory (ending) Cost of Goods Sold Purchase Returns Purchase Discounts Purchases Freight-In Inventory (beginning) (Record period-end adjustment)

Debit

Credit

656 6,500 900 144 5,700 400 2,100

Requirement 3 Chow Company Multiple-Step Income Statement (partial) For the month of June Net sales Cost of goods sold: Beginning inventory Add: Purchases Freight-in Less: Purchase returns Purchase discounts Cost of goods available for sale Less: Ending inventory Cost of goods sold Gross Profit

$9,800 2,100 5,700 400 (900) (144) 7,156 (656) 6,500 $3,300

276) Fulkerson Metals maintains accurate records of the inventory purchased from its suppliers and sold to customers. The records show the following purchases and sales during 2021. Date January 1 April 14 August 22 October 29

Transactions Beginning inventory Purchase Purchase Purchase

Units 28 72 115 90 305

Jan. 1-Dec. 31 Sales ($60 each)

Cost per Unit Total Cost $33 $924 35 2,520 37 4,255 39 3,510 $11,209

280

Fulkerson uses a periodic inventory system and believes there are 25 units of ending inventory. However, Fulkerson neglects to make a final inventory count at the end of the year. An employee accidentally threw out 4 units of inventory, leaving only 21 units. Fulkerson is not aware of the lost inventory. Required: 1. What amount will Fulkerson calculate for ending inventory and cost of goods sold using FIFO, assuming it erroneously believes 25 units remain in ending inventory? 2. What amount would Fulkerson calculate for ending inventory and cost of goods sold using FIFO if it correctly knows that only 21 units remain in ending inventory? 3. What effect will the inventory error have on reported amounts for (a) ending inventory, (b) retained earnings, (c) cost of goods sold, and (d) net income (ignoring tax effects) in 2021? 4. Assuming that ending inventory is correctly counted at the end of 2022, what effect will the inventory error in 2021 have on reported amounts for (a) ending inventory, (b) retained earnings, (c) cost of goods sold, and (d) net income (ignoring tax effects) in 2022? Answer: Requirement 1

Date Oct. 29

Date Jan. 1 Apr. 14 Aug. 22 Oct. 29

Transaction Purchase

Transaction Beginning inventory Purchase Purchase Purchase

Number of Ending Units Unit Cost Inventory 25 $39 $975

Number of Cost of Goods Units Unit Cost Sold 28 $33 $924 72 35 2,520 115 37 4,255 65 39 2,535 280a $10,234

a First 280 units purchased are assumed sold 148 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Requirement 2

Date Oct. 29

Transaction Purchase

Date Jan. 1 Apr. 14 Aug. 22 Oct. 29

Transaction Beginning inventory Purchase Purchase Purchase

Number of Ending Units Unit Cost Inventory 21 $39 $819

Number of Cost of Goods Units Unit Cost Sold 28 $33 $924 72 35 2,520 115 37 4,255 69 39 2,691 284* $10,390

* First 284 units purchased are assumed sold (including the 4 lost units) Requirements 3 and 4

(a) ending inventory (b) retained earnings (c) cost of goods sold (d) net income

2021 Overstate Overstate Understate Overstate

2022 No Effect No Effect Overstate Understate

Difficulty: 3 Hard Topic: Inventory Cost Methods - FIFO; Inventory Errors Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods.; 06-09 Determine the financial statement effects of inventory errors. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement; FN Reporting/Keyboard Navigation

277) Explain the difference in the type of inventory and the flow of inventory for a manufacturing company versus a merchandising company. Answer: Merchandising companies purchase inventories that are primarily in finished form for resale to customers. These companies may assemble, sort, repackage, redistribute, store, refrigerate, deliver, or install the inventory, but they do not manufacture it. They simply serve as intermediaries in the process of moving inventory from the manufacturer to the end user. Manufacturing companies manufacture the inventories they sell, rather than buying them in finished form from suppliers. Manufacturers have three types of inventory: (1) raw materials include the cost of components that have yet to be used in production; (2) work-in-process refers to the products that have been started in production but are not yet complete at the end of the period, which includes raw materials, direct labor, and overhead; and (3) finished goods consists of items for which the manufacturing process is complete. Difficulty: 2 Medium Topic: Types of Inventory Learning Objective: 06-01 Understand that inventory flows from manufacturing companies to merchandising companies and is reported as an asset on the balance sheet. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 278) What does the balance of cost of goods sold in the income statement represent? What does the balance of inventory in the balance sheet represent? Answer: The balance of cost of goods sold in the income statement represents the cost of inventory sold during the period. Cost of goods sold is an expense. The balance of inventory in the balance sheet represents the cost of inventory not sold by the end of the reporting period. Inventory is an asset. Difficulty: 2 Medium Topic: Types of Inventory; Multiple-Step Income Statement Learning Objective: 06-01 Understand that inventory flows from manufacturing companies to merchandising companies and is reported as an asset on the balance sheet.; 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

279) What is a multiple-step income statement? What information does it provide beyond "bottom-line" net income? Answer: A multiple-step income statement reports multiple levels of profitability. Gross profit equals sales revenue minus cost of goods sold. Operating income equals gross profit minus operating expenses. Income before income taxes equals operating income plus nonoperating revenues and minus nonoperating expenses. Net income equals all revenues minus all expenses. Difficulty: 2 Medium Topic: Multiple-Step Income Statement Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 280) What are the three primary cost flow assumptions? How does the specific identification method differ from these three primary cost flow assumptions? Answer: The three most common inventory cost flow assumptions are FIFO (first-in, first-out), LIFO (last-in, first-out), and weighted-average cost. These methods provide assumptions as to which inventory units are sold, whereas the specific identification method matches or identifies each unit of inventory with its actual cost. Difficulty: 2 Medium Topic: Inventory Cost Methods - Specific Identification; Inventory Cost Methods - FIFO; Inventory Cost Methods - LIFO; Inventory Cost Methods - Weighted-Average Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 281) What does it mean that FIFO has a balance-sheet focus and LIFO has an income-statement focus? Answer: Since FIFO assumes the first purchases sell first, the amount it reports for ending inventory (in the balance sheet) better approximates the current cost of inventory. LIFO assumes the last purchases are sold first, reporting the most recent inventory cost in cost of goods sold (in the income statement). Thus, LIFO more realistically matches the current costs of inventory needed to produce current revenues. Difficulty: 2 Medium Topic: Effects of Inventory Cost Methods Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 151 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

282) What is meant by the assertion that the lower of cost and net realizable value for inventory is an example of conservatism in accounting? Answer: Firms are required to report the decreasing value of inventory, but not allowed to report the increasing value of inventory. Conservative accounting implies that there is more potential harm to users of financial statements if estimated gains turn out to be wrong than if estimated losses turn out to be wrong. Therefore, companies typically do not report estimated gains. Difficulty: 2 Medium Topic: Lower of Cost and Net Realizable Value Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

Financial Accounting, 5e (Spiceland) Chapter 7 Long-Term Assets 1) Property, plant, and equipment are types of tangible assets. Answer: TRUE Difficulty: 1 Easy Topic: Acquisition - Property, Plant, and Equipment Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 2) We record a long-term asset at its cost less all expenditures necessary to get the asset ready for use. Answer: FALSE Explanation: We record a long-term asset at its cost plus all expenditures necessary to get the asset ready for use. Difficulty: 1 Easy Topic: Acquisition - Property, Plant, and Equipment Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 3) We use the term capitalize to describe recording an expenditure as an expense. Answer: FALSE Explanation: We use the term capitalize to describe recording an expenditure as an asset. Difficulty: 1 Easy Topic: Acquisition - Property, Plant, and Equipment Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 4) Cash received from the sale of salvaged materials increases the total cost of land. Answer: FALSE Explanation: Cash received from the sale of salvaged materials decreases the total cost of land. Difficulty: 2 Medium Topic: Acquisition - Property, Plant, and Equipment Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 1 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

5) Land improvements are recorded separately from the land itself because, unlike land, these assets have limited useful lives. Answer: TRUE Difficulty: 2 Medium Topic: Acquisition - Property, Plant, and Equipment Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 6) A basket purchase is the purchase of more than one asset at the same time for one purchase price. Answer: TRUE Difficulty: 1 Easy Topic: Acquisition - Basket Purchases Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 7) Natural resources are distinguished from other property, plant, and equipment by the fact that they are depleted. Answer: TRUE Difficulty: 1 Easy Topic: Acquisition - Property, Plant, and Equipment Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 8) Many intangible assets are not recorded in the balance sheet at their estimated values. Answer: TRUE Difficulty: 1 Easy Topic: Acquisition - Intangible Assets Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

9) We record purchased intangible assets at their original cost plus all other costs necessary to get the asset ready for use. Answer: TRUE Difficulty: 1 Easy Topic: Acquisition - Intangible Assets Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 10) Most of the costs associated with internally developed intangible assets are recorded as intangible assets in the balance sheet. Answer: FALSE Explanation: We expense most of the costs for internally developed intangible assets in the income statement as we incur them. Difficulty: 1 Easy Topic: Acquisition - Intangible Assets Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 11) Research and development costs incurred in developing a patent internally are not recorded as an intangible asset in the balance sheet, but rather are expensed directly in the income statement. Answer: TRUE Difficulty: 2 Medium Topic: Acquisition - Intangible Assets Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 12) International accounting standards allow firms to record development costs that benefit future periods as an intangible asset. Answer: TRUE Difficulty: 2 Medium Topic: Acquisition - Intangible Assets Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Understand AACSB: Reflective Thinking; Diversity AICPA/Accessibility: BB Global; FN Reporting/Keyboard Navigation 3 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

13) A trademark can be registered with the U.S. Patent and Trademark Office for a maximum of 20 years. Answer: FALSE Explanation: Trademarks are registered with the U.S. Patent and Trademark Office for an indefinite number of 10-year periods. Difficulty: 2 Medium Topic: Acquisition - Intangible Assets Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 14) We expense internally generated intangible assets, such as research and development, as we incur them. Answer: TRUE Difficulty: 2 Medium Topic: Acquisition - Intangible Assets Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 15) A patent is an exclusive right to a published work such as a song, film, or painting. Answer: FALSE Explanation: A patent is an exclusive right to manufacture a product or to use a process. A copyright is an exclusive right of protection given to the creator of a published work such as a song, film, painting, photograph, book, or computer software. Difficulty: 1 Easy Topic: Acquisition - Intangible Assets Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 16) A copyright is an exclusive right of protection given to the creator of a published work such as a song, film, painting, photograph, book, or computer software. Answer: TRUE Difficulty: 1 Easy Topic: Acquisition - Intangible Assets Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 5 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

17) A trademark is a word, slogan, or symbol that distinctively identifies a company, product, or service. Answer: TRUE Difficulty: 1 Easy Topic: Acquisition - Intangible Assets Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 18) When a firm develops a trademark internally through advertising, it does not record the advertising costs as an intangible asset, but rather expenses them in the income statement. Answer: TRUE Difficulty: 1 Easy Topic: Acquisition - Intangible Assets Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 19) The franchisee's initial fee is recorded as an expense in the income statement. Answer: FALSE Explanation: The franchisee's initial fee is recorded as an intangible asset and then expensed over the life of the franchise agreement. Difficulty: 1 Easy Topic: Acquisition - Intangible Assets Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 20) We record goodwill as an intangible asset in the balance sheet only when we purchase it as part of the acquisition of another company. Answer: TRUE Difficulty: 1 Easy Topic: Acquisition - Goodwill Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

21) The acquiring company records goodwill equal to the purchase price less the book value of the net assets acquired. Answer: FALSE Explanation: The acquiring company records goodwill equal to the purchase price less the fair value of the net assets acquired. Difficulty: 2 Medium Topic: Acquisition - Goodwill Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 22) We capitalize repairs and maintenance expenditures because they maintain a given level of benefits. Answer: FALSE Explanation: We expense repairs and maintenance expenditures in the period incurred because they maintain a given level of benefits. Difficulty: 1 Easy Topic: Expenditures after Acquisition Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 23) If a firm successfully defends an intangible right, it should expense the litigation costs as incurred. Answer: FALSE Explanation: If a firm successfully defends an intangible right, it should capitalize the litigation costs and amortize them over the remaining useful life of the related intangible. Difficulty: 1 Easy Topic: Expenditures after Acquisition Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

24) If the defense of an intangible right is unsuccessful, then the firm should expense the litigation costs as incurred because they provide no future benefit. Answer: TRUE Difficulty: 1 Easy Topic: Expenditures after Acquisition Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 25) Depreciation in accounting is the process of allocating to expense the cost of an asset over its service life. Answer: TRUE Difficulty: 1 Easy Topic: Depreciation - General Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 26) Depreciation in accounting records the decrease in value of an asset. Answer: FALSE Explanation: Depreciation in accounting is the process of allocating to expense the cost of an asset over its service life. Difficulty: 1 Easy Topic: Depreciation - General Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 27) Accumulated Depreciation is a liability account that is increased by credits. Answer: FALSE Explanation: Accumulated Depreciation is a contra asset account; it reduces an asset account. Difficulty: 1 Easy Topic: Depreciation - General Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

28) Book value is equal to the original cost of the asset minus the current balance in Accumulated Depreciation. Answer: TRUE Difficulty: 1 Easy Topic: Depreciation - General Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 29) The Accumulated Depreciation account allows us to reduce the carrying value of assets through depreciation, while maintaining the original cost of each asset in the accounting records. Answer: TRUE Difficulty: 2 Medium Topic: Depreciation - General Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 30) The service life of an asset is always equal to the full life of the asset. Answer: FALSE Explanation: The service life is how long the company expects to receive benefits from the asset before disposing of it. Difficulty: 1 Easy Topic: Depreciation - General Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 31) Residual value, also referred to as salvage value, is the amount the company expects to receive from selling the asset at the end of its service life. Answer: TRUE Difficulty: 1 Easy Topic: Depreciation - General Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

32) With the straight-line depreciation method, we allocate an equal amount of the depreciable cost to each year of the asset's service life. Answer: TRUE Difficulty: 2 Medium Topic: Depreciation - Straight-Line Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 33) When a change in estimate is required, the company changes depreciation in prior, current, and future years. Answer: FALSE Explanation: When a change in estimate is required, the company changes depreciation in current and future years, but not in prior periods. Difficulty: 2 Medium Topic: Depreciation - Change in Estimate Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 34) Straight-line depreciation assumes that the benefits we derive from the use of an asset are the same each year. Answer: TRUE Difficulty: 2 Medium Topic: Depreciation - Straight-Line Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 35) Declining-balance depreciation will be lower than straight-line depreciation in earlier years, but higher in later years. Answer: FALSE Explanation: Declining-balance depreciation will be higher than straight-line depreciation in earlier years, but lower in later years. Difficulty: 2 Medium Topic: Depreciation - Declining-Balance Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 10 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

36) In an activity-based depreciation method, we allocate an asset's cost based on its use. Answer: TRUE Difficulty: 2 Medium Topic: Depreciation - Activity-Based Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 37) Straight-line produces a lower net income than accelerated methods in the earlier years of an asset's life. Answer: FALSE Explanation: Straight-line produces a higher net income than accelerated methods in the earlier years of an asset's life. Difficulty: 2 Medium Topic: Depreciation - Straight-Line Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 38) Straight-line, declining-balance, and activity-based depreciation all are acceptable depreciation methods for both financial reporting and tax reporting. Answer: FALSE Explanation: These are acceptable methods for financial reporting, not tax reporting. Most companies use MACRS for income tax depreciation. Difficulty: 2 Medium Topic: Depreciation - Straight-Line Method; Depreciation - Declining-Balance Method; Depreciation - Activity-Based Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

39) Most companies use straight-line amortization for intangibles and credit the amount of amortization to the intangible asset account itself rather than to Accumulated Amortization. Answer: TRUE Difficulty: 2 Medium Topic: Amortization of Intangible Assets Learning Objective: 07-05 Calculate amortization of intangible assets. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 40) Goodwill is amortized over its estimated useful life. Answer: FALSE Explanation: Intangible assets with an indefinite useful life (goodwill and most trademarks) are not amortized. Difficulty: 1 Easy Topic: Amortization of Intangible Assets Learning Objective: 07-05 Calculate amortization of intangible assets. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 41) Intangible assets with an indefinite useful life (goodwill and most trademarks) are not amortized. Answer: TRUE Difficulty: 1 Easy Topic: Amortization of Intangible Assets Learning Objective: 07-05 Calculate amortization of intangible assets. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 42) We record a gain if we sell an asset for less than book value. Answer: FALSE Explanation: We record a gain if we sell an asset for more than book value. Difficulty: 1 Easy Topic: Disposition - Sale Learning Objective: 07-06 Account for the disposal of long-term assets. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

43) We record a loss if we sell an asset for less than book value. Answer: TRUE Difficulty: 1 Easy Topic: Disposition - Sale Learning Objective: 07-06 Account for the disposal of long-term assets. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 44) A more comparable measure of profitability than income is return on assets, which equals net income divided by average total assets. Answer: TRUE Difficulty: 2 Medium Topic: Analysis - Return on Assets Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 45) Profit margin is net income divided by net sales. Answer: TRUE Difficulty: 1 Easy Topic: Analysis - Profit Margin Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 46) Asset turnover is net sales divided by ending total assets. Answer: FALSE Explanation: Asset turnover is net sales divided by average total assets. Difficulty: 1 Easy Topic: Analysis - Asset Turnover Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

47) Management must review long-term assets for impairment. Answer: TRUE Difficulty: 1 Easy Topic: Asset Impairment Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 48) Impairment occurs when the future cash flows expected to be generated for a long-term asset fall below its fair value. Answer: FALSE Explanation: Impairment occurs when the future cash flows expected to be generated for a long-term asset fall below its book value (cost minus accumulated depreciation). Difficulty: 2 Medium Topic: Asset Impairment Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 49) An impairment loss is equal to the amount by which book value exceeds the fair value of a long-term asset. Answer: TRUE Difficulty: 1 Easy Topic: Asset Impairment Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 50) Taking a "big bath" is recording all losses in one year to make a bad year even worse. Answer: TRUE Difficulty: 1 Easy Topic: Asset Impairment Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 14 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

51) Real Angus Steakhouse purchased land for $75,000 cash. Commissions of $4,500, property taxes of $5,000, and title insurance of $800 were also incurred. The $5,000 in property taxes includes $4,000 in back taxes paid by Real Angus on behalf of the seller and $1,000 due for the current year after the purchase date. For what amount should Real Angus Steakhouse record the land? A) $83,500. B) $84,300. C) $85,300. D) $75,000. Answer: B Explanation: $75,000 + $4,500 + $4,000 + $800 = $84,300. Difficulty: 3 Hard Topic: Acquisition - Property, Plant, and Equipment Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 52) Which of the following would be recorded as land improvements? A) Property taxes. B) Title insurance. C) Real estate commissions. D) Adding a parking lot. Answer: D Difficulty: 1 Easy Topic: Acquisition - Property, Plant, and Equipment Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 53) Which of the following would not be recorded as land improvements? A) Adding a parking lot. B) Landscaping. C) Sidewalks. D) Closing costs on purchasing the land. Answer: D Difficulty: 1 Easy Topic: Acquisition - Property, Plant, and Equipment Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 15 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

54) A company purchased a piece of equipment by paying $5,000 cash. Shipping cost of $400 to get the equipment to its factory was also incurred. The fair value of this equipment is $7,000. For what amount should the company record the equipment? A) $5,000. B) $5,400. C) $7,000. D) $7,400. Answer: B Explanation: $5,000 + $400 = $5,400. Difficulty: 3 Hard Topic: Acquisition - Property, Plant, and Equipment Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 55) A company purchased new equipment for $60,000. The company paid cash for the equipment. Other costs associated with the equipment were: transportation costs, $1,000; sales tax paid $3,000; and installation cost, $2,500. The cost recorded for the equipment was: A) $60,000. B) $61,000. C) $64,000. D) $66,500. Answer: D Explanation: $60,000 + $1,000 + $3,000 + $2,500 = $66,500. Difficulty: 3 Hard Topic: Acquisition - Property, Plant, and Equipment Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

56) A company incurred the following costs associated with the purchase of a piece of land that it will use to re-build an office building: Purchase price of the land Sale of salvaged parts already on land Demolition of the old building Ground-breaking ceremony (food and supplies) Land preparation and leveling

$ 400,000 $ 20,000 $ 30,000 $ 1,500 $ 7,500

What amount should be recorded for the purchase of the land? A) $437,500. B) $417,500. C) $439,000. D) $419,000. Answer: B Explanation: $400,000 − $20,000 + $30,000 + $7,500 = $417,500. The $1,500 in costs for the ground-breaking ceremony should be expensed. Difficulty: 3 Hard Topic: Acquisition - Property, Plant, and Equipment Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 57) A company purchased a commercial dishwasher by paying cash of $8,000. The dishwasher's fair value on the date of the purchase was $10,000. The company incurred $600 in transportation costs, $500 installation fees, and paid $300 annual insurance on the equipment. For what amount will the company record the dishwasher? A) $10,000. B) $9,100. C) $8,000. D) $9,400. Answer: B Explanation: $8,000 + $600 + $500 = $9,100. The annual insurance on the equipment of $300 should be recorded as insurance expense over the first year of coverage. Difficulty: 3 Hard Topic: Acquisition - Property, Plant, and Equipment Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

58) A company purchased a commercial dishwasher by paying cash of $5,000. The dishwasher's fair value on the date of the purchase was $5,600. The company incurred $400 in transportation costs, $300 installation fees, and paid a $200 fine for illegal parking while the dishwasher was being delivered. For what amount will the company record the dishwasher? A) $5,600. B) $5,700. C) $5,900. D) $6,300. Answer: B Explanation: $5,000 + $400 + $300 = $5,700. The parking ticket should be expensed as incurred since it is not a cost necessary to get the asset ready for use. Difficulty: 3 Hard Topic: Acquisition - Property, Plant, and Equipment Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 59) A company purchased a three-acre tract of land for a building site for $350,000. The company demolished the old building at a cost of $12,000, but was able to sell scrap from the building for $1,500. The cost of title insurance was $900 and attorney fees for reviewing the contract was $500. Property taxes paid were $3,000, of which $250 covered the period after the purchase date. The capitalized cost of the land is: A) $366,400. B) $366,150. C) $364,650. D) $231,150. Answer: C Explanation: Purchase price Demolition costs Scrap sold Title insurance Legal fees Property taxes ($3,000 − $250) Total cost of land

$ 350,000 12,000 (1,500) 900 500 2,750 $ 364,650

60) A company purchased a $500,000 tract of land that is intended to be the site of a new office complex. The company incurred additional costs and realized salvage proceeds as follows: Demolition of existing building on site Legal and other fees to close escrow Proceeds from sale of demolition scrap

$ 75,000 15,000 10,000

What would be the capitalized cost of the land? A) $500,000. B) $575,000. C) $580,000. D) $590,000. Answer: C Explanation: Purchase price Demolition costs Legal fees Sale of scrap Total cost of land

$ 500,000 75,000 15,000 (10,000) $ 580,000

Difficulty: 3 Hard Topic: Acquisition - Property, Plant, and Equipment Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 61) Assets acquired in a lump-sum purchase are valued based on: A) Their relative fair values. B) Their assessed valuation. C) The present value of their future cash flows. D) Their cost plus the difference between their cost and fair values. Answer: A Difficulty: 2 Medium Topic: Acquisition - Basket Purchases Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

62) A company purchased land, a building, and equipment for one price of $800,000. The estimated fair values of the land, building, and equipment are $100,000, $700,000, and $200,000, respectively. At what amount would the company record the land? A) $80,000. B) $90,000. C) $100,000. D) $800,000. Answer: A Explanation: $800,000 × [$100,000 / ($100,000 + $700,000 + $200,000)] = $80,000. Difficulty: 3 Hard Topic: Acquisition - Basket Purchases Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 63) A company acquired an office building on three acres of land for a lump-sum price of $2,400,000. The building was completely equipped. According to independent appraisals, the fair values were $1,300,000, $780,000, and $520,000 for the building, land, and equipment, respectively. At what amount would the company record the building? A) $720,000. B) $1,300,000. C) $1,200,000. D) None of these answer choices are correct. Answer: C Explanation: $2,400,000 × [$1,300,000 / ($1,300,000 + $780,000 + $520,000)] = $1,200,000. Difficulty: 3 Hard Topic: Acquisition - Basket Purchases Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

64) A company acquired an office building, land, and equipment in a single basket purchase. The fair values were $1,200,000, $600,000, and $200,000 for the building, land, and equipment, respectively. The company recorded the building for $1,080,000. What was the total purchase cost for all three assets? A) $1,600,000. B) $1,500,000. C) $2,000,000. D) $1,800,000. Answer: D Explanation: $1,200,000 / ($1,200,000 + $600,000 + $200,000) = 60%. Purchase cost × 60% = $1,080,000. Purchase cost = $1,800,000. Difficulty: 3 Hard Topic: Acquisition - Basket Purchases Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 65) Productive assets that are physically used up or depleted are: A) Equipment. B) Land. C) Land improvements. D) Natural resources. Answer: D Difficulty: 1 Easy Topic: Acquisition - Property, Plant, and Equipment Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

66) The following financial information is from Cook Company: Accounts Payable Land Inventory Accounts Receivable Equipment Deferred Revenue Short-Term Investments Notes Receivable (due in 8 months) Interest Payable Patents

$ $ $ $ $ $ $ $ $ $

55,000 90,000 10,500 7,500 8,000 58,500 20,000 45,500 2,000 75,000

What is the total amount of property, plant, and equipment assuming the accounts above reflect normal activity? A) $90,000. B) $98,000. C) $165,000. D) $110,000. Answer: B Explanation: $90,000 + $8,000 = $98,000. Difficulty: 3 Hard Topic: Acquisition - Property, Plant, and Equipment Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

67) The following financial information is from Cook Company: Accounts Payable Land Inventory Accounts Receivable Equipment Deferred Revenue Short-Term Investments Notes Receivable (due in 8 months) Interest Payable Patents

$ $ $ $ $ $ $ $ $ $

55,000 90,000 10,500 7,500 8,000 58,500 20,000 45,500 2,000 75,000

What is the amount of intangible assets assuming the accounts above reflect normal activity? A) $95,000. B) $75,000. C) $120,500. D) $140,500. Answer: B Explanation: Patents = $75,000. Difficulty: 3 Hard Topic: Acquisition - Intangible Assets Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

68) The following financial information is from Cook Company: Accounts Payable Land Inventory Accounts Receivable Equipment Deferred Revenue Short-Term Investments Notes Receivable (due in 8 months) Interest Payable Patents

$ $ $ $ $ $ $ $ $ $

55,000 90,000 10,500 7,500 8,000 58,500 20,000 45,500 2,000 75,000

What is the total amount of long-term assets assuming the accounts above reflect normal activity? A) $342,500. B) $173,000. C) $273,500. D) $98,000. Answer: B Explanation: $90,000 + $8,000 + $75,000 = $173,000. Difficulty: 3 Hard Topic: Acquisition - Property, Plant, and Equipment; Acquisition - Intangible Assets Learning Objective: 07-01 Identify the major types of property, plant, and equipment.; 07-02 Identify the major types of intangible assets. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 69) The legal life of a patent is: A) Forty years. B) Twenty years. C) Life of the inventor plus fifty years. D) Indefinite. Answer: B Difficulty: 1 Easy Topic: Acquisition - Intangible Assets Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

70) An exclusive 20-year right to manufacture a product or to use a process is a: A) Patent. B) Copyright. C) Trademark. D) Franchise. Answer: A Difficulty: 1 Easy Topic: Acquisition - Intangible Assets Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 71) The exclusive right to benefit from a creative work, such as a film, is a: A) Patent. B) Copyright. C) Trademark. D) Franchise. Answer: B Difficulty: 1 Easy Topic: Acquisition - Intangible Assets Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 72) A word, slogan, or symbol that distinctively identifies a company, product, or service is a: A) Patent. B) Copyright. C) Trademark. D) Franchise. Answer: C Difficulty: 1 Easy Topic: Acquisition - Intangible Assets Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

73) The exclusive right to use another company's name and to sell its products within a specified geographical area is a: A) Patent. B) Copyright. C) Trademark. D) Franchise. Answer: D Difficulty: 1 Easy Topic: Acquisition - Intangible Assets Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 74) Research and development costs should be: A) Expensed in the period incurred. B) Expensed in the period they are determined to be unsuccessful. C) Deferred pending determination of success. D) Expensed if unsuccessful, capitalized if successful. Answer: A Difficulty: 2 Medium Topic: Acquisition - Intangible Assets Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 75) Morgan Pharmaceutical spends $50,000 this year in research and development for a new drug to cure liver damage. By the end of the year, management feels confident that the new drug will gain FDA approval and lead to higher future sales. What impact will the $50,000 spending have on this year's financial statements? A) Increase Assets. B) Decrease Revenues. C) Increase Expenses. D) Increase Revenues. Answer: C Difficulty: 3 Hard Topic: Acquisition - Intangible Assets Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation

76) Suppose a company spends $100,000 on research and development in 2021. As a result of the products developed, additional revenue is generated over the next five years totaling $600,000. When is the cost of the research and development in 2021 recognized as an expense? A) Evenly over the period 2022–2026. B) Full amount in 2026. C) Evenly over the period 2021–2025. D) Full amount in 2021. Answer: D Difficulty: 3 Hard Topic: Acquisition - Intangible Assets Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 77) Suppose a company spends $100,000 in the current year to research and develop a safety device for motorcycles. By the end of the year, the company estimates that the new safety device has an 80% chance of generating $300,000 in revenues from sales to customers over the next five years. For what amount would Research and Development Expense be reported in the current year? A) $100,000. B) $80,000. C) $20,000. D) $0. Answer: A Difficulty: 3 Hard Topic: Acquisition - Intangible Assets Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation

78) Aspen, Inc. developed a new horse transport device and incurred research and development costs of $250,000. Rather than continue with its own research, Aspen decided to purchase a patent for a similar design from Vail, Inc. for $350,000. What are the total assets and expenses for these developments? A) Assets $600,000; Expenses $0. B) Assets $250,000; Expenses $350,000. C) Assets $350,000; Expenses $250,000. D) Assets $0; Expenses $600,000. Answer: C Difficulty: 3 Hard Topic: Acquisition - Intangible Assets Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 79) Research and development costs should be capitalized when the: A) Future benefit is probable and the amount can be reasonably estimated. B) Future benefit is reasonably possible and the amount can be reasonably estimated. C) Future benefit is probable and the amount cannot be reasonably estimated. D) None of these answer choices are correct. Answer: D Difficulty: 2 Medium Topic: Acquisition - Intangible Assets Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Understand AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

80) Bio-Lab Pharmaceuticals was engaged in a project to develop a new drug that would dramatically shorten the recovery period of influenza. The project cost the company $150,000 before Bio-Lab abandoned the project due to the slim possibility to gain FDA approval. Bio-Lab then spent $300,000 on another project to develop a shot that would achieve the same goal, and the company is confident in gaining FDA approval and in generating profits from the shot. What amount would be expensed for these projects? A) $0. B) $150,000. C) $300,000. D) $450,000. Answer: D Difficulty: 3 Hard Topic: Acquisition - Intangible Assets Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation 81) Goodwill is: A) Amortized over the greater of its estimated life or forty years. B) Only recorded by the seller of a business. C) The value of a business as a whole, over and above the value of its net identifiable assets. D) Recorded when created internally through advertising expense. Answer: C Difficulty: 1 Easy Topic: Acquisition - Goodwill Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

82) In accounting, goodwill A) May be recorded whenever a company achieves a level of net income that exceeds the industry average. B) Is amortized over its useful life. C) May be recorded when a company purchases another business. D) Must be expensed in the period it is recorded because benefits from goodwill are difficult to identify. Answer: C Difficulty: 2 Medium Topic: Acquisition - Goodwill Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 83) In accounting, goodwill A) Is never recorded. B) May be recorded when a company's level of net income exceeds the industry average. C) Must be expensed in the period when it is acquired. D) May be recorded when the company purchases another business. Answer: D Difficulty: 2 Medium Topic: Acquisition - Goodwill Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 84) Which of the following is true concerning goodwill? A) Goodwill can never be recorded. B) Goodwill is recorded when a company is purchased for more than the fair value of its identifiable net assets. C) Goodwill is recorded when the market value of a company exceeds the fair value of its identifiable net assets. D) Goodwill is recorded as a revenue in the income statement. Answer: B Difficulty: 2 Medium Topic: Acquisition - Goodwill Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

85) The balance sheet of Cattleman's Steakhouse shows assets of $86,400 and liabilities of $15,000. The fair value of the assets is $90,000 and the fair value of its liabilities is $15,000. Longhorn paid Cattleman's $95,000 to acquire all of its assets and liabilities. Longhorn should record goodwill on this purchase of: A) $3,600. B) $5,000. C) $20,000. D) $23,600. Answer: C Explanation: Purchase price Less: Fair value of net assets: Assets Less: Liabilities assumed Goodwill

$ $ 90,000 15,000

95,000

(75,000) $ 20,000

Difficulty: 3 Hard Topic: Acquisition - Goodwill Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

86) Northern purchased the entire business of Southern including all its assets and liabilities for $600,000. Below is information related to the two companies: Northern $ 1,050,000 575,000 800,000 500,000 60,000

Fair value of assets Fair value of liabilities Reported assets Reported liabilities Net Income for the year

Southern $ 800,000 300,000 650,000 250,000 50,000

How much goodwill did Northern pay for acquiring Southern? A) $100,000. B) $300,000. C) $200,000. D) $150,000. Answer: A Explanation: Purchase price Less: Fair value of net assets: Assets Less: Liabilities assumed Goodwill

$ $ 800,000 300,000

600,000

(500,000) $ 100,000

87) Vikings Inc. reports the following amounts:

Assets Liabilities Net income

Book Value $ 400,000 45,000 25,000

Fair Value $ 500,000 45,000

How much goodwill would be recorded if Torretta Holdings purchases Vikings, assuming its liabilities, for $635,000? A) $255,000. B) $280,000. C) $180,000. D) $100,000. Answer: C Explanation: Purchase price Less: Fair value of net assets: Assets Less: Liabilities assumed Goodwill

$ $ 500,000 45,000

635,000

(455,000) $ 180,000

88) Lake Incorporated purchased all of the outstanding stock of Huron Company, paying $850,000 cash. Lake assumed all of the liabilities. Book values and fair values of acquired assets and liabilities were: Book Value $ 130,000 600,000 175,000

Current assets (net) Property, plant, equip. (net) Liabilities

Fair Value $ 125,000 750,000 175,000

Lake would record goodwill of: A) $0. B) $150,000. C) $345,000. D) $850,000. Answer: B Explanation: Purchase price Less: Fair value of net assets: Assets ($125,000 + 750,000) Less: Liabilities assumed Goodwill

$ $ 875,000 175,000

850,000

(700,000) $ 150,000

89) A company has the following expenditures during the year. Advertising Employee training Customer outreach and consultation

$ 100,000 80,000 50,000

The company believes that these efforts have increased the fair value of the entire company by $325,000. How much goodwill can the company recognize at the end of the year associated with these expenditures? A) $0. B) $80,000. C) $230,000. D) $325,000. Answer: A Explanation: Goodwill is recorded only when one company purchases another company. Difficulty: 3 Hard Topic: Acquisition - Goodwill Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 90) Which of the following subsequent expenditures would be capitalized? A) Ordinary repair. B) Costs that increase the service life of an asset. C) Routine maintenance. D) Ordinary repair and routine maintenance. Answer: B Difficulty: 2 Medium Topic: Expenditures after Acquisition Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

91) Which of the following subsequent expenditures would be capitalized? A) Ordinary repairs and maintenance. B) Additions. C) Improvements. D) Additions and improvements. Answer: D Difficulty: 2 Medium Topic: Expenditures after Acquisition Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 92) The cost of an engine tune-up is an example of which of the following expenditures after acquisition? A) Ordinary repairs and maintenance. B) Additions. C) Improvements. D) Capitalized costs. Answer: A Difficulty: 2 Medium Topic: Expenditures after Acquisition Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 93) Which of the following subsequent expenditures would not be capitalized? A) Ordinary repairs and maintenance. B) Additions. C) Improvements. D) Successful legal defense of intangible assets. Answer: A Difficulty: 2 Medium Topic: Expenditures after Acquisition Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

94) The cost of replacing a major component on a piece of equipment is an example of: A) Repairs and maintenance. B) Improvements. C) Additions. D) An expenditure that only benefits the current period. Answer: B Difficulty: 2 Medium Topic: Expenditures after Acquisition Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 95) Adding a refrigeration unit to a delivery truck that previously did not have this capability is an example of: A) Repairs and maintenance. B) Additions. C) Improvements. D) An expenditure that only benefits the current period. Answer: B Difficulty: 2 Medium Topic: Expenditures after Acquisition Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 96) The purchase of a new cooling system for $150,000 to upgrade an office building owned by the company would be accounted for as: A) Goodwill. B) An addition in the Buildings account. C) An expense in the period of the purchase. D) A patent. Answer: B Difficulty: 2 Medium Topic: Expenditures after Acquisition Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

97) Woods Company made an ordinary repair to a delivery truck at a cost of $500. Woods' accountant debited the asset account, Equipment. Was this treatment an error, and if so, what will be the effect on Woods' financial statements? A) No, the repair was accounted for correctly. B) Yes, the error overstated assets and net income. C) Yes, in the years following, net income will be overstated. D) Yes, the error understated net income. Answer: B Difficulty: 3 Hard Topic: Expenditures after Acquisition Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 98) The replacement of a major component increased the productive capacity of equipment from 10 units per hour to 18 units per hour. The expenditure for the replacement component should be debited to: A) Repairs Expense. B) Maintenance Expense. C) Equipment. D) Gain from Repairs. Answer: C Difficulty: 2 Medium Topic: Expenditures after Acquisition Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 99) Which of the following subsequent expenditures would not be capitalized? A) Unsuccessful legal defense of intangible assets. B) Additions. C) Improvements. D) Successful legal defense of intangible assets. Answer: A Difficulty: 2 Medium Topic: Expenditures after Acquisition Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

100) Which of the following statements accurately describes depreciation? I. Depreciation is used to allocate the cost of the asset over periods benefited. II. Depreciation is used to track the fair value of the asset. III. The book value of an asset is its original cost less accumulated depreciation. A) I and III B) I and II C) II and III D) All of these statements are correct. Answer: A Difficulty: 2 Medium Topic: Depreciation - General Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 101) Which one of the following regarding the book value of an asset is correct? A) It is the fair value of the asset if the asset is sold. B) It reflects the original cost of the asset less accumulated depreciation. C) It is the original cost of the asset minus the depreciation expense for that asset during the year. D) It is the original cost at which the asset was purchased. Answer: B Difficulty: 1 Easy Topic: Depreciation - General Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 102) Which of the following is considered a "contra" account? A) Deferred Revenue. B) Goodwill. C) Accumulated Depreciation. D) Cost of Goods Sold. Answer: C Difficulty: 1 Easy Topic: Depreciation - General Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

103) The factors used to compute depreciation expense are an asset's: A) Cost, residual value, and physical life. B) Cost, residual value, and service life. C) Fair value, residual value, and economic life. D) Cost, replacement value, and service life. Answer: B Difficulty: 1 Easy Topic: Depreciation - General Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 104) The depreciable cost used in calculating depreciation expense is: A) Its service life. B) The amount allowable under tax depreciation methods. C) The difference between its replacement value and cost. D) The asset's cost minus its estimated residual value. Answer: D Difficulty: 1 Easy Topic: Depreciation - General Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 105) Which depreciation method generally will result in the greatest amount of depreciation expense in the first year of the asset's life? A) Straight-line. B) Double-declining balance. C) Activity-based. D) Capitalization. Answer: B Difficulty: 2 Medium Topic: Depreciation - Declining-Balance Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

106) Kansas Enterprises purchased equipment for $60,000 on January 1, 2021. The equipment is expected to have a five-year service life, with a residual value of $5,000 at the end of five years. Using the straight-line method, depreciation expense for 2021 would be: A) $12,000. B) $11,000. C) $60,000. D) None of these. Answer: B Explanation: Depreciation expense = (($60,000 − $5,000) / 5 years) = $11,000. Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 107) Kansas Enterprises purchased equipment for $60,000 on January 1, 2021. The equipment is expected to have a five-year service life, with a residual value of $5,000 at the end of five years. Using the straight-line method, the book value at December 31, 2021, would be: A) $44,000. B) $49,000. C) $55,000. D) $60,000. Answer: B Explanation: Depreciation expense = (($60,000 − $5,000) / 5 years) = $11,000. Book value = $60,000 − $11,000 = $49,000. Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

108) Kansas Enterprises purchased equipment for $60,000 on January 1, 2021. The equipment is expected to have a five-year service life, with a residual value of $5,000 at the end of five years. Using the straight-line method, depreciation expense for 2022 and the book value at December 31, 2022, would be: A) $12,000 and $36,000. B) $12,000 and $31,000. C) $11,000 and $33,000. D) $11,000 and $38,000. Answer: D Explanation: Depreciation expense = (($60,000 − $5,000) / 5 years) = $11,000. Book value = $60,000 − ($11,000 × 2 years) = $38,000. Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 109) Kansas Enterprises purchased equipment for $60,000 on January 1, 2021. The equipment is expected to have a five-year service life, with a residual value of $5,000 at the end of five years. Using the double-declining balance method, depreciation expense for 2021 would be: A) $24,000. B) $22,000. C) $19,000. D) $20,000. Answer: A Explanation: Depreciation rate = 2 / 5 = 0.40. Depreciation expense = $60,000 × 0.40 = $24,000. Difficulty: 3 Hard Topic: Depreciation - Declining-Balance Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

110) Kansas Enterprises purchased equipment for $60,000 on January 1, 2021. The equipment is expected to have a five-year service life, with a residual value of $5,000 at the end of five years. Using the double-declining balance method, depreciation expense for 2022 would be: A) $22,000. B) $13,200. C) $14,400. D) $24,000. Answer: C Explanation: Depreciation rate = 2 / 5 = 0.40. Depreciation expense = [$60,000 − ($60,000 × 0.40)] × 0 .40 = $14,400. Difficulty: 3 Hard Topic: Depreciation - Declining-Balance Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 111) Kansas Enterprises purchased equipment for $60,000 on January 1, 2021. The equipment is expected to have a five-year life, with a residual value of $5,000 at the end of five years. Using the double-declining balance method, the book value at December 31, 2022, would be: A) $21,600. B) $24,800. C) $36,000. D) $45,600. Answer: A Explanation: Depreciation rate = 2 / 5 = 0.40. $60,000 × 0.40 = $24,000 depreciation in the first year. ($60,000 − 24,000) × 0.40 = $14,400 depreciation in the second year. Book value = $60,000 − $24,000 − $14,400 = $21,600. Difficulty: 3 Hard Topic: Depreciation - Declining-Balance Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

112) A machine has a cost of $15,000, an estimated residual value of $3,000, and an estimated useful life of four years. The machine is being depreciated on a straight-line basis. At the end of the second year, what amount will be reported for accumulated depreciation? A) $9,000. B) $6,000. C) $7,500. D) $3,000. Answer: B Explanation: ($15,000 − $3,000) / 4 years = $3,000 per year × 2 years = $6,000. Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 113) A building was purchased for $50,000. The asset has an expected useful life of six years and depreciation expense each year is $8,000 using the straight-line method. What is the residual value of the building? A) $0. B) $2,000. C) $4,000. D) $6,000. Answer: B Explanation: ($50,000 − X) / 6 years = $8,000 depreciation expense; therefore X = $2,000. Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

114) A company purchases a piece of equipment on January 1, 2021, for $70,000 and the equipment has an expected useful life of five years. Its residual value is estimated to be $10,000. Assuming the company uses the straight-line depreciation method, what should be the balance in accumulated depreciation for the equipment as of December 31, 2023 (three years later)? A) $44,000. B) $32,000. C) $36,000. D) $42,000. Answer: C Explanation: ($70,000 − $10,000) / 5 years = $12,000 depreciation per year. Accumulated depreciation = $12,000 × 3 years = $36,000. Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 115) Equipment with a cost of $390,000 and estimated residual value of $60,000 is expected to have a useful life of 30,000 hours. During August, the equipment was operated 700 hours. What amount should be recorded as depreciation expense for the month? A) $8,400. B) $7,700. C) $9,100. D) $7,000. Answer: B Explanation: ($390,000 − $60,000) / 30,000 hours = $11 per hour. Depreciation expense = 700 hours × $11 per hour = $7,700. Difficulty: 3 Hard Topic: Depreciation - Activity-Based Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

116) A company purchased a delivery truck on January 1, 2021, for $65,000. The truck has an estimated life of 10 years and an estimated residual value of $5,000. If the company uses straight-line depreciation, what would be the book value after four years? A) $41,000. B) $60,000. C) $36,000. D) $24,000. Answer: A Explanation: ($65,000 − $5,000) / 10 years = $6,000 depreciation per year. Book value = $65,000 − ($6,000 × 4 years) = $41,000. Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 117) A company purchased a delivery truck on January 1, 2021, for $100,000. The truck has an estimated life of 10 years and an estimated residual value of $10,000. If the company uses double-declining balance, what would be the book value of the truck after two years? A) $64,000. B) $76,000. C) $82,000. D) $54,000. Answer: A Explanation: Year 1 depreciation: $100,000 ×(2 / 10) = $20,000. Year 2 depreciation: ($100,000 − $20,000) × (2 / 10) = $16,000. Book value = $100,000 − ($20,000 + $16,000) = $64,000. Difficulty: 3 Hard Topic: Depreciation - Declining-Balance Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

118) A company purchased a machine for $100,000 on October 1, 2021. The estimated service life is 10 years with a $10,000 residual value. The company records partial-year depreciation based on the number of months in service. Depreciation expense for the year ended December 31, 2021, using straight-line depreciation, is: A) $1,500. B) $7,500. C) $2,250. D) $2,500. Answer: C Explanation: Depreciation expense = [($100,000 − $10,000) / 10 years] × 3 / 12 = $2,250. Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method; Depreciation - Partial Year Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 119) A company purchased equipment for $240,000 on March 1, 2021. The estimated service life is six years with a $60,000 residual value. The company records partial-year depreciation based on the number of months in service. Depreciation expense for the year ended December 31, 2021, using straight-line depreciation, is: A) $33,333. B) $40,000. C) $30,000. D) $25,000. Answer: D Explanation: Depreciation expense = [($240,000 − $60,000) / 6 years] × 10 / 12 = $25,000. Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method; Depreciation - Partial Year Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

120) Best Construction purchased a delivery truck on June 1, 2021. The following information is available: Cost = $90,000 Estimated service life = 5 years Estimated residual value = $15,000 Calculate depreciation expense for the year ended December 31, 2021, using straight-line depreciation. A) $8,750. B) $15,000. C) $6,250. D) $18,000. Answer: A Explanation: Depreciation expense = [($90,000 − $15,000) / 5 years] × 7 / 12 = $8,750. Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method; Depreciation - Partial Year Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 121) Best Construction purchased a delivery truck on June 1, 2021. The following information is available: Cost = $90,000 Estimated service life = 5 years Estimated residual value = $15,000 Calculate depreciation expense for the year ended December 31, 2022, using straight-line depreciation. A) $8,750. B) $15,000. C) $6,250. D) $18,000. Answer: B Explanation: Depreciation expense = [($90,000 − $15,000) / 5 years] × 12 / 12 = $15,000. Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

122) Best Construction purchased a delivery truck on June 1, 2021. The following information is available: Cost = $90,000 Estimated service life = 5 years Estimated residual value = $15,000 Calculate the balance of accumulated depreciation for the year ended December 31, 2022, using straight-line depreciation. A) $21,250. B) $17,500. C) $23,750. D) $30,000. Answer: C Explanation: Depreciation expense for 2021 = [($90,000 − $15,000) / 5 years] × 7 / 12 = $8,750. Depreciation expense for 2022 = [($90,000 − $15,000) / 5 years] × 12 / 12 = $15,000. Accumulated depreciation for 2022 = $8,750 + $15,000 = $23,750. Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method; Depreciation - Partial Year Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 123) A company purchased office equipment for $130,000 on March 1, 2021. The estimated service life is four years with a $40,000 residual value. The company records partial-year depreciation based on the number of months in service. The balance of accumulated depreciation for the year ended December 31, 2022, using straight-line depreciation, is: A) $41,250. B) $22,500. C) $88,750. D) $18,750. Answer: A Explanation: Depreciation expense for 2021 = [($130,000 − 40,000) / 4 years] × 10 / 12 = $18,750. Depreciation expense for 2022 = [($130,000 − 40,000) / 4 years] × 12 / 12 = $22,500. Accumulated depreciation for 2022 = $18,750 + $22,500 = $41,250. Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method; Depreciation - Partial Year Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 49 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

124) A company purchased a computer system at a cost of $40,000. The estimated useful life is 10 years, and the estimated residual value is $5,000. Assuming the company uses the doubledeclining-balance method, what is the depreciation expense for the second year? A) $8,000. B) $7,000. C) $5,600. D) $6,400. Answer: D Explanation: Depreciation rate = 2 / 10 = 20%. $40,000 × 20% = $8,000 depreciation in the first year. ($40,000 − 8,000) × 20% = $6,400 depreciation in the second year. Difficulty: 3 Hard Topic: Depreciation - Declining-Balance Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 125) A company purchased a piece of equipment for $50,000 and the equipment has an expected useful life of five years. Its residual value is estimated to be $4,000. Assuming the company uses the double-declining-balance depreciation method, what is the depreciation expense for the equipment for the second full year? A) $9,200. B) $9,040. C) $12,000. D) $11,040. Answer: C Explanation: Depreciation rate = 2 / 10 = 20%. $50,000 × 40% = $20,000 depreciation in the first year. ($50,000 − 20,000) × 40% = $12,000 depreciation in the second year. Difficulty: 3 Hard Topic: Depreciation - Declining-Balance Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

126) During the first two years, Supplies, Inc. drove the company truck 15,000 and 22,000 miles, respectively, to deliver merchandise to its customers. The company originally purchased the truck for $175,000. If the truck has an estimated life of 10 years or 300,000 miles, and an estimated residual value of $25,000, what amount of depreciation expense should Supplies, Inc. record in the second year using the activity-based method? A) $11,000. B) $18,500. C) $7,500. D) $16,000. Answer: A Explanation: ($175,000 − $25,000) / 300,000 miles = $0.50 per mile × 22,000 miles = $11,000. Difficulty: 3 Hard Topic: Depreciation - Activity-Based Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 127) On January 1, 2022, a company purchased a machine that cost $500,000 and had a residual value of $50,000. The machine is expected to produce 360,000 units and is estimated to last 10 years. If 25,000 units were produced in 2022 and 35,000 were produced in 2023, what amount of accumulated depreciation is reported at the end of 2023 using the activity-based method (rounded to the nearest whole dollar if necessary)? A) $43,750. B) $90,000. C) $75,000. D) $31,200. Answer: C Explanation: ($500,000 − $50,000) / 360,000 units = $1.25 per unit. (25,000 units + 35,000 units) × $1.25 per unit = $75,000. Difficulty: 3 Hard Topic: Depreciation - Activity-Based Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

128) A company purchased a tractor on January 1, 2021, for $65,000. The tractor's useful life is estimated to be 30,000 miles with an expected residual value of $5,000. If the company used the tractor 5,000 miles in 2021 and 3,000 miles in 2022, what is the balance for accumulated depreciation at the end of 2022 using the activity-based method? A) $38,000. B) $6,000. C) $16,000. D) $10,000. Answer: C Explanation: ($65,000 − $5,000) / 30,000 miles = $2 per mile × 8,000 miles = $16,000. Difficulty: 3 Hard Topic: Depreciation - Activity-Based Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 129) A company purchased equipment at the beginning of 2021 for $500,000. The equipment is depreciated on a straight-line basis with an estimated useful life of nine years and a $50,000 residual value. At the beginning of 2024, the company revised the equipment's useful life to a total of seven years (four more years) because of changing customer demand. The company also revised the expected residual value to $30,000. What depreciation expense would the company record for the year 2024 on this equipment? A) $87,500. B) $80,000. C) $50,000. D) $75,000. Answer: B Explanation: Depreciation for 2021-2023 = [($500,000 − $50,000) / 9] × 3 years = $150,000. This leaves a Book value at beginning of 2024 = ($500,000 − $150,000) = $350,000. Annual depreciation in 2024 = [($350,000 − $30,000) / 4] = $80,000. Difficulty: 3 Hard Topic: Depreciation - Change in Estimate Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

130) A company purchased equipment at the beginning of 2021 for $650,000. In 2021 and 2022, the company depreciated the asset on a straight-line basis with an estimated useful life of eight years and a $10,000 residual value. At the beginning of 2023, due to changes in technology, the company revised the useful life to a total of six years (four more years) with zero residual value. What depreciation expense would the company record for the year 2023 on this equipment? A) $108,333. B) $106,667. C) $122,500. D) $81,667. Answer: C Explanation: Depreciation for 2021 and 2022 = [($650,000 − $10,000) / 8] × 2 years = $160,000. Book value at beginning of 2023 = ($650,000 − $160,000) = $490,000. Annual depreciation for 2023 = [($490,000 − $0) / 4] = $122,500. Difficulty: 3 Hard Topic: Depreciation - Change in Estimate Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 131) Which of the following intangible assets is not amortized? A) Patents. B) Copyrights. C) Franchises. D) Goodwill. Answer: D Difficulty: 1 Easy Topic: Amortization of Intangible Assets Learning Objective: 07-05 Calculate amortization of intangible assets. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

132) Which of the following intangible assets may or may not be amortized depending on whether it has a finite or an indefinite life? A) Patents. B) Copyrights. C) Goodwill. D) Trademarks. Answer: D Difficulty: 1 Easy Topic: Amortization of Intangible Assets Learning Objective: 07-05 Calculate amortization of intangible assets. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 133) Which of the following intangible assets has an indefinite useful life? A) Patents. B) Copyrights. C) Franchises. D) Goodwill. Answer: D Difficulty: 1 Easy Topic: Amortization of Intangible Assets Learning Objective: 07-05 Calculate amortization of intangible assets. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 134) Which of the following amortization methods is most commonly used? A) Straight-line. B) Double-declining-balance. C) Activity-based. D) A combination of methods. Answer: A Difficulty: 1 Easy Topic: Amortization of Intangible Assets Learning Objective: 07-05 Calculate amortization of intangible assets. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

135) Which of the following statements is true regarding the amortization of intangible assets? A) The expected residual value of most intangible assets is zero. B) The service life of an intangible asset is always equal to its legal life. C) Intangible assets with a limited useful life are not amortized. D) In recording amortization, an accumulated amortization account is always used. Answer: A Difficulty: 2 Medium Topic: Amortization of Intangible Assets Learning Objective: 07-05 Calculate amortization of intangible assets. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 136) Bricktown Exchange purchases a copyright for $50,000. The copyright has a remaining legal life of 25 years, but only an expected useful life of five years with no residual value. Assume the company uses the straight-line method to record amortization. What is the amortization expense for the first year? A) $0. B) $2,000. C) $3,333. D) $10,000. Answer: D Explanation: $50,000 / 5 years = $10,000. Difficulty: 3 Hard Topic: Amortization of Intangible Assets Learning Objective: 07-05 Calculate amortization of intangible assets. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

137) Bricktown Exchange purchases a copyright for $50,000. The copyright has a remaining legal life of 25 years, but only an expected useful life of five years with no residual value. Assume the company uses the straight-line method to record amortization. What is the carrying value of the copyright at the end of the first year? A) $0. B) $10,000. C) $50,000. D) $40,000. Answer: D Explanation: $50,000 / 5 years = $10,000 amortization per year. Cost Less: Accumulated Amortization = Carrying Value, end of year 1

50,000 (10,000) $ 40,000

Difficulty: 3 Hard Topic: Amortization of Intangible Assets Learning Objective: 07-05 Calculate amortization of intangible assets. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 138) Bricktown Exchange purchases a copyright for $50,000. The copyright has a remaining legal life of 25 years, but only an expected useful life of five years with no residual value. Assume the company uses the straight-line method to record amortization. What is the carrying value of the copyright at the end of the second year? A) $10,000. B) $40,000. C) $50,000. D) $30,000. Answer: D Explanation: $50,000 / 5 years = $10,000 amortization per year. Cost Less: Accumulated Amortization = Carrying Value, end of year 2

50,000 (20,000) $ 30,000

Difficulty: 3 Hard Topic: Amortization of Intangible Assets Learning Objective: 07-05 Calculate amortization of intangible assets. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 57 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

139) Berry Co. purchases a patent on January 1, 2021, for $40,000 and the patent has an expected useful life of five years with no residual value. Assuming Berry Co. uses the straightline method, what is the amortization expense for the year ended December 31, 2022? A) $0. B) $8,000. C) $16,000. D) $40,000. Answer: B Explanation: $40,000 / 5 years = $8,000. Difficulty: 3 Hard Topic: Amortization of Intangible Assets Learning Objective: 07-05 Calculate amortization of intangible assets. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 140) Berry Co. purchases a patent on January 1, 2021, for $40,000 and the patent has an expected useful life of five years with no residual value. Assuming Berry Co. uses the straightline method, what is the carrying value of the patent on December 31, 2022? A) $21,000. B) $33,000. C) $24,000. D) $26,000. Answer: C Explanation: $40,000 / 5 years = $8,000 amortization per year. Cost Less: Accumulated Amortization = Carrying Value, 12/31/2022

40,000 (16,000) $ 24,000

141) Charco purchased a franchise from Burger Master on January 1, 2021, for $240,000. The franchise agreement allows Charco to sell hamburgers and other related food items using the Burger Master name for a period of six years. Assuming Charco uses the straight-line method, what is the amortization expense for the year ended December 31, 2021? A) $0. B) $28,000. C) $40,000. D) $240,000. Answer: C Explanation: $240,000 / 6 years = $40,000 amortization per year. Difficulty: 3 Hard Topic: Amortization of Intangible Assets Learning Objective: 07-05 Calculate amortization of intangible assets. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 142) Charco purchased a franchise from Burger Master on January 1, 2021, for $240,000. The franchise agreement allows Charco to sell hamburgers and other related food items using the Burger Master name for a period of 6 years. Assuming Charco uses the straight-line method, what is the carrying value of the franchise on December 31, 2022? A) $120,000. B) $80,000. C) $240,000. D) $160,000. Answer: D Explanation: $240,000 / 6 years = $40,000 amortization per year. Cost Less: Accumulated Amortization = Carrying Value, 12/31/2022

$ 240,000 (80,000) $ 160,000

143) When a company reports a gain on the sale of a depreciable asset, which of the following is always true? A) The company sold the asset for more than its fair value. B) The company sold the asset for more than its book value. C) The company sold the asset before its useful life was over. D) The company sold the asset for more than it was worth. Answer: B Difficulty: 3 Hard Topic: Disposition - Sale Learning Objective: 07-06 Account for the disposal of long-term assets. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 144) When a company reports a loss on the sale of a depreciable asset, which of the following is always true? A) The company sold the asset for less than accumulated depreciation. B) The company sold the asset for less than fair value. C) The company sold the asset for less than book value. D) The company sold the asset before the useful life was over. Answer: C Difficulty: 3 Hard Topic: Disposition - Sale Learning Objective: 07-06 Account for the disposal of long-term assets. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation

145) Equipment was sold for $50,000. The equipment was originally purchased for $85,000. At the time of the sale, the equipment had accumulated depreciation of $30,000. Calculate the gain or loss to be recorded on the sale of equipment. A) Gain of $20,000. B) Loss of $5,000. C) Loss of $35,000. D) Gain of $5,000. Answer: B Explanation: Original cost ($85,000) less accumulated depreciation ($30,000) = book value ($55,000). Because the sale price ($50,000) is less than book value ($55,000), a loss for the difference ($5,000) is recorded. Difficulty: 3 Hard Topic: Disposition - Sale Learning Objective: 07-06 Account for the disposal of long-term assets. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 146) Equipment was sold for $40,000. The equipment was originally purchased for $75,000. At the time of the sale, the equipment had accumulated depreciation of $50,000. Calculate the gain or loss to be recorded on the sale of equipment. A) Gain of $10,000. B) Loss of $15,000. C) Loss of $35,000. D) Gain of $15,000. Answer: D Explanation: Original cost ($75,000) less accumulated depreciation ($50,000) = book value ($25,000). Because the sale price ($40,000) is greater than book value ($40,000), a gain for the difference ($15,000) is recorded. Difficulty: 3 Hard Topic: Disposition - Sale Learning Objective: 07-06 Account for the disposal of long-term assets. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

147) A company purchased a computer that cost $10,000. It had an estimated useful life of five years and no residual value. The computer was depreciated by the straight-line method and was sold at the end of the fourth year of use for $3,000 cash. The company should record: A) a gain of $1,000. B) a loss of $1,000. C) neither a gain nor a loss—the computer was sold at its book value. D) neither a gain nor a loss—the gain that occurred in this case would not be recognized. Answer: A Explanation: $10,000 / 5 years = depreciation of $2,000 per year. After four years, the book value would be $10,000 − ($2,000 × 4 years) = $2,000. The asset was sold for $3,000, so the company should record a gain of $1,000. Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method; Disposition - Sale Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment.; 07-06 Account for the disposal of long-term assets. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 148) A company purchased a computer that cost $10,000. It had an estimated useful life of five years and no residual value. The computer was depreciated by the straight-line method and was sold at the end of the second year of use for $5,000 cash. The company should record: A) a loss of $1,000. B) a gain of $1,000. C) neither a gain nor a loss—the computer was sold at its book value. D) neither a gain nor a loss—the gain that occurred in this case would not be recognized. Answer: A Explanation: $10,000 / 5 years = depreciation of $2,000 per year. After two years, the book value would be $10,000 − ($2,000 × 2 years) = $6,000. The asset was sold for $5,000, so the company should record a loss of $1,000. Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method; Disposition - Sale Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment.; 07-06 Account for the disposal of long-term assets. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

149) On January 1, 2020, a company purchased a commercial truck for $48,000 and uses the straight-line depreciation method. The truck has a useful life of eight years and an estimated residual value of $8,000. On December 31, 2022, the company sold the truck for $30,000. What amount of gain or loss should the company record on December 31, 2022? A) Gain, $22,000. B) Loss, $18,000. C) Gain, $5,000. D) Loss, $3,000. Answer: D Explanation: ($48,000 − $8,000) / 8 = depreciation of $5,000 per year. After three years, the book value would be [$48,000 − ($5,000 × 3 years)] = $33,000. The truck was sold for $30,000, so the company should record a loss of $3,000. Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method; Disposition - Sale Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment.; 07-06 Account for the disposal of long-term assets. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 150) On January 1, 2020, Jacob Inc. purchased a commercial truck for $48,000 and uses the straight-line depreciation method. The truck has a useful life of eight years and an estimated residual value of $8,000. On December 31, 2021, Jacob Inc. sold the truck for $43,000. What amount of gain or loss should Jacob Inc. record on December 31, 2021? A) Gain, $22,000. B) Loss, $18,000. C) Gain, $5,000. D) Loss, $3,000. Answer: C Explanation: ($48,000 − $8,000) / 8 years = depreciation of $5,000 per year. After two years, the book value would be [$48,000 − ($5,000 × 2 years)] = $38,000. The truck was sold for $43,000, so the company should record a $5,000 gain. Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method; Disposition - Sale Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment.; 07-06 Account for the disposal of long-term assets. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

151) On January 1, 2021, Jacob Inc. purchased a commercial truck for $48,000 and uses the straight-line depreciation method. The truck has a useful life of eight years and an estimated residual value of $8,000. Assume the truck was totaled in an accident on December 31, 2022. What amount of gain or loss should Jacob Inc. record on December 31, 2022? A) Gain, $5,000. B) Loss, $18,000. C) Loss, $38,000. D) Loss, $3,000. Answer: C Explanation: ($48,000 − $8,000) / 8 years = depreciation of $5,000 per year. After two years, the book value would be [$48,000 − ($5,000 × 2 years)] = $38,000. The truck was retired at a loss of $38,000. Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method; Disposition - Retirement Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment.; 07-06 Account for the disposal of long-term assets. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 152) On January 1, 2021, Jacob Inc. purchased a commercial truck for $48,000 and uses the straight-line depreciation method. The truck has a useful life of eight years and an estimated residual value of $8,000. On December 31, 2022, the truck was exchanged for a new truck valued at $60,000. Jacob received a trade allowance of $35,000 on the exchange with the remaining $25,000 paid in cash. What amount of gain or loss should Jacob Inc. record on December 31, 2022? A) Gain, $5,000. B) Loss, $18,000. C) Loss, $38,000. D) Loss, $3,000. Answer: D Explanation: ($48,000 − $8,000) / 8 years = depreciation of $5,000 per year. After two years, the book value would be [$48,000 − ($5,000 × 2 years)] = $38,000. The truck was exchanged receiving a trade allowance of only $35,000, so the company should record a loss of $3,000. Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method; Disposition - Exchange Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment.; 07-06 Account for the disposal of long-term assets. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

153) Alliance Products purchased equipment that cost $120,000. It had an estimated useful life of four years and no residual value. The equipment was depreciated by the straight-line method and was sold at the end of the second year of use. For what amount should Alliance record the gain or loss if the equipment is sold for $65,000? A) Gain of $5,000. B) Loss of $5,000. C) Neither a gain nor a loss since the equipment was sold at its book value. D) Neither a gain nor a loss since the gain would not be recognized. Answer: A Explanation: $120,000 / 4 years = depreciation of $30,000 per year. After two years, the book value would be [$120,000 − ($30,000 × 2 years)] = $60,000. The asset was sold for $65,000, so the company should record a gain of $5,000. Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method; Disposition - Sales Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment.; 07-06 Account for the disposal of long-term assets. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 154) Alliance Products purchased equipment that cost $120,000. It had an estimated useful life of four years and no residual value. The equipment was depreciated by the straight-line method and was sold at the end of the third year of use. For what amount should Alliance record the gain or loss if the equipment is sold for $25,000? A) A gain of $5,000. B) A loss of $5,000. C) Neither a gain nor a loss since the equipment was sold at its book value. D) Neither a gain nor a loss since the gain would not be recognized. Answer: B Explanation: $120,000 / 4 years = depreciation of $30,000 per year. After three years, the book value would be [$120,000 − ($30,000 × 3 years)] = $30,000. The asset was sold for $25,000, so the company should record a loss of $5,000. Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method; Disposition - Sale Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment.; 07-06 Account for the disposal of long-term assets. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

155) Career Services, Incorporated sold some office equipment for $52,000 on December 31, 2021. The journal entry to record the sale would include which of the following if the original cost of the equipment was $80,000 with a residual value of $5,000 and a useful life of 10 years? Assume the machine was purchased on January 1, 2018, and depreciated using the straight-line method. A) Gain of $2,000. B) Loss of $9,500. C) Gain of $9,500. D) Loss of $2,000. Answer: A Explanation: [($80,000 − $5,000) / 10 years] = $7,500 depreciation per year. After four years, the book value would be [$80,000 − ($7,500 × 4 years)] = $50,000. The asset was sold for $52,000, so the company should record a gain of $2,000. Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method; Disposition - Sale Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment.; 07-06 Account for the disposal of long-term assets. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 156) ABO purchased a truck at the beginning of 2021 for $140,000. They sold the truck at the end of 2022 for $95,000. If the expected useful life of the truck was six years with a residual value of $20,000 and ABO uses straight-line depreciation, which of the following is true regarding the entry to record the sale of the truck? A) Credit Gain $5,000. B) Debit Loss $5,000. C) Credit Accumulated Depreciation $40,000. D) Credit Equipment $100,000. Answer: B Explanation: The journal entry to record the sale of the truck would be: Cash Accumulated Depreciation* Loss Equipment

95,000 40,000 5,000 140,000

*[($140,000 − $20,000) / 6 years] = $20,000 per year × 2 years = $40,000. Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method; Disposition - Sale Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment.; 07-06 Account for the disposal of long-term assets. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 66 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

157) Oregon Adventures purchased equipment for $80,000. They sold the equipment at the end of three years for $45,000. If the expected useful life of the equipment was seven years with a residual value of $10,000, and they use straight-line depreciation, which of the following is true regarding the entry to record the sale of the equipment? A) Debit Loss $5,000. B) Credit Gain $5,000. C) Credit Accumulated Depreciation $40,000. D) Credit Equipment $5,000. Answer: A Explanation: The sale of equipment is recorded as: Cash Accumulated Depreciation* Loss Equipment

45,000 30,000 5,000 80,000

*[($80,000 − $10,000) / 7 years] = $10,000 per year × 3 years = $30,000. Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method; Disposition - Sale Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment.; 07-06 Account for the disposal of long-term assets. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 158) Gains on the sale of long-term assets for cash: A) Are the excess of the book value over the cash received. B) Are recorded as a debit. C) Are reported on a net-of-tax basis, if material. D) Are the excess of the cash received over the book value. Answer: D Difficulty: 2 Medium Topic: Disposition - Sale Learning Objective: 07-06 Account for the disposal of long-term assets. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

159) Losses on the sale of long-term assets for cash: A) Are the excess of the book value over the cash received. B) Are recorded as a credit. C) Are reported on a net-of-tax basis, if material. D) Are the excess of the cash received over the book value. Answer: A Difficulty: 2 Medium Topic: Disposition - Sale Learning Objective: 07-06 Account for the disposal of long-term assets. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 160) Return on assets is calculated as: A) Net Income divided by total assets. B) Net Income divided by average total assets. C) Net Income divided by ending total assets. D) Ending total assets divided by net income. Answer: B Difficulty: 1 Easy Topic: Analysis - Return on Assets Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 161) Return on assets is equal to: A) Profit margin plus asset turnover. B) Profit margin minus asset turnover. C) Profit margin times asset turnover. D) Profit margin divided by asset turnover. Answer: C Difficulty: 1 Easy Topic: Analysis - Return on Assets Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

162) The balance sheet of Paradise Pizza reports total assets of $1,500,000 and $1,700,000 at the beginning and end of the year, respectively. Net income and sales for the year are $240,000 and $2,000,000, respectively. What is Paradise Pizza's return on assets? A) 15%. B) 14.12%. C) 16%. D) 12%. Answer: A Explanation: $240,000 / [($1,500,000 + $1,700,000) / 2] = 15%. Difficulty: 3 Hard Topic: Analysis - Return on Assets Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 163) The balance sheet of Paradise Pizza reports total assets of $1,500,000 and $1,700,000 at the beginning and end of the year, respectively. Net income and sales for the year are $240,000 and $2,000,000, respectively. What is Paradise Pizza's profit margin? A) 15%. B) 14.12%. C) 16%. D) 12%. Answer: D Explanation: $240,000 / $2,000,000 = 12%. Difficulty: 3 Hard Topic: Analysis - Profit Margin Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

164) The balance sheet of Paradise Pizza reports total assets of $1,500,000 and $1,700,000 at the beginning and end of the year, respectively. Net income and sales for the year are $240,000 and $2,000,000, respectively. What is Paradise Pizza's asset turnover? A) 1.25 times. B) 1.33 times. C) 8.33 times. D) 0.80 times. Answer: A Explanation: $2,000,000 / [($1,500,000 + $1,700,000) / 2] = 1.25 times. Difficulty: 3 Hard Topic: Analysis - Asset Turnover Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 165) The balance sheet of Purdy's BBQ reports total assets of $800,000 and $900,000 at the beginning and end of the year, respectively. Net income and sales for the year are $85,000 and $1,700,000, respectively. What is Purdy's return on assets? A) 10%. B) 20%. C) 200%. D) 5%. Answer: A Explanation: $85,000 / [($800,000 + $900,000) / 2] = 10%. Difficulty: 3 Hard Topic: Analysis - Return on Assets Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

166) The balance sheet of Purdy's BBQ reports total assets of $800,000 and $900,000 at the beginning and end of the year, respectively. Net income and sales for the year are $85,000 and $1,700,000, respectively. What is Purdy's profit margin? A) 5%. B) 10%. C) 20%. D) 50%. Answer: A Explanation: $85,000 / $1,700,000 = 5%. Difficulty: 3 Hard Topic: Analysis - Profit Margin Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 167) The balance sheet of Purdy's BBQ reports total assets of $800,000 and $900,000 at the beginning and end of the year, respectively. Net income and sales for the year are $85,000 and $1,700,000, respectively. What is Purdy's asset turnover? A) 0.5 times. B) 20.0 times. C) 10.0 times. D) 2.0 times. Answer: D Explanation: $1,700,000 / [($800,000 + $900,000) / 2] = 2.0 times. Difficulty: 3 Hard Topic: Analysis - Asset Turnover Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

168) The balance sheet of Purdy's BBQ reports total assets of $800,000 and $900,000 at the beginning and end of the year, respectively. The return on assets for the year is 20%. What is Purdy's net income for the year? A) $4,500,000. B) $170,000. C) $4,250,000. D) $85,000. Answer: B Explanation: Net income divided by average total assets = 20%. Average total assets = $850,000 [($800,000 + $900,000) / 2]; therefore, net income must be $170,000 ($850,000 × 20%). Difficulty: 3 Hard Topic: Analysis - Return on Assets Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 169) The balance sheet of Hidden Valley Farms reports total assets of $450,000 and $550,000 at the beginning and end of the year, respectively. Net income and sales for the year are $100,000 and $800,000, respectively. What is Hidden Valley's return on assets? A) 10%. B) 20%. C) 160%. D) 18%. Answer: B Explanation: $100,000 / [($450,000 + $550,000) / 2] = 20%. Difficulty: 3 Hard Topic: Analysis - Return on Assets Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

170) The balance sheet of Hidden Valley Farms reports total assets of $450,000 and $550,000 at the beginning and end of the year, respectively. Net income and sales for the year are $100,000 and $800,000, respectively. What is Hidden Valley's profit margin? A) 10%. B) 12.5%. C) 18%. D) 22%. Answer: B Explanation: $100,000 / $800,000 = 12.5%. Difficulty: 3 Hard Topic: Analysis - Profit Margin Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 171) The balance sheet of Hidden Valley Farms reports total assets of $450,000 and $550,000 at the beginning and end of the year, respectively. Net income and sales for the year are $100,000 and $800,000, respectively. What is Hidden Valley's asset turnover? A) 1.6 times. B) 1.8 times. C) 1.5 times. D) 0.2 times. Answer: A Explanation: $800,000 / [($450,000 + $550,000) /2] = 1.6 times. Difficulty: 3 Hard Topic: Analysis - Asset Turnover Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

172) The balance sheet of Hidden Valley Farms reports total assets of $450,000 and $550,000 at the beginning and end of the year, respectively. The return on assets for the year is 10%. What is Hidden Valley's net income for the year? A) $5,000,000. B) $55,000. C) $5,500,000. D) $50,000. Answer: D Explanation: Net income divided by average total assets = 10%. Average total assets = $500,000 [($450,000 + $550,000) / 2]; therefore, net income must be $50,000 ($500,000 × 10%). Difficulty: 3 Hard Topic: Analysis - Return on Assets Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 173) Recognition of impairment for long-term assets is required if book value exceeds: A) Original cost. B) Fair value. C) Future cash flows. D) Accumulated depreciation. Answer: C Difficulty: 2 Medium Topic: Asset Impairment Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

174) The amount of impairment loss is the excess of book value over: A) Carrying value. B) Future cash flows. C) Fair value. D) Future revenues. Answer: C Difficulty: 2 Medium Topic: Asset Impairment Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 175) Accounting for impairment losses: A) Involves a two-step process to first test for impairment and then record the loss. B) Applies only to depreciable, operational assets. C) Applies only to assets with finite lives. D) All of these. Answer: A Difficulty: 2 Medium Topic: Asset Impairment Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 176) In testing for impairment of an operational asset, an impairment loss has occurred if the: A) Asset's book value exceeds the present value of its expected future cash flows. B) Expected future cash flows exceeds the asset's book value. C) Present value of expected future cash flows exceeds its carrying value. D) Asset's book value exceeds the expected future cash flows. Answer: D Difficulty: 2 Medium Topic: Asset Impairment Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

177) Wilson Inc. owns equipment for which it originally paid $70 million and has recorded accumulated depreciation on the equipment of $12 million. Due to adverse economic conditions, Wilson's management determined that it should assess whether an impairment should be recognized for the equipment. The estimated future cash flows to be provided by the equipment total $60 million, and its fair value at that point totals $50 million. Under these circumstances, Wilson: A) Would record no impairment loss on the equipment. B) Would record an $8 million impairment loss on the equipment. C) Would record a $20 million impairment loss on the equipment. D) Would record a $2 million impairment loss on the equipment. Answer: A Explanation: The estimated future cash flows exceed the current book value, so no impairment exists. Difficulty: 3 Hard Topic: Asset Impairment Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 178) Leonard's Jewelry owns a patent with a carrying value of $50 million. Due to adverse economic conditions, Leonard's management determined that it should assess whether an impairment should be recognized for the patent. The estimated future cash flows to be provided by the patent total $43 million, and its fair value at that point totals $35 million. Under these circumstances, Leonard: A) Would record no impairment loss on the patent. B) Would record a $7 million impairment loss on the patent. C) Would record a $15 million impairment loss on the patent. D) Would record a $31 million impairment loss on the patent. Answer: C Explanation: The patent is impaired because estimated future cash flows of $43 million are less than the carrying value of $50 million. The impairment loss is measured by the difference between its carrying value of $50 million and its fair value of $35 million. Difficulty: 3 Hard Topic: Asset Impairment Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

179) C-Stop reports the following information at year-end:

Building Patent Copyright Machine

Book Value $ 500,000 $ 35,000 $ 40,000 $ 100,000

Estimated Cash Flows $ 380,000 $ 40,000 $ 38,000 $ 120,000

Fair Value $ 360,000 $ 38,000 $ 39,000 $ 85,000

Based on the above information, what is the total amount of impairment loss that C-Stop should record at year-end? A) $141,000. B) $126,000. C) $123,000. D) $122,000. Answer: A Explanation: The building and the copyright are impaired since their estimated future cash flows are less than book value. The impairment loss is calculated as the difference between the book value and the fair value: Building ($500,000 − $360,000) = $140,000 and Copyright (40,000 − $39,000) = $1,000. Total impairment loss ($140,000 + $1,000) = $141,000. Difficulty: 3 Hard Topic: Asset Impairment Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

180) Maple Inc. has the following information regarding its assets:

Equipment Building Patent

Book Value $ 35,000 $ 68,000 $ 30,000

Estimated Cash Flows $ 30,000 $ 70,000 $ 34,000

Fair Value $ 28,000 $ 65,000 $ 32,000

What amount of loss should be recorded due to asset impairment? A) $10,000. B) $9,000. C) $8,000. D) $7,000. Answer: D Explanation: Only the equipment is impaired since its estimated future cash flows are less than book value. The impairment loss is calculated as the difference between the book value and the fair value ($35,000 − $28,000) = $7,000. Difficulty: 3 Hard Topic: Asset Impairment Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

181) Based on the information below, what amount of impairment loss would be reported?

Asset Equipment Truck Building

Fair value $ 25,000 $ 34,000 $ 135,000

Estimated cash flows $ 36,000 $ 45,000 $ 138,000

Book value $ 30,000 $ 42,000 $ 140,000

A) $5,000. B) $23,000. C) $13,000. D) $18,000. Answer: A Explanation: Only the building is impaired since its estimated future cash flows are less than book value. The impairment loss is calculated as the difference between the book value and the fair value ($140,000 − $135,000) = $5,000. Difficulty: 3 Hard Topic: Asset Impairment Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

Match the following: A) Addition B) Repairs and maintenance C) Capitalize D) Materiality E) Improvement 182) Recording an expenditure as an asset. Difficulty: 2 Medium Topic: Acquisition - Property, Plant, and Equipment; Expenditures after Acquisition Learning Objective: 07-01 Identify the major types of property, plant, and equipment.; 07-03 Describe the accounting treatment of expenditures after acquisition. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 183) Expenses after acquisition that maintain a given level of benefits. Difficulty: 2 Medium Topic: Acquisition - Property, Plant, and Equipment; Expenditures after Acquisition Learning Objective: 07-01 Identify the major types of property, plant, and equipment.; 07-03 Describe the accounting treatment of expenditures after acquisition. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 184) The cost of replacing a major component of an asset. Difficulty: 2 Medium Topic: Acquisition - Property, Plant, and Equipment; Expenditures after Acquisition Learning Objective: 07-01 Identify the major types of property, plant, and equipment.; 07-03 Describe the accounting treatment of expenditures after acquisition. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 185) Occurs when we add a new major component to an existing asset. Difficulty: 2 Medium Topic: Acquisition - Property, Plant, and Equipment; Expenditures after Acquisition Learning Objective: 07-01 Identify the major types of property, plant, and equipment.; 07-03 Describe the accounting treatment of expenditures after acquisition. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

186) Large enough to influence an investor's or creditor's decision. Difficulty: 2 Medium Topic: Acquisition - Property, Plant, and Equipment; Expenditures after Acquisition Learning Objective: 07-01 Identify the major types of property, plant, and equipment.; 07-03 Describe the accounting treatment of expenditures after acquisition. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 182) C 183) B 184) E 185) A 186) D

Match the following: A) Declining-balance method B) Straight-line method C) Activity-based method D) Amortization E) Depletion 187) Allocates an asset's cost based on its use. Difficulty: 2 Medium Topic: Acquisition - Property, Plant, and Equipment; Depreciation - General; Amortization of Intangible Assets Learning Objective: 07-01 Identify the major types of property, plant, and equipment.; 07-04 Calculate depreciation of property, plant, and equipment.; 07-05 Calculate amortization of intangible assets. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 188) Allocates an equal amount of depreciation to each year of the asset's service life. Difficulty: 2 Medium Topic: Acquisition - Property, Plant, and Equipment; Depreciation - General; Amortization of Intangible Assets Learning Objective: 07-01 Identify the major types of property, plant, and equipment.; 07-04 Calculate depreciation of property, plant, and equipment.; 07-05 Calculate amortization of intangible assets. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 189) Allocating the cost of an intangible asset over its service life. Difficulty: 2 Medium Topic: Acquisition - Property, Plant, and Equipment; Depreciation - General; Amortization of Intangible Assets Learning Objective: 07-01 Identify the major types of property, plant, and equipment.; 07-04 Calculate depreciation of property, plant, and equipment.; 07-05 Calculate amortization of intangible assets. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

190) The process of recording expense for natural resources. Difficulty: 2 Medium Topic: Acquisition - Property, Plant, and Equipment; Depreciation - General; Amortization of Intangible Assets Learning Objective: 07-01 Identify the major types of property, plant, and equipment.; 07-04 Calculate depreciation of property, plant, and equipment.; 07-05 Calculate amortization of intangible assets. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 191) An accelerated depreciation method that records more depreciation in earlier years and less depreciation in later years. Difficulty: 2 Medium Topic: Acquisition - Property, Plant, and Equipment; Depreciation - General; Amortization of Intangible Assets Learning Objective: 07-01 Identify the major types of property, plant, and equipment.; 07-04 Calculate depreciation of property, plant, and equipment.; 07-05 Calculate amortization of intangible assets. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 187) C 188) B 189) D 190) E 191) A

Match the following: A) Franchise B) Patent C) Trademark D) Goodwill E) Copyright 192) Payment for the exclusive right to use the company's name and to sell its products within a specified geographical area. Difficulty: 2 Medium Topic: Intangible Asset Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 193) An exclusive right to manufacture a product or to use a process. Difficulty: 2 Medium Topic: Intangible Asset Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 194) A word, slogan, or symbol that distinctively identifies a company, product, or service. Difficulty: 2 Medium Topic: Intangible Asset Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 195) An exclusive right of protection given to the creator of a published work such as a song, film, painting, photograph, book, or computer software. Difficulty: 2 Medium Topic: Intangible Asset Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

196) The purchase price of a company less the fair value of the net assets acquired. Difficulty: 2 Medium Topic: Intangible Asset Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 192) A 193) B 194) C 195) E 196) D

Match the following: A) Residual value B) Book value C) Accumulated depreciation D) Depreciation E) Service life 197) A contra asset account representing the total depreciation taken to date. Difficulty: 2 Medium Topic: Depreciation – General Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 198) Equal to the original cost of the asset minus the current balance in accumulated depreciation. Difficulty: 2 Medium Topic: Depreciation - General Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 199) Allocating the cost of a tangible asset over its service life. Difficulty: 2 Medium Topic: Depreciation - General Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 200) The amount the company expects to receive from selling the asset at the end of its service life. Difficulty: 2 Medium Topic: Depreciation - General Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 201) How long the company expects to receive benefits from the asset before disposing of it. Difficulty: 2 Medium Topic: Depreciation - General Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Understand 86 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 197) C 198) B 199) D 200) A 201) E Match the following: A) Impairment B) Profit margin C) Big bath D) Asset turnover E) Return on assets 202) Net income divided by average total assets; measures the amount of net income generated for each dollar invested in assets. Difficulty: 2 Medium Topic: Analysis - Return on Assets; Analysis - Profit Margin; Analysis - Asset Turnover; Asset Impairment Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover.; 07-08 Identify impairment situations and describe the two-step impairment process. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 203) Net income divided by net sales; indicates the earnings per dollar of sales. Difficulty: 2 Medium Topic: Analysis - Return on Assets; Analysis - Profit Margin; Analysis - Asset Turnover; Asset Impairment Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover.; 07-08 Identify impairment situations and describe the two-step impairment process. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 204) Net sales divided by average total assets; measures the sales per dollar of assets invested. Difficulty: 2 Medium Topic: Analysis - Return on Assets; Analysis - Profit Margin; Analysis - Asset Turnover; Asset Impairment Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover.; 07-08 Identify impairment situations and describe the two-step impairment process. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

205) Occurs when the future cash flows (future benefits) generated for a long-term asset fall below its book value (cost minus accumulated depreciation). Difficulty: 2 Medium Topic: Analysis - Return on Assets; Analysis - Profit Margin; Analysis - Asset Turnover; Asset Impairment Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover.; 07-08 Identify impairment situations and describe the two-step impairment process. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 206) Recording all losses in one year to make a bad year even worse. Difficulty: 2 Medium Topic: Analysis - Return on Assets; Analysis - Profit Margin; Analysis - Asset Turnover; Asset Impairment Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover.; 07-08 Identify impairment situations and describe the two-step impairment process. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 202) E 203) B 204) D 205) A 206) C 207) Soccer Wholesale purchased land and a warehouse for one price of $800,000. In addition to the purchase price, Soccer Wholesale makes the following expenditures related to the acquisition: broker's commission, $48,000; title insurance, $3,000; and miscellaneous closing costs, $8,000. The warehouse is immediately demolished at a cost of $80,000 in anticipation of building a new warehouse. Determine the amount Soccer Wholesale should record as the cost of the land. Answer: Purchase price of land (and warehouse to be removed) Broker's commission Title insurance Closing costs Cost of removing the warehouse Total cost of the land

$800,000 48,000 3,000 8,000 80,000 $939,000

208) Holiday Laboratories purchased a high-speed industrial centrifuge at a cost of $420,000. Shipping costs totaled $15,000. Foundation work to house the centrifuge cost $8,000. An additional water line had to be run to the equipment at a cost of $3,000. Labor and testing costs totaled $6,000. Materials used up in testing cost $3,000. What is the total cost of the equipment? How much of this amount should be expensed immediately? Answer: Purchase price Shipping costs Foundation work Water line Labor and testing Materials used in testing Total cost of equipment Immediately expensed

$420,000 15,000 8,000 3,000 6,000 3,000 $455,000 $0

209) Little King Sandwiches made the following expenditures related to its restaurant: 1. Replaced the heating and air-conditioning equipment at a cost of $15,000. 2. Remodeled the restaurant building. The total cost of the project was $150,000. 3. Performed annual building maintenance at a cost of $47,000. 4. Paid annual insurance premium on the property for the coming year, $7,700. 5. Purchased a new delivery truck, $22,500. 6. Landscaped the property and added outdoor lights, $9,000. Little King credits cash for each of these expenditures. Indicate the account to be debited for each of these expenditures. Answer: 1. Equipment 2. Building 3. Maintenance Expense 4. Prepaid Insurance 5. Equipment 6. Land Improvements Difficulty: 3 Hard Topic: Acquisition - Property, Plant, and Equipment; Expenditures after Acquisition Learning Objective: 07-01 Identify the major types of property, plant, and equipment.; 07-03 Describe the accounting treatment of expenditures after acquisition. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation

210) Suddenly Salad had the following expenditures related to developing its trademark. General advertising costs Advertising specifically focused on trademark development Legal fees to register trademark Registration and design fees for the trademark Legal fees for successful defense of the new trademark Total

$300,000 120,000 52,000 38,000 33,000 $543,000

During your year-end review of the accounts related to intangibles, you discover that the company has capitalized all the above as costs of the trademark. Management contends that all of the costs increase the value of the trademark; therefore, all the costs should be capitalized. 1. Which of the above costs should the company capitalize to the Trademark account in the balance sheet? 2. Which of the above costs should the company report as expense in the income statement? Answer: 1. Trademark account in the balance sheet: Legal fees to register trademark Registration and design fees for the trademark Legal fees for successful defense of the new trademark Total costs capitalized

$52,000 38,000 33,000 $123,000

2. Expense in the income statement: General advertising costs Advertising specifically focused on trademark development Total costs expensed

$300,000 120,000 $420,000

Difficulty: 3 Hard Topic: Acquisition - Intangible Assets Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

211) New Harvest Bakery acquired all the outstanding common stock of Red Rock Bakery for $68,000 in cash. The book values and fair values of Red Rock's assets and liabilities were as follows:

Current assets Property, plant, and equipment Other assets Current liabilities Long-term liabilities

Book Value Fair Value $24,000 $30,000 44,000 56,000 4,000 6,000 16,000 16,000 24,000 22,000

Calculate the amount paid for goodwill. Answer: Purchase price Less: Fair value of assets acquired Less: fair value of liabilities assumed Fair value of identifiable net assets Goodwill

$68,000 92,000 (38,000) 54,000 $14,000

212) Western Wholesale Foods incurs the following expenditures during the current fiscal year: (1) salaries for the repair technicians, $155,000; (2) remodeling of the executive offices, $84,000; (3) annual maintenance costs related to its machinery, $72,900; (4) improvement of the production line resulting in an increase in productivity, $38,000; and (5) addition of a sprinkler system to the manufacturing facility to reduce the risk of fire damage, $35,000. How should Western account for each of these expenditures? Answer: (1) Expense in the period incurred. (2) Capitalize and depreciate over the useful life of the asset. (3) Expense in the period incurred. (4) Capitalize and depreciate over the useful life of the asset. (5) Capitalize and depreciate over the useful life of the asset. Difficulty: 3 Hard Topic: Expenditures after Acquisition Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation 213) Taco Hut purchased equipment on May 1, 2021, for $15,000. Residual value at the end of an estimated eight-year service life is expected to be $3,000. Calculate depreciation expense using the straight-line method for 2021 and 2022, assuming a December 31 year-end. Answer: Year 2021 = $1,500 × 8/12 = $1,000

Year 2022 = $1,500 Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

214) China Dragon purchased new restaurant equipment on September 1, 2021, for $8,000. Residual value at the end of an estimated five-year service life is expected to be $2,000. Calculate depreciation expense using the straight-line method for 2021 and 2022, assuming a December 31 year-end. Answer: Year 2021 = $1,200 × 4/12 = $400

Year 2022 = $1,200 Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 215) Mountain View Resorts purchased equipment at the beginning of 2021 for $40,000. Residual value at the end of an estimated four-year service life is expected to be $8,000. The machine operated for 2,200 hours in the first year and the company expects the machine to operate for a total of 10,000 hours over its four-year life. Calculate depreciation expense for 2021, using each of the following depreciation methods: (1) straight-line, (2) double-decliningbalance, and (3) activity-based. Answer: (1) ($40,000 - $8,000)/4 = $8,000. (2) $40,000 × 2/4 = $20,000. (3) ($40,000 - $8,000)/10,000 hours = $3.20 per hour × 2,200 hours = $7,040. Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method; Depreciation - Declining-Balance Method; Depreciation - Activity-Based Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

216) Chubbyville purchases a delivery van for $23,500. Chubbyville estimates a four-year service life and a residual value of $2,500. During the four-year period, the company expects to drive the van 105,000 miles. Calculate annual depreciation for the four-year life of the van using each of the following methods. Round all amounts to the nearest dollar. 1. Straight-line. 2. Double-declining-balance. 3. Activity-based. Actual miles driven each year were 24,000 miles in Year 1; 26,000 miles in Year 2; 22,000 miles in Year 3; and 25,000 miles in Year 4. Note that actual total miles of 97,000 fall short of expectations by 8,000 miles. Answer: Straight-line Depreciation Expense =

= $5,250 per year

Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method; Depreciation - Declining-Balance Method; Depreciation - Activity-Based Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

217) Burger Chef acquired a delivery truck on March 1, 2021, for $26,000. The company estimates a residual value of $2,000 and a six-year service life. It expects to drive the truck 80,000 miles. Actual mileage was 12,000 miles in 2021 and 16,000 miles in 2022. Calculate depreciation expense using the activity-based method for 2021 and 2022, assuming a December 31 year-end. Answer: = $0.30/mile

2021 12,000 × $0.30 = $3,600 2022 16,000 × $0.30 = $4,800 Difficulty: 3 Hard Topic: Depreciation - Activity-Based Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

218) Strawberry Fields purchased a tractor at a cost of $38,000 and sold it two years later for $25,000. Strawberry Fields recorded depreciation using the straight-line method, a five-year service life, and an $8,000 residual value. What was the gain or loss on the sale? Record the sale. Answer: Sale amount Less: Cost of tractor Less: Accumulated Depreciation* Book value Loss on sale

$25,000 38,000 (12,000) 26,000 ($1,000)

* ($38,000 - $8,000)/5 years = $6,000 per year × 2 years = $12,000.

Cash Accumulated Depreciation Loss Equipment

Debit 25,000 12,000 1,000

Credit

38,000

Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method; Disposition - Sale Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment.; 07-06 Account for the disposal of long-term assets. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 219) At the beginning of the year, Big Time Tires acquired a patent for $800,000 and a trademark for $300,000. Big Time Tires' policy is to amortize intangible assets with finite useful lives using the straight-line method, no residual value, and a five-year service life. What is the total amount of amortization expense that would appear in Big Time Tires' income statement for the first year related to these items? Answer: The patent would have amortization expense of $160,000 ($800,000/5 years). The trademark would not be amortized because it has an indefinite life. Difficulty: 3 Hard Topic: Amortization of Intangible Assets Learning Objective: 07-05 Calculate amortization of intangible assets. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

220) On January 1, 2021, The Donut Stop purchased a patent for $80,000. At that time, the remaining legal life was 15 years, but the company estimated the patent would be useful for only five more years. In late December 2022, the company incurred legal fees of $25,000 in successfully defending the patent in an infringement suit. The successful defense did not change the company's estimate of the patent's useful life. The Donut Stop's year-end is December 31. Record (1) the purchase of the patent in 2021, (2) amortization in 2021, (3) the cost of legal fees in 2022, and (4) amortization in 2022 (for simplicity, assume no amortization for the legal fees is recorded in 2022 because the expenditures did not occur until late December). What is the balance in the Patents account at the end of 2022? Answer: January 1, 2021 Patents Cash December 31, 2021 Amortization Expense Patents ($80,000/5 years) December, 2022 Patents Cash December 31, 2022 Amortization Expense Patents

80,000 25,000 73,000

Debit $80,000

Credit 80,000

16,000 16,000

25,000 25,000 16,000 16,000

Patents 16,000 16,000

221) The Bomb Pop Corporation sold ice cream equipment for $16,000. The equipment was originally purchased for $40,000, and depreciation through the date of sale totaled $25,000. What was the gain or loss on the sale of the equipment? Record the sale of the equipment. Answer: Sale amount Less: Cost of the ice cream equipment Less: Accumulated Depreciation* Book value Gain on sale

Cash Accumulated Depreciation Equipment Gain

$16,000 40,000 (25,000) 15,000 $1,000

Debit 16,000 25,000

Credit

40,000 1,000

Difficulty: 3 Hard Topic: Disposition - Sale Learning Objective: 07-06 Account for the disposal of long-term assets. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 222) Nate's Hot Dogs exchanges long-term assets with Lizzy's Lemonade. Nate receives a delivery truck and gives up a piece of machinery. The fair value and book value of the machinery were $27,000 and $25,000 (original cost of $35,000 less accumulated depreciation of $10,000), respectively. Since the delivery truck was worth $32,000, Nate paid an additional $5,000 in cash to Lizzy. Record the exchange for Nate's Hot Dogs. Answer: Delivery Truck ($27,000 + $5,000) Accumulated Depreciation Cash Machinery Gain on exchange

Debit $32,000 10,000

Credit

5,000 35,000 2,000

Difficulty: 3 Hard Topic: Disposition - Exchange Learning Objective: 07-06 Account for the disposal of long-term assets. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 100 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

223) New World Deli exchanged land for a more suitable parcel of land to be used for a new restaurant. New World Deli reported the old land at its original cost of $85,000. According to an independent appraisal, the old land currently is worth $110,000. New World Deli paid $15,000 in cash to complete the transaction. Record the exchange. Answer: Fair value of the old land Cash paid to complete the purchase Fair value of the new land Journal entry to record exchange Land, new Land, old Cash Gain on exchange

$110,000 15,000 $125,000 Debit $125,000

Credit 85,000 15,000 25,000

224) Allied Construction and Axis Construction reported the following information in their annual financial statements ($ in millions): Allied Construction Sales Net income Total assets

2021 $48,283 2,809 30,869

2020 $46,927 3,105 27,767

Axis Construction Sales Net income Total assets

2021 $77,349 4,395 44,324

2020 $90,837 5,761 52,263

Required: 1. Calculate Allied Construction's return on assets, profit margin, and asset turnover ratio for 2021. 2. Calculate Axis Construction's return on assets, profit margin, and asset turnover ratio for 2021. 3. Which company has the better profit margin and which company has the better asset turnover? Answer: Requirement 1: Allied Construction: Net Income

Average Total Assets

$2,809

($30,869 + $27,767)/2

Net Income $2,809

÷ ÷

Sales $48,283

÷ ÷

Sales $48,283

Average Total Assets ($30,869 + $27,767)/2

= =

Return on Assets 9.6%

Profit Margin 5.8%

= Asset Turnover = 1.65 times

Requirement 2: Axis Construction: Net Income

Average Total Assets

$4,395

($44,324 + $52,263)/2

Net Income $4,395

÷ ÷

Sales $77,349

÷ ÷

Sales $77,349 Average Total Assets ($44,324 + $52,263)/2

= =

Return on Assets 9.1%

Profit Margin 5.7% = Asset Turnover = 1.60 times

Requirement 3: Allied has a slightly better (higher) profit margin and a slightly better (higher) asset turnover resulting in a higher return on assets. Difficulty: 3 Hard Topic: Analysis - Return on assets; Analysis - Profit Margin; Analysis - Asset Turnover Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 225) ACME Drilling is evaluating an offshore oil-drilling platform for possible impairment. The company estimates the following: book value, $18.5 million; fair value, $12 million; sum of estimated future cash flows generated from the oil-drilling platform, $16 million. What amount of impairment loss, if any, should ACME record? Answer: Step 1: Test for Impairment The long-term asset is impaired since future cash flows ($16 million) are less than book value ($18.5 million). Step 2: If Impaired, Record Loss The impairment loss is $6.5 million calculated as the amount by which book value ($18.5 million) exceeds fair value ($12 million). Difficulty: 3 Hard Topic: Asset Impairment Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 103 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

226) Northwest Catering owns and operates several restaurant services in Oregon, Washington, and Idaho. One restaurant chain has experienced sharply declining profits. The company's management has decided to test the operational assets for possible impairment. The relevant information for these assets is presented below: Book value Estimated total future cash flows Fair value

$4.5 million 5.0 million 3.5 million

Determine the amount of the impairment loss, if any. Answer: Step 1: Test for Impairment The long-term asset is not impaired since future cash flows ($5.0 million) exceed book value ($4.5 million). Step 2: If Impaired, Record Loss Since the asset does not meet the first test for impairment, no impairment loss is recorded. Difficulty: 3 Hard Topic: Asset Impairment Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

227) China Express purchased land for $140,000. Prior to construction on the new building, the land had to be cleared of trees and brush. Costs incurred during the first year are listed below: Land clearing costs Architect fees (for new building) Legal fees for title investigation of land Property taxes on land (for the first year) Building construction costs

$5,000 30,000 1,000 2,500 440,000

Required: Determine the amounts that should be recorded in the land and the new building accounts. Answer: Purchase price of land Land clearing costs Architect fees (for new building) Legal fees (for title investigation of land) Building construction costs Totals

Land 140,000 5,000

Building

$30,000 1,000 $146,000

440,000 $470,000

The property taxes on the land of $2,500 will be recorded as property tax expense during the first year. Difficulty: 3 Hard Topic: Acquisition - Property, Plant, and Equipment Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

228) El Tapitio purchased equipment from Old World Deli. Old World Deli was closing its business and sold its restaurant equipment for $80,000. In addition to the purchase price, El Tapitio paid shipping costs of $2,000. Employees of El Tapitio installed the ovens; labor costs were $10,000. An outside contractor performed some of the electrical work for $2,200. El Tapitio incurred costs of $800 in testing the equipment. Required: 1. Prepare a schedule showing the amount at which the equipment should be recorded in El Tapitio's equipment account. 2. Indicate where any amounts not included in the equipment account should be recorded. Answer: Requirement 1 The ovens should be recorded in the equipment account at $95,000 as detailed in the following schedule: Purchase price Shipping costs Labor costs Electrical work Costs incurred in testing equipment Total Equipment

$80,000 2,000 10,000 2,200 800 $95,000

Requirement 2 All amounts were included in the equipment account. Difficulty: 3 Hard Topic: Acquisition - Property, Plant, and Equipment Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

229) Nordic Outfitters purchased all the outstanding common stock of European Retail for $3,000,000 in cash. The book values and fair values of European Retail's assets and liabilities were:

Receivables Property, plant, and equipment Intangible assets Liabilities Net Assets

Book Value Fair Value $250,000 $250,000 2,000,000 2,400,000 200,000 500,000 (650,000) (650,000) $1,800,000 $2,500,000

Required: 1. Calculate the amount paid for goodwill. 2. Record Nordic Outfitters' acquisition of European Retail. Answer: 1. The amount Nordic Outfitters paid for goodwill is $500,000 calculated as follows: Purchase price Less: Fair value of assets acquired Less: fair value of liabilities assumed Fair value of identifiable net assets Goodwill

$3,000,000 3,150,000 (650,000) 2,500,000 $ 500,000

2. The journal entry to record Nordic Outfitters' acquisition of European Retail is:

Receivables (at fair value) Property, plant, and equipment (at fair value) Intangible assets (at fair value) Goodwill (remaining purchase price) Liabilities (at fair value) Cash (at purchase price)

Debit 250,000 2,400,000 500,000 500,000

Credit

650,000 3,000,000

230) Lincoln Driving Academy purchased a used car to use in its driver's education program. Lincoln incurred the following expenses related to the car: 1. Painted the car and fixed a dent on the side of the car at a cost of $2,700. The repairs are considered extensive and increase future benefits. 2. Installed a driver's side brake to be used by the instructor if necessary. 3. Paid the annual registration fees of $120. 4. Performed annual maintenance and repairs at $400. 5. Overhauled the engine at a cost of $2,600, increasing the service life of the car by an estimated four years. Required: Indicate whether Lincoln should capitalize or expense each of these expenditures. How could Lincoln use expenditures like these to increase reported earnings? Answer: 1. Capitalize 2. Capitalize 3. Expense 4. Expense 5. Capitalize Lincoln could increase reported earnings by improperly recording expenses as assets. For example, Lincoln could record repairs and maintenance expense to the equipment (asset) account. This would lower expenses and increase earnings reported in the current year. Difficulty: 3 Hard Topic: Expenditures after Acquisition Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation

231) Diamond Autobody purchased new equipment for $90,000. Residual value at the end of an estimated four-year service life is expected to be $10,000. During the four-year period, the company expects to use the equipment a total of 5,000 hours. Required: Prepare a depreciation schedule for the four-year life of the equipment using the following methods: 1. Straight-line. 2. Double-declining-balance. 3. Activity-based. Actual use per year was as follows: Year 1 2 3 4

Hours Used 1,200 1,400 1,500 1,100

Answer: Requirement 1

Requirement 2

Requirement 3

232) The Snack Stop had the following long-term asset balances as of January 1, 2021:

Land Building Equipment Patent

Cost $90,000 600,000 200,000 80,000

Accumulated Depreciation — ($60,000) (72,000) (20,000)

Book Value $90,000 540,000 128,000 60,000

All of the assets were purchased at the beginning of 2020. The building is depreciated over a 20year service life using the straight-line method and estimating no residual value. The equipment is depreciated over a 10-year useful life using the double-declining-balance method with an estimated residual value of $10,000. The patent is estimated to have an eight-year service life with no residual value and is amortized using the straight-line method. Depreciation and amortization have already been calculated for the first two years. Required: 1. For the year ended December 31, 2022, record depreciation expense for buildings and equipment. Land is not depreciated. 2. For the year ended December 31, 2022, record amortization expense for the patent. 3. Calculate the book value for each of the four long-term assets at December 31, 2022.

Answer: Requirement 1

Depreciation Expense ($600,000/20) Accumulated Depreciation (To record depreciation on the building)

Depreciation Expense ($128,000 × 2/10) Accumulated Depreciation (To record depreciation on the equipment)

Debit 30,000

Credit 30,000

Debit 25,600

Credit 25,600

Requirement 2

Amortization Expense ($80,000/8) Patent (To record amortization on the patent)

Debit 10,000

Credit 10,000

Requirement 3 The Snack Stop December 31, 2022

Land Building Equipment Patent

Accumulated Cost Depreciation $90,000 — 600,000 ($90,000) 200,000 (97,600) 80,000 (30,000)

Book Value $90,000 510,000 102,400 50,000

Difficulty: 3 Hard Topic: Depreciation - Straight-Line Method; Depreciation - Declining-Balance Method; Amortization of Intangible Assets Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment.; 07-05 Calculate amortization of intangible assets. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

233) Murphy's Deli is in the process of closing its operations and sold its three-year-old restaurant equipment to Stan's Steakhouse for $80,000. The equipment originally cost $220,000 and had an estimated service life of five years and an estimated residual value of $20,000. Murphy's Deli uses straight-line depreciation for all equipment. Required: 1. Calculate the balance in the accumulated depreciation account at the end of the third year. 2. Calculate the book value of the equipment at the end of the third year. 3. What is the gain or loss on the sale of the equipment at the end of the third year? 4. Record the sale of the equipment at the end of the third year. Answer: Requirement 1 $120,000 =

× 3 years

Requirement 2 Cost of the equipment Less: Accumulated Depreciation Book value at the end of year 3

$220,000 (120,000) $100,000

Requirement 3 The loss on sale is calculated as: Sale amount Less: Cost of the equipment Less: Accumulated Depreciation Book value at the end of year 3 Loss on sale

$80,000 220,000 (120,000) 100,000 $20,000

Requirement 4 The entry to record the loss on sale is as follows:

Cash Accumulated Depreciation Loss on Sale Equipment (To record loss on sale)

Debit 80,000 120,000 20,000

Credit

220,000

234) The following information relates to the intangible assets of University Hero: a. On January 1, 2021, University Hero completed the purchase of Whole Grain Foods for $800,000 in cash. The fair value of the identifiable net assets of Whole Grain Foods was $625,000. b. Included in the assets purchased from Whole Grain Foods was a patent valued at $75,000. The original legal life of the patent was 20 years. There are still eight years left on the patent, but University Hero estimates the patent will be useful for only three more years. c. University Hero acquired a franchise on July 1, 2021, by paying an initial franchise fee of $100,000. The contractual life of the franchise is five years. Required: 1. Record amortization expense for the intangible assets at December 31, 2021. 2. Prepare the intangible asset section of the December 31, 2021 balance sheet. Answer: Requirement 1 a. Goodwill is not amortized. Debit b. Amortization Expense 25,000 Patent (To record amortization = $75,000/3 years)

Credit

c. Amortization Expense Franchise

Credit

Debit 10,000

25,000

10,000 (To record amortization = $100,000/5 years × 1/2 year)

Requirement 2

235) Reported below is selected financial information from two competing retail companies ($ in millions): Company A Sales Net income Total assets

2021 $405,607 $13,400 $163,429

2020 $378,799 $12,731 $163,514

Company B Sales Net income Total assets

2021 $64,948 $2,214 $44,106

2020 $63,367 $2,849 $44,560

Required: 1. Calculate the return on assets, profit margin, and asset turnover ratio for Company A for 2021. 2. Calculate the return on assets, profit margin, and asset turnover ratio for Company B for 2021. 3. Which company has the higher profit margin and which company has the higher asset turnover? Answer: Requirement 1 Company A Net Income

Average Total Assets

$13,400

($163,429 + $163,514)/2

Net Income $13,400

÷ ÷

Sales $405,607

÷ ÷

Sales $405,607

= =

Average Total Assets ($163,429 + $163,514)/2

Return on Assets 8.2%

Profit Margin 3.3%

= Asset Turnover = 2.5 times

Requirement 2 Company B Net Income

Average Total Assets

$2,214

($44,106 + $44,560)/2

Net Income $2,214

÷ ÷

Sales $64,948

÷ ÷

Sales $64,948

Average Total Assets ($44,106 + $44,560)/2

= =

Return on Assets 5.0%

Profit Margin 3.4%

= Asset Turnover = 1.5 times

Requirement 3 Company B has a slightly higher profit margin, while Company A has a much higher asset turnover (2.5 times vs. 1.5 times). The higher asset turnover results in a return on assets of 8.2% for Company A compared to only 5.0% for Company B. Difficulty: 3 Hard Topic: Analysis - Return on Assets; Analysis - Profit Margin; Analysis - Asset Turnover Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

236) Kelli Davis is in the flower business. While business has been steady, she wonders if she should expand her business to include candy as well. Both flowers and candy fit well into her business model. Kelli provides the following projections of annual sales, net income, and average total assets for the flower business alone and for the business if both flowers and candy were sold.

Sales Net income Average total assets

Flowers and Flowers Only Candy $380,000 $500,000 40,000 60,000 200,000 250,000

Required: 1. Calculate Kelli's return on assets, profit margin, and asset turnover for flowers only. 2. Calculate Kelli's return on assets, profit margin, and asset turnover for flowers and candy. 3. Based on these ratios, what recommendation would you make? Answer: Requirement 1 Flowers Only Net Income

Average Total Assets

$40,000

$200,000

Return on Assets 20.0%

Net Income $40,000

÷ ÷

Sales $380,000

= =

Profit Margin 10.5%

Sales $380,000

÷ ÷

Average Total Assets $200,000

= Asset Turnover = 1.9 times

Requirement 2 Flowers and Candy Net Income

Average Total Assets

$60,000

$250,000

Return on Assets 24.0%

Net Income $60,000

÷ ÷

Sales $500,000

= =

Profit Margin 12.0%

Sales $500,000

÷ ÷

Average Total Assets $250,000

= Asset Turnover = 2.0 times

Requirement 3 Go forward with the expansion plans to include the sale of candy. The return on assets, profit margin, and asset turnover are all higher with the additional sale of candy. Difficulty: 3 Hard Topic: Analysis - Return on Assets; Analysis - Profit Margin; Analysis - Asset Turnover Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making; FN Measurement/Keyboard Navigation 237) If a company initially records an expense incorrectly as an asset, explain how this mistake affects the income statement and the balance sheet. Answer: This mistake will overstate net income on the income statement and overstate assets and retained earnings on the balance sheet. If a company initially records an expense incorrectly as an asset, expenses are understated or too small. Since expenses are subtracted from revenues in arriving at net income, understating expenses will overstate net income reported on the income statement. Similarly, recording an expense as an asset will overstate assets on the balance sheet. Retained earnings on the balance sheet will also be overstated due to the overstatement of net income. Difficulty: 3 Hard Topic: Acquisition - Property, Plant, and Equipment Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation

238) Why don't we depreciate land? What are land improvements? Why do we record land and land improvements separately? Answer: We don't depreciate land because its service life never ends. Land improvements are additional amounts spent to improve the land such as a parking lot, paving, temporary landscaping, lighting systems, fences, sprinkler systems, and similar additions. We record land improvements separately from land because, unlike land, these assets are subject to depreciation. Difficulty: 2 Medium Topic: Acquisition - Property, Plant, and Equipment Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 239) Explain how the accounting treatment differs between purchased and internally developed intangible assets. Answer: We value purchased intangible assets at their original cost plus all other costs, such as legal and filing fees, necessary to get the asset ready for use. Reporting intangible assets developed internally is quite different. Rather than recording these as an intangible asset in the balance sheet, we expense most of the costs for internally developed intangible assets in the income statement as we incur them. Difficulty: 2 Medium Topic: Acquisition - Intangible Assets Learning Objective: 07-02 Identify the major types of intangible assets. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 240) Contrast the effects of the straight-line, declining-balance, and activity-based depreciation methods on annual depreciation expense. Answer: Straight-line creates an equal amount of depreciation each year. Double-decliningbalance creates more depreciation in earlier years and less depreciation in later years. Activitybased depreciation varies depending on the use of the asset each year. Difficulty: 2 Medium Topic: Depreciation - Straight-Line Method; Depreciation - Declining-Balance Method; Depreciation - Activity-Based Method Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

241) Which depreciation method is most common for financial reporting? Which depreciation method is most common for tax reporting? Why do companies choose these methods? Answer: Most companies use the straight-line method for financial reporting and the Internal Revenue Service's prescribed accelerated method (called MACRS) for income tax purposes. Companies choose straight-line for financial reporting for several reasons. Many probably believe they realize benefits from their plant assets approximately evenly over these assets' useful lives. Another contributing factor is that straight-line is the easiest method to understand and apply. One more important motivation is the positive effect on reported income. Straight-line produces a higher net income than accelerated methods in the earlier years of an asset's life. Most companies choose MACRS for tax reporting to reduce taxable income. MACRS combines declining-balance methods in earlier years with straight-line in later years to allow for a more advantageous tax depreciation deduction. Difficulty: 3 Hard Topic: Depreciation - General Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Bloom's: Evaluate AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

Financial Accounting, 5e (Spiceland) Chapter 8 Current Liabilities 1) American, Delta, and United Airlines have all, at one time, filed for bankruptcy. Answer: TRUE Difficulty: 1 Easy Topic: Current vs. Long-Term Classification Learning Objective: 08-01 Distinguish between current and long-term liabilities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 2) In a classified balance sheet, we categorize all liabilities as current. Answer: FALSE Explanation: Liabilities may be classified as either current or long-term. Difficulty: 1 Easy Topic: Current vs. Long-Term Classification Learning Objective: 08-01 Distinguish between current and long-term liabilities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 3) Typically, current liabilities are payable within one year, and long-term liabilities are payable more than one year from the balance sheet date. Answer: TRUE Difficulty: 1 Easy Topic: Current vs. Long-Term Classification Learning Objective: 08-01 Distinguish between current and long-term liabilities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 4) Given a choice, most companies would prefer to report a liability as current rather than longterm, because doing so may cause the firm to appear less risky. Answer: FALSE Explanation: Companies prefer to report a liability as long-term, because long-term debt makes a company appear less risky. Difficulty: 2 Medium Topic: Current vs. Long-Term Classification Learning Objective: 08-01 Distinguish between current and long-term liabilities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 1 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

5) When a company borrows cash from a bank promising to repay the amount borrowed plus interest, the borrower reports its liability as notes payable. Answer: TRUE Difficulty: 1 Easy Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 6) Interest is stated in terms of an annual percentage rate to be applied to the face value of the loan. Answer: TRUE Difficulty: 1 Easy Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 7) We record interest expense in the period in which we pay it, rather than in the period we incur it. Answer: FALSE Explanation: Interest expense is recorded in the period incurred, not in the period in which we pay it. Difficulty: 2 Medium Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 8) A line of credit is an informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and paperwork. Answer: TRUE Difficulty: 1 Easy Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 2 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

9) If a company borrows from another company rather than from a bank, the note is referred to as commercial paper. Answer: TRUE Difficulty: 1 Easy Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 10) Accounts payable are amounts the company owes to suppliers of merchandise or services that it has bought on credit. Answer: TRUE Difficulty: 1 Easy Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 11) Deductions from employee salaries in determining the amount of payroll checks include withholdings for federal and state income taxes, FICA taxes, and the employee portion of insurance and retirement contributions. Answer: TRUE Difficulty: 2 Medium Topic: Payroll Liabilities Learning Objective: 08-03 Account for employee and employer payroll liabilities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 12) All states impose a state income tax. Answer: FALSE Explanation: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming have no state income tax. Difficulty: 1 Easy Topic: Payroll Liabilities Learning Objective: 08-03 Account for employee and employer payroll liabilities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

13) Companies are required by law to withhold federal and state income taxes from employees' paychecks and remit these taxes to the government. Answer: TRUE Difficulty: 1 Easy Topic: Payroll Liabilities Learning Objective: 08-03 Account for employee and employer payroll liabilities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 14) The employer records amounts deducted from employee payroll as liabilities until it pays them to the appropriate organizations. Answer: TRUE Difficulty: 1 Easy Topic: Payroll Liabilities Learning Objective: 08-03 Account for employee and employer payroll liabilities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 15) FICA taxes are paid only by the employee. Answer: FALSE Explanation: The employer is required to match the amount withheld for each employee, effectively doubling the amount paid into Social Security. Difficulty: 1 Easy Topic: Payroll Liabilities Learning Objective: 08-03 Account for employee and employer payroll liabilities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 16) The employer is required to match the amount of FICA taxes withheld for each employee, effectively doubling the amount paid into Social Security. Answer: TRUE Difficulty: 1 Easy Topic: Payroll Liabilities Learning Objective: 08-03 Account for employee and employer payroll liabilities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

17) Additional employee benefits paid for by the employer are often referred to as fringe benefits. Answer: TRUE Difficulty: 1 Easy Topic: Payroll Liabilities Learning Objective: 08-03 Account for employee and employer payroll liabilities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 18) When a company receives cash in advance, it debits Cash and credits a revenue account called Deferred Revenue. Answer: FALSE Explanation: When a company receives cash in advance, it debits Cash and credits a liability account called Deferred Revenue. Difficulty: 2 Medium Topic: Deferred Revenues Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 19) Airlines do not record revenue when a ticket is sold, but wait to record revenue until the actual flight occurs. Answer: TRUE Difficulty: 2 Medium Topic: Deferred Revenues Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 20) All states impose a general state sales tax, and many areas include an additional local sales tax. Answer: FALSE Explanation: Alaska, Delaware, Montana, New Hampshire, and Oregon do not have a general state sales tax. Difficulty: 1 Easy Topic: Sales Tax Payable Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 5 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

21) Companies selling products subject to sales taxes are responsible for collecting the sales tax directly from customers and periodically remitting the sales taxes collected to the state and local governments. Answer: TRUE Difficulty: 1 Easy Topic: Sales Tax Payable Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 22) When a company collects sales taxes, the debit is to Cash and the credit is to Sales Tax Payable. Answer: TRUE Difficulty: 2 Medium Topic: Sales Tax Payable Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 23) Sales taxes collected from customers by the seller are not an expense. Instead, they represent current liabilities payable to the government. Answer: TRUE Difficulty: 1 Easy Topic: Sales Tax Payable Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 24) Long-term obligations such as notes, mortgages, and bonds are reported as long-term liabilities when they become payable within one year of the balance sheet date. Answer: FALSE Explanation: These liabilities usually are reclassified and reported as current liabilities when they become payable within one year of the balance sheet date. Difficulty: 1 Easy Topic: Current Portion of Long-Term Debt Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 6 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

25) Given a choice, most managers would choose to record an obligation as long-term rather than current. Answer: TRUE Difficulty: 2 Medium Topic: Current Portion of Long-Term Debt Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 26) A contingent liability is an existing, uncertain situation that might result in a loss. Answer: TRUE Difficulty: 1 Easy Topic: Contingencies - General Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 27) We record a contingent liability when the likelihood of the loss occurring is reasonably possible and the amount is reasonably estimable. Answer: FALSE Explanation: We record a contingent liability when the likelihood of the loss occurring is probable and the amount is reasonably estimable. Difficulty: 2 Medium Topic: Contingencies - General Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 28) The journal entry to record a contingent liability requires a debit to a loss (or expense) account and a credit to a liability. Answer: TRUE Difficulty: 2 Medium Topic: Contingencies - General Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

29) Regarding a contingent liability, when no amount within a range of potential losses appears more likely than others, we record the maximum amount in the range. Answer: FALSE Explanation: When no amount within a range of potential losses appears more likely than others, we record the minimum amount in the range. Difficulty: 2 Medium Topic: Contingencies - General Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 30) If the likelihood of a loss is reasonably possible rather than probable, we record no entry, but make full disclosure in a note to the financial statements to describe the contingency. Answer: TRUE Difficulty: 2 Medium Topic: Contingencies - General Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 31) If the likelihood of loss is remote, disclosure of a contingency usually is not required. Answer: TRUE Difficulty: 2 Medium Topic: Contingencies - General Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 32) A contingent liability is recorded only if a loss is at least reasonably possible and the amount is reasonably estimable. Answer: FALSE Explanation: A contingent liability is recorded only if a loss is probable and the amount is reasonably estimable. Difficulty: 2 Medium Topic: Contingencies - General Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 8 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

33) The balance in the Warranty Liability account is always equal to Warranty Expense. Answer: FALSE Explanation: The Warranty Liability account is increased by warranty expense, but it is also reduced over time by actual warranty expenditures. Difficulty: 2 Medium Topic: Contingent Liabilities - Warranties Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 34) A gain contingency is an existing uncertain situation that might result in a gain, which often is the flip side of loss contingencies. Answer: TRUE Difficulty: 1 Easy Topic: Contingencies - General Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 35) We record gain contingencies when the gain is probable and the amount is reasonably estimable. Answer: FALSE Explanation: We do not record gain contingencies until the gain is certain. Difficulty: 2 Medium Topic: Contingencies - General Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 36) A company is said to be liquid if it has sufficient cash to pay currently maturing debts. Answer: TRUE Difficulty: 1 Easy Topic: Analysis - Working Capital; Analysis - Current Ratio; Analysis - Acid-Test Ratio Learning Objective: 08-06 Assess liquidity using current liability ratios. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

37) The current ratio is calculated by dividing current liabilities by current assets. Answer: FALSE Explanation: The current ratio is calculated by dividing current assets by current liabilities. Difficulty: 1 Easy Topic: Analysis - Current Ratio Learning Objective: 08-06 Assess liquidity using current liability ratios. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 38) The acid-test ratio, or quick ratio, is similar to the current ratio but is based on a more conservative measure of current assets available to pay current liabilities. Answer: TRUE Difficulty: 1 Easy Topic: Analysis - Acid-Test Ratio Learning Objective: 08-06 Assess liquidity using current liability ratios. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 39) Quick assets include only cash, short-term investments, and accounts receivable. Answer: TRUE Difficulty: 1 Easy Topic: Analysis - Acid-Test Ratio Learning Objective: 08-06 Assess liquidity using current liability ratios. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 40) A lower current ratio or acid-test ratio generally indicates a greater ability to pay current liabilities on a timely basis. Answer: FALSE Explanation: A higher current ratio or acid-test ratio generally indicates a greater ability to pay current liabilities on a timely basis. Difficulty: 3 Hard Topic: Analysis - Current Ratio; Analysis - Acid-Test Ratio Learning Objective: 08-06 Assess liquidity using current liability ratios. Bloom's: Evaluate AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation

41) Which of the following is not a reason why a company might prefer to report a liability as long-term rather than current? A) It may cause the firm to appear less risky to investors and creditors. B) It may increase interest rates on borrowing. C) It may cause the company to appear more stable commanding a higher stock price for new stock listings. D) It may reduce interest rates on borrowing. Answer: B Difficulty: 2 Medium Topic: Current vs. Long-Term Classification Learning Objective: 08-01 Distinguish between current and long-term liabilities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 42) Given a choice, most companies would prefer to report a liability as long-term rather than current because: A) It may cause the firm to appear less risky to investors and creditors. B) It may reduce interest rates on borrowing. C) It may cause the company to appear more stable, commanding a higher stock price for new stock listings. D) All of the other answer choices are correct. Answer: D Difficulty: 2 Medium Topic: Current vs. Long-Term Classification Learning Objective: 08-01 Distinguish between current and long-term liabilities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 43) Which of the following is not a current liability? A) Accounts payable. B) A note payable due in 2 years. C) Current portion of long-term debt. D) Sales tax payable. Answer: B Difficulty: 1 Easy Topic: Current vs. Long-Term Classification Learning Objective: 08-01 Distinguish between current and long-term liabilities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

44) In most cases, current liabilities are payable within ________ year(s), and long-term liabilities are payable more than ________ year(s) from the balance sheet date. A) one; two B) one; one C) two; two D) one; ten Answer: B Difficulty: 1 Easy Topic: Current vs. Long-Term Classification Learning Objective: 08-01 Distinguish between current and long-term liabilities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 45) Which of the following is not a characteristic of a liability? A) It represents a probable, future sacrifice of economic benefits. B) It must be payable in cash. C) It arises from present obligations to other entities. D) It results from past transactions or events. Answer: B Difficulty: 2 Medium Topic: Current vs. Long-Term Classification Learning Objective: 08-01 Distinguish between current and long-term liabilities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 46) Which of the following is not a liability? A) Notes payable. B) Current portion of long-term debt. C) An unused line of credit. D) Deferred revenue. Answer: C Difficulty: 1 Easy Topic: Current vs. Long-Term Classification Learning Objective: 08-01 Distinguish between current and long-term liabilities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

47) Liabilities are defined as: A) Resources owed by an entity as a result of past transactions. B) Resources owned by an entity as a result of past transactions. C) Selling products and services to customers in the current period. D) Costs of running the business in the current period. Answer: A Difficulty: 1 Easy Topic: Current vs. Long-Term Classification Learning Objective: 08-01 Distinguish between current and long-term liabilities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 48) Brian Inc. borrowed $8,000 from First Bank and signed a promissory note. What entry should Brian Inc. record? A) Debit Cash, $8,000; Credit Notes Receivable, $8,000. B) Debit Notes Receivable, $8,000; Credit Cash, $8,000. C) Debit Cash, $8,000; Credit Notes Payable, $8,000. D) Debit Notes Payable, $8,000; Credit Cash, $8,000. Answer: C Difficulty: 3 Hard Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation 49) Brian Inc. borrowed $8,000 from First Bank and signed a promissory note. What entry should First Bank record? A) Debit Cash, $8,000; Credit Notes Receivable, $8,000. B) Debit Notes Receivable, $8,000; Credit Cash, $8,000. C) Debit Cash, $8,000; Credit Notes Payable, $8,000. D) Debit Notes Payable, $8,000; Credit Cash, $8,000. Answer: B Difficulty: 3 Hard Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation

50) Bear Essentials borrowed $50,000 from Stacks Bank and signed a promissory note. What entry should Bear Essentials record? A) Debit Cash, $50,000; Credit Notes Receivable, $50,000. B) Debit Notes Receivable, $50,000; Credit Cash, $50,000. C) Debit Cash, $50,000; Credit Notes Payable, $50,000. D) Debit Notes Payable, $50,000; Credit Cash, $50,000. Answer: C Difficulty: 3 Hard Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation 51) Bear Essentials borrowed $50,000 from Stacks Bank and signed a promissory note. What entry should Stacks Bank record? A) Debit Cash, $50,000; Credit Notes Receivable, $50,000. B) Debit Notes Receivable, $50,000; Credit Cash, $50,000. C) Debit Cash, $50,000; Credit Notes Payable, $50,000. D) Debit Notes Payable, $50,000; Credit Cash, $50,000. Answer: B Difficulty: 3 Hard Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation 52) On November 1, 2021, a company signed a $100,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2022. The company should report interest payable at December 31, 2021, in the amount of: A) $0. B) $1,000. C) $2,000. D) $3,000. Answer: B Explanation: [($100,000 × 6%) × 2/12] = $1,000. Difficulty: 3 Hard Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 14 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

53) On November 1, 2021, a company signed a $100,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2022. The company records the appropriate adjusting entry for the note on December 31, 2021. In recording the payment of the note plus accrued interest at maturity on May 1, 2022, the company would: A) Debit Interest Expense, $2,000. B) Debit Interest Expense, $1,000. C) Debit Interest Payable, $2,000. D) Debit Interest Expense, $3,000. Answer: A Explanation: Interest expense in 2022 = [($100,000 × 6%) × 4/12] = $2,000. Difficulty: 3 Hard Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 54) On September 1, 2021, Daylight Donuts signed a $100,000, 9%, six-month note payable with the amount borrowed plus accrued interest due six months later on March 1, 2022. Daylight Donuts should report interest payable at December 31, 2021, in the amount of: (Do not round your intermediate calculations.) A) $0. B) $1,500. C) $3,000. D) $4,500. Answer: C Explanation: [($100,000 × 9%) × 4/12] = $3,000. Difficulty: 3 Hard Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

55) On September 1, 2021, Daylight Donuts signed a $100,000, 9%, six-month note payable with the amount borrowed plus accrued interest due six months later on March 1, 2022. Daylight Donuts records the appropriate adjusting entry for the note on December 31, 2021. In recording the payment of the note plus accrued interest at maturity on March 1, 2022, Daylight Donuts would: (Do not round your intermediate calculations.) A) Debit Interest Expense, $3,000. B) Debit Interest Expense, $1,500. C) Debit Interest Payable, $1,500. D) Debit Interest Expense, $4,500. Answer: B Explanation: Interest expense in 2022 = [($100,000 × 9%) × 2/12] = $1,500. Difficulty: 3 Hard Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 56) On December 1, 2021, Old World Deli signed a $300,000, 5%, six-month note payable with the amount borrowed plus accrued interest due six months later on June 1, 2022. Old World Deli should record which of the following adjusting entries at December 31, 2021? A) Debit Interest Expense and credit Interest Payable, $7,500. B) Debit Interest Expense and credit Cash, $7,500. C) Debit Interest Expense and credit Interest Payable, $1,250. D) Debit Interest Expense and credit Cash, $1,250. Answer: C Explanation: [($300,000 × 5%) × 1/12] = $1,250. Difficulty: 3 Hard Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

57) On December 1, 2021, Old World Deli signed a $300,000, 5%, six-month note payable with the amount borrowed plus accrued interest due six months later on June 1, 2022. Old World Deli records the appropriate adjusting entry for the note on December 31, 2021. What amount of cash will be needed to pay back the note payable plus any accrued interest on June 1, 2022? A) $300,000. B) $301,250. C) $306,250. D) $307,500. Answer: D Explanation: $300,000 + [$300,000 × 5% × 6/12] = $307,500. Difficulty: 3 Hard Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 58) On November 1, 2021, New Morning Bakery signed a $200,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2022. New Morning Bakery should record which of the following adjusting entries at December 31, 2021? (Do not round your intermediate calculations.) A) Debit Interest Expense and credit Interest Payable, $2,000. B) Debit Interest Expense and credit Cash, $2,000. C) Debit Interest Expense and credit Interest Payable, $6,000. D) Debit Interest Expense and credit Cash, $6,000. Answer: A Explanation: [($200,000 × 6%) × 2/12] = $2,000. Difficulty: 3 Hard Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

59) On November 1, 2021, New Morning Bakery signed a $200,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2022. New Morning Bakery records the appropriate adjusting entry for the note on December 31, 2021. What amount of cash will be needed to pay back the note payable plus any accrued interest on May 1, 2022? (Do not round your intermediate calculations.) A) $200,000. B) $202,000. C) $204,000. D) $206,000. Answer: D Explanation: $200,000 + [$200,000 × 6% × 6/12] = $206,000. Difficulty: 3 Hard Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 60) The Pita Pit borrowed $100,000 on November 1, 2021, and signed a six-month note bearing interest at 12%. Principal and interest are payable in full at maturity on May 1, 2022. In connection with this note, The Pita Pit should report interest expense at December 31, 2021, in the amount of: (Do not round your intermediate calculations.) A) $0. B) $1,000. C) $2,000. D) $6,000. Answer: C Explanation: [($100,000 × 12%) × 2/12] = $2,000. Difficulty: 3 Hard Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

61) The Pita Pit borrowed $100,000 on November 1, 2021, and signed a six-month note bearing interest at 12%. Principal and interest are payable in full at maturity on May 1, 2022. In connection with this note, The Pita Pit should report interest expense in 2022 for the amount of: A) $0. B) $4,000. C) $2,000. D) $6,000. Answer: B Explanation: [($100,000 × 12%) × 4/12] = $4,000. Difficulty: 3 Hard Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 62) Universal Travel, Inc. borrowed $500,000 on November 1, 2021, and signed a twelve-month note bearing interest at 6%. Principal and interest are payable in full at maturity on October 31, 2022. In connection with this note, Universal Travel, Inc. should report interest payable at December 31, 2021, in the amount of: (Do not round your intermediate calculations.) A) $8,000. B) $30,000. C) $5,000. D) $25,000. Answer: C Explanation: [($500,000 × 6%) × 2/12] = $5,000. Difficulty: 3 Hard Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

63) Universal Travel, Inc. borrowed $500,000 on November 1, 2021, and signed a twelve-month note bearing interest at 6%. Principal and interest are payable in full at maturity on October 31, 2022. In connection with this note, Universal Travel, Inc. should record interest expense in 2022 in the amount of: A) $8,000. B) $30,000. C) $5,000. D) $25,000. Answer: D Explanation: [($500,000 × 6%) × 10/12] = $25,000. Difficulty: 3 Hard Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 64) Large, highly-rated firms sometimes sell commercial paper: A) To borrow funds at a lower rate than through a bank. B) To borrow funds when they cannot obtain a loan from a bank. C) Because they can't borrow anywhere else. D) To improve their credit rating. Answer: A Difficulty: 1 Easy Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 65) An informal agreement that allows a company to borrow up to a prearranged limit without having to follow formal loan procedures and prepare paperwork is known as: A) A line of credit. B) Commercial Paper. C) A debt covenant. D) Working capital. Answer: A Difficulty: 1 Easy Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 20 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

66) Which of the following is not an employer payroll cost? A) FICA taxes. B) Federal and state unemployment taxes. C) Federal and state income taxes. D) Employer contributions to a retirement plan. Answer: C Difficulty: 1 Easy Topic: Payroll Liabilities Learning Objective: 08-03 Account for employee and employer payroll liabilities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 67) Which of the following are employer payroll costs? I. FICA taxes. II. Federal and state unemployment taxes. III. Federal and state income taxes. IV. Employer contributions to a retirement plan. A) I and IV B) I, III, and IV C) I, II, and IV D) II and III Answer: C Difficulty: 1 Easy Topic: Payroll Liabilities Learning Objective: 08-03 Account for employee and employer payroll liabilities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 68) Which of the following is not withheld from an employee's salary? A) FICA taxes. B) Federal and state unemployment taxes. C) Federal and state income taxes. D) Employee portion of health insurance. Answer: B Difficulty: 1 Easy Topic: Payroll Liabilities Learning Objective: 08-03 Account for employee and employer payroll liabilities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 21 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

69) Which of the following are withheld from an employee's salary? I. FICA taxes. II. Federal and state unemployment taxes. III. Federal and state income taxes. IV. Employee portion of health insurance. A) I, II, and IV B) I, III, and IV C) I and IV D) II and III Answer: B Difficulty: 1 Easy Topic: Payroll Liabilities Learning Objective: 08-03 Account for employee and employer payroll liabilities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 70) Which of the following is true regarding FICA taxes? A) FICA taxes are paid only by the employee. B) FICA taxes are paid only by the employer. C) FICA taxes are paid in equal amounts by the employee and the employer. D) FICA taxes are paid in different amounts by the employee and the employer. Answer: C Difficulty: 1 Easy Topic: Payroll Liabilities Learning Objective: 08-03 Account for employee and employer payroll liabilities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 71) Which of the following are not included in an employer's payroll tax expense? A) Employer portion of FICA taxes. B) Federal unemployment taxes. C) State unemployment taxes. D) State income taxes. Answer: D Difficulty: 1 Easy Topic: Payroll Liabilities Learning Objective: 08-03 Account for employee and employer payroll liabilities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 22 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

72) Which of the following are included in an employer's payroll tax expense? A) Employer portion of FICA taxes. B) Federal unemployment taxes. C) State unemployment taxes. D) All of the other answer choices are correct. Answer: D Difficulty: 1 Easy Topic: Payroll Liabilities Learning Objective: 08-03 Account for employee and employer payroll liabilities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 73) Suppose a college football coach makes a base salary of $2,400,000 a year ($200,000 per month). Employers are required to withhold a 6.2% Social Security tax up to a maximum base amount and a 1.45% Medicare tax with no maximum. Assuming the Social Security maximum base amount is $128,400, how much will be withheld during the year for the coach's Social Security and Medicare taxes? (Round your answers to the nearest dollar amount.) A) $34,800. B) $42,761. C) $183,600. D) None of the other answer choices are correct. Answer: B Explanation: Total withheld for: Social Security Medicare Total

$ 128,400 × 0.062 = $ 2,400,000 × 0.0145 =

7,961 34,800 $ 42,761

74) Suppose a college football coach makes a base salary of $2,400,000 a year ($200,000 per month). Employers are required to withhold a 6.2% Social Security tax up to a maximum base amount and a 1.45% Medicare tax with no maximum. Assuming the Social Security maximum base amount is $128,400, through what month will Social Security be withheld? A) Social Security will be withheld only in January. B) Social Security will be withheld through the entire year. C) Social Security will be withheld through the month of March. D) Social Security will be withheld through the month of June. Answer: A Explanation: The coach's monthly salary of $200,000 exceeds the Social Security maximum base amount of $128,400, so the total amount of Social Security for the year will be withheld in January. Difficulty: 3 Hard Topic: Payroll Liabilities Learning Objective: 08-03 Account for employee and employer payroll liabilities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 75) Greger Peterson is a senior manager at a public accounting firm making a base salary of $180,000 a year ($15,000 per month). Employers are required to withhold a 6.2% Social Security tax up to a maximum base amount and a 1.45% Medicare tax with no maximum. Assuming the Social Security maximum base amount is $128,400, how much will be withheld during the year for Peterson's Social Security and Medicare taxes. (Round your answers to the nearest dollar amount.) A) $2,610. B) $10,571. C) $13,770. D) None of the other answer choices are correct. Answer: B Explanation: Total withheld for: Social Security Medicare Total

$ 128,400 × $ 180,000 ×

0.062 = 0.0145 =

7,961 2,610 $ 10,571

Difficulty: 3 Hard Topic: Payroll Liabilities Learning Objective: 08-03 Account for employee and employer payroll liabilities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 24 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

76) Greger Peterson is a senior manager at a public accounting firm making a base salary of $180,000 a year ($15,000 per month). Employers are required to withhold a 6.2% Social Security tax up to a maximum base amount and a 1.45% Medicare tax with no maximum. Assuming the Social Security maximum base amount is $128,400, through what month will Social Security be withheld? A) Social Security will be withheld through the month of September. B) Social Security will be withheld through the entire year. C) Social Security will be withheld through the month of January. D) Social Security will be withheld through the month of October. Answer: A Explanation: Peterson's monthly salary of $15,000 exceeds the Social Security maximum base amount of $128,400 during the 9th month, so Social Security will only be withheld through September. Difficulty: 3 Hard Topic: Payroll Liabilities Learning Objective: 08-03 Account for employee and employer payroll liabilities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

77) Action Travel has 10 employees each working 40 hours per week and earning $20 an hour. Federal income taxes are withheld at 15% and state income taxes at 6%. FICA taxes are 7.65% and unemployment taxes are 3.8% of the first $7,000 earned per employee. What is the actual payroll payment (Salaries Payable) for the first week of January? A) $5,404. B) $5,708. C) $4,792. D) $8,000. Answer: B Explanation: Total salaries Expense Less: Withholdings Federal Income Taxes State Income Taxes FICA Taxes Total Withholdings Actual Payroll Payment (Salaries Payable)

[(10 × 40 hours) × $20]

$ 8,000

($8,000 × 0.15) $ 1,200 ($8,000 × 0.06) 480 ($8,000 × 612 0.0765) 2,292 $ 5,708

78) Action Travel has 10 employees each working 40 hours per week and earning $20 an hour. Federal income taxes are withheld at 15% and state income taxes at 6%. FICA taxes are 7.65% and unemployment taxes are 3.8% of the first $7,000 earned per employee. What is the employer's total payroll tax expense for the first week of January? A) $612. B) $1,224. C) $916. D) $304. Answer: C Explanation: FICA Taxes Unemployment Taxes Total Payroll Tax Expense

($8,000* × 0.0765) ($8,000* × 0.038)

$ 612 304 $ 916

*[(10 × 40 hours) × $20] Difficulty: 3 Hard Topic: Payroll Liabilities Learning Objective: 08-03 Account for employee and employer payroll liabilities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

79) Rock Adventures has 15 employees each working 40 hours per week and earning $30 an hour. Federal income taxes are withheld at 15% and state income taxes at 6%. FICA taxes are 7.65% and unemployment taxes are 3.8% of the first $7,000 earned per employee. What is the actual payroll payment (salaries payable) for the first week of January? A) $13,923. B) $12,843. C) $5,157. D) $18,000. Answer: B Explanation: Total Salaries Expense

[(15 × 40 hours) × $30]

$ 18,000

Less: Withholdings Federal Income Taxes State Income Taxes FICA Taxes Total Withholdings Actual Payroll Payment (Salaries Payable)

($18,000 × 0.15) ($18,000 × 0.06) ($18,000 × 0.0765)

$ 2,700 1,080 1,377 5,157 $ 12,843

80) Rock Adventures has 15 employees each working 40 hours per week and earning $30 an hour. Federal income taxes are withheld at 15% and state income taxes at 6%. FICA taxes are 7.65% and unemployment taxes are 3.8% of the first $7,000 earned per employee. What is the employer's total payroll tax expense for the first week of January? A) $1,377. B) $3,141. C) $2,061. D) $684. Answer: C Explanation: FICA Taxes Unemployment Taxes Total Payroll Tax Expense

($18,000* × 0.0765) ($18,000* × 0.038)

$ 1,377 684 $ 2,061

*[(15 × 40 hours) × $30] Difficulty: 3 Hard Topic: Payroll Liabilities Learning Objective: 08-03 Account for employee and employer payroll liabilities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 81) Deferred Revenues is a(n): A) Liability account. B) Asset account. C) Stockholders' equity account. D) Revenue account. Answer: A Difficulty: 1 Easy Topic: Deferred Revenues Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

82) In December 2020, Quebecor Printing received magazine subscriptions for 2021 from customers, who paid $500 in cash. What would be the appropriate journal entry for this event in December 2020? A) Debit Cash, $500; credit Subscription Revenue, $500. B) Debit Cash, $500; credit Deferred Revenue, $500. C) Debit Subscription Revenue, $500; credit Cash, $500. D) No journal entry is necessary. Answer: B Difficulty: 3 Hard Topic: Deferred Revenues Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation 83) In January 2021, Summit Department Store sells a gift card for $50 and receives cash. In February, 2021, the customer comes back and spends $20 of the gift card to purchase a water bottle. What would be the appropriate journal entry for the sale of the gift card in January? A) Debit Cash, $50; credit Sales Revenue, $50. B) Debit Cash, $50; credit Deferred Revenue, $50. C) Debit Sales Revenue, $20; credit Cash, $20. D) No journal entry is necessary. Answer: B Difficulty: 3 Hard Topic: Deferred Revenues Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation

84) In January, 2021, Summit Department Store sells a gift card for $50 and receives cash. In February, 2021, the customer comes back and spends $20 of the gift card to purchase a water bottle. What would be the appropriate journal entry for the customer's purchase of the water bottle in February? A) Debit Deferred Revenue, $50; credit Sales Revenue, $50. B) Debit Deferred Revenue, $20; credit Sales Revenue, $20. C) Debit Sales Revenue, $20; credit Deferred Revenue, $20. D) No journal entry is necessary. Answer: B Difficulty: 3 Hard Topic: Deferred Revenues Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 85) At times, businesses require advance payments from customers that will be applied to the purchase price when goods are delivered or services provided. These customer advances represent: A) Liabilities until the product or service is provided. B) A component of stockholders' equity. C) Long-term assets until the product or service is provided. D) Revenue upon receipt of the advance payment. Answer: A Difficulty: 2 Medium Topic: Deferred Revenues Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 86) The sale of gift cards by a company is a direct example of: A) Deferred revenues. B) Sales tax payable. C) Current portion of long-term debt. D) Contingencies. Answer: A Difficulty: 1 Easy Topic: Deferred Revenues Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 31 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

87) When a company delivers a product or service for which a customer has previously paid, the company records the following: A) A debit to a revenue account and a credit to a liability account. B) A debit to a revenue account and a credit to an asset account. C) A debit to an asset account and a credit to a revenue account. D) A debit to a liability account and a credit to a revenue account. Answer: D Difficulty: 3 Hard Topic: Deferred Revenues Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation 88) Gift card breakage refers to: A) The inability of the company to satisfy its obligation to customers that have previously purchased gift cards. B) The point in time when gift cards expire or when the likelihood of redemption by customers is viewed as remote. C) The time at which customers redeem their previously purchased gift cards for goods and services. D) Companies selling gift cards to customers on account and then those customers failing to pay the amount owed. Answer: B Difficulty: 2 Medium Topic: Deferred Revenues Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 89) On March 31, 2021, a company sells $1,200 of gift cards to customers. The gift cards expire one year from the date of sale. What entry should the company record on March 31, 2021? A) Debit Cash, $1,200; credit Sales Revenue, $1,200. B) Debit Sales Revenue, $1,200; credit Cash, $1,200. C) Debit Cash, $1,200; credit Deferred Revenue, $1,200. D) No journal entry is necessary. Answer: C Difficulty: 2 Medium Topic: Deferred Revenues Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 32 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

90) On October 1, 2021, a company sells $800 of gift cards to customers. The gift cards expire one year from the date of sale. By October 1, 2022, $750 of the gift cards have been redeemed and the sales recorded at the time of redemption. What entry, if any, should the company record on October 1, 2022? A) Debit Deferred Revenue, $50; credit Sales Revenue, $50. B) Debit Sales Revenue, $50; credit Cash, $50. C) Debit Cash, $750; credit Sales Revenue, $750. D) No journal entry is necessary. Answer: A Explanation: $800 − $750 = $50. Difficulty: 3 Hard Topic: Deferred Revenues Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 91) On July 1, 2021, a company sells $2,000 of gift cards to customers. The gift cards expire one year from the date of sale. By December 31, 2021, $1,600 of the gift cards have been redeemed. What is the appropriate balance in the Deferred Revenue account on December 31, 2021? A) $2,000. B) $1,800. C) $1,600. D) $400. Answer: D Explanation: $2,000 − $1,600 = $400. Difficulty: 3 Hard Topic: Deferred Revenues Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

92) Sales taxes collected by a company on behalf of the state and local governments are recorded by: A) A debit to an expense account. B) A credit to a revenue account. C) A debit to a revenue account. D) A credit to a liability account. Answer: D Difficulty: 3 Hard Topic: Sales Tax Payable Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation 93) When a company collects sales tax from a customer, the event is recorded by: A) A debit to Sales Tax Expense and a credit to Sales Tax Payable. B) A debit to Cash and a credit to Sales Tax Payable. C) A debit to Sales Tax Payable and a credit to Sales Tax Expense. D) A debit to Sales Tax Payable and a credit to Cash. Answer: B Difficulty: 3 Hard Topic: Sales Tax Payable Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation 94) When a company collects sales tax from a customer, the event results in a(n) ________ in Cash and a(n) ________ in Sales Tax Payable: A) increase; decrease B) increase; increase C) decrease; increase D) decrease; decrease Answer: B Difficulty: 3 Hard Topic: Sales Tax Payable Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation

95) Suppose you buy lunch for $8.39 that includes a 5% sales tax. How much did the restaurant charge you for the lunch (excluding any tax) and how much does the restaurant owe for sales tax? (Do not round intermediate calculations. Round the answers to 2 decimal places.) A) $8.39 for lunch and $0.42 for sales tax. B) $8.39 for lunch and no sales tax. C) $8.81 for lunch and $0.42 for sales tax. D) $7.99 for lunch and $0.40 for sales tax. Answer: D Explanation: Cost of lunch = $8.39/1.05 = $7.99; Sales tax = $8.39 − $7.99 = $0.40. Difficulty: 3 Hard Topic: Sales Tax Payable Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 96) The Route 66 Gift Shop, which records sales and sales tax separately, had sales on account of $1,500 and cash sales of $1,000. The state sales tax is 8%. The journal entry to record the sales would include a: A) Debit to Sales Tax Payable for $75. B) Debit to Cash of $1,000. C) Credit to Sales Revenue of $2,700. D) Debit to Accounts Receivable of $1,620 and a debit to Cash of $1,080. Answer: D Explanation: ($1,500 × 1.08) = $1,620; ($1,000 × 1.08) = $1,080. Difficulty: 3 Hard Topic: Sales Tax Payable Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

97) Suppose you buy dinner for $23.75 that includes an 8% sales tax. How much did the restaurant charge you for the dinner (excluding any tax) and how much does the restaurant owe for sales tax? A) $23.75 for dinner and $1.90 for sales tax. B) $23.75 for dinner and no sales tax. C) $21.85 for dinner and $1.90 for sales tax. D) $21.99 for dinner and $1.76 for sales tax. Answer: D Explanation: Cost of dinner = $23.75/1.08 = $21.99. Sales tax = $23.75 − $21.99 = $1.76. Difficulty: 3 Hard Topic: Sales Tax Payable Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 98) If a 6% sales tax is recorded together with sales revenue in the sales account and the balance at the end of the month is $5,300, how much sales tax is payable? A) $600 B) $280 C) $318 D) $300 Answer: D Explanation: $5,300/1.06 = $5,000; $5,300 − $5,000 = $300. Difficulty: 3 Hard Topic: Sales Tax Payable Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

99) Union Apparel has sales including sales taxes for the month of $551,200. If the sales tax rate is 6%, what are Union Apparel's sales for the month? A) $500,000. B) $518,128. C) $520,000. D) $551,200. Answer: C Explanation: $551,200/1.06 = $520,000. Difficulty: 3 Hard Topic: Sales Tax Payable Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 100) Union Apparel has sales including sales taxes for the month of $551,200. If the sales tax rate is 6%, how much does Union Apparel owe for sales tax? A) $51,200. B) $33,272. C) $31,200. D) $551,200. Answer: C Explanation: $551,200/1.06 = $520,000; $551,200 − $520,000 = $31,200. Difficulty: 3 Hard Topic: Sales Tax Payable Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 101) The current portion of long-term debt should be A) Reported as a current liability in the balance sheet. B) Reported as a long-term liability in the balance sheet. C) Combined with the rest of the long-term debt in the balance sheet. D) Paid immediately. Answer: A Difficulty: 1 Easy Topic: Current Portion of Long-Term Debt Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

102) The current portion of long-term debt is: A) The amount that will be paid within one year of the balance sheet date. B) Reported as an asset. C) Reported as a long-term liability. D) None of the other answer choices is correct. Answer: A Difficulty: 1 Easy Topic: Current Portion of Long-Term Debt Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 103) Region Jet has a $50 million liability at December 31, 2021, of which $10 million is payable in 2022. In its December 31, 2021 balance sheet, the company reports the $50 million debt as a: A) $50 million current liability in the balance sheet. B) $50 million long-term liability in the balance sheet. C) $10 million current liability and a $40 million long-term liability in the balance sheet. D) $40 million current liability and a $10 million long-term liability in the balance sheet. Answer: C Difficulty: 3 Hard Topic: Current Portion of Long-Term Debt Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 104) United Supply has a $5 million liability at December 31, 2021, of which $1 million is payable in each of the next five years. United Supply reports the liability in the balance sheet as a: A) $5 million current liability. B) $5 million long-term liability. C) $1 million current liability and a $4 million long-term liability. D) $4 million current liability and a $1 million long-term liability. Answer: C Difficulty: 3 Hard Topic: Current Portion of Long-Term Debt Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

105) If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss is reasonably possible, a contingent liability should be A) Disclosed, but not reported as a liability. B) Disclosed and reported as a liability. C) Neither disclosed nor reported as a liability. D) Reported as a liability, but not disclosed. Answer: A Difficulty: 2 Medium Topic: Contingent Liabilities - Litigation Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 106) If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss is probable, a contingent liability should be A) Disclosed, but not reported as a liability. B) Disclosed and reported as a liability. C) Neither disclosed nor reported as a liability. D) Reported as a liability, but not disclosed. Answer: B Difficulty: 2 Medium Topic: Contingent Liabilities - Litigation Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

107) Reeves Co. filed suit against Higgins, Inc., seeking damages for copyright violations. Higgins' legal counsel believes it is probable that Higgins will settle the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should Higgins report this litigation? A) As a liability for $100,000 with disclosure of the range. B) As a liability for $150,000 with disclosure of the range. C) As a liability for $200,000 with disclosure of the range. D) As a disclosure only. No liability is reported. Answer: A Explanation: When no amount within a range of potential losses appears more likely than others, the liability is recorded at the minimum amount in the range. Difficulty: 3 Hard Topic: Contingent Liabilities - Litigation Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 108) Away Travel filed suit against West Coast Travel seeking damages for copyright violations. West Coast Travel's legal counsel believes it is reasonably possible that West Coast Travel will settle the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should West Coast Travel report this litigation? A) As a liability for $100,000 with disclosure of the range. B) As a liability for $150,000 with disclosure of the range. C) As a liability for $200,000 with disclosure of the range. D) As a disclosure only. No liability is reported. Answer: D Explanation: A contingent liability is not recorded if the likelihood of loss is only reasonably possible. Difficulty: 3 Hard Topic: Contingent Liabilities - Litigation Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation

109) Away Travel filed suit against West Coast Travel seeking damages for copyright violations. Away Travel's legal counsel believes it is probable (but not certain) that Away Travel will win the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should Away Travel report this litigation? A) As a receivable for $100,000 with disclosure of the range. B) As a receivable for $150,000 with disclosure of the range. C) As a receivable for $200,000 with disclosure of the range. D) As a disclosure only. No receivable is reported. Answer: D Explanation: A contingent gain is not recorded until the gain is certain. Difficulty: 3 Hard Topic: Contingent Liabilities - Litigation Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 110) Young Company is involved in a lawsuit. The liability that could arise as a result of this lawsuit should be recorded on the books if the probability of Young owing money as a result of the lawsuit is: A) Remote and the amount is reasonably estimable. B) Probable and the amount is reasonably estimable. C) Reasonably possible and the amount is reasonably estimable. D) Probable and the amount is not reasonably estimable. Answer: B Difficulty: 2 Medium Topic: Contingent Liabilities - Litigation Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

111) Ogden Motors, Inc. is involved in a lawsuit. It is reasonably possible that the jury will find in favor of the plaintiff and Ogden will owe ten million dollars. What is the appropriate reporting of this lawsuit and what is the effect in the balance sheet? A) Record; decrease stockholders' equity and increase liabilities. B) Record; increase stockholders' equity and decrease liabilities. C) Disclose; no effect in the balance sheet. D) Disclose; decrease stockholders' equity and decrease liabilities. Answer: C Explanation: The outcome is reasonably possible, not probable, so the contingent liability will be disclosed, but not recorded. Difficulty: 3 Hard Topic: Contingent Liabilities - Litigation Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 112) Amplify, Inc. was sued by Sound City for $50,000. Sound City feels very confident that it will win the case and will be awarded the full amount. Amplify, Inc. feels it is probable that it will lose the case and pay Sound City the full amount. Which of the following is correct? A) Amplify, Inc. would record a loss and contingent liability for $50,000. B) Sound City would record a gain and lawsuit receivable for $50,000. C) Sound City would record nothing. D) Amplify, Inc. would record a loss and contingent liability for $50,000; Sound City would record nothing. Answer: D Difficulty: 3 Hard Topic: Contingent Liabilities - Litigation Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation

113) A company has two active lawsuits at the end of the year. In Lawsuit 1, the company feels it is probable that it will win $10,000. In Lawsuit 2, the company feels that it is probable that it will lose $6,000. At the end of the year, the company should report a: A) Net gain for $4,000. B) Loss for $6,000. C) Net Loss for $4,000. D) Gain for $10,000. Answer: B Difficulty: 3 Hard Topic: Contingent Liabilities - Litigation Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 114) While providing services to Palmer Co., Raider Group caused damages of $125,000. As of the end of the year, both parties agree that it is probable that Raider will pay Palmer the full amount of the damages within the next two months. How would Raider and Palmer report the lawsuit at the end of the year? A) Raider reports a loss; Palmer reports nothing. B) Raider reports nothing; Palmer reports nothing. C) Raider reports nothing; Palmer reports a gain. D) Raider reports a loss; Palmer reports a gain. Answer: A Difficulty: 3 Hard Topic: Contingent Liabilities - Litigation Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation

115) At the beginning of 2021, Angel Corporation began offering a 1-year warranty on its products. The warranty program was expected to cost Angel 4% of net sales. Net sales made under warranty in 2021 were $180 million. Five percent of the units sold were returned in 2021 and repaired or replaced at a cost of $5.3 million. The amount of warranty expense in Angel's 2021 income statement is: A) $5.3 million. B) $7.2 million. C) $9.0 million. D) $27.0 million. Answer: B Explanation: $180 million × 4% = $7.2 million. Difficulty: 3 Hard Topic: Contingent Liabilities - Warranties Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 116) The account "Warranty Liability": A) is adjusted at the end of the year. B) is closed at the end of the year. C) has a year-end credit balance equal to the cost of warranty repairs made during the year. D) is credited each time a warranty repair is made. Answer: A Difficulty: 2 Medium Topic: Contingent Liabilities - Warranties Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

117) Strikers, Inc. sells soccer goals to customers over the Internet. History has shown that 2% of Strikers' goals will need repair under the warranty program. For the year, Strikers has sold 4,000 goals and 45 have been repaired. If the estimated cost to repair a goal is $200, what would be the warranty expense for the year? A) $0. B) $16,000. C) $7,000. D) $9,000. Answer: B Explanation: [(4,000 goals × 2%) × $200] = $16,000. Difficulty: 3 Hard Topic: Contingent Liabilities - Warranties Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 118) Strikers, Inc. sells soccer goals to customers over the Internet. History has shown that 2% of Strikers' goals will need repair under the warranty program. For the year, Strikers has sold 4,000 goals and 45 have been repaired. If the estimated cost to repair a goal is $200, what would be the warranty liability at the end of the year? A) $0. B) $16,000. C) $7,000. D) $9,000. Answer: C Explanation: (4,000 goals × 2%) × $200 = $16,000; $16,000 − (45 × $200) = $7,000 Difficulty: 3 Hard Topic: Contingent Liabilities - Warranties Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

119) Bears Inc. sells football helmets to local schools and warrants all of its products for one year. While no helmets sold in 2021 have been returned yet, based upon previous years, Bears Inc. estimates that 3% of its products will need repairs or be replaced within the next year. What effect would this warranty have on assets, liabilities, and stockholders' equity in 2021? A) A decrease in assets and decrease in stockholders' equity. B) No journal entry is necessary until products under warranty are returned. C) An increase in stockholders' equity and a decrease in liabilities. D) A decrease in stockholders' equity and an increase in liabilities. Answer: D Explanation: The company would record an expense and a liability related to the estimated warranties. Difficulty: 3 Hard Topic: Contingent Liabilities - Warranties Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 120) In 2021, a company estimates that warranty costs in the following year will be $25,000. Actual warranty costs in 2022 are only $20,000. What is the effect on the accounting equation when recording actual warranty costs in 2022? A) Stockholders' equity decreases. B) Stockholders' equity increases. C) Liabilities increase. D) Liabilities decrease. Answer: D Explanation: The company would record a reduction in the warranty liability and a reduction in cash, inventory parts, or other assets used to repair the items. Difficulty: 3 Hard Topic: Contingent Liabilities - Warranties Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation

121) Patriot Paddleboards sells a paddleboard model that carries a one-year warranty on all included accessories. Past experience indicates that 15% of those sold will have defective accessories within a year and that average repair cost is $20 per paddleboard. If 1,000 were sold this year and 50 have already been repaired under warranty, the entry to record warranty expense for the year would include a debit to: A) Warranty Expense of $2,000. B) Warranty Liability of $2,000. C) Warranty Liability of $3,000. D) Warranty Expense of $3,000. Answer: D Explanation: [(1,000 × 15%) × $20] = $3,000. Difficulty: 3 Hard Topic: Contingent Liabilities - Warranties Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 122) Talks-A-Lot, Inc. sells cell phones to customers and expects that 10% of phones sold will be returned for repair under its warranty program. The average repair cost is $75 per phone. For 2021, Talks-A-Lot has sold 750 cell phones and has repaired 30 of them as of December 31, 2021. What amount of warranty liability should be reported at December 31, 2021? A) $2,250. B) $3,375. C) $5,625. D) None, all expected returns from warranties have been received. Answer: B Explanation: [(750 × 10%) × $75] = $5,625; [$5,625 − (30 × $75)] = $3,375. Difficulty: 3 Hard Topic: Contingent Liabilities - Warranties Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

123) Carpenter Inc. estimates warranty expense at 2% of sales. Sales during the year were $4 million and warranty expenditures were $44,000. What was the balance in the Warranty Liability account at the end of the year? A) $44,000. B) $80,000. C) $36,000. D) $480,000. Answer: C Explanation: $4 million × 2% = $80,000; $80,000 − $44,000 = $36,000. Difficulty: 3 Hard Topic: Contingent Liabilities - Warranties Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 124) Note disclosure is required for material potential losses when the loss is at least reasonably possible: A) Only if the amount is known. B) Only if the amount is known or reasonably estimable. C) Unless the amount is not reasonably estimable. D) Even if the amount is not reasonably estimable. Answer: D Difficulty: 2 Medium Topic: Contingencies - General Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 125) Gain contingencies usually are recognized in a company's income statement when: A) The gain is certain. B) The amount is reasonably estimable. C) The gain is reasonably possible and the amount is reasonably estimable. D) The gain is probable and the amount is reasonably estimable. Answer: A Difficulty: 2 Medium Topic: Contingencies - General Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

126) A contingent liability should be recorded in a company's financial statements only if the likelihood of a loss occurring is: A) At least remotely possible and the amount of the loss is known. B) At least reasonably possible and the amount of the loss is known. C) At least reasonably possible and the amount of the loss is reasonably estimable. D) Probable and the amount of the loss can be reasonably estimated. Answer: D Difficulty: 2 Medium Topic: Contingencies - General Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 127) When a gain contingency is probable and the amount of gain is reasonably estimable, the gain should be: A) Reported in the income statement and disclosed. B) Offset against stockholders' equity. C) Disclosed, but not recognized in the income statement. D) Reported in the income statement, but not disclosed. Answer: C Difficulty: 2 Medium Topic: Contingencies - General Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 128) A contingent liability should be disclosed in a note to the financial statements rather than being recorded if: A) The likelihood of a loss is remote. B) The likelihood of a loss is reasonably possible. C) The likelihood of a loss is probable. D) The likelihood of a loss is eighty percent. Answer: B Difficulty: 2 Medium Topic: Contingencies - General Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

129) Volt Electronics sells equipment that includes a three-year warranty. Repairs under the warranty are performed by an independent service company under a contract with Volt. Based on prior experience, warranty costs are estimated to be $25 per item sold. Volt should recognize these warranty costs: A) When the equipment is sold. B) When the repairs are performed. C) When payments are made to the service firm. D) Evenly over the life of the warranty. Answer: A Difficulty: 2 Medium Topic: Contingent Liabilities - Warranties Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 130) Which of the following is a contingency that should be recorded? A) The company is being sued and a loss is reasonably possible and reasonably estimable. B) The company deducts life insurance premiums from employees' paychecks. C) The company offers a two-year warranty and the expenses can be reasonably estimated. D) It is probable that the company will receive $100,000 in settlement of a lawsuit. Answer: C Difficulty: 2 Medium Topic: Contingent Liabilities - Warranties Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 131) Unified Airlines is being sued by Northeast Airlines for $5,000,000. At the end of the year, Unified feels it is probable that it will pay $5,000,000 at some point in the following year. What should Unified and Northeast record at the end of the year concerning the lawsuit? A) Unified does not record any loss; Northeast records a $5,000,000 gain. B) Unified records a $5,000,000 loss; Northeast does not record any gain. C) Unified records a $5,000,000 loss; Northeast records a $5,000,000 gain. D) Neither company records a loss or gain. Answer: B Difficulty: 2 Medium Topic: Contingent Liabilities - Litigation Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 50 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

132) Unified Airlines is being sued by Northeast Airlines for $5,000,000. At the end of the year, Unified feels it is reasonably possible that it will pay $5,000,000 at some point in the following year. What should Unified and Northeast record at the end of the year concerning the lawsuit? A) Unified does not record any loss; Northeast records a $5,000,000 gain. B) Neither company records a loss or gain. C) Unified records a $5,000,000 loss; Northeast records a $5,000,000 gain. D) Unified records a $5,000,000 loss; Northeast does not record any gain. Answer: B Difficulty: 2 Medium Topic: Contingent Liabilities - Litigation Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 133) Discount Travel has the following current assets: cash, $102 million; receivables, $94 million; inventory, $182 million; and other current assets, $18 million. Discount Travel also has the following liabilities: accounts payable, $98 million; current portion of long-term debt, $35 million; and long-term debt, $23 million. Based on these amounts, what is the current ratio? A) 2.54. B) 2.98. C) 4.04. D) 2.84. Answer: B Explanation: ($102 + $94 + $182 + $18)/($98 + $35) = 2.98 (rounded). Difficulty: 3 Hard Topic: Analysis - Current Ratio Learning Objective: 08-06 Assess liquidity using current liability ratios. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation

134) Discount Travel has the following current assets: cash, $102 million; receivables, $94 million; inventory, $182 million; and other current assets, $18 million. Discount Travel also has the following liabilities: accounts payable, $98 million; current portion of long-term debt, $35 million; and long-term debt, $23 million. Based on these amounts, what is the acid-test ratio? A) 1.47. B) 2.00. C) 2.84. D) 3.86. Answer: A Explanation: ($102 + $94)/($98 + $35) = 1.47 (rounded). Difficulty: 3 Hard Topic: Analysis - Acid-Test Ratio Learning Objective: 08-06 Assess liquidity using current liability ratios. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 135) Which of the following statements regarding liquidity ratios is false? A) A high current ratio generally indicates the ability to pay current liabilities on a timely basis. B) A high acid-test ratio generally indicates the ability to pay current liabilities on a timely basis. C) All current assets are due within one year and therefore have essentially equal liquidity. D) As a rule of thumb, a current ratio of 1 or higher often reflects an acceptable level of liquidity. Answer: C Difficulty: 3 Hard Topic: Analysis - Working Capital; Analysis - Current Ratio; Analysis - Acid-Test Ratio Learning Objective: 08-06 Assess liquidity using current liability ratios. Bloom's: Evaluate AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 136) Which of the following statements regarding liquidity ratios is true? A) A low current ratio generally indicates the ability to pay current liabilities on a timely basis. B) A low acid-test ratio generally indicates the ability to pay current liabilities on a timely basis. C) All current assets are due within one year and therefore have essentially equal liquidity. D) A high working capital generally indicates the ability to pay current liabilities on a timely basis. Answer: D Difficulty: 3 Hard Topic: Analysis - Working Capital; Analysis - Current Ratio; Analysis - Acid-Test Ratio Learning Objective: 08-06 Assess liquidity using current liability ratios. Bloom's: Evaluate AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 52 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

137) Which of the following is true regarding the relationship between the current ratio and the acid-test ratio? A) The current ratio will always be equal to or larger than the acid-test ratio for a specific company. B) The acid-test ratio will always be equal to or larger than the current ratio for a specific company. C) Either the current ratio or the acid-test ratio could be larger for a specific company. D) One ratio will always exceed 1.0, while the other will always be less than 1.0. Answer: A Difficulty: 3 Hard Topic: Analysis - Current Ratio; Analysis - Acid-Test Ratio Learning Objective: 08-06 Assess liquidity using current liability ratios. Bloom's: Evaluate AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 138) A company's liquidity refers to its: A) Ability to collect accounts receivable. B) Ability to sell inventory efficiently. C) Ability to generate profits from operations. D) Ability to pay currently maturing debts. Answer: D Difficulty: 1 Easy Topic: Analysis - Working Capital; Analysis - Current Ratio; Analysis - Acid-Test Ratio Learning Objective: 08-06 Assess liquidity using current liability ratios. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 139) Which financial ratio relates most closely to a company's ability to pay its short-term debts? A) Receivables turnover B) Debt to equity ratio C) Return on assets D) Current ratio Answer: D Difficulty: 1 Easy Topic: Analysis - Current Ratio Learning Objective: 08-06 Assess liquidity using current liability ratios. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

140) Working capital is A) Current assets divided by current liabilities. B) Current assets minus current liabilities. C) Cash, short-term investments, and accounts receivable divided by current liabilities. D) Cash, short-term investments, and accounts receivable minus current liabilities. Answer: B Difficulty: 1 Easy Topic: Analysis - Working Capital Learning Objective: 08-06 Assess liquidity using current liability ratios. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 141) The current ratio is A) Current assets divided by current liabilities. B) Cash and short-term investments divided by current liabilities. C) Cash, short-term investments, and accounts receivable divided by current liabilities. D) Cash, short-term investments, accounts receivable, and inventory divided by current liabilities. Answer: A Difficulty: 1 Easy Topic: Analysis - Current Ratio Learning Objective: 08-06 Assess liquidity using current liability ratios. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 142) The acid-test ratio is A) Current assets divided by current liabilities. B) Cash and short-term investments divided by current liabilities. C) Cash, short-term investments, and accounts receivable divided by current liabilities. D) Cash, short-term investments, accounts receivable, and inventory divided by current liabilities. Answer: C Difficulty: 1 Easy Topic: Analysis - Acid-Test Ratio Learning Objective: 08-06 Assess liquidity using current liability ratios. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

143) Which of the following measures of liquidity does not control for the relative size of the company? A) Working capital. B) Current ratio. C) Acid-test ratio. D) They all control for the relative size of the company. Answer: A Difficulty: 2 Medium Topic: Analysis - Working Capital Learning Objective: 08-06 Assess liquidity using current liability ratios. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 144) Assuming a current ratio of 1.2 and an acid-test ratio of 0.80, how will the purchase of inventory with cash affect each ratio? A) Increase the current ratio and increase the acid-test ratio. B) No change to the current ratio and decrease the acid-test ratio. C) Decrease the current ratio and decrease the acid-test ratio. D) Decrease the current ratio and increase the acid-test ratio. Answer: B Difficulty: 3 Hard Topic: Analysis - Current Ratio; Analysis - Acid-Test Ratio Learning Objective: 08-06 Assess liquidity using current liability ratios. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 145) Assuming a current ratio of 1.0 and an acid-test ratio of 0.80, how will the borrowing of cash by issuing a six-month note payable affect each ratio? A) Increase the current ratio and increase the acid-test ratio. B) No change to the current ratio and increase the acid-test ratio. C) Decrease the current ratio and decrease the acid-test ratio. D) Decrease the current ratio and increase the acid-test ratio. Answer: B Difficulty: 3 Hard Topic: Analysis - Current Ratio; Analysis - Acid-Test Ratio Learning Objective: 08-06 Assess liquidity using current liability ratios. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation

146) Assuming a current ratio of 1.2 and an acid-test ratio of 0.80, how will an increase in accounts receivable affect each ratio? A) No change to the current ratio and decrease the acid-test ratio. B) Increase the current ratio and increase the acid-test ratio. C) Decrease the current ratio and decrease the acid-test ratio. D) Decrease the current ratio and increase the acid-test ratio. Answer: B Difficulty: 3 Hard Topic: Analysis - Current Ratio; Analysis - Acid-Test Ratio Learning Objective: 08-06 Assess liquidity using current liability ratios. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 147) Which of the following would not result in an increase in both the current ratio and the acid-test ratio? A) Increase in cash B) Increase in inventory C) Increase in accounts receivable D) Increase in current investments Answer: B Difficulty: 3 Hard Topic: Analysis - Current Ratio; Analysis - Acid-Test Ratio Learning Objective: 08-06 Assess liquidity using current liability ratios. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 148) Which of the following would result in an increase in the current ratio, but not necessarily the acid-test ratio? A) Increase in current assets. B) Increase in quick assets. C) Decrease in current liabilities. D) Decrease in current assets. Answer: A Difficulty: 3 Hard Topic: Analysis - Current Ratio; Analysis - Acid-Test Ratio Learning Objective: 08-06 Assess liquidity using current liability ratios. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation

149) How many of the following transactions increase a company's liquidity? • • • •

Provide services on account. Pay workers' salaries in the current period. Purchase office supplies with cash. Pay dividends to stockholders.

A) 0. B) 1. C) 2. D) 3. Answer: B Explanation: Provide services on account. Difficulty: 3 Hard Topic: Analysis - Working Capital; Analysis - Current Ratio; Analysis - Acid-Test Ratio Learning Objective: 08-06 Assess liquidity using current liability ratios. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation

Match the following: A) Interest on debt B) Line of credit C) The riskiness of a business's obligations D) Payroll taxes E) Current portion of long-term debt 150) Long-term debt maturing within one year of the balance sheet date. Difficulty: 2 Medium Topic: Current vs. Long-Term Classification; Notes Payable; Payroll Liabilities; Current Portion of Long-Term Debt Learning Objective: 08-01 Distinguish between current and long-term liabilities.; 08-02 Account for notes payable and interest expense.; 08-03 Account for employee and employer payroll liabilities.; 08-04 Explain the accounting for other current liabilities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 151) FICA and FUTA. Difficulty: 2 Medium Topic: Current vs. Long-Term Classification; Notes Payable; Payroll Liabilities; Current Portion of Long-Term Debt Learning Objective: 08-01 Distinguish between current and long-term liabilities.; 08-02 Account for notes payable and interest expense.; 08-03 Account for employee and employer payroll liabilities.; 08-04 Explain the accounting for other current liabilities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 152) Informal agreement that permits a company to borrow up to a prearranged limit. Difficulty: 2 Medium Topic: Current vs. Long-Term Classification; Notes Payable; Payroll Liabilities; Current Portion of Long-Term Debt Learning Objective: 08-01 Distinguish between current and long-term liabilities.; 08-02 Account for notes payable and interest expense.; 08-03 Account for employee and employer payroll liabilities.; 08-04 Explain the accounting for other current liabilities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

153) Classifying liabilities as either current or long-term helps investors and creditors assess this. Difficulty: 2 Medium Topic: Current vs. Long-Term Classification; Notes Payable; Payroll Liabilities; Current Portion of Long-Term Debt Learning Objective: 08-01 Distinguish between current and long-term liabilities.; 08-02 Account for notes payable and interest expense.; 08-03 Account for employee and employer payroll liabilities.; 08-04 Explain the accounting for other current liabilities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 154) Amount of note payable × annual interest rate × fraction of the year. Difficulty: 2 Medium Topic: Current vs. Long-Term Classification; Notes Payable; Payroll Liabilities; Current Portion of Long-Term Debt Learning Objective: 08-01 Distinguish between current and long-term liabilities.; 08-02 Account for notes payable and interest expense.; 08-03 Account for employee and employer payroll liabilities.; 08-04 Explain the accounting for other current liabilities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 150) E 151) D 152) B 153) C 154) A

Match the following: A) Accrual accounting B) Current portion of long-term debt C) Deferred revenues D) Commercial paper E) The riskiness of a business's obligations F) Recording a contingent liability G) Interest expense H) FICA I) Acid-test ratio J) Disclosure of a contingent liability 155) Cash, short-term investments, and accounts receivable all divided by current liabilities. Difficulty: 2 Medium Topic: Current vs. Long-Term Classification; Notes Payable; Payroll Liabilities; Deferred Revenues; Current Portion of Long-Term Debt; Contingencies - General; Analysis - Acid-Test Ratio Learning Objective: 08-01 Distinguish between current and long-term liabilities.; 08-02 Account for notes payable and interest expense.; 08-03 Account for employee and employer payroll liabilities.; 08-04 Explain the accounting for other current liabilities.; 08-05 Apply the appropriate accounting treatment for contingencies.; 08-06 Assess liquidity using current liability ratios. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 156) Loss is probable and amount is reasonably estimable. Difficulty: 2 Medium Topic: Current vs. Long-Term Classification; Notes Payable; Payroll Liabilities; Deferred Revenues; Current Portion of Long-Term Debt; Contingencies - General; Analysis - Acid-Test Ratio Learning Objective: 08-01 Distinguish between current and long-term liabilities.; 08-02 Account for notes payable and interest expense.; 08-03 Account for employee and employer payroll liabilities.; 08-04 Explain the accounting for other current liabilities.; 08-05 Apply the appropriate accounting treatment for contingencies.; 08-06 Assess liquidity using current liability ratios. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

157) Gift cards. Difficulty: 2 Medium Topic: Current vs. Long-Term Classification; Notes Payable; Payroll Liabilities; Deferred Revenues; Current Portion of Long-Term Debt; Contingencies - General; Analysis - Acid-Test Ratio Learning Objective: 08-01 Distinguish between current and long-term liabilities.; 08-02 Account for notes payable and interest expense.; 08-03 Account for employee and employer payroll liabilities.; 08-04 Explain the accounting for other current liabilities.; 08-05 Apply the appropriate accounting treatment for contingencies.; 08-06 Assess liquidity using current liability ratios. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 158) Long-term debt maturing within one year of the balance sheet date. Difficulty: 2 Medium Topic: Current vs. Long-Term Classification; Notes Payable; Payroll Liabilities; Deferred Revenues; Current Portion of Long-Term Debt; Contingencies - General; Analysis - Acid-Test Ratio Learning Objective: 08-01 Distinguish between current and long-term liabilities.; 08-02 Account for notes payable and interest expense.; 08-03 Account for employee and employer payroll liabilities.; 08-04 Explain the accounting for other current liabilities.; 08-05 Apply the appropriate accounting treatment for contingencies.; 08-06 Assess liquidity using current liability ratios. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 159) Social Security and Medicare. Difficulty: 2 Medium Topic: Current vs. Long-Term Classification; Notes Payable; Payroll Liabilities; Deferred Revenues; Current Portion of Long-Term Debt; Contingencies - General; Analysis - Acid-Test Ratio Learning Objective: 08-01 Distinguish between current and long-term liabilities.; 08-02 Account for notes payable and interest expense.; 08-03 Account for employee and employer payroll liabilities.; 08-04 Explain the accounting for other current liabilities.; 08-05 Apply the appropriate accounting treatment for contingencies.; 08-06 Assess liquidity using current liability ratios. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

160) Interest expense is recorded in the period interest is incurred rather than in the period interest is paid. Difficulty: 2 Medium Topic: Current vs. Long-Term Classification; Notes Payable; Payroll Liabilities; Deferred Revenues; Current Portion of Long-Term Debt; Contingencies - General; Analysis - Acid-Test Ratio Learning Objective: 08-01 Distinguish between current and long-term liabilities.; 08-02 Account for notes payable and interest expense.; 08-03 Account for employee and employer payroll liabilities.; 08-04 Explain the accounting for other current liabilities.; 08-05 Apply the appropriate accounting treatment for contingencies.; 08-06 Assess liquidity using current liability ratios. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 161) Loss is reasonably possible and amount is reasonably estimable. Difficulty: 2 Medium Topic: Current vs. Long-Term Classification; Notes Payable; Payroll Liabilities; Deferred Revenues; Current Portion of Long-Term Debt; Contingencies - General; Analysis - Acid-Test Ratio Learning Objective: 08-01 Distinguish between current and long-term liabilities.; 08-02 Account for notes payable and interest expense.; 08-03 Account for employee and employer payroll liabilities.; 08-04 Explain the accounting for other current liabilities.; 08-05 Apply the appropriate accounting treatment for contingencies.; 08-06 Assess liquidity using current liability ratios. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 162) Incurred on a note payable. Difficulty: 2 Medium Topic: Current vs. Long-Term Classification; Notes Payable; Payroll Liabilities; Deferred Revenues; Current Portion of Long-Term Debt; Contingencies - General; Analysis - Acid-Test Ratio Learning Objective: 08-01 Distinguish between current and long-term liabilities.; 08-02 Account for notes payable and interest expense.; 08-03 Account for employee and employer payroll liabilities.; 08-04 Explain the accounting for other current liabilities.; 08-05 Apply the appropriate accounting treatment for contingencies.; 08-06 Assess liquidity using current liability ratios. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

163) Notes issued by one company to another company with maturities normally ranging up to 270 days. Difficulty: 2 Medium Topic: Current vs. Long-Term Classification; Notes Payable; Payroll Liabilities; Deferred Revenues; Current Portion of Long-Term Debt; Contingencies - General; Analysis - Acid-Test Ratio Learning Objective: 08-01 Distinguish between current and long-term liabilities.; 08-02 Account for notes payable and interest expense.; 08-03 Account for employee and employer payroll liabilities.; 08-04 Explain the accounting for other current liabilities.; 08-05 Apply the appropriate accounting treatment for contingencies.; 08-06 Assess liquidity using current liability ratios. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 164) Classifying liabilities as either current or long-term helps investors and creditors assess this. Difficulty: 2 Medium Topic: Current vs. Long-Term Classification; Notes Payable; Payroll Liabilities; Deferred Revenues; Current Portion of Long-Term Debt; Contingencies - General; Analysis - Acid-Test Ratio Learning Objective: 08-01 Distinguish between current and long-term liabilities.; 08-02 Account for notes payable and interest expense.; 08-03 Account for employee and employer payroll liabilities.; 08-04 Explain the accounting for other current liabilities.; 08-05 Apply the appropriate accounting treatment for contingencies.; 08-06 Assess liquidity using current liability ratios. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 155) I 156) F 157) C 158) B 159) H 160) A 161) J 162) G 163) D 164) E

Match the following: A) Disclosure of a contingent liability B) Deferred revenues C) Current portion of long-term debt D) Recording a contingent liability E) Notes payable 165) A written promise to repay the amount borrowed plus interest. Difficulty: 2 Medium Topic: Notes Payable; Deferred Revenues; Current Portion of Long-Term Debt; Contingencies – General Learning Objective: 08-02 Account for notes payable and interest expense.; 08-04 Explain the accounting for other current liabilities.; 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 166) Loss is reasonably possible and amount is reasonably estimable. Difficulty: 2 Medium Topic: Notes Payable; Deferred Revenues; Current Portion of Long-Term Debt; Contingencies General Learning Objective: 08-02 Account for notes payable and interest expense.; 08-04 Explain the accounting for other current liabilities.; 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 167) Debt that will be paid within one year of the balance sheet date. Difficulty: 2 Medium Topic: Notes Payable; Deferred Revenues; Current Portion of Long-Term Debt; Contingencies General Learning Objective: 08-02 Account for notes payable and interest expense.; 08-04 Explain the accounting for other current liabilities.; 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

168) Loss is probable and amount is reasonably estimable. Difficulty: 2 Medium Topic: Notes Payable; Deferred Revenues; Current Portion of Long-Term Debt; Contingencies General Learning Objective: 08-02 Account for notes payable and interest expense.; 08-04 Explain the accounting for other current liabilities.; 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 169) A liability that requires the sacrifice of something other than cash. Difficulty: 2 Medium Topic: Notes Payable; Deferred Revenues; Current Portion of Long-Term Debt; Contingencies General Learning Objective: 08-02 Account for notes payable and interest expense.; 08-04 Explain the accounting for other current liabilities.; 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 165) E 166) A 167) C 168) D 169) B

170) Match (by letter) the correct reporting method for each of the items listed below. Reporting Method C. Current liability L. Long-term liability D. Disclosure note only N. Not reported Item _____ 1. Accounts payable. _____ 2. A contingent liability that is probable of occurring within one year of the balance sheet date and is reasonably estimable. _____ 3. A contingent liability that is reasonably possible of occurring within one year of the balance sheet date and is reasonably estimable. _____ 4. Current portion of long-term debt. _____ 5. Sales tax collected from customers. Answer: C; C; D; C; C Difficulty: 2 Medium Topic: Current vs. Long-Term Classification; Sales Tax Payable; Current Portion of Long-Term Debt; Contingencies - General Learning Objective: 08-01 Distinguish between current and long-term liabilities.; 08-04 Explain the accounting for other current liabilities.; 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

171) Match (by letter) the correct reporting method for each of the items listed below. Reporting Method C. Current liability L. Long-term liability D. Disclosure note only N. Not reported Item _____ 1. Notes payable due in more than one year of the balance sheet date. _____ 2. Customer advances. _____ 3. Commercial paper. _____ 4. Unused line of credit. _____ 5. A contingent liability that is probable of occurring within one year of the balance sheet date but cannot be estimated. Answer: L; C; C; D; D Difficulty: 2 Medium Topic: Notes Payable; Deferred Revenues; Contingencies - General Learning Objective: 08-02 Account for notes payable and interest expense.; 08-04 Explain the accounting for other current liabilities.; 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

172) On November 1, Vacation Destinations borrows $1.5 million and issues a six-month, 8% note payable. Interest is payable at maturity. Record the issuance of the note and the appropriate adjusting entry for interest expense at December 31, the end of the reporting period. Answer: November 1 Cash Notes Payable (Issuance of notes payable)

Debit 1,500,000

Credit 1,500,000

December 31 Debit Credit Interest Expense [($1,500,000 × .08) × 2/12] 20,000 Interest Payable 20,000 (Interest expense incurred, but not paid) Difficulty: 3 Hard Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

173) On September 1, 2021, Allied Moving Corp. borrows $100,000 cash from First National Bank. Allied signs a six-month, 6% note payable. Interest is payable at maturity. Allied's yearend is December 31. 1. Record the note payable by Allied Moving Corp. 2. Record the appropriate adjusting entry for the note by Allied Moving Corp. on December 31, 2021. 3. Record the payment of the note at maturity. Answer: 1. September 1, 2021 Cash Notes Payable (Issuance of notes payable) 2. December 31, 2021 Interest Expense [($100,000 × 6%) × 4/12] Interest Payable (Interest expense incurred, but not paid)

Debit 100,000

Credit 100,000

Debit 2,000

Credit 2,000

3. March 1, 2022 Debit Credit Notes Payable 100,000 Interest Expense [($100,000 × 6%) × 2/12] 1,000 Interest Payable [($100,000 × 6%) × 4/12] 2,000 Cash 103,000 (Payment of notes payable and interest) Difficulty: 3 Hard Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

174) On November 1, 2021, Dual Systems borrows $200,000 to expand operations. Dual Systems signs a six-month, 9% promissory note. Interest is payable at maturity. Dual Systems' year-end is December 31. 1. Record the issuance of the note by Dual Systems. 2. Record the appropriate adjusting entry for the note by Dual Systems on December 31, 2021. 3. Record the payment of the note by Dual Systems at maturity on April 30, 2022. Answer: 1. November 1, 2021 Cash Notes Payable (Issuance of notes payable) 2. December 31, 2021 Interest Expense [($200,000 × 9%) × 2/12] Interest Payable (Interest expense incurred, but not paid)

Debit 200,000

Credit 200,000

Debit 3,000

Credit 3,000

3. April 30, 2022 Debit Credit Notes Payable 200,000 Interest Expense ($200,000 × 9% × 4/12) 6,000 Interest Payable ($200,000 × 9% × 2/12) 3,000 Cash 209,000 (Payment of notes payable and interest) Difficulty: 3 Hard Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

175) Assume that on July 1, 2021, Togo's Sandwiches issues a $2 million, one-year note. Interest is payable at maturity. Determine the amount of interest expense that should be recorded in a year-end adjusting entry under each of the following independent assumptions:

1. 2. 3. 4.

Interest Rate 8% 9% 6% 7%

Answer: 1. $2,000,000 2. $2,000,000 3. $2,000,000 4. $2,000,000

× × × ×

Fiscal Year-End 31 December 30 September 31 October 31 January

.08 .09 .06 .07

× × × ×

6/12 3/12 4/12 7/12

= = = =

$80,000. $45,000. $40,000. $81,667.

Difficulty: 3 Hard Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

176) The following selected transactions relate to liabilities of Food Emporium whose fiscal year ends on December 31. Negotiated a line of credit with City Bank that can be renewed annually upon bank approval. The amount available under the line of credit is $1 million at the bank's prime rate. Arranged a six-month bank loan of $400,000 with City Bank under the March 1 line of credit agreement. Interest at the prime rate of 8% is payable at maturity. September 1 Paid the 8% note at maturity. January 26

Answer: January 26 No Journal Entry March 1 Cash Notes Payable (Issuance of notes payable) September 1 Notes Payable Interest Expense [(400,000 × .08) × 6/12] Cash (Payment of notes payable and interest)

Debit

Credit

400,000 400,000

400,000 16,000 416,000

177) Mike Smith is a college football coach making a base salary of $960,000 a year ($80,000 per month). Employers are required to withhold a 6.2% Social Security tax up to a maximum base amount and a 1.45% Medicare tax with no maximum. Unemployment taxes are 6.2% of the first $7,000 earned per employee. 1. Assuming the Social Security base amount is $128,400, compute how much will be withheld during the year for Coach Smith's Social Security and Medicare. 2. Through what month will Social Security be withheld? 3. What additional amount will the employer need to pay, assuming unemployment taxes of 6.2%? Answer: 1. Total withheld for: Social Security Medicare Total

$128,400 × 0.062 = $960,000 × 0.0145 =

7,961 13,920 $21,881

2. At $80,000 per month, Coach Smith's salary will exceed the Social Security base amount of $128,400 in February ($80,000 × 2 months = $160,000) 3. Additional amounts paid by employer: Social Security and Medicare (matched from 1. above) = 21,881 Unemployment $7,000 × 0.062 = 434 Total $22,315 Difficulty: 3 Hard Topic: Payroll Liabilities Learning Objective: 08-03 Account for employee and employer payroll liabilities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

178) Accurate Reports has 50 employees each working 40 hours per week and earning $25 an hour. Federal income taxes are withheld at 15% and state income taxes at 6%. FICA taxes are 7.65% of the first $128,400 earned per employee and 1.45% thereafter. Unemployment taxes are 3.8% of the first $7,000 earned per employee. 1. Compute the total salaries expense, the total withholdings from employee salaries, and the actual payroll payment (salaries payable) for the first week of January. 2. Compute the total payroll tax expense Accurate Reports will pay for the first week of January. Answer:

2. FICA Taxes Unemployment Taxes Total Payroll Tax Expense

($50,000 × 0.0765) ($50,000 × 0.038)

$3,825 1,900 $5,725

179) During January, Deluxe Printing pays employee salaries of $1 million. Withholdings in January are $76,500 for the employee portion of FICA, $210,000 for federal and state income tax, and $40,000 for the employee portion of health insurance (payable to Blue Cross/Blue Shield). The company incurs an additional $38,000 for federal and state unemployment tax, and $30,000 for the employer portion of health insurance. 1. Record the employee salary expense, withholdings, and salaries payable. 2. Record the employer-provided fringe benefits. 3. Record the employer payroll taxes. Answer: January 31 Salaries Expense Income Tax Payable FICA Tax Payable Accounts Payable (Blue Cross/Blue Shield) Salaries Payable (to balance) (Employee salary expense and withholdings) January 31 Salaries Expense (fringe benefits) Accounts Payable (Blue Cross/Blue Shield) (Employer-provided fringe benefits)

Debit 1,000,000

Credit 210,000 76,500 40,000 673,500

30,000 30,000

January 31 Payroll Tax Expense (total) 114,500 FICA Tax Payable 76,500 Unemployment Tax Payable 38,000 (Employer payroll taxes) Difficulty: 3 Hard Topic: Payroll Liabilities Learning Objective: 08-03 Account for employee and employer payroll liabilities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

180) Midwest Shipping pays employees at the end of each month. Payroll information is listed below for January, the first month of the fiscal year. Assume that none of the employees exceeds the Federal unemployment tax maximum salary of $7,000 in January. Salaries Federal and state income taxes withheld Federal unemployment tax rate State unemployment tax rate (after FUTA deduction) Social Security (FICA) tax rate

$800,000 160,000 0.80% 3.00% 7.65%

Record salaries expense and payroll tax expense for the January pay period. Answer: January 31 Salaries Expense Income Tax Payable FICA Tax Payable ($800,000 × .0765) Salaries Payable (to balance) (Employee salary expense and withholdings)

Debit 800,000

Credit 160,000 61,200 578,800

January 31 Payroll Tax Expense (total) 91,600 FICA Tax Payable ($800,000 × .0765) 61,200 Unemployment Tax Payable ($800,000 × .038) 30,400 (Employer payroll tax expense) Difficulty: 3 Hard Topic: Payroll Liabilities Learning Objective: 08-03 Account for employee and employer payroll liabilities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

181) On July 8, Compusoft receives $250,000 from a customer toward a cash sale of $1 million for customized computer equipment to be completed on August 1. The remaining $750,000 payment is received upon delivery of the product on August 1. The equipment had a total production cost of $700,000. What journal entries should Compusoft record on July 8 and August 1? Assume Compusoft uses the perpetual inventory system. Answer: July 8 Debit Cash 250,000 Deferred Revenue (to record advance receipt of cash)

Credit 250,000

August 1 Cash 750,000 Deferred Revenue 250,000 Sales Revenue 1,000,000 Cost of Goods Sold 700,000 Inventory 700,000 (to complete the sale) Difficulty: 3 Hard Topic: Deferred Revenues Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

182) T. Boone Pickens football stadium at Oklahoma State University has a seating capacity of about 60,000. Assume the stadium sells out all six home games before the season begins and the athletic department collects $30.6 million in ticket sales. 1. What was the average price per season ticket and average price per individual game ticket sold? 2. Record the advance collection of $30.6 million in ticket sales. 3. Record the revenue recognized after the first home game is completed. Answer: 1. = $510 per season ticket

= $85 per individual game ticket

2. Cash Deferred Revenue (Advance collection of ticket sales)

30,600,000 30,600,000

3. Deferred Revenue 5,100,000 Sales Revenue ($30,600,000/6) 5,100,000 (Revenue recognized after first home game) Difficulty: 3 Hard Topic: Deferred Revenues Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

183) During November, Wireless, Inc., makes a $1,600 credit sale excluding sales tax. The state sales tax rate is 5% and the local sales tax rate is 1.5%. Record sales revenue and sales tax payable. Answer: Debit Credit Accounts Receivable 1,704 Sales Revenue 1,600 Sales Tax Payable (.065 × $1,600) 104 (Record sales and sales tax) Difficulty: 3 Hard Topic: Sales Tax Payable Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 184) On April 1, 2021, the Electronic Superstore borrows $22 million of which $4 million is due in 2022. Show how the company would report the $22 million debt on its December 31, 2021 balance sheet. Answer: Electronic Superstore Partial Balance Sheet December 31, 2021 Current Liabilities: Current portion of long-term debt Long-Term Liabilities: Notes payable Total Liabilities

$4,000,000 $18,000,000 $22,000,000

Difficulty: 3 Hard Topic: Current Portion of Long-Term Debt Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

185) Consultants notify management of Generic Drug that a prescription medication poses a potential health risk. Legal counsel indicates that a product recall is probable and is estimated to cost the company between $5 and $8 million. How will this affect the company's income statement and balance sheet this period? Answer: The contingent liability is probable and reasonably estimable, so a loss and a liability for the minimum amount of the range ($5 million) must be recorded. The entry will reduce income before taxes on the income statement and increase total liabilities on the balance sheet by $5 million. Difficulty: 3 Hard Topic: Contingent Liabilities - Litigation Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 186) Decorative Concrete produces a concrete overlay for residential and commercial concrete flooring. Customers have complained that one of the products results in excessive cracking. The likelihood the company will incur a loss on this product is probable and the amount of the loss is estimated to be somewhere between $1.5 and $3 million. 1. Should this contingent liability be reported, disclosed in a note only, or both? Explain. 2. What loss, if any, should Decorative Concrete report in its income statement? 3. What liability, if any, should Decorative Concrete report in its balance sheet? 4. What entry, if any, should be recorded? Answer: 1. The contingent liability is probable and reasonably estimable, so it must be reported. The details of the contingent liability should also be provided in a note to the financial statements. 2. When the loss is estimated within a range, the minimum amount of the loss, $1.5 million, should be reported in the company's 2021 income statement. 3. Similarly, a $1.5 million liability should be reported in the 2021 balance sheet. 4. The journal entry is as follows: Loss 1,500,000 Contingent Liability 1,500,000 (Record a contingent liability) Difficulty: 3 Hard Topic: Contingent Liabilities - Litigation Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

187) Panama Shirt Designs is a defendant in litigation involving an employee accident in its manufacturing plant. For each of the following scenarios, determine the appropriate way to report the situation. Explain your reasoning and record any necessary entry. 1. The likelihood of a loss occurring is probable and the estimated loss is $650,000. 2. The likelihood of a loss occurring is probable and the loss is estimated to be in the range of $500,000 to $800,000. 3. The likelihood of a loss occurring is reasonably possible and the estimated loss is $650,000. 4. The likelihood of a loss occurring is remote, while the estimated potential loss is $650,000. Answer: 1. The contingent liability is probable and reasonably estimable, so it must be recorded as follows: Loss 650,000 Contingent Liability (Entry to record the contingent liability)

650,000

2. Panama Shirt Designs should record a loss and a liability for the minimum amount ($500,000) and disclose the range between $500,000 and $800,000 in the notes to the financial statements. The journal entry is as follows: Loss 500,000 Contingent Liability (Entry to record the contingent liability)

500,000

3. If the likelihood of loss is reasonably possible rather than probable, we record no entry, but make full disclosure in a note to the financial statements to describe the contingency. 4. If the likelihood of loss is remote, disclosure is usually not required. Difficulty: 3 Hard Topic: Contingent Liabilities - Litigation Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

188) Rotary Tools sells power tools and backs each product it sells with a one-year warranty against defects. Based on previous experience, the company expects warranty costs to be approximately 5% of sales. By the end of the first year, sales are $800,000. Actual warranty expenses incurred so far are $13,000. 1. Does this situation represent a contingent liability? Why or why not? 2. Record warranty expense and warranty liability for the year based on 5% of sales. 3. Record the actual warranty expenditures of $13,000 incurred so far. 4. What is the balance in the Warranty Liability account after the entries in parts 2 and 3? Answer: 1. Yes, it's probable that costs for warranties will be incurred and based on previous experience the company can reasonably estimate the amount. 2. Warranty Expense ($800,000 × 5%) Warranty Liability (Record liability for warranties) 3. Warranty Liability Cash (Record actual warranty expenditures)

40,000 40,000

13,000 13,000

4. Warranty Liability Payment $13,000 $40,000 Expense $27,000 Balance Difficulty: 3 Hard Topic: Contingent Liabilities - Warranties Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

189) The Copper Grill has the following current assets: cash, $12 million; receivables, $50 million; inventory, $44 million; and other current assets $4 million. The Copper Grill has the following liabilities: accounts payable, $38 million; current portion of long-term debt, $7 million; and long-term debt, $12 million. Based on these amounts, calculate the current ratio and the acid-test ratio for The Copper Grill. Answer: ($ in millions) Current Assets

($12 + 50 + 44 + 4)

Quick Assets

($12 + 50)

Current Liabilities ($38 + 7) Current Liabilities ($38 + 7)

Current Ratio

2.44 (rounded)

Acid-Test Ratio

1.38 (rounded)

Difficulty: 3 Hard Topic: Analysis - Current Ratio; Analysis - Acid-Test Ratio Learning Objective: 08-06 Assess liquidity using current liability ratios. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation

190) Selected financial data regarding current assets and current liabilities for two competing companies, Simon and Garfunkel, are provided as follows: ($ in millions) Current assets Cash and cash equivalents Short-term investments Net receivables Inventory Other current assets Total current assets Current liabilities Accounts payable Short-term debt Other current liabilities Total current liabilities

Simon

Garfunkel

$648 3,676 991 515 334 $6,164

$2,917 0 1,372 202 476 $4,967

$7,081 1,239 0 $8,320

$4,295 1,021 1,308 $6,624

1. Calculate the current ratio for Simon. Then calculate the current ratio for Garfunkel. Which of the two companies has the best current ratio? 2. Calculate the acid-test (quick) ratio for Simon. Then calculate the acid-test (quick) ratio for Garfunkel. Which of the two companies has the best acid-test ratio? Answer: 1. Garfunkel has a slightly better current ratio. Total Total ($ in millions) Current ÷ Current Assets Liabilities Simon $6,164 ÷ $8,320 Garfunkel $4,967 ÷ $6,624 2. Garfunkel also has a slightly better acid-test ratio. Total Quick ($ in millions) ÷ Current Assets Liabilities Simon $5,315 (a) ÷ $8,320 Garfunkel $4,289 (b) ÷ $6,624

Current Ratio

= 0.74 (rounded) = 0.75 (rounded)

Acid-Test Ratio

= 0.64 (rounded) = 0.65 (rounded)

(a) $648 + $3,676 + $991 = $5,315 (b) $2,917 + $1,372 = $4,289 Difficulty: 3 Hard Topic: Analysis - Current Ratio; Analysis - Acid-Test Ratio Learning Objective: 08-06 Assess liquidity using current liability ratios. Bloom's: Evaluate AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 84 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

191) Listed below are several terms and phrases associated with current liabilities. Pair each item from List A (by letter) with the item from List B that is most appropriately associated with it. List A List B _____ 1. Long-term debt maturing within one a. FICA year of the balance sheet date. _____ 2. Borrowing from another company b. Acid-test ratio with maturities up to 270 days. _____ 3. Classifying liabilities as either current c. Accrual accounting or long-term helps investors and creditors assess this. _____ 4. Cash, short-term investments, and d. Recording a contingent liability accounts receivable all divided by current liabilities. _____ 5. Incurred on a notes payable. e. Deferred revenues _____ 6. Interest expense is recorded in the f. The riskiness of a business's period interest is incurred rather than in obligations the period interest is paid. _____ 7. Loss is reasonably possible and g. Current portion of long-term debt amount is reasonably estimable. _____ 8. Loss is probable and amount is h. Disclosure of a contingent liability reasonably estimable. _____ 9. Gift cards. i. Interest expense _____ 10. Social Security and Medicare. j. Commercial paper

Answer: List A List B __g__ 1. Long-term debt maturing within one a. FICA year of the balance sheet date. __j__ 2. Borrowing from another company b. Acid-test ratio with maturities up to 270 days. __f__ 3. Classifying liabilities as either current c. Accrual accounting or long-term helps investors and creditors assess this. __b__ 4. Cash, short-term investments, and d. Recording a contingent liability accounts receivable all divided by current liabilities. __i__ 5. Incurred on a notes payable. e. Deferred revenues __c__ 6. Interest expense is recorded in the f. The riskiness of a business's period interest is incurred rather than in obligations the period interest is paid. __h__ 7. Loss is reasonably possible and g. Current portion of long-term debt amount is reasonably estimable. __d__ 8. Loss is probable and amount is h. Disclosure of a contingent liability reasonably estimable. __e__ 9. Gift cards. i. Interest expense __a__ 10. Social Security and Medicare. j. Commercial paper Difficulty: 2 Medium Topic: Current vs. Long-Term Classification; Notes Payable; Payroll Liabilities; Deferred Revenues; Current Portion of Long-Term Debt; Contingencies - General; Analysis - Acid-Test Ratio Learning Objective: 08-01 Distinguish between current and long-term liabilities.; 08-02 Account for notes payable and interest expense.; 08-03 Account for employee and employer payroll liabilities.; 08-04 Explain the accounting for other current liabilities.; 08-05 Apply the appropriate accounting treatment for contingencies.; 08-06 Assess liquidity using current liability ratios. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

192) Aerospace Engineering borrows $40 million cash on November 1, 2021. Aerospace issues a six-month, 6% promissory note to First National Bank under a prearranged short-term line of credit. Interest on the note is payable at maturity. Each firm has a December 31 year end. Required: 1. Prepare the journal entries on November 1, 2021 to record (a) the notes payable for Aerospace Engineering and (b) the notes receivable for First National Bank. 2. Record the adjusting entries on December 31, 2021 for (a) Aerospace Engineering and (b) First National Bank. 3. Prepare the journal entries on April 30, 2022 to record payment of (a) the notes payable for Aerospace Engineering and (b) the notes receivable for First National Bank. Answer: Requirement 1 (a). November 1, 2021 Cash Notes Payable (Issuance of notes payable) (b). November 1, 2021 Notes Receivable Cash (Acceptance of notes receivable)

40,000,000 40,000,000

Requirement 2 (a). December 31, 2021 Interest Expense ($40 million × 6% × 2/12) Interest Payable (To record interest expense incurred, but not paid) (b). December 31, 2021 Interest Receivable ($40 million × 6% × 2/12) Interest Revenue (Interest revenue earned, but not received)

400,000 400,000

Requirement 3 (a). April 30, 2022 Notes Payable Interest Expense ($40 million × 6% × 4/12) Interest Payable ($40 million × 6% × 2/12) Cash (Payment of notes payable and interest)

40,000,000 800,000 400,000 41,200,000

(b). April 30, 2022 Cash 41,200,000 Interest Revenue ($40 million × 6% × 4/12) 800,000 Interest Receivable ($40 million × 6% × 2/12) 400,000 Notes Receivable 40,000,000 (Collection of notes receivable and interest) Difficulty: 3 Hard Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

193) Assume payroll for Kicker Sound Systems for the month of January was $150,000 and the following withholdings, fringe benefits, and payroll taxes apply: Federal and state income taxes withheld Health insurance premiums (Blue Cross) paid by employer Contribution to retirement plan (Fidelity) paid by employer FICA tax rate (Social Security and Medicare) Federal and state unemployment tax rate

$38,000 12,000 15,000 7.65% 3.80%

Assume that Kicker has paid none of the withholdings or payroll taxes by the end of January (record them as payables) and that no employee's cumulative wages exceed the relevant wage bases. Required: 1. Record the employee salary expense, withholdings, and salaries payable. 2. Record the employer-provided fringe benefits. 3. Record the employer payroll taxes. Answer: Requirement 1 January 31 Salaries Expense Income Tax Payable FICA Tax Payable Salaries Payable (to balance) (Employee salary expense and withholdings)

150,000 38,000 11,475 100,525

Requirement 2 January 31 Salaries Expense (fringe benefits) Payable to Blue Cross Payable to Fidelity (Employer-provided fringe benefits)

27,000 12,000 15,000

Requirement 3 January 31 Payroll Tax Expense (total) FICA Tax Payable Unemployment Tax Payable (Employer payroll taxes)

17,175 11,475 5,700

FICA Tax Payable: $150,000 × 0.0765 = $11,475 Unemployment Tax Payable: $150,000 × 0.038 = $5,700 Difficulty: 3 Hard Topic: Payroll Liabilities Learning Objective: 08-03 Account for employee and employer payroll liabilities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

194) Arrow Systems offers its employees free medical, dental, and life insurance coverage. It also matches employee contributions to a voluntary retirement plan up to 6% of their salaries. Assume that no employee's cumulative wages exceed the relevant wage bases. Payroll information for the bi-weekly payroll period ending January 24th is listed below. Wages and salaries Employee contribution to voluntary retirement plan Medical insurance premiums Dental insurance premiums Life insurance premiums Federal and state income taxes to be withheld FICA tax rate Federal and state unemployment tax rate

$1,000,000 60,000 25,000 6,000 7,000 205,000 7.65% 3.80%

Required: 1. Record the employee salary expense, withholdings, and salaries payable. 2. Record the employer-provided fringe benefits. 3. Record the employer payroll taxes. Answer: Requirement 1 January 24 Salaries Expense 1,000,000 Income Tax Payable FICA Tax Payable Payable for Retirement Plan Salaries Payable (to balance) (Employee salary expense and withholdings)

205,000 76,500 60,000 658,500

Requirement 2 January 24 Salaries Expense (fringe benefits) Payable for Medical Insurance Payable for Dental Insurance Payable for Life Insurance Payable for Retirement Plan (Employer-provided fringe benefits)

98,000 25,000 6,000 7,000 60,000

Requirement 3 January 24 Payroll Tax Expense (total) FICA Tax Payable Unemployment Tax Payable (Employer payroll taxes)

114,500 76,500 38,000

FICA Tax Payable: $1,000,000 × 0.0765 = $76,500 Unemployment Tax Payable: $1,000,000 × 0.038 = $38,000 Difficulty: 3 Hard Topic: Payroll Liabilities Learning Objective: 08-03 Account for employee and employer payroll liabilities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

195) The University of Nebraska football stadium is the third largest city in the state of Nebraska on game days. The stadium has sold out every game since the late 1960s. The seating capacity is about 80,000 fans. Assume the stadium sells out all six home games before the season begins, and the athletic department collects $38.4 million in ticket sales. Required: 1. What is the average price per season ticket and average price per individual game ticket sold? 2. Record the advance collection of $38.4 million in ticket sales. 3. Record the revenue recognized after the first home game is completed. Answer: Requirement 1 = $480 per season ticket

= $80 per individual game ticket

Requirement 2 Cash Deferred Revenue (Advance collection of ticket sales)

38,400,000 38,400,000

Requirement 3 Deferred Revenue 6,400,000 Sales Revenue ($38,400,000/6) 6,400,000 (Revenue recognized after first home game) Difficulty: 3 Hard Topic: Deferred Revenues Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

196) During its first three months of operation, Palimino's sold gift cards in various amounts totaling $5,200. The gift cards are redeemable for meals within one year of the purchase date. Gift cards totaling $1,900 were presented for redemption prior to year-end on December 31. The sales tax rate on restaurant sales is 7%, assessed at the time meals (not gift cards) are purchased. Palimino's will remit sales taxes in January. Required: 1. Record (in summary form) the $5,200 in gift cards sold (keeping in mind that, in actuality, each sale of a gift card or a meal would be recorded individually). 2. Record the $1,900 in gift cards redeemed. The $1,900 includes a 7% sales tax of $124.30. 3. Determine the balance in the deferred revenue account (remaining liability for gift cards) to be reported on the December 31 balance sheet.

Answer: Requirement 1 Cash Deferred Revenue (Sale of gift cards)

5,200 5,200

Requirement 2 Deferred Revenue Sales ($1,900/1.07) Sales Tax Payable (Redemption of gift cards)

1,900 1,775.70 124.30

Requirement 3 Deferred Revenue 1,900 5,200 3,300 Balance Difficulty: 3 Hard Topic: Deferred Revenues; Sales Tax Payable Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement; FN Reporting/Keyboard Navigation

197) Leisure Luggage manufactures a line of luggage designed for airline travel. Assume the following transactions occur during the year ended December 31, 2021. Required: Record any amounts as a result of each of these contingencies. 1. In November 2021, Leisure Luggage became aware of a design flaw in one of its lines of luggage. A product recall is probable and is estimated to cost the company between $300,000 and $500,000. 2. Leisure Luggage is the defendant in a patent infringement lawsuit brought by a competitor. It appears reasonably possible Leisure Luggage will lose the case, and potential losses are estimated to be $1.2 million. 3. Credit sales were $12 million for 2021. Although no customer accounts have been shown to be uncollectible, the company estimates that 3% of credit sales will eventually prove uncollectible. 4. Leisure Luggage is the plaintiff in a lawsuit filed against a supplier. The suit is in final appeal, and attorneys advise it is virtually certain that Leisure Luggage will win and be awarded $800,000. Answer: Requirement 1 Loss Contingent Liability (Record the contingent liability)

300,000 300,000

Requirement 2 The likelihood of loss is reasonably possible rather than probable, so no journal entry is recorded. However, full disclosure of the contingent liability and the estimated loss of $1.2 million is disclosed in notes to the financial statements. Requirement 3 Bad Debt Expense ($12 million × 3%) Allowance for Uncollectible Accounts (Estimated uncollectible accounts)

360,000 360,000

Requirement 4 Leisure Luggage has a contingent gain that is probable and is reasonably estimable; however, contingent gains are not recorded until the gain is certain. Though firms do not record contingent gains in the accounts, they sometimes disclose them in notes to the financial statements. Difficulty: 3 Hard Topic: Contingencies - General; Contingent Liabilities - Litigation Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement; FN Reporting/Keyboard Navigation

198) Washington County Airport (WCA) faces three potential contingency situations, described below. The end of the fiscal year is December 31, 2021. Required: Determine the appropriate means of reporting each situation for the year ended December 31, 2021 and record any necessary entries. Explain your reasoning. 1. WCA is suing a national airline. WCA's lawyers confirm that it is probable WCA will be awarded damages of $500,000 in the case. 2. In June, 2021 a worker was injured in an accident and has sued the company for $200,000. Legal counsel believes it is reasonably possible, but not probable, that the outcome of the suit will be unfavorable, and that the settlement would cost the company from $100,000 to $200,000. 3. A suit for $1.5 million was filed by an airline on November 3, 2021. Legal counsel believes an unfavorable outcome is probable. A reasonable estimate of the award payment to the airline is between $500,000 and $1 million. No amount within this range is a better estimate of potential damages than any other amount. Answer: Requirement 1 Washington County Airport (WCA) has a contingent gain that is probable and can be reasonably estimated at $500,000; however, contingent gains are not recorded until the gain is certain. Though firms do not record contingent gains in the accounts, they sometimes disclose them in notes to the financial statements. Requirement 2 The contingent liability is reasonably possible and the amount is reasonably estimable within a range; however, because the loss is not probable, no journal entry for a loss and liability is required. WCA must disclose a description of the contingency in the notes to the financial statements.

Requirement 3 The contingent liability is probable and reasonably estimable, so it must be reported. Because the estimate of the loss is a range where no amount within the range is a better estimate than any other amount, the minimum amount of the range will be recorded as follows: Loss Contingent Liability (Record the contingent liability)

500,000 500,000

The range of the potential loss (from $500,000 to $1 million) should also be disclosed. Difficulty: 3 Hard Topic: Contingencies - General; Contingent Liabilities - Litigation Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

199) Selected financial data regarding two competing airlines are provided as follows: ($ in millions) Current assets Cash and cash equivalents Short-term investments Net receivables Inventory Other current assets Total current assets Current liabilities Accounts payable Short-term debt Other current liabilities Total current liabilities

Company A

Company B

$1,225 3,104 811 525 270 $5,935

$4,684 1,351 1,844 388 637 $8,904

$6,702 2,672

$6,991 2,407 1,624 $11,022

$9,374

Required: 1. Calculate the current ratio for both companies. Which airline has the best current ratio? 2. Calculate the acid-test (quick) ratio for both companies. Which airline has the best acid-test ratio? 3. How would the purchase of additional inventory by issuing short-term debt affect the current ratio? How would it affect the acid-test ratio? Answer: Requirement 1

($ in millions) Company A Company B

Total Current Assets $5,935 $8,904

÷ ÷ ÷

Total Current Liabilities $9,374 $11,022

Current Ratio

= =

0.63 (rounded) 0.81 (rounded)

Acid-Test Ratio

= =

0.55 (rounded) 0.71 (rounded)

Company B (0.81) has the best current ratio. Requirement 2

($ in millions) Company A Company B

Quick Assets

$5,140 $7,879

÷ ÷

Total Current Liabilities $9,374 $11,022

Company B (0.71) also has the best acid-test ratio.

Requirement 3 The purchase of additional inventory by issuing short-term debt would increase the current ratio as both current assets and current liabilities would increase by an equal amount. The purchase of additional inventory by issuing short-term debt would decrease the acid-test ratio due to the increase in current liabilities in the denominator of the ratio. Recall that inventory is excluded in calculating the numerator for the acid-test ratio. Difficulty: 3 Hard Topic: Analysis - Current Ratio; Analysis - Acid-Test Ratio Learning Objective: 08-06 Assess liquidity using current liability ratios. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making; FN Measurement/Keyboard Navigation 200) Why is it important to distinguish between current and long-term liabilities? Answer: Distinguishing between current and long-term liabilities is important in helping investors and creditors assess the riskiness of a business' obligations. Given a choice, most companies would prefer to report a liability as long-term rather than current because it may cause the firm to appear less risky. In turn, less risky firms may enjoy lower interest rates on borrowing and command higher stock prices for new stock listings. Difficulty: 2 Medium Topic: Current vs. Long-Term Classification Learning Objective: 08-01 Distinguish between current and long-term liabilities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 201) Explain why we record interest in the period in which we incur it rather than in the period we pay it. Answer: Accrual-basis accounting requires expenses to be recorded when incurred; cash-basis requires expenses to be recorded when the cash is paid. Generally Accepted Accounting Principles (GAAP) requires the use of accrual-basis accounting in preparing financial statements because it best reflects the timing of the expense. Difficulty: 2 Medium Topic: Notes Payable Learning Objective: 08-02 Account for notes payable and interest expense. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

202) Name as many items as you can that are withheld from employee payroll checks. Which employee deductions are required by law and which are voluntary? Name as many items as you can that are employer payroll costs in addition to the employee's salary. Which employer costs are required by law and which are voluntary? Answer: Items commonly withheld from employee payroll checks include federal and state income taxes, Social Security and Medicare, health, dental, disability, and life insurance premiums, and employee investments to retirement or savings plans. Federal and state income taxes, Social Security and Medicare are required by law. The rest are voluntary. Common employer payroll costs, in addition to the employee's salary, include federal and state unemployment taxes, the employer portion of Social Security and Medicare, employer contributions for health, dental, disability, and life insurance, and employer contributions to retirement or savings plans. Federal and state unemployment taxes and the employer portion of Social Security and Medicare are required by law. The rest are voluntary benefits paid by a company on behalf of its employees. Difficulty: 2 Medium Topic: Payroll Liabilities Learning Objective: 08-03 Account for employee and employer payroll liabilities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 203) Retailers like McDonald's, American Eagle, and Apple Computer sell a large number of gift cards. Explain how these companies account for the sale of gift cards. Answer: When a company receives cash in advance through the sale of gift cards, it debits Cash and credits a current liability account called Deferred Revenue. When customers redeem gift cards for goods or services, the company debits Deferred Revenue and credits Sales Revenue. Difficulty: 2 Medium Topic: Deferred Revenues Learning Objective: 08-04 Explain the accounting for other current liabilities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

204) Define a contingent liability. Provide three common examples. Under what circumstances should a firm report a contingent liability? Answer: A contingent liability is an existing, uncertain situation that might result in a loss. Examples include lawsuits, product warranties, environmental problems, and premium offers. A contingent liability is recorded only if a loss is probable and the amount is reasonably estimable. Difficulty: 2 Medium Topic: Contingencies - General; Contingent Liabilities - Litigation; Contingent Liabilities Warranties Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

Financial Accounting, 5e (Spiceland) Chapter 9 Long-Term Liabilities 1) The mixture of liabilities and stockholders' equity a business uses is called its capital structure. Answer: TRUE Difficulty: 1 Easy Topic: Financing Alternatives Learning Objective: 09-01 Explain financing alternatives. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 2) Interest expense incurred when borrowing money, as well as dividends paid to stockholders, are tax-deductible. Answer: FALSE Explanation: Interest expense incurred when borrowing money is tax deductible, while dividends paid to stockholders and not tax-deductible. Difficulty: 2 Medium Topic: Financing Alternatives Learning Objective: 09-01 Explain financing alternatives. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 3) Debt financing refers to borrowing money from creditors. Answer: TRUE Difficulty: 1 Easy Topic: Financing Alternatives Learning Objective: 09-01 Explain financing alternatives. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 4) Equity financing refers to profits generated by operations. Answer: FALSE Explanation: Equity financing refers to obtaining investment from stockholders. Difficulty: 1 Easy Topic: Financing Alternatives Learning Objective: 09-01 Explain financing alternatives. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 1 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

5) Three primary sources of long-term debt financing are notes, leases, and bonds. Answer: TRUE Difficulty: 1 Easy Topic: Financing Alternatives Learning Objective: 09-01 Explain financing alternatives. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 6) Monthly installment payments on a note payable include both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance. Answer: TRUE Difficulty: 1 Easy Topic: Installment Notes Learning Objective: 09-02 Account for installment notes payable. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 7) Car loans and home loans that require monthly payments are sometimes referred to as installment notes. Answer: TRUE Difficulty: 1 Easy Topic: Installment Notes Learning Objective: 09-02 Account for installment notes payable. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 8) With each monthly payment of an installment note payable, the portion assigned to interest expense increases. Answer: FALSE Explanation: The portion assigned to interest expense decreases with each payment. Difficulty: 1 Easy Topic: Installment Notes Learning Objective: 09-02 Account for installment notes payable. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

9) The amount of interest expense recorded with each monthly payment of an installment note payable equals the note's monthly interest rate times the note's carrying value at the end of the previous month. Answer: TRUE Difficulty: 2 Medium Topic: Installment Notes Learning Objective: 09-02 Account for installment notes payable. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 10) A lease is a contractual arrangement by which the lessor (owner) provides the lessee (user) the right to use an asset for a specified period of time. Answer: TRUE Difficulty: 1 Easy Topic: Leases Learning Objective: 09-03 Understand how leases are recorded. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 11) An advantage of leasing an asset rather than buying is that leasing improves cash flows by reducing the upfront cash needed to use an asset. Answer: TRUE Difficulty: 1 Easy Topic: Leases Learning Objective: 09-03 Understand how leases are recorded. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 12) An advantage of buying an asset rather than leasing is that installment payments associated with buying often are lower than lease payments. Answer: FALSE Explanation: Lease payment often are tied only to the portion of the asset's fair value expected to decline over the lease period (rather than the asset's entire value). This means the monthly payments associated with leasing often are lower. Difficulty: 2 Medium Topic: Leases Learning Objective: 09-03 Understand how leases are recorded. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 3 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

13) Signing a lease for equipment has no effect on the lessee's balance sheet. Answer: FALSE Explanation: Leases are recorded by the lessee as an increase in assets and an increase in liabilities at the beginning of the lease. Difficulty: 1 Easy Topic: Leases Learning Objective: 09-03 Understand how leases are recorded. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 14) Leasing typically does not protect the lessee (user) against the risk of declining asset values. Answer: FALSE Explanation: Lessees don't have to worry about declining fair values (selling prices) while they are using the asset. Difficulty: 1 Easy Topic: Leases Learning Objective: 09-03 Understand how leases are recorded. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 15) At the beginning of the lease term, a lease is recorded for the sum of all future lease payments. Answer: FALSE Explanation: Leases are recorded for the present value of the lease payments. Difficulty: 1 Easy Topic: Leases Learning Objective: 09-03 Understand how leases are recorded. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 16) A private placement is when a company chooses to sell the debt securities directly to a single investor. Answer: TRUE Difficulty: 1 Easy Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 4 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

17) Secured bonds are backed by the federal government. Answer: FALSE Explanation: Secured bonds are supported by specific assets the issuer has pledged as collateral. Difficulty: 1 Easy Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 18) Unsecured bonds are not backed by a specific asset. Answer: TRUE Difficulty: 1 Easy Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 19) Term bonds require payments in installments over a series of years. Answer: FALSE Explanation: Term bonds require payments of the full principal amount of the bond at a single maturity date. Serial bonds require payments in installments over a series of years. Difficulty: 1 Easy Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 20) Serial bonds require payment of the full principal amount of the bond at a single maturity date. Answer: FALSE Explanation: Serial bonds require payments in installments over a series of years. Term bonds require payment of the full principal amount of the bond at a single maturity date. Difficulty: 1 Easy Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 5 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

21) Callable bonds allow the borrower to repay the bonds before their scheduled maturity date at a specified call price. Answer: TRUE Difficulty: 1 Easy Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 22) Convertible bonds allow the investor to convert each bond into a specified number of shares of common stock. Answer: TRUE Difficulty: 1 Easy Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 23) We can calculate the issue price of a bond as the face amount plus the total periodic interest payments. Answer: FALSE Explanation: We can calculate the issue price of a bond as the present value of the face amount plus the present value of the periodic interest payments. The market rate of interest is used to calculate the present value. Difficulty: 1 Easy Topic: Pricing a Bond - Face Amount Learning Objective: 09-07 Calculate the issue price of a bond. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 24) The market interest rate represents the true interest rate used by investors to value a company's bond issue. Answer: TRUE Difficulty: 1 Easy Topic: Recording Bonds Payable - General; Pricing a Bond - General Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 6 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

25) The stated interest rate is the rate quoted in the bond contract used to calculate the cash payments for interest. Answer: TRUE Difficulty: 1 Easy Topic: Recording Bonds Payable-General; Pricing a Bond-General Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 26) The market interest rate does not change over time. Answer: FALSE Explanation: Market rates change continuously. The market value of bonds moves in an opposite direction of interest rates. When market interest rates go up, the market value of bonds goes down. Difficulty: 1 Easy Topic: Recording Bonds Payable - General; Pricing a Bond-General Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 27) The stated interest rate does not change over time. Answer: TRUE Difficulty: 1 Easy Topic: Recording Bonds Payable - General; Pricing a Bond - General Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

28) As a company's default risk increases, investors demand a higher market interest rate on their bond investments. Answer: TRUE Difficulty: 2 Medium Topic: Recording Bonds Payable-General; Pricing a Bond-General Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 29) The lower the market interest rate, the lower the bond issue price will be. Answer: FALSE Explanation: The higher the market interest rate, the lower the bond issue price will be. Difficulty: 2 Medium Topic: Recording Bonds Payable-General; Pricing a Bond-General Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 30) Bonds issued below face amount are said to be issued at a discount. Answer: TRUE Difficulty: 1 Easy Topic: Recording Bonds Payable-Discount; Pricing a Bond-Discount Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 31) A premium occurs when the issue price of a bond is above its face amount. Answer: TRUE Difficulty: 1 Easy Topic: Recording Bonds Payable - Premium; Pricing a Bond - Premium Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

32) The amount reported in the balance sheet for bonds payable is equal to the carrying value at the balance sheet date. Answer: TRUE Difficulty: 1 Easy Topic: Recording Bonds Payable - General Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 33) When bonds are issued at a discount (below face amount), the carrying value and the corresponding interest expense increase over time. Answer: TRUE Difficulty: 2 Medium Topic: Recording Bonds Payable - Discount Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 34) When bonds are issued at a premium (above face amount), the carrying value and the corresponding interest expense increase over time. Answer: FALSE Explanation: When bonds are issued at a premium (above face amount), the carrying value and the corresponding interest expense decrease over time. Difficulty: 2 Medium Topic: Recording Bonds Payable - Premium Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 35) Interest expense is calculated as the carrying value times the market rate. Answer: TRUE Difficulty: 1 Easy Topic: Recording Bonds Payable - General Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

36) The cash payment each period is calculated as the carrying value times the market rate. Answer: FALSE Explanation: The cash payment each period is calculated as the face value times the stated interest rate. Difficulty: 1 Easy Topic: Recording Bonds Payable - General Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 37) An amortization schedule provides a summary of the cash interest payments, interest expense, and changes in carrying value for each period. Answer: TRUE Difficulty: 1 Easy Topic: Installment Notes; Recording Bonds Payable - General Learning Objective: 09-02 Account for installment notes payable.; 09-05 Record the issuance of bonds and related interest. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 38) For bonds issued at a premium, the difference between interest expense and the cash paid increases the carrying value of the bonds. Answer: FALSE Explanation: For bonds issued at a premium, the difference between interest expense and the cash paid decreases the carrying value of the bonds. Difficulty: 2 Medium Topic: Recording Bonds Payable - Premium Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 39) At the maturity date, the carrying value will equal the face amount of the bond. Answer: TRUE Difficulty: 2 Medium Topic: Recording Bonds Payable - General; Accounting for Bond Retirements Learning Objective: 09-05 Record the issuance of bonds and related interest.; 09-06 Record the retirement of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 10 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

40) The market value of bonds moves in the opposite direction of interest rates. Answer: TRUE Difficulty: 1 Easy Topic: Recording Bonds Payable - General; Pricing a Bond - General Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 41) When an issuer retires debt of any type before its scheduled maturity date, the transaction is an early extinguishment of debt. Answer: TRUE Difficulty: 1 Easy Topic: Accounting for Bond Retirements Learning Objective: 09-06 Record the retirement of bonds. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 42) Gains/losses on the early extinguishment of debt are reported as part of operating income in the income statement. Answer: FALSE Explanation: Gains/losses on the early extinguishment of debt are reported as non-operating items in the income statement. Difficulty: 1 Easy Topic: Accounting for Bond Retirements Learning Objective: 09-06 Record the retirement of bonds. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 43) Losses have the effect of reducing net income, while gains increase net income. Answer: TRUE Difficulty: 2 Medium Topic: Accounting for Bond Retirements Learning Objective: 09-06 Record the retirement of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

44) A gain or loss is recorded on bonds retired at maturity. Answer: FALSE Explanation: No gain or loss is recorded on bonds retired at maturity, as the carrying value at maturity is equal to the face amount of the bond. Difficulty: 1 Easy Topic: Accounting for Bond Retirements Learning Objective: 09-06 Record the retirement of bonds. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 45) The debt to equity ratio measures a company's risk and is calculated as total liabilities divided by stockholders' equity. Answer: TRUE Difficulty: 1 Easy Topic: Analysis - Debt to Equity Ratio Learning Objective: 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 46) Leverage enables a company to earn a higher return using debt than without debt. Answer: TRUE Difficulty: 2 Medium Topic: Analysis - Debt to Equity Ratio Learning Objective: 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 47) Return on assets is calculated as net income divided by the ending balance for total assets. Answer: FALSE Explanation: Return on assets is calculated as net income divided by average total assets. Difficulty: 1 Easy Topic: Analysis - Return on Assets Learning Objective: 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

48) The times interest earned ratio compares interest expense with income available to pay interest charges. Answer: TRUE Difficulty: 2 Medium Topic: Analysis - Times Interest Earned Ratio Learning Objective: 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 49) Which of the following is not a primary source of corporate debt financing? A) Bonds Payable. B) Common Stock. C) Leases. D) Notes Payable. Answer: B Difficulty: 1 Easy Topic: Financing Alternatives Learning Objective: 09-01 Explain financing alternatives. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 50) Which of the following is the primary source of corporate equity financing? A) Bonds Payable. B) Common Stock. C) Leases. D) Notes Payable. Answer: B Difficulty: 1 Easy Topic: Financing Alternatives Learning Objective: 09-01 Explain financing alternatives. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

51) Profits generated by the company are a(n): A) Source of external financing. B) Source of internal financing. C) Liability. D) Asset. Answer: B Difficulty: 1 Easy Topic: Financing Alternatives Learning Objective: 09-01 Explain financing alternatives. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 52) The mixture of liabilities and stockholders' equity a business uses is called its: A) Bond contract. B) Carrying value. C) Capital structure. D) Accounting equation. Answer: C Difficulty: 1 Easy Topic: Financing Alternatives Learning Objective: 09-01 Explain financing alternatives. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 53) Which of the following is not a true statement? A) Companies that are believed to have high bankruptcy risk generally receive low credit ratings and must pay a higher interest rate for borrowing. B) As a company's level of debt increases, the risk of bankruptcy increases. C) Interest expense incurred when borrowing money, as well as dividends paid to stockholders, are both tax-deductible. D) The mixture of liabilities and stockholders' equity a business uses is called its capital structure. Answer: C Difficulty: 2 Medium Topic: Financing Alternatives Learning Objective: 09-01 Explain financing alternatives. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

54) In each succeeding payment on an installment note: A) The amount that goes to decreasing the carrying value of the note increases. B) The amount that goes to decreasing the carrying value of the note decreases. C) The amount that goes to decreasing the carrying value of the note is unchanged. D) The amounts paid for both interest and principal increase proportionately. Answer: A Difficulty: 1 Easy Topic: Installment Notes Learning Objective: 09-02 Account for installment notes payable. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 55) In each succeeding payment on an installment note: A) The amount of interest expense increases. B) The amount of interest expense decreases. C) The amount of interest expense is unchanged. D) The amounts paid for both interest and principal increase proportionately. Answer: B Difficulty: 1 Easy Topic: Installment Notes Learning Objective: 09-02 Account for installment notes payable. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 56) For a ten-year installment note, the portion of the periodic installment payment that represents interest in the third year is: A) The same as in the fourth year. B) The same as in the first year. C) Less than in the fourth year. D) More than in the fourth year. Answer: D Difficulty: 2 Medium Topic: Installment Notes Learning Objective: 09-02 Account for installment notes payable. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

57) Which of the following describes monthly installment payments of a note payable? A) The monthly payments equal interest expense plus the reduction of the note's carrying value. B) The amount of interest expense recorded each month increases over time. C) The amount of the reduction in the note's carrying value recorded each month decreases over time. D) All of the other answer choices are correct. Answer: A Difficulty: 2 Medium Topic: Installment Notes Learning Objective: 09-02 Account for installment notes payable. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 58) Babble Co. signs a five-year installment note on January 1, 2021. At which of the following dates would the carrying value be the highest? A) August 1, 2021 B) November 30, 2023 C) April 30, 2024 D) December 31, 2022 Answer: A Difficulty: 2 Medium Topic: Installment Notes Learning Objective: 09-02 Account for installment notes payable. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 59) Babble Co. signs a five-year installment note on January 1, 2021. At which of the following dates would the carrying value be the lowest? A) August 1, 2021 B) November 30, 2023 C) April 30, 2024 D) December 31, 2022 Answer: C Difficulty: 2 Medium Topic: Installment Notes Learning Objective: 09-02 Account for installment notes payable. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

60) The entry to record a monthly payment on an installment note such as a car loan: A) Increases expenses, decreases liabilities, and decreases assets. B) Increases expenses, increases liabilities, and increases assets. C) Increases expenses, decreases liabilities, and increases assets. D) Increases expenses, increases liabilities, and decreases assets. Answer: A Difficulty: 3 Hard Topic: Installment Notes Learning Objective: 09-02 Account for installment notes payable. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation 61) How does the amortization schedule for an installment note such as a car loan differ from an amortization schedule for bonds? A) The final carrying value is not zero in either amortization schedule. B) The final carrying value is zero in an amortization schedule for bonds. C) The final carrying value is zero in both amortization schedules. D) The final carrying value is zero in an amortization schedule for an installment note. Answer: D Difficulty: 2 Medium Topic: Installment Notes; Recording Bonds Payable - General Learning Objective: 09-02 Account for installment notes payable.; 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 62) Camp Elim obtains a $125,000, 6%, five-year loan for a new camp bus on January 1, 2021. What amount will be recorded for interest expense for the first month's payment on January 31, 2021? A) $625 B) $125 C) $7,500 D) $1,000 Answer: A Explanation: $125,000 × 6% × 1/12 = $625 Difficulty: 3 Hard Topic: Installment Notes Learning Objective: 09-02 Account for installment notes payable. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 17 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

63) Camp Elim obtains a $125,000, 6%, five-year loan for a new camp bus on January 1, 2021. If the monthly payment is $2,416.60, by how much will the carrying value decrease when the first payment is made on January 31, 2021? A) $1,791.60 B) $625.00 C) $2,416.60 D) $1,000.60 Answer: A Explanation: $125,000 × 6% × 1/12 = $625.00 interest expense $2,416.60 − $625.00 = $1,791.60 decrease in carrying value Difficulty: 3 Hard Topic: Installment Notes Learning Objective: 09-02 Account for installment notes payable. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 64) A company issues a $200,000, 5%, six-year note on January 1, 2021. What amount will be recorded for interest expense for the first month's payment on January 31, 2021? A) $1,000.00 B) $138.89 C) $833.33 D) $694.44 Answer: C Explanation: $200,000 × 5% × 1/12 = $833.33 Difficulty: 3 Hard Topic: Installment Notes Learning Objective: 09-02 Account for installment notes payable. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

65) A company issues a $200,000, 5%, six-year note on January 1, 2021. If the monthly payment is $3,220.99, by how much will the carrying value decrease when the first month's payment is made on January 31, 2021? A) $4,054.32 B) $2,387.66 C) $3,220.99 D) $833.33 Answer: B Explanation: $200,000 × 5% × 1/12 = $833.33 interest expense. $3,220.99 − $833.33 = $2,387.66 decrease in carrying value. Difficulty: 3 Hard Topic: Installment Notes Learning Objective: 09-02 Account for installment notes payable. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 66) A company issues a $200,000, 5%, six-year note on January 1, 2021. If the monthly payment is $3,220.99, what is the note's carrying value after the first month's payment is made on January 31, 2021? A) $197,612.34 B) $200,000.00 C) $196,779.01 D) $199,166.67 Answer: A Explanation: $200,000 × 5% × 1/12 = $833.33 interest expense. $3,220.99 − $833.33 = $2,387.66 decrease in carrying value. $200,000 − $2,387.66 = $197,612.34 new carrying value Difficulty: 3 Hard Topic: Installment Notes Learning Objective: 09-02 Account for installment notes payable. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

67) On January 1, 2021, Red, Inc. borrowed cash by issuing a $500,000, 5-year note that specified 6% interest to be paid on December 31 of each year and the $500,000 to be paid at maturity. If the note had instead been an installment note to be paid in four equal payments at the end of each year beginning December 31, 2021, which of the following would be true? A) The effective interest rate would have been higher. B) The annual cash payment would have been less. C) The first year's interest expense would have been higher. D) The second year's interest expense would have been less. Answer: D Difficulty: 3 Hard Topic: Installment Notes Learning Objective: 09-02 Account for installment notes payable. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 68) Which of the following represents an advantage of leasing rather than buying an asset with an installment note? A) Leasing may offer protection against the risk of declining asset values. B) Lease payments often are lower than installment payments. C) Leasing offers flexibility and lower costs when disposing of an asset. D) All of the other answer choices are correct. Answer: D Difficulty: 2 Medium Topic: Leases Learning Objective: 09-03 Understand how leases are recorded. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 69) Which of the following is the number one method of external financing by U.S. companies? A) Issuing installment notes. B) Leasing. C) Issuing bonds. D) Borrowing from banks. Answer: B Difficulty: 2 Medium Topic: Leases Learning Objective: 09-03 Understand how leases are recorded. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

70) Which of the following is not a reason why some companies lease rather than buy? A) Leasing may allow you to borrow with little or no down payment. B) Leasing may offer protection against risk of declining asset values. C) Leasing offers flexibility and lower costs when disposing of an asset. D) Leasing transfers the title to the lessee at the beginning of the lease. Answer: D Difficulty: 2 Medium Topic: Leases Learning Objective: 09-03 Understand how leases are recorded. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 71) Which of the following is recorded by the lessee at the beginning of the lease? A) Decrease in assets. B) Increase in expenses. C) Increase in revenues. D) Increase in liabilities. Answer: D Difficulty: 2 Medium Topic: Leases Learning Objective: 09-03 Understand how leases are recorded. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 72) At the beginning of the lease period, the lease is reported in the lessee's balance sheet for which amount? A) Fair value of the underlying asset. B) Present value of expected cash inflows from using the underlying asset. C) Present value of lease payments over the lease period. D) Leases are not reported in the balance sheet. Answer: C Difficulty: 2 Medium Topic: Leases Learning Objective: 09-03 Understand how leases are recorded. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

73) A company is deciding between two options: (1) purchase a piece of equipment for $10,000 or (2) lease the same piece of equipment for three years and then return the equipment to the owner. The lease payments are $182.53 per month and have a present value of $6,000. If the company decides to lease, for what amount would the leased asset be recorded at the beginning of the lease? A) $10,000. B) $6,000. C) $4,000. D) $6,571. Answer: B Explanation: Recorded at the present value of the lease payments. Difficulty: 3 Hard Topic: Leases Learning Objective: 09-03 Understand how leases are recorded. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 74) Before signing a lease, a company reports total assets of $500,000 and total liabilities of $300,000. The company then signs a 30-month lease for equipment with payments of $922.21 each month. The lease payments have a present value of $25,000. After recording the inception of the lease, the company would report which of the following? A) Total assets of $527,666.30, and total liabilities of $325,000.00. B) Total assets of $525,000.00, and total liabilities of $327,666.30. C) Total assets of $527,666.30, and total liabilities of $327,666.30. D) Total assets of $525,000.00, and total liabilities of $325,000.00. Answer: D Explanation: Total assets = $500,000 (beginning) + $25,000 (PV of lease payments = $525,000). Total liabilities = $300,000 (beginning) + $25,000 (PV of lease payments = $325,000). Difficulty: 3 Hard Topic: Leases Learning Objective: 09-03 Understand how leases are recorded. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

75) On April 1, 2021, a company signs a 20-month lease for equipment. Monthly payments of $554.15 begin on May 1, 2021. The company's normal borrowing rate is 12%. For what amount would the company record the lease on April 1, 2021 (rounded to nearest whole dollar)? Use (PV of $1, and PVA of $1) (Use appropriate factor(s) from the tables provided. Do not round interest rate factors.) A) $12,000. B) $11,083. C) $10,000. D) $10,800. Answer: C Explanation: $554.15 × 18.04555* = $10,000 (rounded) * PV of ordinary annuity of $1 (n=20; i=1%) Difficulty: 3 Hard Topic: Leases Learning Objective: 09-03 Understand how leases are recorded. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 76) On January 1, 2021, a company signs a 25-year lease for land. Annual payments of $20,000 begin on December 31, 2021. The company's normal borrowing rate is 6%. For what amount would the company record the lease on January 1, 2021 (rounded to nearest whole dollar)? Use (PV of $1, and PVA of $1) (Use appropriate factor(s) from the tables provided. Do not round interest rate factors.) A) $255,667. B) $440,463. C) $500,000. D) $244,333. Answer: A Explanation: $20,000 × 12.78336* = $255,667 (rounded) * PV of ordinary annuity of $1 (n=25; i=6%) Difficulty: 3 Hard Topic: Leases Learning Objective: 09-03 Understand how leases are recorded. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

77) On July 1, 2021, a company signs a 30-month lease for an office building. Lease payments of $6,457 are due every three months (10 payments total), beginning on October 1, 2021. The company's normal borrowing rate is 8% (2% every three months). For what amount would the company record the lease on July 1, 2021 (rounded to nearest whole dollar)? Use (PV of $1, and PVA of $1) (Use appropriate factor(s) from the tables provided. Do not round interest rate factors.) A) $62,000. B) $58,001. C) $64,570. D) $43,327. Answer: B Explanation: $6,457 × 8.98259* = $58,001 (rounded) * PV of ordinary annuity of $1 (n=10; i=2%) Difficulty: 3 Hard Topic: Leases Learning Objective: 09-03 Understand how leases are recorded. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 78) A bond is a formal debt instrument that obligates the borrower to repay a stated amount at the maturity date. This stated amount is referred to as the: A) Note. B) Interest. C) Lease. D) Principal or face amount. Answer: D Difficulty: 1 Easy Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

79) A common advantage of obtaining long-term funds by issuing bonds, rather than borrowing from the bank, includes which of the following? A) Bonds involve less surrendering of ownership control. B) Bonds usually have a lower interest rate. C) Bonds are more likely to involve borrowing from a single lender. D) Bond issue costs are usually lower than fees charged by the bank. Answer: B Difficulty: 2 Medium Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 80) Which of the following definitions describes a term bond? A) Matures on a single date. B) Secured only by the "full faith and credit" of the issuing corporation. C) Matures in installments. D) Supported by specific assets pledged as collateral by the issuer. Answer: A Difficulty: 2 Medium Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 81) Which of the following definitions describes a serial bond? A) Matures on a single date. B) Secured only by the "full faith and credit" of the issuing corporation. C) Matures in installments. D) Supported by specific assets pledged as collateral by the issuer. Answer: C Difficulty: 2 Medium Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

82) Which of the following definitions describes a secured bond? A) Matures on a single date. B) Secured only by the "full faith and credit" of the issuing corporation. C) Matures in installments. D) Supported by specific assets pledged as collateral by the issuer. Answer: D Difficulty: 2 Medium Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 83) Term bonds are: A) Bonds issued below the face amount. B) Bonds that mature in installments. C) Bonds that mature all at once. D) Bonds issued above the face amount. Answer: C Difficulty: 1 Easy Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 84) Serial bonds are: A) Bonds backed by collateral. B) Bonds that mature in installments. C) Bonds with greater risk. D) Bonds issued below the face amount. Answer: B Difficulty: 1 Easy Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

85) Bonds can be secured or unsecured. Likewise, bonds can be term or serial bonds. Which is more common? A) Secured and term. B) Secured and serial. C) Unsecured and term. D) Unsecured and serial. Answer: C Difficulty: 2 Medium Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 86) A home loan with fixed monthly payments and the house as collateral most closely represents which of the following bond characteristics? A) Secured and term. B) Secured and serial. C) Unsecured and term. D) Unsecured and serial. Answer: B Difficulty: 2 Medium Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 87) Which of the following is not true regarding callable bonds? A) This feature allows the issuer to repay the bonds before their scheduled maturity date. B) This feature helps protect the issuer against future decreases in interest rates. C) This feature usually allows the issuer to repay bonds just below face value. D) This feature benefits the issuer more when the bond's stated rate is 8% and the market interest rate is 5%. Answer: C Difficulty: 2 Medium Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

88) Convertible bonds: A) Provide potential benefits only to the issuer. B) Provide potential benefits only to the investor. C) Provide potential benefits to both the issuer and the investor. D) Provide no potential benefits. Answer: C Difficulty: 2 Medium Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 89) A bond issue with a face amount of $500,000 bears interest at the rate of 10%. The current market rate of interest is also 10%. These bonds will sell at a price that is: A) Equal to $500,000. B) More than $500,000. C) Less than $500,000. D) The answer cannot be determined from the information provided. Answer: A Difficulty: 2 Medium Topic: Pricing a Bond - Face Amount; Recording Bonds Payable - Face Amount Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 90) A bond issue with a face amount of $500,000 bears interest at the rate of 7%. The current market rate of interest is 8%. These bonds will sell at a price that is: A) Equal to $500,000. B) More than $500,000. C) Less than $500,000. D) The answer cannot be determined from the information provided. Answer: C Difficulty: 2 Medium Topic: Recording Bonds Payable - Discount; Pricing a Bond - Discount Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

91) A bond issue with a face amount of $500,000 bears interest at the rate of 7%. The current market rate of interest is 6%. These bonds will sell at a price that is: A) Equal to $500,000. B) More than $500,000. C) Less than $500,000. D) The answer cannot be determined from the information provided. Answer: B Difficulty: 2 Medium Topic: Recording Bonds Payable - Premium; Pricing a Bond - Premium Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 92) A $500,000 bond issue sold for $510,000. Therefore, the bonds: A) Sold at a premium because the stated interest rate was higher than the market rate. B) Sold for the $500,000 face amount plus $10,000 of accrued interest. C) Sold at a discount because the stated interest rate was higher than the market rate. D) Sold at a premium because the market interest rate was higher than the stated rate. Answer: A Difficulty: 2 Medium Topic: Recording Bonds Payable - Premium; Pricing a Bond - Premium Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 93) A $500,000 bond issue sold for $490,000. Therefore, the bonds: A) Sold at a discount because the stated interest rate was higher than the market rate. B) Sold for the $500,000 face amount less $10,000 of accrued interest. C) Sold at a premium because the stated interest rate was higher than the market rate. D) Sold at a discount because the market interest rate was higher than the stated rate. Answer: D Difficulty: 2 Medium Topic: Recording Bonds Payable - Discount; Pricing a Bond - Discount Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

94) For a bond issue that sells for more than the bond face amount, the stated interest rate is: A) The actual yield rate. B) The prime rate. C) More than the market rate. D) Less than the market rate. Answer: C Difficulty: 1 Easy Topic: Recording Bonds Payable - Premium; Pricing a Bond - Premium Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 95) For a bond issue that sells for less than the bond face amount, the stated interest rate is: A) The actual yield rate. B) The prime rate. C) More than the market rate. D) Less than the market rate. Answer: D Difficulty: 1 Easy Topic: Recording Bonds Payable - Discount; Pricing a Bond - Discount Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 96) Bond X and Bond Y are both issued by the same company. Each of the bonds has a face value of $100,000 and each matures in 10 years. Bond X pays 8% interest while Bond Y pays 7% interest. The current market rate of interest is 7%. Which of the following is correct? A) Both bonds will sell for the same amount. B) Bond X will sell for more than Bond Y. C) Bond Y will sell for more than Bond X. D) Both bonds will sell at a premium. Answer: B Difficulty: 3 Hard Topic: Recording Bonds Payable - Premium; Pricing a Bond - Premium; Recording Bonds Payable - Face Amount; Pricing a Bond - Face Amount Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation 30 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

97) Seaside issues a bond with a stated interest rate of 10%, face value of $50,000, and due in 5 years. Interest payments are made semi-annually. The market rate for this type of bond is 12%. What is the issue price of the bond (rounded to nearest whole dollar? (Use Table 2 and Table 4, contained within a separate file.) A) $83,920. B) $46,320. C) $53,605. D) $50,000. Answer: B Explanation: $50,000 × 0.55839* $2,500^ × 7.36009**

= =

$ 27,920 (rounded) $ 18,400 (rounded) $ 46,320

^$50,000 × 10% × 1/2 year = $2,500. *Table 2: i = 12%/2 semi annual periods = 6% n = 5 years × 2 periods each year = 10 periods **Table 4: i = 12%/2 semi annual periods = 6% n = 5 years × 2 periods each year = 10 periods Difficulty: 3 Hard Topic: Pricing a Bond - Discount Learning Objective: 09-07 Calculate the issue price of a bond. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

98) Seaside issues a bond with a stated interest rate of 10%, face value of $50,000, and due in 5 years. Interest payments are made semi-annually. The market rate for this type of bond is 8%. What is the issue price of the bond (rounded to nearest whole dollar)? (Use Table 2 and Table 4) A) $83,920. B) $46,320. C) $54,055. D) $50,000. Answer: C Explanation: $50,000 × 0.67556* $2,500^ × 8.11090**

= =

$ 33,778 $ 20,277 (rounded) $ 54,055

^$50,000 × 10% × 1/2 year = $2,500. *Table 2: i = 8%/2 semi annual periods = 4% n = 5 years × 2 periods each year = 10 periods **Table 4: i = 8%/2 semi annual periods = 4% n = 5 years × 2 periods each year = 10 periods Difficulty: 3 Hard Topic: Pricing a Bond - Premium Learning Objective: 09-07 Calculate the issue price of a bond. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

99) Given the information below, which bond(s) will be issued at a discount?

Stated Rate of Return Market Rate of Return

Bond 1 5% 7%

Bond 2 7% 8%

Bond 3 12% 12%

Bond 4 10% 9%

A) Bond 1. B) Bond 2. C) Bond 4. D) Bonds 1 and 2. Answer: D Difficulty: 2 Medium Topic: Recording Bonds Payable - Discount; Pricing a Bond - Discount Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 100) Given the information below, which bond(s) will be issued at a premium?

Stated Rate of Return Market Rate of Return

Bond 1 5% 7%

Bond 2 10% 8%

Bond 3 7% 7%

Bond 4 10% 9%

A) Bond 1. B) Bond 2. C) Bond 3. D) Bonds 2 and 4. Answer: D Difficulty: 2 Medium Topic: Recording Bonds Payable - Premium; Pricing a Bond - Premium Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

101) Given the information below, which bond(s) will be issued at a discount?

Stated Rate of Return Market Rate of Return

Bond 1 10% 12%

Bond 2 8% 8%

Bond 3 12% 15%

Bond 4 12% 10%

A) Bond 1. B) Bond 3. C) Bonds 2 and 4. D) Bonds 1 and 3. Answer: D Difficulty: 2 Medium Topic: Recording Bonds Payable - Discount; Pricing a Bond - Discount Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 102) Given the information below, which bond(s) will be issued at a premium?

Stated Rate of Return Market Rate of Return

Bond 1 7% 8%

Bond 2 12% 10%

Bond 3 10% 10%

Bond 4 8% 9%

A) Bond 1. B) Bond 2. C) Bond 3. D) Bonds 2 and 4. Answer: B Difficulty: 2 Medium Topic: Recording Bonds Payable - Discount; Pricing a Bond - Discount Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

103) The rate quoted in the bond contract used to calculate the cash payments for interest is called the: A) Face rate. B) Yield rate. C) Market rate. D) Stated rate. Answer: D Difficulty: 1 Easy Topic: Recording Bonds Payable - General Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 104) The true interest rate used by investors to value a bond is called the: A) Face interest rate. B) Cash payment rate. C) Market interest rate. D) Stated interest rate. Answer: C Difficulty: 1 Easy Topic: Recording Bonds Payable - General Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 105) Which of the following is true for bonds issued at a discount? A) The stated interest rate is greater than the market interest rate. B) The market interest rate is greater than the stated interest rate. C) The stated interest rate and the market interest rate are equal. D) The stated interest rate and the market interest rate are unrelated. Answer: B Difficulty: 2 Medium Topic: Recording Bonds Payable - Discount; Pricing a Bond - Discount Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

106) A bond issued at a discount indicates that at the date of issue: A) Its stated rate was lower than the prevailing market rate of interest on similar bonds. B) Its stated rate was higher than the prevailing market rate of interest on similar bonds. C) The bonds were issued at a price greater than their face value. D) The bonds must be non-interest bearing. Answer: A Difficulty: 2 Medium Topic: Recording Bonds Payable - Discount; Pricing a Bond - Discount Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 107) Which of the following is true for bonds issued at a premium? A) The stated interest rate is less than the market interest rate. B) The market interest rate is less than the stated interest rate. C) The stated interest rate and the market interest rate are equal. D) The stated interest rate and the market interest rate are unrelated. Answer: B Difficulty: 2 Medium Topic: Recording Bonds Payable - Premium; Pricing a Bond - Premium Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 108) A bond issued at a premium indicates that at the date of issue: A) Its stated rate was lower than the prevailing market rate of interest on similar bonds. B) Its stated rate was higher than the prevailing market rate of interest on similar bonds. C) The bonds were issued at a price less than their face value. D) The bonds must be non-interest bearing. Answer: B Difficulty: 2 Medium Topic: Recording Bonds Payable - Discount; Pricing a Bond - Discount Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

109) Samson Enterprises issued a ten-year, $20 million bond with a 10% interest rate for $19,500,000. The entry to record the bond issuance would have what effect on the financial statements? A) Increase assets. B) Increase liabilities. C) Increase stockholders' equity. D) Increase assets and liabilities. Answer: D Difficulty: 3 Hard Topic: Recording Bonds Payable - Discount Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 110) Megginson, Inc. issued a five-year corporate bond of $300,000 with a 5% interest rate for $290,000. What effect would the bond issuance have on Megginson, Inc.'s accounting equation? A) Increase assets and liabilities. B) Increase and decrease assets. C) Increase assets and stockholders' equity. D) Increase and decrease stockholders' equity. Answer: A Difficulty: 3 Hard Topic: Recording Bonds Payable - Discount Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 111) The cash interest payment each period is calculated as the: A) Face amount times the stated interest rate. B) Face amount times the market interest rate. C) Carrying value times the market interest rate. D) Carrying value times the stated interest rate. Answer: A Difficulty: 2 Medium Topic: Recording Bonds Payable - General Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

112) Interest expense on bonds payable is calculated as the: A) Face amount times the stated interest rate. B) Face amount times the market interest rate. C) Carrying value times the market interest rate. D) Carrying value times the stated interest rate. Answer: C Difficulty: 2 Medium Topic: Recording Bonds Payable - General Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 113) When bonds are issued at a discount, what happens to the carrying value and interest expense over the life of the bonds? A) Carrying value and interest expense increase. B) Carrying value and interest expense decrease. C) Carrying value decreases and interest expense increases. D) Carrying value increases and interest expense decreases. Answer: A Difficulty: 2 Medium Topic: Recording Bonds Payable - Discount Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 114) When bonds are issued at a premium, what happens to the carrying value and interest expense over the life of the bonds? A) Carrying value and interest expense increase. B) Carrying value and interest expense decrease. C) Carrying value decreases and interest expense increases. D) Carrying value increases and interest expense decreases. Answer: B Difficulty: 2 Medium Topic: Recording Bonds Payable - Discount Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

115) Bonds payable should be reported as a long-term liability in the balance sheet at the: A) Face value. B) Current bond market price. C) Carrying value. D) Face value less accrued interest since the last interest payment date. Answer: C Difficulty: 2 Medium Topic: Recording Bonds Payable - General Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 116) How would the carrying value of bonds payable change over time for bonds issued at a discount and for bonds issued at a premium? A) Decrease for bonds issued at a discount and decrease for bonds issued at a premium. B) Decrease for bonds issued at a discount and increase for bonds issued at a premium. C) Increase for bonds issued at a discount and decrease for bonds issued at a premium. D) Increase for bonds issued at a discount and increase for bonds issued at a premium. Answer: C Difficulty: 2 Medium Topic: Recording Bonds Payable - Premium; Recording Bonds Payable - Discount Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 117) The carrying value, using the effective interest method, would decrease each year: A) If the bonds were sold at a discount. B) If the bonds were sold at a premium. C) If the bonds were sold at either a discount or a premium. D) The carrying value of bonds will never decrease. Answer: B Difficulty: 2 Medium Topic: Recording Bonds Payable - Premium; Recording Bonds Payable - Discount Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

118) The carrying value, using the effective interest method, would increase each year: A) If the bonds were sold at a discount. B) If the bonds were sold at a premium. C) If the bonds were sold at either a discount or a premium. D) The carrying value of bonds will never increase. Answer: A Difficulty: 2 Medium Topic: Recording Bonds Payable - Premium; Recording Bonds Payable - Discount Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 119) When bonds are issued at a discount and the effective interest method is used for amortization, at each subsequent interest payment date, the cash paid is: A) Less than the interest expense. B) Equal to the interest expense. C) Greater than the interest expense. D) More than if the bonds had been sold at a premium. Answer: A Difficulty: 3 Hard Topic: Recording Bonds Payable - Discount Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 120) When bonds are issued at a premium and the effective interest method is used for amortization, at each subsequent interest payment date, the cash paid is: A) Less than the interest expense. B) Equal to the interest expense. C) Greater than the interest expense. D) More than if the bonds had been sold at a discount. Answer: C Difficulty: 3 Hard Topic: Recording Bonds Payable - Premium Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

121) When bonds are issued at a discount and the effective interest method is used for amortization, at each interest payment date, the interest expense: A) Increases. B) Decreases. C) Remains the same. D) Is equal to the change in book value. Answer: A Difficulty: 2 Medium Topic: Recording Bonds Payable - Discount Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 122) When bonds are issued at a premium and the effective interest method is used for amortization, at each interest payment date, the interest expense: A) Increases. B) Decreases. C) Remains the same. D) Is equal to the change in book value. Answer: B Difficulty: 2 Medium Topic: Recording Bonds Payable - Premium Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 123) An amortization schedule for a bond issued at a discount: A) Has a carrying value that decreases over time. B) Is contained in the balance sheet. C) Is a schedule that reflects the changes in carrying value of the bond over its term to maturity. D) All of the other answer choices are correct. Answer: C Difficulty: 1 Easy Topic: Recording Bonds Payable - Discount Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

124) An amortization schedule for a bond issued at a premium: A) Has a carrying value that increases over time. B) Is contained in the balance sheet. C) Is a schedule that reflects the changes in the carrying value of the bond over its term to maturity. D) All of the other answer choices are correct. Answer: C Difficulty: 1 Easy Topic: Recording Bonds Payable - Premium Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 125) Discount-Mart issues $10 million in bonds on January 1, 2021. The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds:

Date 01/01/2021 06/30/2021 12/31/2021 06/30/2022 12/31/2022

Cash Paid

Interest Expense

$ 300,000 300,000 300,000 300,000

$ 345,639 347,464 349,363 351,337

Increase in Carrying Value Carrying Value $ 8,640,967 $ 45,639 8,686,606 47,464 8,734,070 49,363 8,783,433 51,337 8,834,770

What is the stated annual rate of interest on the bonds? (Hint: Be sure to provide the annual rate rather than the six-month rate.) A) 3%. B) 4%. C) 6%. D) 8%. Answer: C Explanation: ($300,000/$10,000,000) × 2 payments per year = 6%. Difficulty: 3 Hard Topic: Recording Bonds Payable - Discount Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

126) Discount-Mart issues $10 million in bonds on January 1, 2021. The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds:

Date 01/01/2021 06/30/2021 12/31/2021 06/30/2022 12/31/2022

Cash Paid

Interest Expense

$ 300,000 300,000 300,000 300,000

$ 345,639 347,464 349,363 351,337

Increase in Carrying Value Carrying Value $ 8,640,967 $ 45,639 8,686,606 47,464 8,734,070 49,363 8,783,433 51,337 8,834,770

What is the market annual rate of interest on the bonds? (Hint: Be sure to provide the annual rate rather than the six-month rate.) A) 3%. B) 4%. C) 6%. D) 8%. Answer: D Explanation: ($345,639/$8,640,967) × 2 payments per year = 8%. Difficulty: 3 Hard Topic: Recording Bonds Payable - Discount Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

127) Discount-Mart issues $10 million in bonds on January 1, 2021. The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds:

Date 01/01/2021 06/30/2021 12/31/2021 06/30/2022 12/31/2022

Cash Paid

Interest Expense

$ 300,000 300,000 300,000 300,000

$ 345,639 347,464 349,363 351,337

Increase in Carrying Value Carrying Value $ 8,640,967 $ 45,639 8,686,606 47,464 8,734,070 49,363 8,783,433 51,337 8,834,770

What is the interest expense on the bonds in 2021? A) $693,103. B) $600,000. C) $345,639. D) $347,464. Answer: A Explanation: $345,639 + $347,464 = $693,103. Difficulty: 3 Hard Topic: Recording Bonds Payable - Discount Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

128) Discount-Mart issues $10 million in bonds on January 1, 2021. The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds:

Date 01/01/2021 06/30/2021 12/31/2021 06/30/2022 12/31/2022

Cash Paid

Interest Expense

$ 300,000 300,000 300,000 300,000

$ 345,639 347,464 349,363 351,337

Increase in Carrying Value Carrying Value $ 8,640,967 $ 45,639 8,686,606 47,464 8,734,070 49,363 8,783,433 51,337 8,834,770

What is the carrying value of the bonds as of December 31, 2022? A) $8,834,770. B) $8,686,606. C) $8,734,070. D) $8,783,433. Answer: A Difficulty: 2 Medium Topic: Recording Bonds Payable - Discount Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

129) Tony Hawk's Adventure (THA) issued callable bonds on January 1, 2021. THA's accountant has projected the following amortization schedule from issuance until maturity:

Date 01/01/2021 06/30/2021 12/31/2021 06/30/2022 12/31/2022 06/30/2023 12/31/2023

Cash Paid

Interest Expense

Increase in Carrying Value

$ 7,000 7,000 7,000 7,000 7,000 7,000

$ 7,790 7,822 7,855 7,889 7,925 7,961

$ 790 822 855 889 925 961

Carrying Value $ 194,758 195,548 196,370 197,225 198,114 199,039 200,000

THA issued the bonds: A) At par. B) At a premium. C) At a discount. D) Cannot be determined from the given information. Answer: C Difficulty: 2 Medium Topic: Recording Bonds Payable - Discount; Pricing a Bond - Discount Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

130) Tony Hawk's Adventure (THA) issued callable bonds on January 1, 2021. THA's accountant has projected the following amortization schedule from issuance until maturity:

Date 01/01/2021 06/30/2021 12/31/2021 06/30/2022 12/31/2022 06/30/2023 12/31/2023

Cash Paid

Interest Expense

Increase in Carrying Value

$ 7,000 7,000 7,000 7,000 7,000 7,000

$ 7,790 7,822 7,855 7,889 7,925 7,961

$ 790 822 855 889 925 961

Carrying Value $ 194,758 195,548 196,370 197,225 198,114 199,039 200,000

THA issued the bonds for: A) $200,000. B) $194,758. C) $242,000. D) Cannot be determined from the given information. Answer: B Difficulty: 2 Medium Topic: Recording Bonds Payable - Discount; Pricing a Bond - Discount Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

131) Tony Hawk's Adventure (THA) issued callable bonds on January 1, 2021. THA's accountant has projected the following amortization schedule from issuance until maturity:

Date 01/01/2021 06/30/2021 12/31/2021 06/30/2022 12/31/2022 06/30/2023 12/31/2023

Cash Paid

Interest Expense

Increase in Carrying Value

$ 7,000 7,000 7,000 7,000 7,000 7,000

$ 7,790 7,822 7,855 7,889 7,925 7,961

$ 790 822 855 889 925 961

Carrying Value $ 194,758 195,548 196,370 197,225 198,114 199,039 200,000

The THA bonds have a life of: A) 2 years. B) 3 years. C) 6 years. D) Cannot be determined from the given information. Answer: B Difficulty: 2 Medium Topic: Recording Bonds Payable - Discount Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

132) Tony Hawk's Adventure (THA) issued callable bonds on January 1, 2021. THA's accountant has projected the following amortization schedule from issuance until maturity:

Date 01/01/2021 06/30/2021 12/31/2021 06/30/2022 12/31/2022 06/30/2023 12/31/2023

Cash Paid

Interest Expense

Increase in Carrying Value

$ 7,000 7,000 7,000 7,000 7,000 7,000

$ 7,790 7,822 7,855 7,889 7,925 7,961

$ 790 822 855 889 925 961

Carrying Value $ 194,758 195,548 196,370 197,225 198,114 199,039 200,000

What is the annual stated interest rate on the bonds? (Hint: Be sure to provide the annual rate rather than the six-month rate.) A) 3%. B) 3.5%. C) 6%. D) 7%. Answer: D Explanation: ($7,000/$200,000) × 2 payments per year = 7%. Difficulty: 3 Hard Topic: Recording Bonds Payable - Discount Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

133) Tony Hawk's Adventure (THA) issued callable bonds on January 1, 2021. THA's accountant has projected the following amortization schedule from issuance until maturity:

Date 01/01/2021 06/30/2021 12/31/2021 06/30/2022 12/31/2022 06/30/2023 12/31/2023

Cash Paid

Interest Expense

Increase in Carrying Value

$ 7,000 7,000 7,000 7,000 7,000 7,000

$ 7,790 7,822 7,855 7,889 7,925 7,961

$ 790 822 855 889 925 961

Carrying Value $ 194,758 195,548 196,370 197,225 198,114 199,039 200,000

What is the annual market interest rate on the bonds? (Hint: Be sure to provide the annual rate rather than the six-month rate.) A) 4%. B) 3.5%. C) 7%. D) 8%. Answer: D Explanation: ($7,790/$194,758) × 2 payments per year = 8%. Difficulty: 3 Hard Topic: Recording Bonds Payable - Discount Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

134) X2 issued callable bonds on January 1, 2021. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity:

Date 01/01/2021 12/31/2021 12/31/2022 12/31/2023 12/31/2024 12/31/2025

Cash Paid

Interest Expense

Decrease in Carrying Value

$ 7,000 7,000 7,000 7,000 7,000

$ 6,253 6,208 6,160 6,110 6,057

$ 747 792 840 890 943

Carrying Value $ 104,212 103,465 102,673 101,833 100,943 100,000

X2 issued the bonds at: A) Face amount. B) A premium. C) A discount. D) Cannot be determined from the given information. Answer: B Difficulty: 2 Medium Topic: Recording Bonds Payable - Premium; Pricing a Bond - Premium Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

135) X2 issued callable bonds on January 1, 2021. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity:

Date 01/01/2021 12/31/2021 12/31/2022 12/31/2023 12/31/2024 12/31/2025

Cash Paid

Interest Expense

Decrease in Carrying Value

$ 7,000 7,000 7,000 7,000 7,000

$ 6,253 6,208 6,160 6,110 6,057

$ 747 792 840 890 943

Carrying Value $ 104,212 103,465 102,673 101,833 100,943 100,000

X2 issued the bonds for: A) $100,000. B) $107,000. C) $104,212. D) Cannot be determined from the given information. Answer: C Difficulty: 2 Medium Topic: Recording Bonds Payable - Premium; Pricing a Bond - Premium Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

136) X2 issued callable bonds on January 1, 2021. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity:

Date 01/01/2021 12/31/2021 12/31/2022 12/31/2023 12/31/2024 12/31/2025

Cash Paid

Interest Expense

Decrease in Carrying Value

$ 7,000 7,000 7,000 7,000 7,000

$ 6,253 6,208 6,160 6,110 6,057

$ 747 792 840 890 943

Carrying Value $ 104,212 103,465 102,673 101,833 100,943 100,000

The X2 bonds have a life of: A) 3 years. B) 4 years. C) 5 years. D) Cannot be determined from the given information. Answer: C Difficulty: 2 Medium Topic: Recording Bonds Payable - Premium Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

137) X2 issued callable bonds on January 1, 2021. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity:

Date 01/01/2021 12/31/2021 12/31/2022 12/31/2023 12/31/2024 12/31/2025

Cash Paid

Interest Expense

Decrease in Carrying Value

$ 7,000 7,000 7,000 7,000 7,000

$ 6,253 6,208 6,160 6,110 6,057

$ 747 792 840 890 943

Carrying Value $ 104,212 103,465 102,673 101,833 100,943 100,000

What is the annual stated interest rate on the bonds? A) 3%. B) 3.5%. C) 6%. D) 7%. Answer: D Explanation: $7,000/$100,000 = 7%. Difficulty: 3 Hard Topic: Recording Bonds Payable - Premium Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

138) X2 issued callable bonds on January 1, 2021. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity:

Date 01/01/2021 12/31/2021 12/31/2022 12/31/2023 12/31/2024 12/31/2025

Cash Paid

Interest Expense

Decrease in Carrying Value

$ 7,000 7,000 7,000 7,000 7,000

$ 6,253 6,208 6,160 6,110 6,057

$ 747 792 840 890 943

Carrying Value $ 104,212 103,465 102,673 101,833 100,943 100,000

What is the annual market interest rate on the bonds? A) 3%. B) 3.5%. C) 6%. D) 7%. Answer: C Explanation: $6,253/$104,212 = 6%. Difficulty: 3 Hard Topic: Recording Bonds Payable - Premium Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

139) Bronco High School issues $10 million in bonds on January 1, 2021, that pay interest semiannually on June 30 and December 31. A portion of the bond amortization schedule appears below:

Date 01/01/2021 06/30/2021 12/31/2021

Cash Paid

Interest Expense

$ 400,000 400,000

$ 440,000 442,000

Increase in Carrying Value Carrying Value $ 8,800,000 $ 40,000 8,840,000 42,000 8,882,000

The bonds were issued at: A) Face amount. B) A discount. C) A premium. D) Cannot be determined from the given information. Answer: B Explanation: The initial carrying amount of $8,800,000 is less than the face amount of $10,000,000. Difficulty: 2 Medium Topic: Recording Bonds Payable - Discount; Pricing a Bond - Discount Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

140) Bronco High School issues $10 million in bonds on January 1, 2021 that pay interest semiannually on June 30 and December 31. A portion of the bond amortization schedule appears below:

Date 01/01/2021 06/30/2021 12/31/2021

Cash Paid

Interest Expense

$ 400,000 400,000

$ 440,000 442,000

Increase in Carrying Value Carrying Value $ 8,800,000 $ 40,000 8,840,000 42,000 8,882,000

What is the original issue price of the bonds? A) $10,000,000. B) $8,882,000. C) $8,800,000. D) $8,840,000. Answer: C Difficulty: 2 Medium Topic: Recording Bonds Payable - Discount; Pricing a Bond - Discount Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

141) Bronco High School issues $10 million in bonds on January 1, 2021 that pay interest semiannually on June 30 and December 31. A portion of the bond amortization schedule appears below:

Date 01/01/2021 06/30/2021 12/31/2021

Cash Paid

Interest Expense

$ 400,000 400,000

$ 440,000 442,000

Increase in Carrying Value Carrying Value $ 8,800,000 $ 40,000 8,840,000 42,000 8,882,000

What is the face amount of the bonds? A) $10,000,000. B) $8,882,000. C) $8,800,000. D) $8,840,000. Answer: A Difficulty: 2 Medium Topic: Recording Bonds Payable - Discount Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

142) Bronco High School issues $10 million in bonds on January 1, 2021 that pay interest semiannually on June 30 and December 31. A portion of the bond amortization schedule appears below:

Date 01/01/2021 06/30/2021 12/31/2021

Cash Paid

Interest Expense

$ 400,000 400,000

$ 440,000 442,000

Increase in Carrying Value Carrying Value $ 8,800,000 $ 40,000 8,840,000 42,000 8,882,000

What is the stated annual interest rate? A) 4%. B) 10%. C) 5%. D) 8%. Answer: D Explanation: $400,000/$10,000,000 = 4% × 2 payments per year = 8%. Difficulty: 3 Hard Topic: Recording Bonds Payable - Discount Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

143) Bronco High School issues $10 million in bonds on January 1, 2021 that pay interest semiannually on June 30 and December 31. A portion of the bond amortization schedule appears below:

Date 01/01/2021 06/30/2021 12/31/2021

Cash Paid

Interest Expense

$ 400,000 400,000

$ 440,000 442,000

Increase in Carrying Value Carrying Value $ 8,800,000 $ 40,000 8,840,000 42,000 8,882,000

What is the market annual interest rate? A) 4%. B) 10%. C) 5%. D) 8%. Answer: B Explanation: $440,000/$8,800,000 = 5% × 2 payments per year = 10%. Difficulty: 3 Hard Topic: Recording Bonds Payable - Discount Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

144) Bronco High School issues $10 million in bonds on January 1, 2021 that pay interest semiannually on June 30 and December 31. A portion of the bond amortization schedule appears below:

Date 01/01/2021 06/30/2021 12/31/2021

Cash Paid

Interest Expense

$ 400,000 400,000

$ 440,000 442,000

Increase in Carrying Value Carrying Value $ 8,800,000 $ 40,000 8,840,000 42,000 8,882,000

What is the total cash paid for interest assuming the bonds mature in 10 years? A) $8,800,000. B) $10,000,000. C) $8,000,000. D) $18,000,000. Answer: C Explanation: $8,000,000 = $400,000 × 20 payments Difficulty: 3 Hard Topic: Recording Bonds Payable - Discount Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

145) Tomkin Library System issues $5 million in bonds on January 1, 2021 that pay interest semi-annually on June 30 and December 31. A portion of the bond amortization schedule appears below:

Date 01/01/2021 06/30/2021 12/31/2021

Cash Paid

Interest Expense

$ 250,000 250,000

$ 220,000 218,800

Decrease in Carrying Value Carrying Value $ 5,500,000 $ 30,000 5,470,000 31,200 5,438,800

The bonds were issued at: A) Face amount. B) A discount. C) A premium. D) Cannot be determined from the given information. Answer: C Explanation: The initial carrying amount of $5,500,000 is greater than the face amount of $5,000,000. Difficulty: 2 Medium Topic: Recording Bonds Payable - Premium; Pricing a Bond - Premium Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

146) Tomkin Library System issues $5 million in bonds on January 1, 2021 that pay interest semi-annually on June 30 and December 31. A portion of the bond amortization schedule appears below:

Date 01/01/2021 06/30/2021 12/31/2021

Cash Paid

Interest Expense

$ 250,000 250,000

$ 220,000 218,800

Decrease in Carrying Value Carrying Value $ 5,500,000 $ 30,000 5,470,000 31,200 5,438,800

What is the original issue price of the bonds? A) $5,000,000. B) $5,470,000. C) $5,500,000. D) $5,438,800. Answer: C Difficulty: 2 Medium Topic: Recording Bonds Payable - Premium; Pricing a Bond - Premium Learning Objective: 09-07 Calculate the issue price of a bond.; 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

147) Tomkin Library System issues $5 million in bonds on January 1, 2021 that pay interest semi-annually on June 30 and December 31. A portion of the bond amortization schedule appears below:

Date 01/01/2021 06/30/2021 12/31/2021

Cash Paid

Interest Expense

$ 250,000 250,000

$ 220,000 218,800

Decrease in Carrying Value Carrying Value $ 5,500,000 $ 30,000 5,470,000 31,200 5,438,800

What is the face amount of the bonds? A) $5,000,000. B) $5,470,000. C) $5,500,000. D) $5,438,800. Answer: A Difficulty: 2 Medium Topic: Recording Bonds Payable - Premium Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

148) Tomkin Library System issues $5 million in bonds on January 1, 2021 that pay interest semi-annually on June 30 and December 31. A portion of the bond amortization schedule appears below:

Date 01/01/2021 06/30/2021 12/31/2021

Cash Paid

Interest Expense

$ 250,000 250,000

$ 220,000 218,800

Decrease in Carrying Value Carrying Value $ 5,500,000 $ 30,000 5,470,000 31,200 5,438,800

What is the stated annual interest rate? A) 4%. B) 10%. C) 5%. D) 8%. Answer: B Explanation: $250,000/$5,000,000 = 5% × 2 payments per year = 10%. Difficulty: 3 Hard Topic: Recording Bonds Payable - Premium Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

149) Tomkin Library System issues $5 million in bonds on January 1, 2021 that pay interest semi-annually on June 30 and December 31. A portion of the bond amortization schedule appears below:

Date 01/01/2021 06/30/2021 12/31/2021

Cash Paid

Interest Expense

$ 250,000 250,000

$ 220,000 218,800

Decrease in Carrying Value Carrying Value $ 5,500,000 $ 30,000 5,470,000 31,200 5,438,800

What is the market annual interest rate? A) 4%. B) 10%. C) 5%. D) 8%. Answer: D Explanation: $220,000/$5,500,000 = 4% × 2 payments per year = 8%. Difficulty: 3 Hard Topic: Recording Bonds Payable - Premium Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

150) Tomkin Library System issues $5 million in bonds on January 1, 2021 that pay interest semi-annually on June 30 and December 31. A portion of the bond amortization schedule appears below:

Date 01/01/2021 06/30/2021 12/31/2021

Cash Paid

Interest Expense

$ 250,000 250,000

$ 220,000 218,800

Decrease in Carrying Value Carrying Value $ 5,500,000 $ 30,000 5,470,000 31,200 5,438,800

What is the total cash paid for interest assuming the bonds mature in 7 years? A) $5,500,000. B) $3,500,000. C) $5,000,000. D) $8,500,000. Answer: B Explanation: $3,500,000 = $250,000 × 14 payments Difficulty: 3 Hard Topic: Recording Bonds Payable - Premium Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 151) Which of the following statements is correct? A) Bonds are always issued at their face amount. B) Bonds issued at more than their face value are said to be issued at a discount. C) Bondholders must hold their bonds until maturity to receive cash for their investment. D) None of the other answer choices are correct. Answer: D Difficulty: 2 Medium Topic: Recording Bonds Payable - Discount; Accounting for Bond Retirements; Recording Bonds Payable - Face Amount Learning Objective: 09-05 Record the issuance of bonds and related interest.; 09-06 Record the retirement of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

152) Tony Hawk's Adventure (THA) issued callable bonds on January 1, 2021. THA's accountant has projected the following amortization schedule from issuance until maturity:

Date 01/01/2021 06/30/2021 12/31/2021 06/30/2022 12/31/2022 06/30/2023 12/31/2023

Cash Paid

Interest Expense

Increase in Carrying Value

$ 7,000 7,000 7,000 7,000 7,000 7,000

$ 7,790 7,822 7,855 7,889 7,925 7,961

$ 790 822 855 889 925 961

Carrying Value $ 194,758 195,548 196,370 197,225 198,114 199,039 200,000

THA buys back the bonds for $196,000 immediately after the interest payment on 12/31/2021 and retires them. What gain or loss, if any, would THA record on this date? A) No gain or loss. B) $370 gain. C) $4,000 gain. D) $1,242 loss. Answer: B Explanation: THA paid only $196,000 to remove a liability with a carrying value of $196,370, so there is a gain of $370. Difficulty: 3 Hard Topic: Accounting for Bond Retirements Learning Objective: 09-06 Record the retirement of bonds. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

153) X2 issued callable bonds on January 1, 2021. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity:

Date 01/01/2021 12/31/2021 12/31/2022 12/31/2023 12/31/2024 12/31/2025

Cash Paid

Interest Expense

Decrease in Carrying Value

$ 7,000 7,000 7,000 7,000 7,000

$ 6,253 6,208 6,160 6,110 6,057

$ 747 792 840 890 943

Carrying Value $ 104,212 103,465 102,673 101,833 100,943 100,000

X2 buys back the bonds for $103,000 immediately after the interest payment on 12/31/2022 and retires them. What gain or loss, if any, would X2 record on this date? A) No gain or loss. B) $3,000 gain. C) $1,202 loss. D) $327 loss. Answer: D Explanation: X2 paid $103,000 to remove a liability with a carrying value of $102,673, so there is a loss of $327. Difficulty: 3 Hard Topic: Accounting for Bond Retirements Learning Objective: 09-06 Record the retirement of bonds. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 154) When bonds are retired before their maturity date: A) GAAP has been violated. B) The issuing company will always report a non-operating gain. C) The issuing company will always report a non-operating loss. D) The issuing company may report a non-operating gain or loss. Answer: D Difficulty: 2 Medium Topic: Accounting for Bond Retirements Learning Objective: 09-06 Record the retirement of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

155) The Viper retires a $40 million bond issue when the carrying value of the bonds is $42 million, but the market value of the bonds is $36 million. The entry to record the retirement will include: A) A credit of $6 million to a gain account. B) A debit of $6 million to a loss account. C) No gain or loss on retirement. D) A credit to cash for $42 million. Answer: A Explanation: Carrying value, $42 million, less cash paid to retire the bonds of $36 million = $6 million gain. Difficulty: 3 Hard Topic: Accounting for Bond Retirements Learning Objective: 09-06 Record the retirement of bonds. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 156) The Raptor retires a $20 million bond issue when the carrying value of the bonds is $18 million, but the market value of the bonds is $15 million. The entry to record the retirement will include: A) A debit of $3 million to a loss account. B) A credit of $3 million to a gain account. C) No gain or loss on retirement. D) A credit to cash for $18 million. Answer: B Explanation: Carrying value, $18 million, less cash paid to retire the bonds of $15 million = $3 million gain. Difficulty: 3 Hard Topic: Accounting for Bond Retirements Learning Objective: 09-06 Record the retirement of bonds. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

157) The Titan retires a $20 million bond issue when the carrying value of the bonds is $18 million, but the market value of the bonds is $23 million. The entry to record the retirement will include: A) A debit of $5 million to a loss account. B) A credit of $5 million to a gain account. C) No gain or loss on retirement. D) A credit to cash for $18 million. Answer: A Explanation: Carrying value, $18 million, less cash paid to retire the bonds of $23 million = $5 million loss. Difficulty: 3 Hard Topic: Accounting for Bond Retirements Learning Objective: 09-06 Record the retirement of bonds. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 158) The issue price of a bond is equal to: A) The future value of the face amount only. B) The present value of the interest only. C) The present value of the face amount plus the present value of the periodic interest payments. D) The future value of the face amount plus the future value of the periodic interest payments. Answer: C Difficulty: 1 Easy Topic: Pricing a Bond - General Learning Objective: 09-07 Calculate the issue price of a bond. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 159) Ordinarily, the proceeds from the sale of a bond issue will be equal to: A) The face amount of the bond. B) The total of the face amount plus all interest payments. C) The present value of the face amount plus the present value of the periodic interest payments. D) The face amount of the bond plus the present value of the periodic interest payments. Answer: C Difficulty: 1 Easy Topic: Pricing a Bond - General Learning Objective: 09-07 Calculate the issue price of a bond. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

160) In calculating the issue price of a bond, the portion associated with the principal is calculated using which time value factor? A) Future value of $1. B) Present value of $1. C) Future value of an ordinary annuity of $1. D) Present value of an ordinary annuity of $1. Answer: B Difficulty: 1 Easy Topic: Pricing a Bond - General Learning Objective: 09-07 Calculate the issue price of a bond. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 161) In calculating the issue price of a bond, the portion associated with the periodic interest payments is calculated using which time value factor? A) Future value of $1. B) Present value of $1. C) Future value of an ordinary annuity of $1. D) Present value of an ordinary annuity of $1. Answer: D Difficulty: 1 Easy Topic: Pricing a Bond - General Learning Objective: 09-07 Calculate the issue price of a bond. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

162) Air Destinations issues a bond due in 10 years with a stated interest rate of 6% and a face value of $500,000. Interest payments are made semi-annually. The market rate for this type of bond is 7%. What is the issue price of the bond? (Use Table 2 and Table 4, contained within a separate file.) A) $537,194. B) $464,471. C) $359,528. D) $500,000. Answer: B Explanation: $500,000 × 0.50257* $15,000^ × 14.21240**

= =

$ 251,285 $ 213,186 $ 464,471

^$500,000 × 6% × 1/2 year = $15,000. *Table 2: i = 7%/2 semi-annual periods = 3.5% n = 10 years × 2 periods each year = 20 periods **Table 4: i = 7%/2 semi-annual periods = 3.5% n = 10 years × 2 periods each year = 20 periods Difficulty: 3 Hard Topic: Pricing a Bond - Discount Learning Objective: 09-07 Calculate the issue price of a bond. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

163) Air Destinations issues a bond due in 10 years with a stated interest rate of 6% and a face value of $500,000. Interest payments are made semi-annually. The market rate for this type of bond is 5%. What is the issue price of the bond (rounded to nearest whole dollar)? (Use Table 2 and Table 4, contained within a separate file.) A) $537,194. B) $464,469. C) $538,972. D) $500,000. Answer: C Explanation: $500,000 × 0.61027* $15,000^ × 15.58916**

= =

$ 305,135 $ 233,837 (rounded) $ 538,972

^$500,000 × 6% × 1/2 year = $15,000. *Table 2: i = 5%/2 semi-annual periods = 2.5% n = 10 years × 2 periods each year = 20 periods **Table 4: i = 5%/2 semi-annual periods = 2.5% n = 10 years × 2 periods each year = 20 periods Difficulty: 3 Hard Topic: Pricing a Bond - Premium Learning Objective: 09-07 Calculate the issue price of a bond. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

164) Air Destinations issues a bond due in 10 years with a stated interest rate of 6% and a face value of $500,000. Interest payments are made semi-annually. The market rate for this type of bond is 7%. What is the issue price of the bond (rounded to nearest whole dollar)? (Use a financial calculator or Excel) A) $537,194. B) $464,469. C) $359,528. D) $500,000. Answer: B Explanation: FV ($500,000); PMT ($15,000); I (3.5%); N (20 periods) = PV ($464,469). PMT = $500,000 × 6% × 1/2 year = $15,000. I = 7%/2 semiannual periods = 3.5%. N = 10 years × 2 periods each year = 20 periods. Difficulty: 3 Hard Topic: Pricing a Bond - Discount Learning Objective: 09-07 Calculate the issue price of a bond. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 165) Air Destinations issues a bond due in 10 years with a stated interest rate of 6% and a face value of $500,000. Interest payments are made semi-annually. The market rate for this type of bond is 5%. What is the issue price of the bond (rounded to nearest whole dollar)? (Use a financial calculator or Excel) A) $537,194. B) $464,469. C) $538,973. D) $500,000. Answer: C Explanation: FV ($500,000); PMT ($15,000); I (2.5%); N (20 periods) = PV ($538,973). PMT = $500,000 × 6% × 1/2 year = $15,000. I = 5%/2 semiannual periods = 2.5%. N = 10 years × 2 periods each year = 20 periods. Difficulty: 3 Hard Topic: Pricing a Bond - Premium Learning Objective: 09-07 Calculate the issue price of a bond. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

166) Mountain Excursions issues a bond due in 10 years with a stated interest rate of 7% and a face value of $200,000. Interest payments are made semi-annually. The market rate for this type of bond is 8%. What is the issue price of the bond (rounded to nearest whole dollar)? (Use Table 2 and Table 4, contained within a separate file.) A) $139,609. B) $186,410. C) $214,877. D) $200,000. Answer: B Explanation: $200,000 × 0.45639* $7,000^ × 13.59033**

= =

$ 91,278 $ 95,132 (rounded) $ 186,410

^$200,000 × 7% × 1/2 year = $7,000. *Table 2: i = 8%/2 semi-annual periods = 4% n = 10 years × 2 periods each year = 20 periods **Table 4: i = 8%/2 semi-annual periods = 4% n = 10 years × 2 periods each year = 20 periods Difficulty: 3 Hard Topic: Pricing a Bond - Discount Learning Objective: 09-07 Calculate the issue price of a bond. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

167) Mountain Excursions issues a bond due in 10 years with a stated interest rate of 7% and a face value of $200,000. Interest payments are made semi-annually. The market rate for this type of bond is 6%. What is the issue price of the bond (rounded to nearest whole dollar)? (Use Table 2 and Table 4, contained within a separate file.) A) $163,200. B) $186,410. C) $214,878. D) $200,000. Answer: C Explanation: $200,000 × 0.55368* $7,000^ × 14.87747**

= =

$ 110,736 $ 104,142 (rounded) $ 214,878

^$200,000 × 7% × 1/2 year = $7,000. *Table 2: i = 6%/2 semi-annual periods = 3% n = 10 years × 2 periods each year = 20 periods **Table 4: i = 6%/2 semi-annual periods = 3% n = 10 years × 2 periods each year = 20 periods Difficulty: 3 Hard Topic: Pricing a Bond - Premium Learning Objective: 09-07 Calculate the issue price of a bond. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

168) Mountain Excursions issues a bond due in 10 years with a stated interest rate of 7% and a face value of $200,000. Interest payments are made semi-annually. The market rate for this type of bond is 8%. What is the issue price of the bond (rounded to nearest whole dollar? (Use a financial calculator or Excel) A) $139,609. B) $186,410. C) $214,877. D) $200,000. Answer: B Explanation: FV ($200,000); PMT ($7,000); I (4%); N (20 periods) = PV ($186,410) (rounded). PMT = $200,000 × 7% × 1/2 year = $7,000. I = 8%/2 semiannual periods = 4%. N = 10 years × 2 periods each year = 20 periods. Difficulty: 3 Hard Topic: Pricing a Bond - Discount Learning Objective: 09-07 Calculate the issue price of a bond. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 169) Mountain Excursions issues a bond due in 10 years with a stated interest rate of 7% and a face value of $200,000. Interest payments are made semi-annually. The market rate for this type of bond is 6%. What is the issue price of the bond (rounded to nearest whole dollar)? (Use a financial calculator or Excel) A) $163,200. B) $186,410. C) $214,877. D) $200,000. Answer: C Explanation: FV ($200,000); PMT ($7,000); I (3%); N (20 periods) = PV ($214,877) (rounded). PMT = $200,000 × 7% × 1/2 year = $7,000. I = 6%/2 semiannual periods = 3%. N = 10 years × 2 periods each year = 20 periods. Difficulty: 3 Hard Topic: Pricing a Bond - Premium Learning Objective: 09-07 Calculate the issue price of a bond. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

170) Underwater Experiences issues a bond due in 5 years with a stated interest rate of 6% and a face value of $100,000. Interest payments are made semi-annually. The market rate for this type of bond is 7%. What is the issue price of the bond (rounded to nearest whole dollar)? (Use Table 2 and Table 4, contained within a separate file.) A) $104,625. B) $95,842. C) $71,906. D) $100,000. Answer: B Explanation: $100,000 × 0.70892* $3,000^ × 8.31661**

= =

$ 70,892 $ 24,950 (rounded) $ 95,842

^$100,000 × 6% × 1/2 year = $3,000. *Table 2: i = 7%/2 semi-annual periods = 3.5% n = 5 years × 2 periods each year = 10 periods **Table 4: i = 7%/2 semi-annual periods = 3.5% n = 5 years × 2 periods each year = 10 periods Difficulty: 3 Hard Topic: Pricing a Bond - Discount Learning Objective: 09-07 Calculate the issue price of a bond. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

171) Underwater Experiences issues a bond due in 5 years with a stated interest rate of 6% and a face value of $100,000. Interest payments are made semi-annually. The market rate for this type of bond is 5%. What is the issue price of the bond (rounded to nearest whole dollar)? (Use Table 2 and Table 4, contained within a separate file.) A) $102,323. B) $84,557. C) $104,376. D) $100,000. Answer: C Explanation: $100,000 × 0.78120* $3,000^ × 8.75206**

= =

$ 78,120 $ 26,256 (rounded) $ 104,376

^$100,000 × 6% × 1/2 year = $3,000. *Table 2: i = 5%/2 semi-annual periods = 2.5% n = 5 years × 2 periods each year = 10 periods **Table 4: i = 5%/2 semi-annual periods = 2.5% n = 5 years × 2 periods each year = 10 periods Difficulty: 3 Hard Topic: Pricing a Bond - Premium Learning Objective: 09-07 Calculate the issue price of a bond. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

172) Underwater Experiences issues a bond due in 5 years with a stated interest rate of 6% and a face value of $100,000. Interest payments are made semi-annually. The market rate for this type of bond is 7%. What is the issue price of the bond (rounded to nearest whole dollar)? (Use a financial calculator or Excel) A) $104,265. B) $95,842. C) $71,906. D) $100,000. Answer: B Explanation: FV ($100,000); PMT ($3,000); I (3.5%); N (10 periods) = PV ($95,842) (rounded). PMT = $100,000 × 6% × 1/2 year = $3,000. I = 7%/2 semiannual periods = 3.5%. N = 5 years × 2 periods each year = 10 periods. Difficulty: 3 Hard Topic: Pricing a Bond - Discount Learning Objective: 09-07 Calculate the issue price of a bond. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 173) Underwater Experiences issues a bond due in 5 years with a stated interest rate of 6% and a face value of $100,000. Interest payments are made semi-annually. The market rate for this type of bond is 5%. What is the issue price of the bond (rounded to nearest whole dollar)? (Use a financial calculator or Excel) A) $102,323. B) $84,557. C) $104,376. D) $100,000. Answer: C Explanation: FV ($100,000); PMT ($3,000); I (2.5%); N (10 periods) = PV ($104,376) (rounded). PMT = $100,000 × 6% × 1/2 year = $3,000. I = 5%/2 semiannual periods = 2.5%. N = 5 years × 2 periods each year = 10 periods. Difficulty: 3 Hard Topic: Pricing a Bond - Premium Learning Objective: 09-07 Calculate the issue price of a bond. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

174) The balance sheet of Sub America reports total assets of $400,000 and $450,000 at the beginning and end of the year, respectively. The return on assets for the year is 10%. What is Sub America's net income for the year? A) $42,500. B) $45,000. C) $4,250,000. D) $85,000. Answer: A Explanation: Net income divided by average total assets = 10%. Average total assets = $425,000 [($400,000 + $450,000)/2]; therefore, net income must be $42,500 ($425,000 × 10%). Difficulty: 3 Hard Topic: Analysis - Return on Assets Learning Objective: 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 175) The balance sheet of Montezuma reports total assets of $900,000 and $1,100,000 at the beginning and end of the year, respectively. The net income for the year is $100,000. What is Montezuma's return on assets? A) 10% B) 11% C) 9% D) 25% Answer: A Explanation: [$100,000/($900,000 + $1,100,000)/2] = 10% Difficulty: 3 Hard Topic: Analysis - Return on Assets Learning Objective: 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

176) A company reports net income of $250,000. The return on assets for the year is 20%. What is the company's average total assets for the year? A) $1,250,000 B) $1,000,000 C) $1,500,000 D) $250,000 Answer: A Explanation: $250,000/X = 20%, therefore X = ($250,000/20%) = $1,250,000. Difficulty: 3 Hard Topic: Analysis - Return on Assets Learning Objective: 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 177) A company's balance sheet reports stockholders' equity of $400,000, total liabilities of $600,000, and total assets of $1,000,000. What is the company's debt to equity ratio? A) 1.5 B) 0.66 C) 2.5 D) 1.0 Answer: A Explanation: $600,000/$400,000 = 1.5 Difficulty: 3 Hard Topic: Analysis - Debt to Equity Ratio Learning Objective: 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 178) A company's balance sheet reports stockholders' equity of $800,000. The debt to equity ratio is 2.5. What is the amount of the company's total liabilities? A) $2,000,000 B) $320,000 C) $1,000,000 D) $800,000 Answer: A Explanation: X/$800,000 = 2.5, therefore X = ($800,000 × 2.5) = $2,000,000. Difficulty: 3 Hard Topic: Analysis - Debt to Equity Ratio Learning Objective: 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 83 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

179) A company's balance sheet reports total liabilities of $2,000,000. The debt to equity ratio is 2.5. What is the company's stockholders' equity? A) $800,000 B) $320,000 C) $1,000,000 D) $2,000,000 Answer: A Explanation: $2,000,000/X = 2.5, therefore X = ($2,000,000/2.5) = $800,000. Difficulty: 3 Hard Topic: Analysis - Debt to Equity Ratio Learning Objective: 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 180) Financial leverage is best measured by which of the following ratios? A) The debt to equity ratio. B) The return on equity ratio. C) The times interest earned ratio. D) The return on assets ratio. Answer: A Difficulty: 2 Medium Topic: Analysis - Debt to Equity Ratio Learning Objective: 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 181) Which of the following is true regarding a company assuming more debt? A) Assuming more debt is always bad for the company. B) Assuming more debt is always good for the company. C) Assuming more debt can be good for the company as long as they earn a return in excess of the rate charged on the borrowed funds. D) Assuming more debt reduces leverage. Answer: C Difficulty: 2 Medium Topic: Analysis - Debt to Equity Ratio Learning Objective: 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation

182) Which of the following is not a true statement? A) The debt to equity ratio measures a company's risk and is calculated as total liabilities divided by stockholders' equity. B) Leverage enables a company to earn a higher return using debt than without debt. C) Return on assets is calculated as net income divided by the ending balance for total assets. D) The times interest earned ratio compares interest expense with income available to pay interest charges. Answer: C Difficulty: 2 Medium Topic: Analysis - Debt to Equity Ratio; Analysis - Return on Assets; Analysis - Times Interest Earned Ratio Learning Objective: 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 183) The times interest earned ratio is calculated as A) Interest expense/Net income. B) Net income/Interest expense. C) (Net income + interest expense + tax expense)/Interest expense. D) Interest expense/(Net income + interest expense + tax expense). Answer: C Difficulty: 1 Easy Topic: Analysis - Times Interest Earned Ratio Learning Objective: 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation

184) Selected financial data for Channel Co. is provided below: ($ in millions) Sales Interest expense Tax expense Net income Total assets (beginning of year) Total assets (end of year) Total liabilities (end of year) Total stockholders' equity (end of year)

$ 50,000 1,000 2,000 7,000 54,000 60,000 24,000 36,000

What is the debt to equity ratio for Channel Co.? A) 0.67. B) 0.40. C) 1.50. D) 0.60. Answer: A Explanation: $24,000/$36,000 = 0.67 (rounded). Difficulty: 3 Hard Topic: Analysis - Debt to Equity Ratio Learning Objective: 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

185) Selected financial data for Channel Co. is provided below: ($ in millions) Sales Interest expense Tax expense Net income Total assets (beginning of year) Total assets (end of year) Total liabilities (end of year) Total stockholders' equity (end of year)

$ 50,000 1,000 2,000 7,000 52,000 60,000 24,000 36,000

What is the return on assets for Channel Co.? A) 11.7%. B) 13.5%. C) 12.5%. D) 17.9%. Answer: C Explanation: $7,000/[($52,000 + $60,000)/2] = 12.5%. Difficulty: 3 Hard Topic: Analyze-Return on Assets Learning Objective: 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

186) Selected financial data for Channel Co. is provided below: ($ in millions) Sales Interest expense Tax expense Net income Total assets (beginning of year) Total assets (end of year) Total liabilities (end of year) Total stockholders' equity (end of year)

$ 50,000 1,000 2,000 7,000 54,000 60,000 24,000 36,000

What is the times interest earned ratio for Channel Co.? A) 10.0 times. B) 7.0 times. C) 4.0 times. D) 8.5 times. Answer: A Explanation: ($7,000 + $1,000 + $2,000)/1,000 = 10.0 times. Difficulty: 3 Hard Topic: Analysis - Times Interest Earned Ratio Learning Objective: 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

187) Selected financial data for Surfer Co. is provided below: ($ in millions) Sales Interest expense Tax expense Net income Total assets (beginning of year) Total assets (end of year) Total liabilities (end of year) Total stockholders' equity (end of year)

$ 940,000 3,000 21,000 54,000 900,000 820,000 600,000 220,000

What is the debt to equity ratio for Surfer Co.? A) 0.37. B) 0.73. C) 2.73. D) 3.73. Answer: C Explanation: $600,000/$220,000 = 2.73 (rounded). Difficulty: 3 Hard Topic: Analysis - Debt to Equity Ratio Learning Objective: 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

188) Selected financial data for Surfer Co. is provided below: ($ in millions) Sales Interest expense Tax expense Net income Total assets (beginning of year) Total assets (end of year) Total liabilities (end of year) Total stockholders' equity (end of year)

$ 940,000 3,000 21,000 54,000 900,000 820,000 600,000 220,000

What is the return on assets for Surfer Co.? A) 6.0%. B) 6.9%. C) 6.6%. D) 6.3%. Answer: D Explanation: $54,000/[($840,000 + $880,000)/2] = 6.3% (rounded). Difficulty: 3 Hard Topic: Analysis - Return on Assets Learning Objective: 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

189) Selected financial data for Surfer Co. is provided below: ($ in millions) Sales Interest expense Tax expense Net income Total assets (beginning of year) Total assets (end of year) Total liabilities (end of year) Total stockholders' equity (end of year)

$ 940,000 3,000 21,000 54,000 900,000 820,000 600,000 220,000

What is the times interest earned ratio for Company Surfer Co.? A) 21.0 times. B) 26.0 times. C) 18.0 times. D) 25.0 times. Answer: B Explanation: ($54,000 + $3,000 + $21,000)/$3,000 = 26.0 times. Difficulty: 3 Hard Topic: Analysis - Times Interest Earned Ratio Learning Objective: 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

Match the following: A) Present value of payments B) Discount C) Amortization schedule D) Times interest earned ratio E) Sinking fund F) Premium G) Market interest rate H) Lease I) Stated interest rate J) Debt to equity ratio 190) The rate quoted in the bond contract used to calculate the cash payments for interest. Difficulty: 2 Medium Topic: Leases; Types of Bonds; Recording Bonds Payable - Discount; Recording Bonds Payable - Premium; Pricing a Bond - Discount; Pricing a Bond - Premium; Analysis - Debt to Equity Ratio; Analysis - Times Interest Earned Ratio Learning Objective: 09-03 Understand how leases are recorded.; 09-04 Identify the characteristics of bonds.; 09-05 Record the issuance of bonds and related interest; 09-07 Calculate the issue price of a bond.; 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 191) Arrangement by which an asset's owner provides another party the right to use the asset for a specified period of time. Difficulty: 2 Medium Topic: Leases; Types of Bonds; Recording Bonds Payable - Discount; Recording Bonds Payable - Premium; Pricing a Bond - Discount; Pricing a Bond - Premium; Analysis - Debt to Equity Ratio; Analysis - Times Interest Earned Ratio Learning Objective: 09-03 Understand how leases are recorded.; 09-04 Identify the characteristics of bonds.; 09-05 Record the issuance of bonds and related interest; 09-07 Calculate the issue price of a bond.; 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

192) Total liabilities divided by total stockholders' equity; measure a company's risk. Difficulty: 2 Medium Topic: Leases; Types of Bonds; Recording Bonds Payable - Discount; Recording Bonds Payable - Premium; Pricing a Bond - Discount; Pricing a Bond - Premium; Analysis - Debt to Equity Ratio; Analysis - Times Interest Earned Ratio Learning Objective: 09-03 Understand how leases are recorded.; 09-04 Identify the characteristics of bonds.; 09-05 Record the issuance of bonds and related interest; 09-07 Calculate the issue price of a bond.; 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 193) The true interest rate used by investors to value a bond. Difficulty: 2 Medium Topic: Leases; Types of Bonds; Recording Bonds Payable - Discount; Recording Bonds Payable - Premium; Pricing a Bond - Discount; Pricing a Bond - Premium; Analysis - Debt to Equity Ratio; Analysis - Times Interest Earned Ratio Learning Objective: 09-03 Understand how leases are recorded.; 09-04 Identify the characteristics of bonds.; 09-05 Record the issuance of bonds and related interest; 09-07 Calculate the issue price of a bond.; 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 194) The issue price is below its face amount. Difficulty: 2 Medium Topic: Leases; Types of Bonds; Recording Bonds Payable - Discount; Recording Bonds Payable - Premium; Pricing a Bond - Discount; Pricing a Bond - Premium; Analysis - Debt to Equity Ratio; Analysis - Times Interest Earned Ratio Learning Objective: 09-03 Understand how leases are recorded.; 09-04 Identify the characteristics of bonds.; 09-05 Record the issuance of bonds and related interest; 09-07 Calculate the issue price of a bond.; 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

195) Amount to record a lease asset and lease liability at the beginning of the lease period. Difficulty: 2 Medium Topic: Leases; Types of Bonds; Recording Bonds Payable - Discount; Recording Bonds Payable - Premium; Pricing a Bond - Discount; Pricing a Bond - Premium; Analysis - Debt to Equity Ratio; Analysis - Times Interest Earned Ratio Learning Objective: 09-03 Understand how leases are recorded.; 09-04 Identify the characteristics of bonds.; 09-05 Record the issuance of bonds and related interest; 09-07 Calculate the issue price of a bond.; 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 196) Provides a summary of the cash interest payments, interest expense, and changes in carrying value for debt instruments. Difficulty: 2 Medium Topic: Leases; Types of Bonds; Recording Bonds Payable - Discount; Recording Bonds Payable - Premium; Pricing a Bond - Discount; Pricing a Bond - Premium; Analysis - Debt to Equity Ratio; Analysis - Times Interest Earned Ratio Learning Objective: 09-03 Understand how leases are recorded.; 09-04 Identify the characteristics of bonds.; 09-05 Record the issuance of bonds and related interest; 09-07 Calculate the issue price of a bond.; 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 197) The issue price is above its face amount. Difficulty: 2 Medium Topic: Leases; Types of Bonds; Recording Bonds Payable - Discount; Recording Bonds Payable - Premium; Pricing a Bond - Discount; Pricing a Bond - Premium; Analysis - Debt to Equity Ratio; Analysis - Times Interest Earned Ratio Learning Objective: 09-03 Understand how leases are recorded.; 09-04 Identify the characteristics of bonds.; 09-05 Record the issuance of bonds and related interest; 09-07 Calculate the issue price of a bond.; 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

198) Ratio that compares interest expense with income available to pay those charges. Difficulty: 2 Medium Topic: Leases; Types of Bonds; Recording Bonds Payable - Discount; Recording Bonds Payable - Premium; Pricing a Bond - Discount; Pricing a Bond - Premium; Analysis - Debt to Equity Ratio; Analysis - Times Interest Earned Ratio Learning Objective: 09-03 Understand how leases are recorded.; 09-04 Identify the characteristics of bonds.; 09-05 Record the issuance of bonds and related interest; 09-07 Calculate the issue price of a bond.; 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 199) An investment fund used to set aside money to be used to pay debts as they come due. Difficulty: 2 Medium Topic: Leases; Types of Bonds; Recording Bonds Payable - Discount; Recording Bonds Payable - Premium; Pricing a Bond - Discount; Pricing a Bond - Premium; Analysis - Debt to Equity Ratio; Analysis - Times Interest Earned Ratio Learning Objective: 09-03 Understand how leases are recorded.; 09-04 Identify the characteristics of bonds.; 09-05 Record the issuance of bonds and related interest; 09-07 Calculate the issue price of a bond.; 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 190) I 191) H 192) J 193) G 194) B 195) A 196) C 197) F 198) D 199) E

Match the following: A) Private placement. B) Bond issue costs. C) Secured bond. D) Term bond. E) Unsecured bond. F) Convertible bond. G) Serial bond. H) Callable bond. 200) Matures in installments. Difficulty: 2 Medium Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 201) Allows the issuer to pay off the bonds early at a fixed price. Difficulty: 2 Medium Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 202) Allows the investor to transfer each bond into shares of common stock. Difficulty: 2 Medium Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 203) Includes underwriting, legal, accounting, registration, and printing fees. Difficulty: 2 Medium Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

204) Sale of debt securities directly to a single investor. Difficulty: 2 Medium Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 205) Supported by specific assets pledged as collateral by the issuer. Difficulty: 2 Medium Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 206) Secured only by the "full faith and credit" of the issuing corporation. Difficulty: 2 Medium Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 207) Matures on a single date. Difficulty: 2 Medium Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 200) G 201) H 202) F 203) B 204) A 205) C 206) E 207) D

Match the following: A) Secured bond. B) Term bond. C) Unsecured bond. D) Serial bond. 208) Matures in installments. Difficulty: 2 Medium Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 209) Matures on a single date. Difficulty: 2 Medium Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 210) Supported by specific assets pledged as collateral by the issuer. Difficulty: 2 Medium Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 211) Secured only by the "full faith and credit" of the issuing corporation. Difficulty: 2 Medium Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 208) D 209) B 210) A 211) C

Match the following: A) Bond issue costs. B) Callable bond. C) Private placement. D) Convertible bond. 212) Allows the issuer to pay off the bonds early at a fixed price. Difficulty: 2 Medium Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 213) Allows the investor to transfer each bond into shares of common stock. Difficulty: 2 Medium Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 214) Includes underwriting, legal, accounting, registration, and printing fees. Difficulty: 2 Medium Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 215) Sale of debt securities directly to a single investor. Difficulty: 2 Medium Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 212) B 213) D 214) A 215) C

Match the following: A) Bonds issued at a premium B) Bonds issued at a discount C) Market interest rate D) Stated interest rate E) Bonds issued at face amount 216) The true interest rate used by investors to value a bond. Difficulty: 2 Medium Topic: Recording Bonds Payable - Face Amount; Recording Bonds Payable - Discount; Recording Bonds Payable - Premium; Pricing a Bond - Face Amount; Pricing a Bond - Discount; Pricing a Bond – Premium Learning Objective: 09-05 Record the issuance of bonds and related interest.; 09-07 Calculate the issue price of a bond Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 217) The stated interest rate is more than the market interest rate. Difficulty: 2 Medium Topic: Recording Bonds Payable - Face Amount; Recording Bonds Payable - Discount; Recording Bonds Payable - Premium; Pricing a Bond - Face Amount; Pricing a Bond - Discount; Pricing a Bond - Premium Learning Objective: 09-05 Record the issuance of bonds and related interest.; 09-07 Calculate the issue price of a bond Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 218) The stated interest rate equals the market interest rate. Difficulty: 2 Medium Topic: Recording Bonds Payable - Face Amount; Recording Bonds Payable - Discount; Recording Bonds Payable - Premium; Pricing a Bond - Face Amount; Pricing a Bond - Discount; Pricing a Bond - Premium Learning Objective: 09-05 Record the issuance of bonds and related interest.; 09-07 Calculate the issue price of a bond Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

219) The stated interest rate is less than the market interest rate. Difficulty: 2 Medium Topic: Recording Bonds Payable - Face Amount; Recording Bonds Payable - Discount; Recording Bonds Payable - Premium; Pricing a Bond - Face Amount; Pricing a Bond - Discount; Pricing a Bond - Premium Learning Objective: 09-05 Record the issuance of bonds and related interest.; 09-07 Calculate the issue price of a bond Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 220) The rate quoted in the bond contract used to calculate the cash payments for interest. Difficulty: 2 Medium Topic: Recording Bonds Payable - Face Amount; Recording Bonds Payable - Discount; Recording Bonds Payable - Premium; Pricing a Bond - Face Amount; Pricing a Bond - Discount; Pricing a Bond - Premium Learning Objective: 09-05 Record the issuance of bonds and related interest.; 09-07 Calculate the issue price of a bond Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 216) C 217) A 218) E 219) B 220) D

221) On January 1, 2021, Julee Enterprises borrows $30,000 to purchase a new Toyota Highlander by agreeing to a 6%, 4-year note with the bank. Payments of $704.55 are due at the end of each month with the first installment due on January 31, 2021. Record the issuance of the note payable and the first two monthly payments. Answer: January 1, 2021 Cash Notes Payable (Issuance of note payable)

January 31, 2021 Interest Expense ($30,000 × 6% × 1/12) Notes Payable (difference) Cash (monthly payment) (to record the first monthly payment)

Debit 30,000

Credit 30,000

150.00 554.55

February 28, 2021 Interest Expense [($30,000 − $554.55) × 6% × 1/12] 147.23 Notes Payable (difference) 557.32 Cash (monthly payment) (to record the second monthly payment) Difficulty: 3 Hard Topic: Installment Notes Learning Objective: 09-02 Account for installment notes payable. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

704.55

222) On January 1, 2021, California Financial purchases a building for $900,000, signing a 5%, 20-year mortgage. Installment payments of $5,939.60 are due at the end of each month, with the first payment due on January 31, 2021. Required: 1. Record issuance of the mortgage installment note on January 1, 2021. 2. Record the first monthly mortgage payment on January 31, 2021. 3. Record the second monthly mortgage payment on February 28, 2021. 4. Total payments over the 20 years are $1,425,504 ($5,939.60 × 240 monthly payments). How much of this is interest expense and how much is actual payment of the loan? Answer: Requirement 1 January 1, 2021 Buildings Notes Payable (Issuance of a note payable)

Debit 900,000

Credit 900,000

Requirement 2 January 31, 2021 Interest Expense ($900,000 × 5% × 1/12) Notes Payable (difference) Cash (monthly payment) (To record the first monthly mortgage payment)

3,750.00 2,189.60 5,939.60

Requirement 3 February 28, 2021 Interest Expense [($900,000 - 2,189.60) × 5% × 1/12] 3,740.88 Notes Payable (difference) 2,198.72 Cash (monthly payment) (To record the second monthly mortgage payment)

5,939.60

Requirement 4 The actual payments on the loan are $1,425,504. Therefore, total interest expense over the 20year mortgage is $525,504 ($1,425,504 − $900,000). Difficulty: 3 Hard Topic: Installment Notes Learning Objective: 09-02 Account for installment notes payable. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 103 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

223) On January 1, 2021, Florida Investments purchases a condo for $400,000. The company pays cash of $80,000 and issues a 6%, 30-year note payable for the remaining $320,000. Installment payments of $1,918.56 are due at the end of each month, with the first payment due on January 31, 2021. Required: 1. Record issuance of the mortgage installment note on January 1, 2021. 2. Fill in the blanks for the first three rows of the amortization schedule blow:

3. Record the first monthly mortgage payment on January 31, 2021. How much of the first payment goes to interest expense and how much goes to reducing the carrying value of the loan? 4. Total payments over the 30 years are $690,682 ($1,918.56 × 360 monthly payments). How much of this is interest expense and how much is actual payment of the loan?

Answer: Requirement 1 January 1, 2021 Buildings 400,000 Cash Notes Payable (Issuance of a mortgage note payable)

80,000 320,000

Requirement 2

(1) Date

(2) Cash Paid

1/1/2021 1/31/2021 2/28/2021

$1,918.56 1,918.56

(3) Interest Expense Carrying Value × .06 × 1/12 $1,600.00 1,598.41

(4) Decrease in Carrying Value

(5)Carrying Value Prior Carrying (2) - (3) Value - (4) $320,000.00 $318.56 319,681.44 320.15 319,361.29

Requirement 3 January 31, 2021 Interest Expense ($320,000 × 6% × 1/12) Notes Payable (difference) Cash (monthly payment) (To record the first monthly mortgage payment)

1,600.00 318.56 1,918.56

In the first monthly payment, $1,600.00 goes to interest expense and only $318.56 goes to reducing the carrying value of the loan.

Requirement 4 The actual payments on the loan are $690,681.60 ($1,918.56 × 360 months). Therefore, total interest expense over the 30-year mortgage is $370,681.60 ($690,681.60 − $320,000). Difficulty: 3 Hard Topic: Installment Notes Learning Objective: 09-02 Account for installment notes payable. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

224) Valentino's Pizza issues $40 million of 3% convertible bonds that mature in ten years. Each $1,000 bond is convertible into twenty-five shares of common stock. The current market price of Valentino's stock is $35 per share. 1. Explain why Valentino's might choose to issue convertible bonds. 2. Explain why investors might choose to purchase Valentino's convertible bonds. Answer: 1. Convertible bonds sell at a higher price and require a lower interest rate than bonds without a conversion feature. 2. Investors would benefit if the market price of the common stock goes above $40 per share ($1,000/25 shares = $40 per share) assuming the current market price of the bond is $1,000. Example: If the company's stock price goes to $50 per share, the convertible bondholder could trade a $1,000 bond for 25 shares of stock worth $50 per share (or $1,250). Prior to conversion, the bondholder has also received 3% interest on the convertible bond. Difficulty: 2 Medium Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 225) A company issues 7%, 10-year bonds with a face amount of $80,000 on January 1, 2021. The market interest rate for bonds of similar risk and maturity is also 7%. Interest is paid semiannually on June 30 and December 31. 1. Record the bond issue. 2. Record the first interest payment on June 30, 2021. Answer: 1. Debit Credit January 1, 2021 Cash 80,000 Bonds Payable 80,000 (to record the bond issue) 2. June 30, 2021 Interest Expense 2,800 Cash ($80,000 × 7% × 1/2) 2,800 (First semiannual interest payment) Difficulty: 3 Hard Topic: Recording Bonds Payable - Face Amount Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 106 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

226) A company issues 7%, 10-year bonds with a face amount of $80,000 for $74,564 on January 1, 2021. The market interest rate for bonds of similar risk and maturity is 8%. Interest is paid semiannually on June 30 and December 31. 1. Record the bond issue. 2. Record the first interest payment on June 30, 2021. Answer: 1. January 1, 2021 Cash Discount on Bonds Payable Bonds Payable (to record the bond issue) 2. June 30, 2021 Interest Expense ($74,564 × 8% × 1/2) (rounded) Discount on Bonds Payable (difference) Cash ($80,000 × 7% × 1/2) (First semiannual interest payment)

Debit

Credit

74,564 5,436 80,000

2,983 183 2,800

Difficulty: 3 Hard Topic: Recording Bonds Payable - Discount Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

227) A company issues 7%, 10-year bonds with a face amount of $80,000 for $85,951 on January 1, 2021. The market interest rate for bonds of similar risk and maturity is 6%. Interest is paid semiannually on June 30 and December 31. 1. Record the bond issue. 2. Record the first interest payment on June 30, 2021. Answer: 1. January 1, 2021 Cash Bonds Payable Premium on Bonds Payable (to record the bond issue) 2. June 30, 2021 Interest Expense ($85,951 × 6% × ½) (rounded) Premium on Bonds Payable (difference) Cash ($80,000 × 7% × 1/2) (First semiannual interest payment)

Debit

Credit

85,951 80,000 5,951

2,579 221 2,800

Difficulty: 3 Hard Topic: Recording Bonds Payable - Premium Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

228) Presented below is a partial amortization schedule for Discount Foods:

(1) Period Issue date 1 2

(2) Cash Paid $2,800 2,800

(3) Interest Expense $2,983 2,990

(4) Increase in Carrying Value

(5) Carrying Value $74,564 $183 74,747 190 74,937

1. Record the bond issue assuming the face value of bonds payable is $80,000. 2. Record the first interest payment. Answer: 1. Cash Discount on Bonds Payable Bonds Payable (to record the bond issue) 2. Interest Expense Discount on Bonds Payable Cash (First interest payment)

Debit 74,564 5,436

Credit

80,000

2,983 183 2,800

229) Presented below is a partial amortization schedule for Premium Foods:

(1) Period Issue date 1 2

(2) Cash Paid $2,800 2,800

(3) Interest Expense $2,579 2,572

(4) Decrease in Carrying Value

(5) Carrying Value $85,951 $221 85,730 228 85,502

1. Record the bond issue assuming the face value of bonds payable is $80,000. 2. Record the first interest payment. Answer: 1. Cash Bonds Payable Premium on Bonds Payable (to record the bond issue) 2. Interest Expense Premium on Bonds Payable Cash (First interest payment)

Debit 85,951

Credit 80,000 5,951

2,579 221 2,800

230) On January 1, 2021, a company issues $800,000 of 8% bonds, due in ten years, with interest payable semiannually on June 30 and December 31 each year. Assuming the market interest rate on the issue date is 8%, the bonds will issue at $800,000. Record the bond issue on January 1, 2021, and the first two semiannual interest payments on June 30, 2021, and December 31, 2021. Answer: January 1, 2021 Cash Bonds Payable (to record the bond issue) June 30, 2021 Interest Expense Cash ($800,000 × 8% × 1/2) (First semiannual interest payment) December 31, 2021 Interest Expense Cash ($800,000 × 8% × 1/2) (Second semiannual interest payment)

Debit 800,000

Credit 800,000

32,000 32,000

Difficulty: 3 Hard Topic: Recording Bonds Payable - Face Amount Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

231) On January 1, 2021, a company issues $800,000 of 8% bonds, due in ten years, with interest payable semiannually on June 30 and December 31 each year. Assuming the market interest rate on the issue date is 9%, the bonds will issue at $747,968. 1. Fill in the blanks in the amortization schedule below:

2. Record the bond issue on January 1, 2021, and the first two semi-annual interest payments on June 30, 2021, and December 31, 2021.

Answer: 1.

(1) Date

1/1/2021 6/30/2021 12/31/2021

(3) Interest (2) Cash Paid Expense Face Amount Carrying Value × × Stated Rate Market Rate $32,000 32,000

$33,659 33,733

2. January 1, 2021 Cash Discount on Bonds Payable Bonds Payable (to record the bond issue) June 30, 2021 Interest Expense ($747,968 × 9% × 1/2) Discount on Bonds Payable (difference) Cash ($800,000 × 8% × ½) (First semiannual interest payment) December 31, 2021 Interest Expense ($749,627 × 9% × 1/2) Discount on Bonds Payable (difference) Cash ($800,000 × 8% × 1/2) (Second semiannual interest payment)

(4) Increase in Carrying Value

(5) Carrying Value Prior Carrying (3) - (2) Value + (4) $747,968 $1,659 749,627 1,733 751,360

Debit 747,968 52,032

Credit

800,000

33,659 1,659 32,000

33,733 1,733 32,000

232) On January 1, 2021, a company issues $800,000 of 8% bonds, due in ten years, with interest payable semiannually on June 30 and December 31 each year. Assuming the market interest rate on the issue date is 7%, the bonds will issue at $856,850. 1. Fill in the blanks in the amortization schedule below:

2. Record the bond issue on January 1, 2021, and the first two semi-annual interest payments on June 30, 2021, and December 31, 2021.

Answer: 1.

(1) Date

1/1/2021 6/30/2021 12/31/2021

(3) Interest (2) Cash Paid Expense Face Amount Carrying Value × × Stated Rate Market Rate $32,000 32,000

$29,990 29,919

2. January 1, 2021 Cash Bonds Payable Premium on Bonds Payable (to record the bond issue) June 30, 2021 Interest Expense ($856,850 × 7% × 1/2) Premium on Bonds Payable (difference) Cash ($800,000 × 8% × 1/2) (First semiannual interest payment) December 31, 2021 Interest Expense ($854,840 × 7% × 1/2) Premium on Bonds Payable (difference) Cash ($800,000 × 8% × 1/2) (Second semiannual interest payment)

(4) Decrease in Carrying Value

(5) Carrying Value Prior Carrying (2) - (3) Value - (4) $856,850 $2,010 854,840 2,081 852,759

Debit 856,850

Credit 800,000 56,850

29,990 2,010 32,000

29,919 2,081 32,000

233) Sun City issues $50 million of bonds on January 1, 2021 that pay interest semiannually on June 30 and December 31. A portion of the bond amortization schedule appears below:

(1) Date 1/1/2021 6/30/2021 12/31/2021

(2) Cash Paid 2,000,000 2,000,000

(3) Interest Expense 1,936,857 1,934,647

(4) Decrease in Carrying Value

(5) Carrying Value $55,338,768 63,143 55,275,625 65,353 55,210,272

Required: 1. Were the bonds issued at face amount, a discount, or a premium? 2. What is the original issue price of the bonds? 3. What is the face amount of the bonds? 4. What is the stated annual interest rate? (Hint: Be sure to provide the annual rate rather than the six-month rate.) 5. What is the market annual interest rate? (Hint: Be sure to provide the annual rate rather than the six-month rate.) 6. What is the total cash paid for interest assuming the bonds mature in 20 years? Answer: 1. Premium. 2. $55,338,768. 3. $50,000,000. 4. 8%. [($2,000,000 cash paid ÷ $50,000,000 face value) × 2] 5. 7%. [($1,936,857 interest expense ÷ $55,338,768 carrying value) × 2] 6. $80,000,000. ($50,000,000 × 8% × 20 years) Difficulty: 3 Hard Topic: Recording Bonds Payable - Premium Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

234) Pizza Pier retires its 7% bonds for $68,000 before their scheduled maturity. At the time, the bonds have a face value of $70,000 carrying value of $74,937. Record the early retirement of the bonds. Answer: Bonds Payable Premium on Bonds Payable Gain Cash (Entry to record early retirement)

Debit 70,000 4,937

Credit

6,937 68,000

Difficulty: 3 Hard Topic: Accounting for Bond Retirements Learning Objective: 09-06 Record the retirement of bonds. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 235) Magic Mountain retires its 8% bonds for $127,000 before their scheduled maturity. At the time, the bonds have a face value of 125,000 and a carrying value of $118,000. Record the early retirement of the bonds. Answer: Bonds Payable Loss Discount on Bonds Payable Cash (Entry to record early retirement)

Debit 125,000 9,000

Credit

7,000 127,000

236) Stealth Fitness Center issues 7%, 10-year bonds with a face amount of $200,000. The market interest rate for bonds of similar risk and maturity is 8%. Interest is paid semiannually. At what price will the bonds be issued? Answer: If the market rate is 8%, the bonds will be issued at $186,410 (a discount).

Difficulty: 3 Hard Topic: Pricing a Bond - Discount Learning Objective: 09-07 Calculate the issue price of a bond. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

237) Stealth Fitness Center issues 7%, 15-year bonds with a face amount of $200,000. The market interest rate for bonds of similar risk and maturity is 6%. Interest is paid semiannually. At what price will the bonds be issued? Answer: If the market rate is 6%, the bonds will be issued at $219,600 (a premium).

Difficulty: 3 Hard Topic: Pricing a Bond - Premium Learning Objective: 09-07 Calculate the issue price of a bond. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

238) On January 1, 2021, Water Wonderland issues $20 million of 8% bonds, due in ten years, with interest payable semiannually on June 30 and December 31 each year. 1. If the market rate is 7%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price. 2. If the market rate is 8%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price. 3. If the market rate is 9%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price. Answer: 1. Premium. The issue price is $21,421,240 (rounded).

2. Face amount. The issue price is $20,000,000.

3. Discount. The issue price is $18,699,206 (rounded).

Difficulty: 3 Hard Topic: Pricing a Bond - Face Amount; Pricing a Bond — Discount; Pricing a Bond - Premium Learning Objective: 09-07 Calculate the issue price of a bond. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

239) Western World has the following selected data ($ in millions): Balance Sheet Data Total Assets Total Liabilities Total Stockholders' Equity Income Statement Data Sales Interest Expense Tax Expense Net Income

2021 $2,511 1,685 826

2020 $2,315 1,525 790

$786 77 32 80

Based on these amounts, calculate the following ratios for Western World in 2021: 1. Debt to equity ratio. 2. Return on assets ratio. 3. Times interest earned ratio. Answer: 1. Total Liabilities $1,685

÷ ÷

Stockholders' Equity $826

Debt to Equity Ratio 2.04

= =

2. Net Income

$80

Average Total Assets $2,413*

Return on Assets Ratio 3.3% (rounded)

= =

*($2,511 + $2,315) / 2

3. Net Income + ÷ Interest + Taxes $189 ÷

Interest

$77

Times Interest Earned Ratio 2.5 (rounded)

Difficulty: 3 Hard Topic: Analysis - Debt to Equity Ratio; Analysis - Return on Assets; Analysis - Times Interest Earned Ratio Learning Objective: 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making; FN Measurement/Keyboard Navigation 123 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

240) Selected financial data for these two close competitors in the home building industry are provided below: ($ in millions) Total assets Total liabilities Total stockholders' equity Sales Interest expense Tax expense Net income

Company A Company B $40,877 $33,005 21,484 13,936 19,393 19,069 $66,176 $47,220 676 287 1,362 1,042 2,620 1,783

1. Calculate the debt to equity ratio for Company A and Company B. Which company has the higher ratio? 2. Calculate the times interest earned ratio for Company A and Company B. Which company is better able to meet interest payments as they become due? Answer: 1. ($ in millions) Company A Company B

Total Liabilities $21,484 $13,936

÷ ÷ ÷

Stockholders' Equity $19,393 $19,069

= = =

Debt to Equity Ratio 1.11 (rounded) 0.73 (rounded)

Company A has a higher debt to equity ratio than Company B. Company B, with a lower debt to equity ratio, is considered to be less risky.

2. ($ in millions)

Net Income + ÷ Interest + Taxes

Interest

Company A

$4,658

$676

Company B

$3,112

$287

Times Interest Earned Ratio 6.9 times (rounded) 10.8 times (rounded)

Company B, with a times interest earned ratio of 10.8 times is better able to meet interest payments as they become due than Company A with a ratio of 6.9 times. Difficulty: 3 Hard Topic: Analysis - Debt to Equity Ratio; Analysis - Times Interest Earned Ratio Learning Objective: 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

241) On January 1, 2021, Lakeside Amusement Park issues $600,000 of 6% bonds, due in ten years, with interest payable semi-annually on June 30 and December 31 each year. Required: Calculate the issue price of a bond and fill in the blanks to the first three rows of an amortization schedule when: 1. The market interest rate is 6% and the bonds issue at face amount. 2. The market interest rate is 7% and the bonds issue at a discount. 3. The market interest rate is 5% and the bonds issue at a premium.

Answer: Requirement 1 Face amount. The issue price is $600,000.

(1) Date

1/1/2021 6/30/2021 12/31/2021

(3) Interest (2) Cash Paid Expense Carrying Face Amount Value × × Stated Rate Market Rate $18,000 18,000

$18,000 18,000

(4) Increase in Carrying (5) Carrying Value Value

(3) - (2) $0 0

Prior Carrying Value + (4) $600,000 600,000 600,000

Requirement 2 Discount. The issue price is $557,363.

(1) Date

1/1/2021 6/30/2021 12/31/2021

(3) Interest (2) Cash Paid Expense Carrying Face Amount Value × × Stated Rate Market Rate $18,000 18,000

$19,508 19,560

(4) Increase in Carrying (5) Carrying Value Value

(3) - (2) $1,508 1,560

Prior Carrying Value + (4) $557,363 558,871 560,431

Requirement 3 Premium. The issue price is $646,767.

(1) Date

1/1/2021 6/30/2021 12/31/2021

(2) Cash Paid

(4) Decrease in Carrying (5) Carrying Value Value

$18,000 18,000

Prior Carrying Value - (4) $646,767 644,936 643,059

(3) Interest Expense Carrying Face Amount Value × × Stated Rate Market Rate $16,169 16,123

(2) - (3) $1,831 1,877

Difficulty: 3 Hard Topic: Recording Bonds Payable - Face Amount; Recording Bonds Payable - Discount; Recording Bonds Payable - Premium; Pricing a Bond - Face Amount; Pricing a Bond - Discount; Pricing a Bond - Premium Learning Objective: 09-05 Record the issuance of bonds and related interest.; 09-07 Calculate the issue price of a bond. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

242) Astro World issues $20 million in bonds on January 1, 2021 that pay interest semi-annually on June 30 and December 31. A portion of the bond amortization schedule appears below:

(1) Date

1/1/2021 6/30/2021 12/31/2021

(3) Interest (2) Cash Paid Expense Carrying Face Amount Value × × Stated Rate Market Rate 600,000 600,000

625,257 626,141

(4) Increase in Carrying (5) Carrying Value Value

(3) - (2) 25,257 26,141

Prior Carrying Value + (4) $17,864,493 17,889,750 17,915,891

Required: 1. Were the bonds issued at face amount, a discount, or a premium? 2. What is the original issue price of the bonds? 3. What is the face amount of the bonds? 4. What is the stated annual interest rate? 5. What is the market annual interest rate? 6. What is the total cash paid for interest assuming the bonds mature in 20 years? Answer: 1. Discount 2. $17,864,493 3. $20,000,000 4. 6% ($600,000 cash paid ÷ $20,000,000 face value) × 2 5. 7% ($625,257 interest expense ÷ $17,864,493 carrying value) × 2 6. $24,000,000 ($20,000,000 × 6% × 20 years) Difficulty: 3 Hard Topic: Recording Bonds Payable - Discount; Pricing a Bond - Discount Learning Objective: 09-05 Record the issuance of bonds and related interest.; 09-07 Calculate the issue price of a bond. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

243) On January 1, 2021, Water Mania issues $1,000,000 of 6% bonds, due in ten years, with interest payable semi-annually on June 30 and December 31 each year. Required: 1. If the market interest rate is 6%, the bonds will issue at $1,000,000. Record the bond issue on January 1, 2021, and the first two semi-annual interest payments on June 30, 2021, and December 31, 2021. 2. If the market interest rate is 7%, the bonds will issue at $928,938. Record the bond issue on January 1, 2021, and the first two semi-annual interest payments on June 30, 2021, and December 31, 2021. 3. If the market interest rate is 5% the bonds will issue at $1,077,946. Record the bond issue on January 1, 2021, and the first two semi-annual interest payments on June 30, 2021, and December 31, 2021. Answer: Requirement 1 January 1, 2021 Cash Bonds Payable (To record the bond issue) June 30, 2021 Interest Expense Cash ($1,000,000 × 6% × ½) (First semi-annual interest payment) December 31, 2021 Interest Expense Cash ($1,000,000 × 6% × ½) (Second semi-annual interest payment)

Debit 1,000,000

Credit 1,000,000

30,000 30,000

Requirement 2 January 1, 2021 Cash Discount on Bonds Payable Bonds Payable (To record the bond issue)

Debit 928,938 71,062

June 30, 2021 Interest Expense ($928,938 × 7% × ½) Discount on Bonds Payable (difference) Cash ($1,000,000 × 6% × ½) (First semi-annual interest payment)

Debit 32,513

December 31, 2021 Interest Expense ([$928,938 + 2,513] × 7% × ½) Discount on Bonds Payable (difference) Cash ($1,000,000 × 6% × ½) (Second semi-annual interest payment)

Debit 32,601

Credit

1,000,000

Credit 2,513 30,000

Credit 2,601 30,000

Requirement 3 January 1, 2021 Cash Bonds Payable Premium on Bonds Payable (To record the bond issue)

Debit 1,077,946

June 30, 2021 Interest Expense ($1,077,946 × 5% × ½) Premium on Bonds Payable (difference) Cash ($1,000,000 × 6% × ½) (First semi-annual interest payment)

Debit 26,949 3,051

Credit 1,000,000 77,946

Credit

30,000

December 31, 2021 Debit Credit Interest Expense ([$1,077,946 - $3,051] × 5% × ½) 26,949 Premium on Bonds Payable (difference) 3,128 Cash ($1,000,000 × 6% × ½) 30,000 (Second semi-annual interest payment) Difficulty: 3 Hard Topic: Recording Bonds Payable - Face Amount; Recording Bonds Payable - Discount; Recording Bonds Payable - Premium Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

244) Aqua Zone issues $1.2 million, 7% bonds on January 1, 2021, that mature in twenty years. The market interest rate for bonds of similar risk and maturity is 6% and the bonds issue for $1,338,689. Interest is paid semi-annually on June 30 and December 31. Required: 1. Fill in the blanks to the first three rows of the amortization schedule below:

2. Record the issuance of the bonds on January 1, 2021. 3. Record the interest payments on June 30, 2021 and December 31, 2021. Answer: Requirement 1

(1) Date

(3) Interest (2) Cash Paid Expense Carrying Face Amount Value × × Stated Rate Market Rate

1/1/2021 6/30/2021 12/31/2021

$42,000 42,000

$40,161 40,106

(4) Decrease in Carrying (5) Carrying Value Value

(2) - (3) $1,839 1,894

Prior Carrying Value - (4) $1,338,689 1,336,850 1,334,956

Requirement 2 January 1, 2021 Cash Bonds Payable Premium on Bonds Payable (To record the bond issue)

Debit 1,338,689

Credit 1,200,000 138,689

Requirement 3 June 30, 2021 Interest Expense ($1,338,689 × 6% × ½) Premium on Bonds Payable (difference) Cash ($1,200,000 × 7% × ½) (First semi-annual interest payment)

40,161 1,839 42,000

December 31, 20211 Interest Expense ($1,336,850 × 6% × ½) 40,161 Premium on Bonds Payable (difference) 1,894 Cash ($1,200,000 × 7% × ½) 42,000 (Second semi-annual interest payment) Difficulty: 3 Hard Topic: Recording Bonds Payable - Premium Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

245) Super Slides has $20 million in bonds payable. As part of the contractual agreement with bondholders, the company guarantees to keep its debt to equity ratio below 2.0. Super Slides' total assets are $90 million and its liabilities, other than the bonds payable, are $40 million. The company needs additional assets and is considering purchasing these assets by issuing a note payable or by leasing. Required: 1. Calculate total stockholders' equity using the balance sheet equation. 2. What is the debt to equity ratio? 3. Explain the difference between the purchase of an asset by issuing a note payable and obtaining the asset using a lease. 4. Suppose the company can obtain the asset by issuing a $2 million note payable or by signing a lease agreement requiring payments with a present value of $2 million. Will issuing the note payable affect the debt to equity ratio? Will the lease agreement affect the debt to equity ratio? 5. Will issuing the note or entering into a lease cause the debt to equity ratio to be in violation of the contractual agreement with bondholders? Show your calculations.

Answer: Requirement 1 Assets $90 million

Liabilities

Stockholders' Equity

$20 + $40 = $60 million

Stockholders' equity must be $30 million ($90 million − $60 million). Requirement 2 Total Liabilities $60 million

÷ ÷

Stockholders' Equity $30 million

= =

Debt to Equity Ratio 2.00

Requirement 3 The purchase of an asset using an installment note allows a company to take legal ownership of the asset and to finance its purchase by promising to pay back the note over time, usually with a stated interest rate. A lease is a contractual agreement by which the lessee (user) agrees to pay the lessor (owner) for the right to use the asset for a specified period of time. The use of the note payable and obtaining the asset using a lease are both recorded as an increase in assets and an increase in liabilities in the purchaser's/lessee's records.

Requirement 4 Yes. The debt to equity ratio will be affected by issuing a note or obtaining a lease. Assets and liabilities will both increase $2 million while stockholders' equity will remain unchanged. The increase in liabilities will increase the debt to equity ratio. Requirement 5 The debt to equity ratio will be in violation (exceed 2.0) under both the note payable and the lease. Without a note payable or lease Total Stockholders' ÷ Liabilities Equity $60 million ÷ $30 million

Debt to Equity Ratio 2.00

With a note payable or lease of $2 million Total Stockholders' ÷ = Liabilities Equity $62 million ÷ $30 million =

Debt to Equity Ratio 2.07

Difficulty: 3 Hard Topic: Installment Notes; Leases; Analysis - Debt to Equity Ratio Learning Objective: 09-02 Account for installment notes payable.; 09-03 Understand how leases are recorded.; 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Evaluate AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making; FN Measurement/Keyboard Navigation

246) Selected financial data for two competitors in the construction supply industry are provided as follows:

Required: 1. Calculate the debt to equity ratio for 2021 for both companies. Which company has the higher ratio? 2. Calculate the return on assets for 2021 for both companies. Which company appears more profitable? 3. Calculate the times interest earned ratio for 2021 for both companies. Which company is better able to meet interest payments as they become due?

Answer: Requirement 1 ($ in millions) Total Liabilities ÷

Stockholders' Equity

Company A

$21,484

$19,393

Company B

$13,936

$19,069

Debt to Equity Ratio 1.11 times (rounded) 0.73 times (rounded)

Company A has a higher debt to equity ratio than Company B.

Requirement 2 ($ in millions)

Net Income

Company A Company B

$2,661 $1,783

÷ ÷

Average Total Assets $41,021* $32,815**

= = =

Return on Assets Ratio 6.5% (rounded) 5.4% (rounded)

*($40,877 + $41,164)/2 **($33,005 + $32,625)/2 Company A appears more profitable than Company B.

Requirement 3 ($ in millions) Company A Company B

Net Income + ÷ Interest + Taxes $4,699 ÷ $3,208 ÷

Interest $676 $383

Times Interest Earned Ratio = 7.0 times (rounded) = 8.4 times (rounded) =

Company B, with a times interest earned ratio of 8.4, is better able to meet interest payments as they become due than Company A with a ratio of 7.0. Difficulty: 3 Hard Topic: Analysis - Debt to Equity Ratio; Analysis - Return on Assets; Analysis - Times Interest Earned Ratio Learning Objective: 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Analyze; Evaluate AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making; FN Measurement/Keyboard Navigation

247) What is capital structure? Why would a company choose to borrow money rather than issue additional stock? Answer: Capital structure is the mixture of liabilities and stockholders' equity a business uses. One of the primary reasons a company chooses to borrow money relates to taxes. Interest expense incurred when borrowing money is tax deductible, while dividends paid to stockholders is not tax deductible. Due to tax considerations, debt can be a less costly form of financing. Difficulty: 2 Medium Topic: Financing Alternatives Learning Objective: 09-01 Explain financing alternatives. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 248) Why do some companies issue bonds rather than borrow money directly from a bank? Answer: A company that borrows by issuing bonds is effectively by-passing the bank and borrowing directly from the investing public, usually at a lower interest rate than in a bank loan. However, issuing bonds entails significant bond issue costs that often exceed 5% of the amount borrowed. For smaller loans, the additional bond issue costs exceed the savings from a lower interest rate, making it more economical to borrow from a bank. For loans of $20 million or more, the interest rate savings often exceed the additional bond issuance costs, making a bond issue more attractive. Difficulty: 2 Medium Topic: Financing Alternatives Learning Objective: 09-01 Explain financing alternatives. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

249) Contrast the following types of bonds: (a) Secured and unsecured. (b) Term and serial. (c) Callable and convertible. Answer: (a) Secured bonds are supported by assets pledged as collateral. Unsecured bonds, also referred to as debentures, are not backed by a specific asset. (b) Term bonds require payment of the full principal amount of the bond at a single maturity date. Serial bonds require payments in installments over a series of years. (c) Callable bonds allow the issuer to repay the bonds before their scheduled maturity date at a specified call price. Convertible bonds allow the investor to convert each bond into a specified number of shares of common stock. Difficulty: 2 Medium Topic: Types of Bonds Learning Objective: 09-04 Identify the characteristics of bonds. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 250) Explain how each of the columns in an amortization schedule is calculated, assuming the bonds are issued at a discount. How is the amortization schedule different if bonds are issued at a premium? Answer: Cash paid is calculated as the face amount of the bonds times the stated interest rate. Interest expense is the carrying value times the market rate. The difference between interest expense and the cash paid increases the carrying value of the bonds. At the maturity date, the carrying value will equal the face amount. The amortization schedule is similar when bonds are issued at a premium, except that the difference between interest expense and the cash paid decreases, rather than increases, the carrying value of the bonds over time. Difficulty: 2 Medium Topic: Recording Bonds Payable - Discount; Recording Bonds Payable - Premium Learning Objective: 09-05 Record the issuance of bonds and related interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

251) What are the potential risks and rewards of carrying additional debt? How does additional debt affect a company's return to investors? Answer: Additional debt increases risk. Failure to repay debt, or the interest associated with the debt, on a timely basis may result in default and perhaps even bankruptcy. Other things being equal, the higher the debt, the higher the risk of bankruptcy. Additional debt also offers potential rewards. If a company earns a return in excess of the cost of borrowing the funds, stockholders are provided with a total return greater than what could have been earned with equity funds alone. Unfortunately, borrowing is not always favorable. Sometimes the cost of borrowing the funds exceeds the returns they generate. If a company has returns in excess of the rate charged on borrowed funds, assuming additional debt will result in a higher return to investors. However, if returns should fall below the rate charged on borrowed funds, assuming additional debt will result in lower overall returns to investors. Difficulty: 3 Hard Topic: Analysis - Debt to Equity Ratio Learning Objective: 09-08 Assess the impact of long-term debt on risk and return. Bloom's: Evaluate AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation

Financial Accounting, 5e (Spiceland) Chapter 10 Stockholders' Equity 1) Assets plus liabilities equal stockholders' equity. Answer: FALSE Explanation: Assets equal liabilities plus stockholders' equity. Difficulty: 1 Easy Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 2) Paid-in Capital is the amount stockholders have invested in the company. Answer: TRUE Difficulty: 1 Easy Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 3) Retained Earnings is the amount stockholders have invested in the company. Answer: FALSE Explanation: Paid-in capital is the amount stockholders have invested in the company. Difficulty: 1 Easy Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

4) Angel investors are investors that focus on companies at or near bankruptcy. Answer: FALSE Explanation: Angel investors are wealthy individuals in the business community willing to risk investment funds on a promising business venture. Difficulty: 1 Easy Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 5) All publicly held corporations in the United States are regulated by the Securities and Exchange Commission. Answer: TRUE Difficulty: 1 Easy Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 6) Limited liability means that even in the event of bankruptcy, stockholders in a corporation can lose no more than the amount they invested in the company. Answer: TRUE Difficulty: 1 Easy Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

7) Owners in a sole proprietorship or a partnership can be held personally liable for debts the company has incurred, over and beyond the investment they have made. Answer: TRUE Difficulty: 1 Easy Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 8) A corporation has limited liability and attracting outside investment is easier relative to soleproprietorships and partnerships. Answer: TRUE Explanation: Two advantages of a corporation relative to sole-proprietorships and partnerships are (1) limited liability and (2) the ability to raise capital and transfer ownership. Difficulty: 2 Medium Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 9) A corporation has lower taxes and less paperwork relative to sole-proprietorships and partnerships. Answer: FALSE Explanation: A corporation has higher taxes and more paperwork relative to sole-proprietorships and partnerships. Difficulty: 2 Medium Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

10) An S Corporation allows a company to enjoy limited liability as a corporation, but tax treatment as a partnership. Answer: TRUE Difficulty: 1 Easy Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 11) Authorized stock is the number of shares that have been sold to investors. Answer: FALSE Explanation: Authorized stock is the total number of shares available to sell, stated in the company's articles of incorporation. Issued stock is the number of shares that have been sold to investors. Difficulty: 1 Easy Topic: Accounting for Common Stock Learning Objective: 10-02 Record the issuance of common stock. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 12) Outstanding stock is the number of shares held by investors. Answer: TRUE Explanation: Issued stock is the number of shares that have been sold to investors. Outstanding stock is the number of shares held by investors. Issued stock includes treasury stock. Outstanding stock excludes treasury stock. Difficulty: 1 Easy Topic: Accounting for Common Stock Learning Objective: 10-02 Record the issuance of common stock. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

13) Par value is the legal capital per share of stock that's assigned when the corporation is first established. Answer: TRUE Difficulty: 1 Easy Topic: Accounting for Common Stock Learning Objective: 10-02 Record the issuance of common stock. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 14) Par value has a direct relationship to the market value of the common stock. Answer: FALSE Explanation: Par value is the legal capital per share of stock that's assigned when the corporation is first established. Par value has no relationship to the market value of the common stock. Difficulty: 2 Medium Topic: Accounting for Common Stock Learning Objective: 10-02 Record the issuance of common stock. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 15) A company credits Additional Paid-in Capital for the portion of the cash proceeds above par value received for the issuance of stock. Answer: TRUE Difficulty: 2 Medium Topic: Accounting for Common Stock Learning Objective: 10-02 Record the issuance of common stock. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 16) The number of shares outstanding is equal to the number of shares issued by the company minus the number of the company's own shares that it has purchased. Answer: TRUE Difficulty: 1 Easy Topic: Accounting for Common Stock; Stockholders' Equity in the Balance Sheet Learning Objective: 10-02 Record the issuance of common stock.; 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

17) In the event a corporation is dissolved, common stockholders receive preference over preferred stockholders in the distribution of assets. Answer: FALSE Explanation: Preferred stockholders received preference over common stockholders in the distribution of assets in the event the corporation is dissolved. Difficulty: 2 Medium Topic: Accounting for Preferred Stock Learning Objective: 10-03 Understand unique features and recording of preferred stock. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 18) Convertible preferred stock allows the stockholder to convert shares of preferred stock into common stock at a specified conversion ratio. Answer: TRUE Difficulty: 1 Easy Topic: Accounting for Preferred Stock Learning Objective: 10-03 Understand unique features and recording of preferred stock. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 19) Cumulative preferred stock means that dividends accumulate interest during the year. Answer: FALSE Explanation: Cumulative preferred stock means shares receive priority for future dividends, if dividends are not paid in a given year. Difficulty: 1 Easy Topic: Accounting for Preferred Stock Learning Objective: 10-03 Understand unique features and recording of preferred stock. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

20) We usually record preferred stock as equity and report it in the stockholders' equity section of the balance sheet just above common stock. Answer: TRUE Difficulty: 2 Medium Topic: Stockholders' Equity in the Balance Sheet; Accounting for Preferred Stock Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity.; 10-03 Understand unique features and recording of preferred stock. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 21) Treasury stock is the purchase of a company's own issued stock. Answer: TRUE Difficulty: 1 Easy Topic: Accounting for Treasury Stock Learning Objective: 10-04 Account for treasury stock. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 22) If a company purchases shares of another company, it records this transaction as treasury stock. Answer: FALSE Explanation: If a company purchases shares of another company, it records this transaction as an investment and not as treasury stock. Difficulty: 2 Medium Topic: Accounting for Treasury Stock Learning Objective: 10-04 Account for treasury stock. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 23) Treasury stock purchases reduce the number of shares outstanding, thereby increasing earnings per share. Answer: TRUE Difficulty: 3 Hard Topic: Accounting for Treasury Stock; Analysis - Earnings Per Share Learning Objective: 10-04 Account for treasury stock.; 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 7 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

24) We record treasury stock at the cost of the shares acquired. Answer: TRUE Difficulty: 1 Easy Topic: Accounting for Treasury Stock Learning Objective: 10-04 Account for treasury stock. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 25) Treasury stock is a contra-equity account because treasury stock increases total stockholders' equity. Answer: FALSE Explanation: Treasury stock is a contra-equity account because treasury stock decreases total stockholders' equity. Difficulty: 3 Hard Topic: Stockholders' Equity in the Balance Sheet; Accounting for Treasury Stock; Statement of Stockholders' Equity Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity.; 10-04 Account for treasury stock. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 26) When we resell treasury stock, we report the difference between its cost and the cash received as an increase or a decrease in additional paid-in capital. Answer: TRUE Difficulty: 2 Medium Topic: Accounting for Treasury Stock Learning Objective: 10-04 Account for treasury stock. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 27) Retained earnings represent the earnings of the corporation that have not been distributed as dividends to stockholders. Answer: TRUE Difficulty: 1 Easy Topic: Retained Earnings Learning Objective: 10-05 Describe retained earnings and record cash dividends. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 8 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

28) The amount of retained earnings equals net income minus dividends for the current year. Answer: FALSE Explanation: The amount of retained earnings equals all net income, less all dividends, since the company began operations. Difficulty: 1 Easy Topic: Retained Earnings Learning Objective: 10-05 Describe retained earnings and record cash dividends. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 29) If a company has expenses that are more than revenues, the net loss decreases retained earnings. Answer: TRUE Difficulty: 3 Hard Topic: Retained Earnings Learning Objective: 10-05 Describe retained earnings and record cash dividends. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 30) Dividends are paid on all shares issued by the company including treasury stock. Answer: FALSE Explanation: Dividends are not paid on treasury shares purchased by the company. Difficulty: 1 Easy Topic: Cash Dividends Learning Objective: 10-05 Describe retained earnings and record cash dividends. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 31) Total assets, total liabilities, and total stockholders' equity do not change as a result of a stock dividend. Answer: TRUE Difficulty: 3 Hard Topic: Stock Dividends and Stock Splits Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation

32) Small stock dividends are recorded by debiting Stock Dividends for the par value per share. Answer: FALSE Explanation: Small stock dividends are recorded by debiting Stock Dividends for the market value, rather than the par value, per share. Difficulty: 2 Medium Topic: Stock Dividends and Stock Splits Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 33) No journal entry is made to record a stock split unless it is treated similar to a large stock dividend. Answer: TRUE Difficulty: 1 Easy Topic: Stock Dividends and Stock Splits Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 34) A stock split has no effect on the total of any account in stockholders' equity. Answer: TRUE Difficulty: 3 Hard Topic: Stock Dividends and Stock Splits Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 35) Common stock is listed before preferred stock in the balance sheet. Answer: FALSE Explanation: Preferred stock is listed before common stock in the balance sheet. Difficulty: 1 Easy Topic: Stockholders' Equity in the Balance Sheet Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

36) We can estimate the average purchase cost of treasury stock per share by dividing the treasury stock balance by the number of shares purchased. Answer: TRUE Difficulty: 1 Easy Topic: Stockholders' Equity in the Balance Sheet Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 37) The statement of stockholders' equity shows how each equity account changed during the year. Answer: TRUE Difficulty: 1 Easy Topic: Statement of Stockholders' Equity Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 38) The stockholders' equity section of the balance sheet shows how each equity account changed during the year. Answer: FALSE Explanation: The stockholders' equity section of the balance sheet presents the balance of each equity account at a point in time. The statement of stockholders' equity shows how each account changes during the period. Difficulty: 1 Easy Topic: Stockholders' Equity in the Balance Sheet Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

39) The return on equity measures the ability of company management to generate earnings from the resources that owners provide. Answer: TRUE Difficulty: 2 Medium Topic: Analysis - Return on Equity Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 40) We compute the return on equity ratio by dividing net income by ending stockholders' equity. Answer: FALSE Explanation: We compute the return on equity ratio by dividing net income by average stockholders' equity. Difficulty: 1 Easy Topic: Analysis - Return on Equity Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 41) Earnings per share (EPS) measures the net income earned per share of common stock outstanding. Answer: TRUE Difficulty: 2 Medium Topic: Analysis - Earnings Per Share Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

42) We calculate earnings per share as net income divided by the average shares outstanding during the period. Answer: TRUE Difficulty: 1 Easy Topic: Analysis - Earnings Per Share Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 43) Earnings per share is useful in comparing earnings performance across companies. Answer: FALSE Explanation: Earnings per share is useful in comparing earnings performance for the same company over time. Earnings per share cannot be used to compare across companies because of differences in the number of shares outstanding among companies. Difficulty: 2 Medium Topic: Analysis - Earnings Per Share Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 44) We calculate the PE ratio as the stock price divided by earnings per share so that both stock price and earnings are expressed on a per share basis. Answer: TRUE Difficulty: 1 Easy Topic: Analysis - Price-Earnings Ratio Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

45) Which of the following accounts is not reported in the stockholders' equity section of the balance sheet? A) Treasury Stock. B) Common Stock. C) Sales Revenue. D) Retained Earnings. Answer: C Difficulty: 2 Medium Topic: Characteristics of Corporations; Stockholders' Equity in the Balance Sheet Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership.; 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 46) Which of the following is a disadvantage of an S Corporation? A) Double Taxation B) Liability C) Restrictions on number of stockholders D) Inability to transfer ownership Answer: C Difficulty: 2 Medium Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 47) Which of the following stages of equity financing comes last in the traditional order of progression? A) Investment by friends and family of the founders. B) Investment by the founders of the business. C) Initial public offering (IPO). D) Outside investment by "angel" investors and venture capital firms. Answer: C Difficulty: 2 Medium Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 14 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

48) Which of the following stages of equity financing comes first in the traditional order of progression? A) Investment by friends and family of the founders. B) Initial Public Offering. C) Investment by the founders of the business. D) Outside investment by "angel" investors and venture capital firms. Answer: C Difficulty: 2 Medium Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 49) In terms of total sales, assets, and earnings, the dominant form of business organization is a: A) Sole proprietorship. B) Partnership. C) Corporation. D) Limited liability company (LLC). Answer: C Difficulty: 2 Medium Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 50) Common stockholders usually have all of the following rights except: A) To receive dividends when declared. B) To share in the distribution of assets. C) To elect board of directors. D) To participate in the day-to-day operations. Answer: D Difficulty: 1 Easy Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 15 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

51) All publicly held corporations are regulated by what government organization? A) The Financial Accounting Standards Board. B) The Commission on Accounting Procedures. C) The Accounting Principles Board. D) The Securities and Exchange Commission. Answer: D Difficulty: 1 Easy Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 52) Which of the following is a reason that a corporation would prefer to issue stock instead of bonds? A) Dividend payments can be deducted for income tax purposes but interest payments cannot. B) Expansion is accomplished without surrendering ownership control. C) The risk of going bankrupt is less. D) All of the other answer choices are correct. Answer: C Difficulty: 2 Medium Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 53) The articles of incorporation describe: A) The nature of the firm's business activities. B) The shares of stock to be issued. C) The initial board of directors. D) All of the other answer choices are correct. Answer: D Difficulty: 1 Easy Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

54) Advantages of the corporate form of business include which of the following? I. Double taxation II. Ability to raise capital III. Ability to transfer ownership IV. More paperwork V. Limited liability A) II. B) II., III., V. C) I., II., III. D) II., IV., V. Answer: B Difficulty: 1 Easy Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 55) Which of the following statements regarding the corporate form of business is correct? A) The disadvantages are that generating capital is difficult and that owners have limited liability. B) Disadvantages are that the business is subject to government regulations and double taxation on its income. C) One disadvantage is that ownership is easy to transfer. D) All of the other answer choices are correct. Answer: B Difficulty: 1 Easy Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

56) The disadvantages of the corporate form of business include: A) Ability to transfer ownership. B) Additional taxes. C) Limited liability. D) Ability to raise capital. Answer: B Difficulty: 1 Easy Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 57) The correct order from the smallest number of shares to the largest number of shares is: A) Authorized, issued, and outstanding. B) Outstanding, issued, and authorized. C) Issued, outstanding, and authorized. D) Issued, authorized, and outstanding. Answer: B Difficulty: 2 Medium Topic: Accounting for Common Stock Learning Objective: 10-02 Record the issuance of common stock. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 58) Authorized common stock refers to the total number of shares: A) Outstanding. B) Issued. C) Issued and outstanding. D) That can be issued. Answer: D Difficulty: 1 Easy Topic: Accounting for Common Stock Learning Objective: 10-02 Record the issuance of common stock. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

59) Issued stock refers to the number of shares: A) Outstanding plus treasury shares. B) Authorized. C) In the hands of stockholders. D) That may be issued under state law. Answer: A Difficulty: 1 Easy Topic: Accounting for Common Stock Learning Objective: 10-02 Record the issuance of common stock. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 60) Outstanding common stock refers to the total number of shares: A) Issued. B) Issued plus treasury stock. C) Issued less treasury stock. D) Authorized. Answer: C Difficulty: 1 Easy Topic: Accounting for Common Stock Learning Objective: 10-02 Record the issuance of common stock. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 61) Outstanding common stock specifically refers to: A) Stock that is performing well. B) Stock that has been authorized for issuance. C) Stock issued plus treasury stock. D) Stock in the hands of stockholders. Answer: D Difficulty: 1 Easy Topic: Accounting for Common Stock Learning Objective: 10-02 Record the issuance of common stock. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

62) The par value of shares issued is normally recorded in the: A) Additional Paid-in Capital account. B) Common Stock account. C) Retained Earnings account. D) Treasury Stock account. Answer: B Difficulty: 1 Easy Topic: Accounting for Common Stock Learning Objective: 10-02 Record the issuance of common stock. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 63) The par value of common stock represents: A) The amount received when the stock was issued. B) The liquidation value of a share. C) The market value of a share of stock. D) The legal capital per share of stock assigned when the corporation was first established. Answer: D Difficulty: 1 Easy Topic: Accounting for Common Stock Learning Objective: 10-02 Record the issuance of common stock. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

64) If a company issues 1,000 shares of $1 par value common stock for $20 per share, what would be the effect on the accounting equation? A) Increase assets and increase liabilities. B) Increase assets and increase revenue. C) Increase assets and increase stockholders' equity. D) Increase assets and decrease stockholders' equity. Answer: C Explanation: The journal entry would be: Cash Common Stock Additional Paid-in Capital

20,000 1,000 19,000

Difficulty: 3 Hard Topic: Accounting for Common Stock Learning Objective: 10-02 Record the issuance of common stock. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 65) If a company issues 1,000 shares of $1 par value common stock for $20 per share, which of the following accounts would be credited? A) Treasury Stock B) Cash C) Additional Paid-in Capital D) Retained Earnings Answer: C Explanation: The journal entry would be: Cash Common Stock Additional Paid-in Capital

20,000 1,000 19,000

66) When a company issues 25,000 shares of $1 par value common stock for $10 per share, the journal entry for this issuance would include: A) A debit to Cash for $25,000. B) A debit to Additional Paid-in Capital for $25,000. C) A credit to Common Stock for $250,000. D) A credit to Additional Paid-in Capital for $225,000. Answer: D Explanation: The journal entry would be: Cash Common Stock Additional Paid-in Capital

250,000 25,000 225,000

Difficulty: 3 Hard Topic: Accounting for Common Stock Learning Objective: 10-02 Record the issuance of common stock. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 67) When a company issues 25,000 shares of $1 par value common stock for $10 per share, the journal entry for this issuance would include: A) A debit to Cash for $25,000. B) A debit to Additional Paid-in Capital for $25,000. C) A credit to Additional Paid-in Capital for $250,000. D) A credit to Common Stock for $25,000. Answer: D Explanation: The journal entry would be: Cash Common Stock Additional Paid-in Capital

250,000 25,000 225,000

68) Wright Inc. issued 20,000 shares of $1 par value common stock for $80,000. The journal entry to record this issuance includes a: A) Credit to Common Stock for $80,000. B) Debit to Additional Paid-In Capital for $60,000. C) Credit to Cash for $80,000. D) Credit to Common Stock for $20,000. Answer: D Explanation: The journal entry would be: Cash Common Stock Additional Paid-in Capital

80,000 20,000 60,000

Difficulty: 3 Hard Topic: Accounting for Common Stock Learning Objective: 10-02 Record the issuance of common stock. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 69) Jade Jewelers issued 15,000 shares of $1 par value stock for $20 per share. What is true about the journal entry to record the issuance? A) Credit Common Stock $300,000. B) Credit Cash $300,000. C) Credit Common Stock $15,000. D) Debit Additional Paid-In Capital $285,000. Answer: C Explanation: The journal entry would be: Cash Common Stock Additional Paid-in Capital

300,000 15,000 285,000

70) South Beach Apparel issued 10,000 shares of $1 par value stock for $5 per share. What is true about the journal entry to record the issuance? A) Debit Common Stock $10,000. B) Credit Additional Paid-in Capital $10,000. C) Credit Common Stock $50,000. D) Credit Additional Paid-In Capital $40,000. Answer: D Explanation: The journal entry would be: Cash Common Stock Additional Paid-in Capital

50,000 10,000 40,000

Difficulty: 3 Hard Topic: Accounting for Common Stock Learning Objective: 10-02 Record the issuance of common stock. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 71) Hayes Corporation issues 100 shares of its $1 par value common stock for $15 per share. The entry to record the issuance will not include a: A) Debit to Cash $1,500. B) Credit to Additional Paid-In Capital $1,400. C) Credit to Common Stock of $100. D) All of the other answer choices are correct. Answer: D Explanation: The journal entry would be: Cash Common Stock Additional Paid-in Capital

1,500 100 1,400

72) Preferred stock is called preferred because it usually has two preferences over common stock. These preferences relate to: A) Payment of dividends and voting rights. B) Higher par value and payment of dividends. C) Distribution of assets if the corporation is dissolved and higher par value. D) Distribution of assets if the corporation is dissolved and payment of dividends. Answer: D Difficulty: 2 Medium Topic: Accounting for Preferred Stock Learning Objective: 10-03 Understand unique features and recording of preferred stock. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 73) Preferred stock: A) Is always recorded as a liability. B) Is always recorded as part of stockholders' equity. C) Can have features of both liabilities and stockholders' equity. D) Is not included in either liabilities or stockholders' equity. Answer: C Difficulty: 1 Easy Topic: Accounting for Preferred Stock Learning Objective: 10-03 Understand unique features and recording of preferred stock. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 74) Which of the following has the highest expected return to the investor? A) Common Stock. B) Preferred Stock. C) Bonds. D) They all have similar expected returns. Answer: A Difficulty: 2 Medium Topic: Accounting for Preferred Stock Learning Objective: 10-03 Understand unique features and recording of preferred stock. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

75) Which of the following has the lowest expected return to the investor? A) Bonds. B) Preferred Stock. C) Common Stock. D) They all have similar expected returns. Answer: A Difficulty: 2 Medium Topic: Accounting for Preferred Stock Learning Objective: 10-03 Understand unique features and recording of preferred stock. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 76) Which of the following is the most likely to have voting rights? A) Common Stock. B) Preferred Stock. C) Bonds. D) They all have similar voting rights. Answer: A Difficulty: 2 Medium Topic: Accounting for Preferred Stock Learning Objective: 10-03 Understand unique features and recording of preferred stock. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 77) Which of the following financing alternatives has the highest preference for dividends/interest payments? A) Common Stock. B) Preferred Stock. C) Bonds. D) The other answer choices have equal preference. Answer: C Difficulty: 2 Medium Topic: Accounting for Preferred Stock Learning Objective: 10-03 Understand unique features and recording of preferred stock. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

78) Which of the following is not a potential feature of preferred stock? A) Convertible. B) Redeemable. C) Cumulative. D) They all are potential features of preferred stock. Answer: D Difficulty: 2 Medium Topic: Accounting for Preferred Stock Learning Objective: 10-03 Understand unique features and recording of preferred stock. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 79) A company issued 1,000 shares of $1 par value preferred stock for $5 per share. What is true about the journal entry to record the issuance? A) Debit Preferred Stock $5,000. B) Credit Cash $5,000. C) Credit Preferred Stock $5,000. D) Credit Additional Paid-In Capital $4,000. Answer: D Explanation: The journal entry would be: Cash Preferred Stock Additional Paid-in Capital

5,000 1,000 4,000

80) The Surf's Up issues 1,000 shares of 6%, $100 par value preferred stock at the beginning of 2020. All remaining shares are common stock. The company was not able to pay dividends in 2020, but plans to pay dividends of $18,000 in 2021. Assuming the preferred stock is cumulative, how much of the $18,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2021? A) $6,000 to preferred stockholders and $12,000 to common stockholders. B) $18,000 to preferred stockholders and $0 to common stockholders. C) $12,000 to preferred stockholders and $6,000 to common stockholders. D) $9,000 to preferred stockholders and $9,000 to common stockholders. Answer: C Explanation: Preferred dividends in arrears from 2020 Preferred dividends for 2021 (1,000 shares ×6% × $100 par value) Remaining dividends to common stockholders Total dividends

6,000 6,000

6,000 $ 18,000

81) The Surf's Up issues 1,000 shares of 6%, $100 par value preferred stock at the beginning of 2020. All remaining shares are common stock. The company was not able to pay dividends in 2020, but plans to pay dividends of $18,000 in 2021. Assuming the preferred stock is noncumulative, how much of the $18,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2021? A) $6,000 to preferred stockholders and $12,000 to common stockholders. B) $18,000 to preferred stockholders and $0 to common stockholders. C) $12,000 to preferred stockholders and $6,000 to common stockholders. D) $9,000 to preferred stockholders and $9,000 to common stockholders. Answer: A Explanation: Preferred dividends in arrears from 2020 are lost $ 0 Preferred dividends for 2021 (1,000 shares × 6% × $100 6,000 par value) Remaining dividends to common stockholders 12,000 Total dividends $ 18,000 Difficulty: 3 Hard Topic: Accounting for Preferred Stock Learning Objective: 10-03 Understand unique features and recording of preferred stock. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

82) California Adventures issues 5,000 shares of 8%, $100 par value preferred stock at the beginning of 2020. All remaining shares are common stock. The company was not able to pay dividends in 2020, but plans to pay dividends of $100,000 in 2021. Assuming the preferred stock is cumulative, how much of the $100,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2021? A) $40,000 to preferred stockholders and $60,000 to common stockholders. B) $80,000 to preferred stockholders and $20,000 to common stockholders. C) $20,000 to preferred stockholders and $80,000 to common stockholders. D) $100,000 to preferred stockholders and $0 to common stockholders. Answer: B Explanation: Preferred dividends in arrears from 2020 Preferred dividends for 2021 (5,000 shares × 8% × $100 par value) Remaining dividends to common stockholders Total dividends

40,000 40,000

20,000 $ 100,000

83) California Adventures issues 5,000 shares of 8%, $100 par value preferred stock at the beginning of 2020. All remaining shares are common stock. The company was not able to pay dividends in 2020, but plans to pay dividends of $100,000 in 2021. Assuming the preferred stock is noncumulative, how much of the $100,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2021? A) $40,000 to preferred stockholders and $60,000 to common stockholders. B) $80,000 to preferred stockholders and $20,000 to common stockholders. C) $20,000 to preferred stockholders and $80,000 to common stockholders. D) $100,000 to preferred stockholders and $0 to common stockholders. Answer: A Explanation: Preferred dividends in arrears from 2020 are lost Preferred dividends for 2021 (5,000 shares × 8% × $100 par value) Remaining dividends to common stockholders Total dividends

0 40,000

60,000 $ 100,000

Difficulty: 3 Hard Topic: Accounting for Preferred Stock Learning Objective: 10-03 Understand unique features and recording of preferred stock. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 84) Treasury Stock is normally reported as: A) A reduction of total stockholders' equity. B) An asset account. C) A liability account. D) An expense account. Answer: A Difficulty: 1 Easy Topic: Stockholders' Equity in the Balance Sheet; Accounting for Treasury Stock; Statement of Stockholders' Equity Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity.; 10-04 Account for treasury stock. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

85) When treasury stock is resold at a price above cost: A) A gain account is credited. B) A loss is reported. C) A revenue account is credited. D) Additional Paid-in Capital is increased. Answer: D Difficulty: 3 Hard Topic: Accounting for Treasury Stock Learning Objective: 10-04 Account for treasury stock. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation 86) When treasury stock is acquired, what is the effect on total stockholders' equity? A) Decrease. B) Increase. C) No effect. D) Cannot determine from the given information. Answer: A Difficulty: 3 Hard Topic: Accounting for Treasury Stock Learning Objective: 10-04 Account for treasury stock. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 87) When an investment is made in another corporation's common stock, what is the effect on total stockholders' equity? A) Decrease. B) Increase. C) No effect. D) Cannot determine from the given information. Answer: C Difficulty: 3 Hard Topic: Accounting for Treasury Stock Learning Objective: 10-04 Account for treasury stock. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation

88) When treasury stock is acquired, what is the effect on assets and stockholders' equity? A) Assets and stockholders' equity increase. B) Assets and stockholders' equity decrease. C) Assets increase and stockholders' equity decrease. D) Assets decrease and stockholders' equity increase. Answer: B Difficulty: 3 Hard Topic: Accounting for Treasury Stock Learning Objective: 10-04 Account for treasury stock. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 89) Treasury Stock: A) Has a normal credit balance. B) Decreases stockholders' equity. C) Is recorded as an investment. D) Increases stockholders' equity. Answer: B Difficulty: 3 Hard Topic: Accounting for Treasury Stock Learning Objective: 10-04 Account for treasury stock. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation 90) Which of the following statements about treasury stock transactions is true? A) Treasury stock is recorded as an asset by the acquiring company. B) Only losses on the sale of treasury stock are recorded in the income statement. C) Stockholders' equity is reduced when treasury stock is acquired. D) Gains and losses on the sale of treasury stock are recorded in the income statement. Answer: C Difficulty: 3 Hard Topic: Accounting for Treasury Stock Learning Objective: 10-04 Account for treasury stock. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Measurement/Keyboard Navigation

91) Which of the following is TRUE regarding the accounting for treasury stock? A) Treasury stock is reported on the balance sheet in the equity section. B) The purchase and sale of treasury stock has no impact on the income statement. C) Treasury stock represents a negative equity account. D) All of the other answer choices are correct. Answer: D Difficulty: 2 Medium Topic: Stockholders' Equity in the Balance Sheet; Accounting for Treasury Stock Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity.; 10-04 Account for treasury stock. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 92) What would be the impact on the accounting equation when a company acquires treasury stock? A) Increase assets and increase stockholders' equity. B) Decrease assets and increase stockholders' equity. C) Decrease assets and decrease stockholders' equity. D) No effect on the accounting equation. Answer: C Difficulty: 3 Hard Topic: Accounting for Treasury Stock Learning Objective: 10-04 Account for treasury stock. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 93) The corporation's own stock that has been issued and then bought back by the company is referred to as: A) Preferred Stock. B) Authorized Stock. C) Treasury Stock. D) Common Stock. Answer: C Difficulty: 1 Easy Topic: Accounting for Treasury Stock Learning Objective: 10-04 Account for treasury stock. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

94) Why would a corporation purchase its own stock? A) To distribute surplus cash without paying dividends. B) To boost earnings per share. C) To satisfy employee stock ownership plans. D) All of the other answer choices are correct. Answer: D Difficulty: 2 Medium Topic: Accounting for Treasury Stock Learning Objective: 10-04 Account for treasury stock. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 95) The purchase of treasury stock can boost earnings per share by: A) Increasing the number of shares outstanding. B) Increasing profits. C) Reducing the number of shares outstanding. D) Decreasing the company's obligation to pay dividends. Answer: C Difficulty: 2 Medium Topic: Accounting for Treasury Stock Learning Objective: 10-04 Account for treasury stock. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 96) A company currently has 200,000 shares issued and 190,000 shares outstanding. If the company purchases 20,000 shares of treasury stock, what amount of shares will be outstanding? A) 170,000. B) 220,000. C) 210,000. D) 180,000. Answer: A Difficulty: 2 Medium Topic: Accounting for Treasury Stock Learning Objective: 10-04 Account for treasury stock. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

97) When treasury stock is sold for more than the company originally paid to purchase the shares, the difference: A) Increases net income. B) Increases stockholders' equity. C) Has no effect on net income or stockholders' equity. D) Decreases net income and decreases stockholders' equity. Answer: B Difficulty: 3 Hard Topic: Accounting for Treasury Stock Learning Objective: 10-04 Account for treasury stock. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 98) Crossroads Mall had 100,000 outstanding shares of common stock. On June 16, 2021, Crossroads bought back 20,000 shares of its own stock at $30 per share. On July 23, 2021, Crossroads resold 10,000 shares at $28 per share. What was the net effect on the accounting equation as a result of the two treasury stock transactions? A) Increase in assets and decrease in stockholders' equity. B) Decrease in assets and increase in stockholders' equity. C) Increase in assets and increase in stockholders' equity. D) Decrease in assets and decrease in stockholders' equity. Answer: D Explanation: The journal entries would be: June 16 Treasury Stock Cash July 23 Cash (10,000 × $28) Additional Paid-in Capital Treasury Stock (10,000 × $30)

600,000 600,000 280,000 20,000 300,000

99) On December 2, Coley Corp. acquired 1,000 shares of its $2 par value common stock for $27 each. On December 20, Coley Corp. resold 400 shares for $15 each. Which of the following is correct regarding the journal entry for the resold shares? A) Debit Cash $15,000. B) Credit Treasury Stock $10,800. C) Credit Additional Paid in Capital $5,200. D) Credit Treasury Stock $6,000. Answer: B Explanation: The journal entry for the resold shares would be: Cash (400 × $15) Additional Paid-in Capital Treasury Stock (400 ×$27)

6,000 4,800 10,800

100) On December 2, Coley Corp. acquired 1,000 shares of its $2 par value common stock for $27 each. On December 20, Coley Corp. resold 400 shares for $30 each. Which of the following is correct regarding the effect of the reselling of shares on the accounting equation? A) Assets decrease. B) Liabilities decrease. C) Expenses increase. D) Stockholders' Equity increases. Answer: D Explanation: The entry for the resale of shares would be: Cash (400 × $30) Treasury Stock (400 × $27) Additional Paid-in Capital

12,000 10,800 1,200

Difficulty: 3 Hard Topic: Accounting for Treasury Stock Learning Objective: 10-04 Account for treasury stock. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 101) A company acquires 1,000 shares of its own $1 par common stock for $15 per share. This purchase would be recorded with a: A) Credit to Treasury Stock for $1,000 B) Debit to Additional Paid-In Capital for $14,000 C) Credit to Treasury Stock for $15,000 D) Debit to Treasury Stock for $15,000 Answer: D Explanation: The entry for the purchase of Treasury Stock would be: Treasury Stock Cash

15,000 15,000

102) A company resells 400 shares of its own common stock for $20 per share. The company had acquired these shares two months before for $15 per share. The resale of this stock would be recorded with a: A) Credit to Treasury Stock for $8,000 B) Debit to Additional Paid-In Capital for $2,000 C) Debit to Common Stock for $8,000 D) Credit to Additional Paid-In Capital for $2,000 Answer: D Explanation: The entry for the resale of the shares would be: Cash (400 × $20) Treasury Stock (400 × $15) Additional Paid-in Capital

8,000 6,000 2,000

Difficulty: 3 Hard Topic: Accounting for Treasury Stock Learning Objective: 10-04 Account for treasury stock. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 103) On February 22, Brett Corporation acquired 200 shares of its $5 par value common stock for $25 each. On March 15, the company resold 70 shares for $30 each. What is true of the entry for reselling the shares? A) Credit Cash $1,750. B) Credit Additional Paid in Capital $350. C) Debit Treasury Stock $1,750. D) Credit Treasury Stock $2,100. Answer: B Explanation: The entry to resell the shares would be: Cash (70 × $30) Treasury Stock (70 × $25) Additional Paid-in Capital

2,100 1,750 350

104) Retained Earnings represent a company's: A) Net income less dividends since the company first began operations. B) Undistributed net assets. C) Extra paid-in capital. D) Undistributed cash. Answer: A Difficulty: 1 Easy Topic: Retained Earnings Learning Objective: 10-05 Describe retained earnings and record cash dividends. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 105) The Retained Earnings balance reported in the balance sheet typically is not affected by: A) Net income. B) Net loss. C) Dividends paid. D) Stock splits. Answer: D Difficulty: 2 Medium Topic: Stockholders' Equity in the Balance Sheet; Retained Earnings Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity.; 10-05 Describe retained earnings and record cash dividends. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 106) The Retained Earnings balance reported in the balance sheet typically is affected by: A) Net income. B) Net loss. C) Dividends paid. D) All of the other answer choices are correct. Answer: D Difficulty: 2 Medium Topic: Stockholders' Equity in the Balance Sheet; Retained Earnings Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity.; 10-05 Describe retained earnings and record cash dividends. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

107) The balance of Retained Earning at the end of the year represents: A) Current year's profits less payments to owners. B) Total earnings less payments to owners over the life of the company. C) Total contributions from owners less withdrawals over the life of the company. D) Total earnings over the life of the company. Answer: B Difficulty: 1 Easy Topic: Retained Earnings Learning Objective: 10-05 Describe retained earnings and record cash dividends. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 108) Retained Earnings normally has an account balance that: A) Has a normal debit balance. B) Decreases stockholders' equity. C) Is equal to the balance in cash. D) Increases stockholders' equity. Answer: D Difficulty: 2 Medium Topic: Retained Earnings Learning Objective: 10-05 Describe retained earnings and record cash dividends. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 109) Journal entries to record cash dividends are made on the: A) Declaration date, record date, and payment date. B) Record date and payment date. C) Declaration date and payment date. D) Declaration date and record date. Answer: C Difficulty: 1 Easy Topic: Cash Dividends Learning Objective: 10-05 Describe retained earnings and record cash dividends. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

110) On June 1, the board of directors declares a cash dividend to be paid on June 30 to stockholders of record on June 15. On which date would the company record a credit to the Dividends Payable account? A) June 30 B) June 15 C) June 1 D) Dividends Payable is never credited Answer: C Difficulty: 1 Easy Topic: Cash Dividends Learning Objective: 10-05 Describe retained earnings and record cash dividends. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

111) The board of directors of Capstone Inc. declared a $0.60 per share cash dividend on its $1 par common stock. On the date of declaration, there were 50,000 shares authorized, 20,000 shares issued, and 5,000 shares held as treasury stock. What is the entry when the dividends are declared? A. B. C. D.

Dividends Dividends Payable Dividends Cash Dividends Dividends Payable Dividends Cash

9,000 9,000 9,000 9,000 12,000 12,000 12,000 12,000

A) Option A B) Option B C) Option C D) Option D Answer: A Explanation: Dividends [(20,000 - 5,000) × $0.60] Dividends Payable

9,000 9,000

112) The board of directors of Capstone Inc. declared a $0.60 per share cash dividend on its $1 par common stock. On the date of declaration, there were 50,000 shares authorized, 20,000 shares issued, and 5,000 shares held as treasury stock. Assuming the dividends were declared on June 1, what is the entry on June 30 to record the payment of cash dividends? A. B. C. D.

Dividends Dividends Payable Dividends Payable Cash Dividends Dividends Payable Dividends Payable Cash

9,000 9,000 9,000 9,000 12,000 12,000 12,000 12,000

A) Option A. B) Option B. C) Option C. D) Option D. Answer: B Explanation: Dividends Payable [(20,000 - 5,000) × $.60] Cash

9,000 9,000

113) The following amounts represent totals from the first three years of operations. Calculate the balance of Retained Earnings at the end of 2021.

Net Income (loss) Net Cash Flows Dividends Issuance of Stock

2019 $ 1,200 $ 500 $ 200 $ 2,000

2020 $ (500) $ 300 $ 0 $ 0

2021 $ 2,300 $ 2,800 $ 200 $ 0

A) $2,600. B) $4,600. C) $3,100. D) $3,500. Answer: A Explanation: ($1,200 − $500 + $2,300) − $200 − $200 = $2,600. Difficulty: 3 Hard Topic: Retained Earnings Learning Objective: 10-05 Describe retained earnings and record cash dividends. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 114) The ending Retained Earnings balance of Lambert Inc. increased by $1.5 million from the beginning of the year. The company's net income earned during the year is $3.5 million. What is the amount of dividends Lambert Inc. declared and paid? A) $1.5 million. B) $3.5 million. C) $2.0 million. D) $5.0 million. Answer: C Explanation: Net income minus dividends equals the change in retained earnings. Difficulty: 3 Hard Topic: Retained Earnings; Cash Dividends Learning Objective: 10-05 Describe retained earnings and record cash dividends. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

115) Over the first four years of the company's life, the company earned the following net income (loss): $6,000; $3,000; $6,000, and ($2,000). If the company's ending retained earnings is $10,000 after year 4, what is the average amount of dividends paid per year? A) $3,000. B) $7,000. C) $0. D) $750. Answer: D Explanation: ($6,000 + $3,000 + $6,000 − $2,000) = $13,000 − $10,000 = $3,000/4 = $750. Difficulty: 3 Hard Topic: Retained Earnings; Cash Dividends Learning Objective: 10-05 Describe retained earnings and record cash dividends. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 116) Fashion, Inc. had a Retained Earnings balance of $12,000 at December 31, 2021. The company had an average income of $7,500 over the next 3 years, and an ending Retained Earnings balance of $15,000 at December 31, 2024. What was the total amount of dividends paid over the last three years? A) $4,500. B) $6,500. C) $19,500. D) $27,000. Answer: C Explanation: Beginning RE + Net income − Dividends = Ending RE. $12,000 + $22,500 ($7,500 × 3) − Dividends = $15,000. Dividends = $19,500. Difficulty: 3 Hard Topic: Retained Earnings; Cash Dividends Learning Objective: 10-05 Describe retained earnings and record cash dividends. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

117) Given the information below, what was the amount of Dividends in the current period? Beginning Retained Earnings = $150,000. Increase in Cash = $40,000. Ending Retained Earnings = $200,000. Issuance of Common Stock = $50,000. Net Income = $160,000. A) $90,000. B) $60,000. C) $110,000. D) $150,000. Answer: C Explanation: Beginning RE + Net income − Dividends = Ending RE. $150,000 + $160,000 − $X = $200,000. Dividends = $110,000. Difficulty: 3 Hard Topic: Retained Earnings; Cash Dividends Learning Objective: 10-05 Describe retained earnings and record cash dividends. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 118) A noncash asset that is distributed to stockholders is referred to as a: A) Treasury dividend. B) Property dividend. C) Preferred dividend. D) Real dividend. Answer: B Difficulty: 1 Easy Topic: Cash Dividends Learning Objective: 10-05 Describe retained earnings and record cash dividends. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

119) Both cash dividends and stock dividends: A) Reduce total assets. B) Reduce total liabilities. C) Reduce total stockholders' equity. D) Reduce retained earnings. Answer: D Difficulty: 3 Hard Topic: Cash Dividends; Stock Dividends and Stock Splits Learning Objective: 10-05 Describe retained earnings and record cash dividends.; 10-06 Explain the effect of stock dividends and stock splits. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 120) The declaration and issuance of a stock dividend: A) Does not change total assets, liabilities, or total stockholders' equity. B) Decreases total stockholders' equity and increases common stock. C) Decreases assets and decreases total stockholders' equity. D) Does not change retained earnings or paid-in capital. Answer: A Difficulty: 3 Hard Topic: Stock Dividends and Stock Splits Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 121) The issuer of a 100% common stock dividend (large stock dividend) to common stockholders should debit stock dividends for an amount equal to the A) Book value of the shares issued. B) Par value of the shares issued. C) Market value of the shares issued. D) Minimum legal requirements. Answer: B Difficulty: 2 Medium Topic: Stock Dividends and Stock Splits Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

122) The issuer of a 100% common stock dividend (large stock dividend) to common stockholders should credit common stock for an amount equal to the A) Book value of the shares issued. B) Par value of the shares issued. C) Market value of the shares issued. D) Minimum legal requirements. Answer: B Difficulty: 2 Medium Topic: Stock Dividends and Stock Splits Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 123) The issuer of a 5% common stock dividend (small stock dividend) to common stockholders should debit stock dividends for an amount equal to the A) Book value of the shares issued. B) Par or stated value of the shares issued. C) Market value of the shares issued. D) Minimum legal requirements. Answer: C Difficulty: 2 Medium Topic: Stock Dividends and Stock Splits Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 124) The entry to record a large stock dividend would include a: A) Debit to Additional Paid-in Capital. B) Debit to Common Stock. C) Debit to Stock Dividends. D) Credit to Stock Dividends. Answer: C Difficulty: 2 Medium Topic: Stock Dividends and Stock Splits Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

125) The issuer of a 5% common stock dividend (small stock dividend) to common stockholders should credit common stock for an amount equal to the A) Book value of the shares issued. B) Par or stated value of the shares issued. C) Market value of the shares issued. D) Minimum legal requirements. Answer: B Difficulty: 2 Medium Topic: Stock Dividends and Stock Splits Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 126) A feature common to both stock splits and stock dividends is A) That there is no effect on total stockholders' equity. B) A reduction in the contributed capital of a corporation. C) A transfer to earned capital of a corporation. D) An increase in total liabilities of a corporation. Answer: A Difficulty: 3 Hard Topic: Stock Dividends and Stock Splits Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 127) Large stock dividends and stock splits are issued primarily to: A) Lower the trading price of the stock per share. B) Increase the number of authorized shares. C) Increase legal capital. D) Increase the number of outstanding shares. Answer: A Difficulty: 2 Medium Topic: Stock Dividends and Stock Splits Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

128) The Common Stock account in a company's balance sheet is measured as: A) The number of common shares outstanding × the stock's par value per share. B) The number of common shares outstanding × the stock's current market value per share. C) The number of common shares issued × the stock's par value per share. D) The number of common shares issued × the stock's current market value per share. Answer: C Difficulty: 2 Medium Topic: Stockholders' Equity in the Balance Sheet Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 129) The stockholders' equity section in the balance sheet shows: A) The ending balance in each stockholders' equity account. B) How each equity account changed over time. C) The average balance in each stockholders' equity account. D) More information than the statement of stockholders' equity. Answer: A Difficulty: 1 Easy Topic: Stockholders' Equity in the Balance Sheet Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 130) The statement of stockholders' equity shows: A) Only the ending balance in each stockholders' equity account. B) How each equity account changed over time. C) Only the beginning balance in each stockholders' equity account. D) Less information than the stockholders' equity section in the balance sheet. Answer: B Difficulty: 1 Easy Topic: Statement of Stockholders' Equity Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

131) The statement of stockholders' equity shows: A) Only the ending balance in each stockholders' equity account. B) More information than the stockholders' equity section in the balance sheet. C) Only the beginning balance in each stockholders' equity account. D) Less information than the stockholders' equity section in the balance sheet. Answer: B Difficulty: 1 Easy Topic: Statement of Stockholders' Equity Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 132) How does the stockholders' equity section in the balance sheet differ from the statement of stockholders' equity? A) The stockholders' equity section is more detailed than the statement of stockholders' equity. B) The stockholders' equity section shows balances at a point in time; whereas, the statement of stockholders' equity shows activity over a period of time. C) The stockholders' equity section shows activity over a period of time; whereas, the statement of stockholders' equity is at a point time. D) There are no differences between them. Answer: B Difficulty: 2 Medium Topic: Stockholders' Equity in the Balance Sheet; Statement of Stockholders' Equity Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

133) Clothing Emporium was organized on January 1, 2021. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2021, Clothing Emporium had the following transactions relating to stockholders' equity: Issued 30,000 shares of common stock at $7 per share. Issued 20,000 shares of common stock at $8 per share. Reported a net income of $100,000. Paid dividends of $50,000. What is the total amount recorded in the Common Stock account at the end of 2021? A) $420,000. B) $370,000. C) $470,000. D) $250,000. Answer: D Explanation: (30,000 × $5) + (20,000 × $5) = $250,000. Difficulty: 3 Hard Topic: Stockholders' Equity in the Balance Sheet Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

134) Clothing Emporium was organized on January 1, 2021. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2021, Clothing Emporium had the following transactions relating to stockholders' equity: Issued 30,000 shares of common stock at $7 per share. Issued 20,000 shares of common stock at $8 per share. Reported a net income of $100,000. Paid dividends of $50,000. What is total paid-in capital at the end of 2021? A) $420,000. B) $370,000. C) $470,000. D) $320,000. Answer: B Explanation: [(30,000 × $7) + (20,000 × $8)] = $370,000. Difficulty: 3 Hard Topic: Stockholders' Equity in the Balance Sheet Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

135) Clothing Emporium was organized on January 1, 2021. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2021, Clothing Emporium had the following transactions relating to stockholders' equity: Issued 30,000 shares of common stock at $7 per share. Issued 20,000 shares of common stock at $8 per share. Reported a net income of $100,000. Paid dividends of $50,000. What is the ending balance in the Retained Earnings account at the end of 2021? A) $50,000. B) $370,000. C) $420,000. D) $100,000. Answer: A Explanation: $100,000 − $50,000 = $50,000. Difficulty: 3 Hard Topic: Stockholders' Equity in the Balance Sheet Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

136) Clothing Emporium was organized on January 1, 2021. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2021, Clothing Emporium had the following transactions relating to stockholders' equity: Issued 30,000 shares of common stock at $7 per share. Issued 20,000 shares of common stock at $8 per share. Reported a net income of $100,000. Paid dividends of $50,000. What is the total stockholders' equity at the end of 2021? A) $420,000. B) $370,000. C) $470,000. D) $250,000. Answer: A Explanation: Common Stock (50,000 × $5) + Additional Paid-in Capital [(30,000 × $2) + (20,000 × $3)] + Net Income ($100,000) − Dividends ($50,000) = $420,000. Difficulty: 3 Hard Topic: Stockholders' Equity in the Balance Sheet Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

137) Roberto Designers was organized on January 1, 2021. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2021, Roberto had the following transactions relating to stockholders' equity: Issued 10,000 shares of common stock at $7 per share. Issued 20,000 shares of common stock at $8 per share. Reported a net income of $100,000. Paid dividends of $50,000. Purchased 3,000 shares of treasury stock at $10 (part of the 20,000 shares issued at $8). What is the balance in the Treasury Stock account at the end of 2021? A) $160,000. B) $260,000. C) $30,000. D) $250,000. Answer: C Explanation: (3,000 × $10) = $30,000. Difficulty: 3 Hard Topic: Stockholders' Equity in the Balance Sheet Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

138) Roberto Designers was organized on January 1, 2021. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2021, Roberto had the following transactions relating to stockholders' equity: Issued 10,000 shares of common stock at $7 per share. Issued 20,000 shares of common stock at $8 per share. Reported a net income of $100,000. Paid dividends of $50,000. Purchased 3,000 shares of treasury stock at $10 (part of the 20,000 shares issued at $8). What is total stockholders' equity at the end of 2021? A) $270,000. B) $300,000. C) $250,000. D) $200,000. Answer: C Explanation: Common stock (at par) (30,000 × $5) Additional paid-in capital [(10,000 × $2) + (20,000 × $3)] Net income Dividends Treasury stock (3,000 × $10)

$ 150,000 80,000 100,000 (50,000) (30,000) $ 250,000

Difficulty: 3 Hard Topic: Stockholders' Equity in the Balance Sheet Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

139) Why doesn't stockholders' equity equal the market value of equity? A) Stockholders' equity usually does equal the market value of equity. B) Investors tend to incorrectly price the market value of equity. C) It's related to the use of historical cost to report many long-term assets and the expensing of value generating costs such as research and development and advertising. D) It's due to incorrect entries prepared by accountants. Answer: C Difficulty: 3 Hard Topic: Stockholders' Equity in the Balance Sheet Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 140) The balance sheet of California Clothing reports total equity of $600,000 and $700,000 at the beginning and end of the year, respectively. Net income and sales for the year are $65,000 and $1,300,000, respectively. What is California Clothing's return on equity? A) 10%. B) 20%. C) 200%. D) 5%. Answer: A Explanation: $65,000/[($600,000 + $700,000)/2] = 10%. Difficulty: 3 Hard Topic: Analysis - Return on Equity Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

141) Western Wear reports net income and sales for the year of $65,000 and $1,300,000, respectively. Return on equity is 10%. What is Western Wear's average Stockholders' Equity for the year? A) $650,000. B) $13,000,000. C) $682,500. D) 5%. Answer: A Explanation: $65,000/10% = $650,000. Difficulty: 3 Hard Topic: Analysis - Return on Equity Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 142) The balance sheet of Sand Sportswear reports total equity of $500,000 and $650,000 at the beginning and end of the year, respectively. The return on equity for the year is 20%. What is Sand Sportswear's net income for the year? A) $100,000. B) $130,000. C) $2,875,000. D) $115,000. Answer: D Explanation: Net income divided by average total equity = 20%. Average total equity = $575,000 [($500,000 + $650,000)/2]; therefore, net income must be $115,000 ($575,000 × 20%). Difficulty: 3 Hard Topic: Analysis - Return on Equity Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

143) Dividend Yield is calculated as: A) Dividends per share divided by the stock price. B) Net income divided by average stockholders' equity. C) The stock price divided by dividends per share. D) Dividends divided by stockholders' equity. Answer: A Difficulty: 1 Easy Topic: Analysis - Dividend Yield Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 144) Beach Boards reports dividends per share of $1.40 and net income for the year of $150,000. The current stock price is $40.00. What is Beach Boards' dividend yield? A) 1.2%. B) 26.7%. C) 4.0%. D) 3.5%. Answer: D Explanation: ($1.40/$40.00) = .035. Difficulty: 3 Hard Topic: Analysis - Dividend Yield Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

145) Blaylock Industries reports dividends per share of $1.40 and net income for the year of $150,000. Dividend yield is 3.5%. What is Blaylock 's current stock price? A) $23.82. B) $15.00. C) $35.00. D) $40.00 Answer: D Explanation: ($1.40/0.035) = $40.00. Difficulty: 3 Hard Topic: Analysis - Dividend Yield Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 146) Financial information for Accessories Unlimited includes the following selected data:

Dividends (in millions) Shares outstanding (in millions) Stock price

75 300 $ 20.00

What is the company's dividend yield? A) 1.25%. B) 10.0%. C) 5.0%. D) 2.5%. Answer: A Explanation: ($75 ÷ 300)/$20.00 = 0.0125 or 1.25%. Difficulty: 3 Hard Topic: Analysis - Dividend Yield Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

147) Financial information for Accessories Unlimited includes the following selected data: Net income (in millions) Shares outstanding (in millions) Stock price

150 300 $ 20.00

What is the company's earnings per share? A) $0.50. B) $0.25. C) $2.00. D) $0.05. Answer: A Explanation: $150 ÷ 300 = $0.50. Difficulty: 2 Medium Topic: Analysis - Earnings Per Share Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 148) Financial information for Accessories Unlimited includes the following selected data: Net income (in millions) Shares outstanding (in millions) Stock price

150 300 $ 20.00

What is the company's price-earnings ratio? A) 20.0. B) 40.0. C) 60.0. D) 80.0. Answer: B Explanation: $20 ÷ $0.50* = 40.0 *Earnings per share = $150 ÷ 300 = $0.50. Difficulty: 3 Hard Topic: Analysis - Price-Earnings Ratio Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

149) Return on equity is calculated as: A) Net income divided by average stockholders' equity. B) Net income divided by ending stockholders' equity. C) Net income divided by average market value of equity. D) Net income divided by ending market value of equity. Answer: A Difficulty: 1 Easy Topic: Analysis - Return on Equity Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 150) Earnings per share (EPS): A) Is useful in comparing earnings performance across companies. B) Is useful in comparing earnings performance for the same company over time. C) Is useful in both comparing earnings performance across companies and in comparing earnings performance for the same company over time. D) Is not useful in comparing earnings performance across companies or in comparing earnings performance for the same company over time. Answer: B Difficulty: 2 Medium Topic: Analysis - Earnings Per Share Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

151) Which of the following statements is not true regarding earnings per share? A) Earnings per share is useful in comparing earnings performance across companies at the same point in time. B) Earnings per share is useful in comparing earnings performance for the same company over time. C) Earnings per share is calculated as net income minus preferred stock dividends divided by the average common shares outstanding during the period. D) Earnings per share is forecasted by financial analysts. Answer: A Difficulty: 2 Medium Topic: Analysis - Earnings Per Share Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 152) Financial information for Retro Designs includes the following selected data: Net income (in millions) Preferred stock dividends (in millions) Average common shares outstanding (in millions) Stock price

$ $

175 25 250 $ 10.00

What is the company's earnings per share? A) $0.60. B) $0.70. C) $0.50. D) $0.05. Answer: A Explanation: ($175 − $25) ÷ 250 = $0.60. Difficulty: 3 Hard Topic: Analysis - Earnings Per Share Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

153) Financial information for Retro Designs includes the following selected data: Net income (in millions) Preferred stock dividends (in millions) Average common shares outstanding (in millions) Stock price

$ $

175 25 250 $ 10.00

What is the company's price-earnings ratio? A) 14.3. B) 16.7. C) 5.7. D) 15.0. Answer: B Explanation: $10 ÷ $0.60* = 16.7 (rounded). *Earnings per share = ($175 − $25) ÷ 250 = $0.60. Difficulty: 3 Hard Topic: Analysis - Price-Earnings Ratio Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 154) The PE ratio: A) Tends to be higher for growth stocks. B) Tends to be higher for value stocks. C) Indicates how a stock is trading in relation to cumulative earnings over the life of the company. D) Typically is less than 1. Answer: A Difficulty: 2 Medium Topic: Analysis - Price-Earnings Ratio Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

Match the following: A) Publicly held corporation B) Articles of Incorporation C) Venture capital firms D) Limited liability company E) S Corporation F) Limited liability G) Double taxation H) Angel investors 155) Provide additional financing, often in the millions, for a percentage ownership in the company. Difficulty: 2 Medium Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 156) Allows for legal treatment as a corporation, but tax treatment as a partnership. Difficulty: 2 Medium Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 157) Like an S corporation, but there are no limitations on the number of owners as in an S corporation. Difficulty: 2 Medium Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

158) Wealthy individuals willing to risk investment funds on a promising business venture. Difficulty: 2 Medium Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 159) Has stock traded on a stock exchange such as the New York Stock Exchange (NYSE). Difficulty: 2 Medium Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 160) Corporate earnings are taxed twice—at the corporate level and individual stockholder level. Difficulty: 2 Medium Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 161) Describes (a) the nature of the firm's business activities, (b) the shares to be issued, and (c) the composition of the initial board of directors. Difficulty: 2 Medium Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 162) Stockholders can lose no more than the amount they invest in the company. Difficulty: 2 Medium Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 68 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Answers: 155) C 156) E 157) D 158) H 159) A 160) G 161) B 162) F Match the following: A) Retained earnings B) Cumulative C) Paid-in capital D) Outstanding stock E) Limited liability F) Issued stock G) Redeemable H) Treasury stock I) Authorized stock J) Angel investors 163) Wealthy individuals willing to risk investment funds on a promising business venture. Difficulty: 2 Medium Topic: Characteristics of Corporations; Accounting for Common Stock; Accounting for Preferred Stock; Accounting for Treasury Stock; Retained Earnings Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership.; 10-02 Record the issuance of common stock.; 10-03 Understand unique features and recording of preferred stock.; 10-04 Account for treasury stock.; 10-05 Describe retained earnings and record cash dividends. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 164) The amount invested by stockholders. Difficulty: 2 Medium Topic: Characteristics of Corporations; Accounting for Common Stock; Accounting for Preferred Stock; Accounting for Treasury Stock; Retained Earnings Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership.; 10-02 Record the issuance of common stock.; 10-03 Understand unique features and recording of preferred stock.; 10-04 Account for treasury stock.; 10-05 Describe retained earnings and record cash dividends. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

165) Shares actually sold. Difficulty: 2 Medium Topic: Characteristics of Corporations; Accounting for Common Stock; Accounting for Preferred Stock; Accounting for Treasury Stock; Retained Earnings Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership.; 10-02 Record the issuance of common stock.; 10-03 Understand unique features and recording of preferred stock.; 10-04 Account for treasury stock.; 10-05 Describe retained earnings and record cash dividends. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 166) Shares available to sell. Difficulty: 2 Medium Topic: Characteristics of Corporations; Accounting for Common Stock; Accounting for Preferred Stock; Accounting for Treasury Stock; Retained Earnings Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership.; 10-02 Record the issuance of common stock.; 10-03 Understand unique features and recording of preferred stock.; 10-04 Account for treasury stock.; 10-05 Describe retained earnings and record cash dividends. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 167) Shares can be returned to the corporation at a predetermined price. Difficulty: 2 Medium Topic: Characteristics of Corporations; Accounting for Common Stock; Accounting for Preferred Stock; Accounting for Treasury Stock; Retained Earnings Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership.; 10-02 Record the issuance of common stock.; 10-03 Understand unique features and recording of preferred stock.; 10-04 Account for treasury stock.; 10-05 Describe retained earnings and record cash dividends. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 168) Shares receive priority for future dividends, if dividends are not paid in a given year. Difficulty: 2 Medium Topic: Characteristics of Corporations; Accounting for Common Stock; Accounting for Preferred Stock; Accounting for Treasury Stock; Retained Earnings Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership.; 10-02 Record the issuance of common stock.; 10-03 Understand unique features and recording of preferred stock.; 10-04 Account for treasury stock.; 10-05 Describe retained earnings and record cash dividends. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 70 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

169) The earnings not paid out in dividends. Difficulty: 2 Medium Topic: Characteristics of Corporations; Accounting for Common Stock; Accounting for Preferred Stock; Accounting for Treasury Stock; Retained Earnings Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership.; 10-02 Record the issuance of common stock.; 10-03 Understand unique features and recording of preferred stock.; 10-04 Account for treasury stock.; 10-05 Describe retained earnings and record cash dividends. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 170) Stockholders can lose no more than the amount they invested in the company. Difficulty: 2 Medium Topic: Characteristics of Corporations; Accounting for Common Stock; Accounting for Preferred Stock; Accounting for Treasury Stock; Retained Earnings Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership.; 10-02 Record the issuance of common stock.; 10-03 Understand unique features and recording of preferred stock.; 10-04 Account for treasury stock.; 10-05 Describe retained earnings and record cash dividends. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 171) The corporation's own stock that it acquired. Difficulty: 2 Medium Topic: Characteristics of Corporations; Accounting for Common Stock; Accounting for Preferred Stock; Accounting for Treasury Stock; Retained Earnings Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership.; 10-02 Record the issuance of common stock.; 10-03 Understand unique features and recording of preferred stock.; 10-04 Account for treasury stock.; 10-05 Describe retained earnings and record cash dividends. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

172) Shares held by investors. Difficulty: 2 Medium Topic: Characteristics of Corporations; Accounting for Common Stock; Accounting for Preferred Stock; Accounting for Treasury Stock; Retained Earnings Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership.; 10-02 Record the issuance of common stock.; 10-03 Understand unique features and recording of preferred stock.; 10-04 Account for treasury stock.; 10-05 Describe retained earnings and record cash dividends. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 163) J 164) C 165) F 166) I 167) G 168) B 169) A 170) E 171) H 172) D

Match the following: A) Stock split B) Preferred stock C) Statement of stockholders' equity D) Additional paid-in capital E) Retained earnings F) Venture capital firms G) Organization chart H) Articles of incorporation I) Stock dividends J) Dividends 173) Provide additional financing, often in the millions, for a percentage ownership in the company. Difficulty: 2 Medium Topic: Characteristics of Corporations; Accounting for Common Stock; Accounting for Preferred Stock; Retained Earnings; Cash Dividends; Stock Dividends and Stock Splits; Statement of Stockholders' Equity Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership.; 10-02 Record the issuance of common stock.; 10-03 Understand unique features and recording of preferred stock.; 10-05 Describe retained earnings and record cash dividends.; 10-06 Explain the effect of stock dividends and stock splits.; 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 174) A mixture of attributes somewhere between common stock and bonds payable. Difficulty: 2 Medium Topic: Characteristics of Corporations; Accounting for Common Stock; Accounting for Preferred Stock; Retained Earnings; Cash Dividends; Stock Dividends and Stock Splits; Statement of Stockholders' Equity Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership.; 10-02 Record the issuance of common stock.; 10-03 Understand unique features and recording of preferred stock.; 10-05 Describe retained earnings and record cash dividends.; 10-06 Explain the effect of stock dividends and stock splits.; 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

175) Summarizes the changes in the balance in each stockholders' equity account over a period of time. Difficulty: 2 Medium Topic: Characteristics of Corporations; Accounting for Common Stock; Accounting for Preferred Stock; Retained Earnings; Cash Dividends; Stock Dividends and Stock Splits; Statement of Stockholders' Equity Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership.; 10-02 Record the issuance of common stock.; 10-03 Understand unique features and recording of preferred stock.; 10-05 Describe retained earnings and record cash dividends.; 10-06 Explain the effect of stock dividends and stock splits.; 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 176) Traces the line of authority for a typical corporation. Difficulty: 2 Medium Topic: Characteristics of Corporations; Accounting for Common Stock; Accounting for Preferred Stock; Retained Earnings; Cash Dividends; Stock Dividends and Stock Splits; Statement of Stockholders' Equity Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership.; 10-02 Record the issuance of common stock.; 10-03 Understand unique features and recording of preferred stock.; 10-05 Describe retained earnings and record cash dividends.; 10-06 Explain the effect of stock dividends and stock splits.; 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 177) The portion of the cash proceeds above par value. Difficulty: 2 Medium Topic: Characteristics of Corporations; Accounting for Common Stock; Accounting for Preferred Stock; Retained Earnings; Cash Dividends; Stock Dividends and Stock Splits; Statement of Stockholders' Equity Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership.; 10-02 Record the issuance of common stock.; 10-03 Understand unique features and recording of preferred stock.; 10-05 Describe retained earnings and record cash dividends.; 10-06 Explain the effect of stock dividends and stock splits.; 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

178) A large stock dividend recorded as a reduction in the par or stated value per share. Difficulty: 2 Medium Topic: Characteristics of Corporations; Accounting for Common Stock; Accounting for Preferred Stock; Retained Earnings; Cash Dividends; Stock Dividends and Stock Splits; Statement of Stockholders' Equity Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership.; 10-02 Record the issuance of common stock.; 10-03 Understand unique features and recording of preferred stock.; 10-05 Describe retained earnings and record cash dividends.; 10-06 Explain the effect of stock dividends and stock splits.; 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 179) Represents all net income, less all dividends, since the company began. Difficulty: 2 Medium Topic: Characteristics of Corporations; Accounting for Common Stock; Accounting for Preferred Stock; Retained Earnings; Cash Dividends; Stock Dividends and Stock Splits; Statement of Stockholders' Equity Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership.; 10-02 Record the issuance of common stock.; 10-03 Understand unique features and recording of preferred stock.; 10-05 Describe retained earnings and record cash dividends.; 10-06 Explain the effect of stock dividends and stock splits.; 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 180) Distributions by a corporation to its stockholders. Difficulty: 2 Medium Topic: Characteristics of Corporations; Accounting for Common Stock; Accounting for Preferred Stock; Retained Earnings; Cash Dividends; Stock Dividends and Stock Splits; Statement of Stockholders' Equity Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership.; 10-02 Record the issuance of common stock.; 10-03 Understand unique features and recording of preferred stock.; 10-05 Describe retained earnings and record cash dividends.; 10-06 Explain the effect of stock dividends and stock splits.; 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

181) Additional shares of the companies' own stock given to stockholders. Difficulty: 2 Medium Topic: Characteristics of Corporations; Accounting for Common Stock; Accounting for Preferred Stock; Retained Earnings; Cash Dividends; Stock Dividends and Stock Splits; Statement of Stockholders' Equity Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership.; 10-02 Record the issuance of common stock.; 10-03 Understand unique features and recording of preferred stock.; 10-05 Describe retained earnings and record cash dividends.; 10-06 Explain the effect of stock dividends and stock splits.; 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 182) Describes the nature of the firm's business activities, the shares to be issued, and the composition of the initial board of directors. Difficulty: 2 Medium Topic: Characteristics of Corporations; Accounting for Common Stock; Accounting for Preferred Stock; Retained Earnings; Cash Dividends; Stock Dividends and Stock Splits; Statement of Stockholders' Equity Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership.; 10-02 Record the issuance of common stock.; 10-03 Understand unique features and recording of preferred stock.; 10-05 Describe retained earnings and record cash dividends.; 10-06 Explain the effect of stock dividends and stock splits.; 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 173) F 174) B 175) C 176) G 177) D 178) A 179) E 180) J 181) I 182) H

Match the following: A) Cumulative B) Redeemable C) Convertible 183) Shares can be exchanged for common stock. Difficulty: 2 Medium Topic: Accounting for Preferred Stock Learning Objective: 10-03 Understand unique features and recording of preferred stock. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 184) Shares can be sold at a predetermined price. Difficulty: 2 Medium Topic: Accounting for Preferred Stock Learning Objective: 10-03 Understand unique features and recording of preferred stock. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 185) Shares receive dividend priority, if dividend not paid. Difficulty: 2 Medium Topic: Accounting for Preferred Stock Learning Objective: 10-03 Understand unique features and recording of preferred stock. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 183) C 184) B 185) A

Match the following: A) 100% stock dividend B) PE ratio C) Growth stocks D) Return on equity E) Retained earnings F) Statement of stockholders' equity G) Stockholders' equity section of the balance sheet H) Value stocks I) Accumulated deficit J) Treasury stock 186) Summarizes the changes in the balance in each stockholders' equity account over a period of time. Difficulty: 2 Medium Topic: Accounting for Treasury Stock; Retained Earnings; Stock Dividends and Stock Splits; Stockholders' Equity in the Balance Sheet; Statement of Stockholders' Equity; Analysis - Return on Equity; Analysis - Price-Earnings Ratio Learning Objective: 10-04 Account for treasury stock.; 10-05 Describe retained earnings and record cash dividends.; 10-06 Explain the effect of stock dividends and stock splits.; 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity.; 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 187) The corporation's own stock that it acquired. Difficulty: 2 Medium Topic: Accounting for Treasury Stock; Retained Earnings; Stock Dividends and Stock Splits; Stockholders' Equity in the Balance Sheet; Statement of Stockholders' Equity; Analysis - Return on Equity; Analysis - Price-Earnings Ratio Learning Objective: 10-04 Account for treasury stock.; 10-05 Describe retained earnings and record cash dividends.; 10-06 Explain the effect of stock dividends and stock splits.; 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity.; 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

188) Priced low in relation to current earnings. Difficulty: 2 Medium Topic: Accounting for Treasury Stock; Retained Earnings; Stock Dividends and Stock Splits; Stockholders' Equity in the Balance Sheet; Statement of Stockholders' Equity; Analysis - Return on Equity; Analysis - Price-Earnings Ratio Learning Objective: 10-04 Account for treasury stock.; 10-05 Describe retained earnings and record cash dividends.; 10-06 Explain the effect of stock dividends and stock splits.; 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity.; 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 189) The earnings not paid out in dividends. Difficulty: 2 Medium Topic: Accounting for Treasury Stock; Retained Earnings; Stock Dividends and Stock Splits; Stockholders' Equity in the Balance Sheet; Statement of Stockholders' Equity; Analysis - Return on Equity; Analysis - Price-Earnings Ratio Learning Objective: 10-04 Account for treasury stock.; 10-05 Describe retained earnings and record cash dividends.; 10-06 Explain the effect of stock dividends and stock splits.; 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity.; 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 190) The stock price divided by earnings per share. Difficulty: 2 Medium Topic: Accounting for Treasury Stock; Retained Earnings; Stock Dividends and Stock Splits; Stockholders' Equity in the Balance Sheet; Statement of Stockholders' Equity; Analysis - Return on Equity; Analysis - Price-Earnings Ratio Learning Objective: 10-04 Account for treasury stock.; 10-05 Describe retained earnings and record cash dividends.; 10-06 Explain the effect of stock dividends and stock splits.; 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity.; 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

191) Shows the balance in each equity account at a point in time. Difficulty: 2 Medium Topic: Accounting for Treasury Stock; Retained Earnings; Stock Dividends and Stock Splits; Stockholders' Equity in the Balance Sheet; Statement of Stockholders' Equity; Analysis - Return on Equity; Analysis - Price-Earnings Ratio Learning Objective: 10-04 Account for treasury stock.; 10-05 Describe retained earnings and record cash dividends.; 10-06 Explain the effect of stock dividends and stock splits.; 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity.; 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 192) Measures the ability of company management to generate earnings from the resources that owners provide. Difficulty: 2 Medium Topic: Accounting for Treasury Stock; Retained Earnings; Stock Dividends and Stock Splits; Stockholders' Equity in the Balance Sheet; Statement of Stockholders' Equity; Analysis - Return on Equity; Analysis - Price-Earnings Ratio Learning Objective: 10-04 Account for treasury stock.; 10-05 Describe retained earnings and record cash dividends.; 10-06 Explain the effect of stock dividends and stock splits.; 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity.; 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 193) Priced high in relation to current earnings as investors expect future earnings to be higher. Difficulty: 2 Medium Topic: Accounting for Treasury Stock; Retained Earnings; Stock Dividends and Stock Splits; Stockholders' Equity in the Balance Sheet; Statement of Stockholders' Equity; Analysis - Return on Equity; Analysis - Price-Earnings Ratio Learning Objective: 10-04 Account for treasury stock.; 10-05 Describe retained earnings and record cash dividends.; 10-06 Explain the effect of stock dividends and stock splits.; 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity.; 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

194) Effectively the same as a 2-for-1 stock split. Difficulty: 2 Medium Topic: Accounting for Treasury Stock; Retained Earnings; Stock Dividends and Stock Splits; Stockholders' Equity in the Balance Sheet; Statement of Stockholders' Equity; Analysis - Return on Equity; Analysis - Price-Earnings Ratio Learning Objective: 10-04 Account for treasury stock.; 10-05 Describe retained earnings and record cash dividends.; 10-06 Explain the effect of stock dividends and stock splits.; 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity.; 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 195) A debit balance in retained earnings. Difficulty: 2 Medium Topic: Accounting for Treasury Stock; Retained Earnings; Stock Dividends and Stock Splits; Stockholders' Equity in the Balance Sheet; Statement of Stockholders' Equity; Analysis - Return on Equity; Analysis - Price-Earnings Ratio Learning Objective: 10-04 Account for treasury stock.; 10-05 Describe retained earnings and record cash dividends.; 10-06 Explain the effect of stock dividends and stock splits.; 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity.; 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 186) F 187) J 188) H 189) E 190) B 191) G 192) D 193) C 194) A 195) I 196) The Shoe Exchange issues 5,000 shares of its $1 par value common stock to provide funds for further expansion. If the issue price is $15 per share, what is the entry to record the issuance of the stock? Answer: Cash (5,000 shares × $15) 75,000 Common Stock (5,000 shares × $1) 5,000 Additional Paid-in Capital (difference) 70,000 (Issue common stock above par) Difficulty: 3 Hard Topic: Accounting for Common Stock Learning Objective: 10-02 Record the issuance of common stock. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 81 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

197) Environmental Designs issues 10,000 shares of its $1 par value common stock at $25 per share. (1) Record the issuance of the stock. (2) Record the issuance of the stock assuming it is no-par value stock. Answer: Cash (10,000 shares × $25) Common Stock (10,000 shares × $1) Additional Paid-in Capital (difference) (Issue common stock above par)

250,000 10,000 240,000

Cash (10,000 shares × $25) 250,000 Common Stock 250,000 (Issue no-par value common stock) Difficulty: 3 Hard Topic: Accounting for Common Stock Learning Objective: 10-02 Record the issuance of common stock. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

198) Diane's Designs has two classes of stock authorized: 8%, $10 par value preferred and $1 par value common. The following transactions affect stockholders' equity during 2021, its first year of operations: January 1 February 6 October 10 November 12

Issue 200,000 shares of common stock for $15 per share. Issue 1,000 shares of preferred stock for $11 per share. Purchase 10,000 shares of its own common stock for $18 per share. Resell 5,000 shares of treasury stock at $20 per share.

Record each of these transactions. Answer: January 1, 2021 Cash (200,000 shares × $15) Common Stock (200,000 shares × $1) Additional Paid-in Capital (difference) (Issue common stock above par) February 6, 2021 Cash (1,000 shares × $11) Preferred Stock (1,000 shares × $10) Additional Paid-in Capital (difference) (Issue preferred stock above par) October 10, 2021 Treasury Stock (10,000 shares × $18) Cash (Purchase treasury stock) November 12, 2021 Cash (5,000 shares × $20) Treasury Stock (5,000 shares × $18) Additional Paid-in Capital (difference) (Resell treasury stock above cost)

Debit 3,000,000

Credit 200,000 2,800,000

11,000 10,000 1,000

180,000 180,000

100,000 90,000 10,000

Difficulty: 3 Hard Topic: Accounting for Common Stock; Accounting for Preferred Stock; Accounting for Treasury Stock Learning Objective: 10-02 Record the issuance of common stock.; 10-03 Understand unique features and recording of preferred stock.; 10-04 Account for treasury stock. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

199) Northwest Clothing Supply has the following transactions during the year related to stockholders' equity: January 1 March 15 December 1 December 15 December 31

Issues 3,000 shares of no-par value common stock for $20 per share. Issues 800 shares of $20 par value preferred stock for $22 per share. Declares a cash dividend of $1 per share to all stockholders of record (both common and preferred) on December 15. Date of record. Pays the cash dividend declared on December 1.

Record each of these transactions. Answer: January 1 Cash (3,000 shares × $20) Common Stock (3,000 shares × $20) (Issue no-par value common stock) March 15 Cash (800 shares × $22) Preferred Stock (800 shares × $20) Additional Paid-in Capital (difference) (Issue preferred stock above par) December 1 Dividends (3,800 shares × $1) Dividends Payable (Declare cash dividends) December 15 No Entry December 31 Dividends Payable (3,800 shares × $1) Cash (Pay cash dividends)

Debit 60,000

Credit 60,000

17,600 16,000 1,600

3,800 3,800

Difficulty: 3 Hard Topic: Accounting for Common Stock; Accounting for Preferred Stock; Cash Dividends Learning Objective: 10-02 Record the issuance of common stock.; 10-03 Understand unique features and recording of preferred stock.; Describe retained earnings and record cash dividends. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

200) Frontier City is trying to decide between the following two alternatives to finance its new $10 million roller coaster: a. Issue $10 million of 6% bonds at face amount. b. Issue one million shares of common stock for $10 per share.

Operating income

Issue Bonds Issue Stock $5,000,000 $5,000,000

Interest expense Income before tax Income tax expense (30%)

________

Net income

________

# of shares

3,000,000

4,000,000

Earnings per share

________

Assuming bonds or shares of stock are issued at the beginning of the year, complete the income statement listed above for each alternative. Which alternative results in the highest earnings per share?

Answer: Operating income Interest expense (bonds only)

Issue Bonds Issue Stock $5,000,000 $5,000,000 600,000

________

Income before tax

4,400,000

5,000,000

Income tax expense (30%)

1,320,000

1,500,000

Net income

$3,080,000

$3,500,000

# of shares

3,000,000

4,000,000

$1.03

$0.88

Earnings per share

Issuing bonds results in earnings per share of $1.03 compared with earnings per share of $0.88 for issuing stock. Difficulty: 3 Hard Topic: Analysis - Earnings Per Share Learning Objective: 10-8 Evaluate company performance using information on stockholders' equity. Bloom's: Evaluate AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

201) Oregon Outfitters issues 1,000 shares of $1 par value common stock at $20 per share. Later in the year, the company decides to purchase 200 shares at a cost of $22 per share. (1) Record the original issue of the 1,000 shares, (2) Record the purchase of 200 shares, and (3) record the entry if Oregon Outfitters resells the 200 shares of treasury stock at $25 per share. Answer: Cash (1,000 shares × $20) Common Stock (1,000 shares × $1) Additional Paid-in Capital (difference) (Issue common stock above par)

20,000 1,000 19,000

Treasury Stock (200 shares × $22) Cash (Purchase treasury stock)

4,400

Cash (200 shares × $25) Treasury Stock (200 shares × $22) Additional Paid-in Capital (difference) (Resell treasury stock above cost)

5,000

4,400

4,400 600

Difficulty: 3 Hard Topic: Accounting for Common Stock; Accounting for Treasury Stock Learning Objective: 10-02 Record the issuance of common stock.; 10-04 Account for treasury stock. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

202) Court Casuals has 100,000 shares of common stock outstanding as of the beginning of the year and has the following transactions affecting stockholders' equity during the year. May 18 May 31 July 1 July 31 August 10

Issues 25,000 additional shares of $1 par value common stock for $40 per share. Purchases 5,000 shares of treasury stock for $45 per share. Declares a cash dividend of $1 per share to all stockholders of record on July 15. Hint: Dividends are not paid on treasury stock. Pays the cash dividend declared on July 1. Resells 2,500 shares of treasury stock purchased on May 31 for $46 per share.

Record each of these transactions. Answer: May 18 Cash (25,000 shares × $40) Common Stock (25,000 shares × $1) Additional Paid-in Capital (difference) (Issue common stock above par) May 31 Treasury Stock (5,000 shares × $45) Cash (Purchase treasury stock) July 1 Dividends (120,000 shares × $1) Dividends Payable (Declare cash dividends) July 31 Dividends Payable (120,000 shares × $1) Cash (Pay cash dividends) August 10 Cash (2,500 shares × $46) Treasury Stock (2,500 shares × $45) Additional Paid-in Capital (difference)

Debit 1,000,000

Credit 25,000 975,000

225,000 225,000

120,000 120,000

115,000 112,500 2,500

Difficulty: 3 Hard Topic: Accounting for Common Stock; Accounting for Treasury Stock; Cash Dividends Learning Objective: 10-02 Record the issuance of common stock.; 10-04 Account for treasury stock.; 10-05 Describe retained earnings and record cash dividends. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

203) Tropical Rainwear issues 1,000 shares of its $20 par value preferred stock for cash at $22 per share. Record the issuance of the preferred shares. Answer: Cash (1,000 shares × $22) Preferred Stock (1,000 shares × $20) Additional Paid-in Capital (difference) (Issue preferred stock above par)

22,000 20,000 2,000

Difficulty: 3 Hard Topic: Accounting for Preferred Stock Learning Objective: 10-03 Understand unique features and recording of preferred stock. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 204) Desert Apparel has 5,000 shares of common stock outstanding. On April 1, the company declares a $2 per share dividend to stockholders of record on April 15. The dividend is paid on April 30. Record all necessary entries on the appropriate dates for cash dividends. Answer: April 1 Dividends (5,000 shares × $2) Dividends Payable (Declare cash dividends) April 15 No Entry April 30 Dividends Payable (5,000 shares × $2) Cash (Pay cash dividends)

10,000 10,000

205) On May 15, Canadian Falcon declares a quarterly cash dividend of $0.15 per share payable on June 10 to all stockholders of record on May 31. Record Canadian Falcon's declaration and payment of cash dividends for its 200,000 shares of common stock. Answer: May 15 Dividends (200,000 shares × $0.15) Dividends Payable (Declare cash dividends) May 31 No Entry June 10 Dividends Payable (200,000 shares × $0.15) Cash (Pay cash dividends)

Debit 30,000

Credit 30,000

30,000 30,000

Difficulty: 3 Hard Topic: Cash Dividends Learning Objective: 10-05 Describe retained earnings and record cash dividends. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 206) On March 31, the board of directors of Shoeboxes, Inc. declares a 100% stock dividend on its 100,000, $0.01 par value, common shares. The market price of Shoeboxes common stock is $30 on March 31. Record the stock dividend. Answer: March 31 Stock Dividends (100,000 shares × $0.01) Common Stock (Record a large stock dividend)

1,000 1,000

Difficulty: 3 Hard Topic: Stock Dividends and Stock Splits Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

207) Indicate whether each of the following transactions increases (+), decreases (−), or has no effect (NE) on total assets, total liabilities, and total stockholders' equity.

Transaction Issue common stock Issue preferred stock Purchase treasury stock Sale of treasury stock

Total Assets

Total Liabilities

Total Stockholders' Equity

Total Assets + + +

Total Liabilities NE NE NE NE

Total Stockholders' Equity + + +

Answer:

Transaction Issue common stock Issue preferred stock Purchase treasury stock Sale of treasury stock

Difficulty: 3 Hard Topic: Stockholders' Equity in the Balance Sheet Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation

208) Indicate whether each of the following transactions increases (+), decreases (−), or has no effect (NE) on total assets, total liabilities, and total stockholders' equity.

Transaction Issue common stock Issue preferred stock Purchase treasury stock Sell treasury stock Declare cash dividend Pay cash dividend 100% stock dividend 2-for-1 stock split

Total Assets

Total Liabilities

Total Stockholders' Equity

Total Liabilities NE NE NE NE + NE NE

Total Stockholders' Equity + + + NE NE NE

Answer:

Transaction Issue common stock Issue preferred stock Purchase treasury stock Sell treasury stock Declare cash dividend Pay cash dividend 100% stock dividend 2-for-1 stock split

Total Assets + + + NE NE NE

Difficulty: 3 Hard Topic: Stockholders' Equity in the Balance Sheet Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation

209) Prom Night Formal Wear has the following stockholders' equity accounts at December 31, 2021: Common Stock, $1 par value, 2,000,000 shares; Additional Paid-in Capital, $22 million; Retained Earnings, $15 million; and Treasury Stock, 50,000 shares, $1.25 million. Prepare the stockholders' equity section of the balance sheet. Answer: Prom Night Formal Wear Balance Sheet (Stockholders' Equity Section) December 31, 2021 Stockholders' equity: Common stock, $1 par value Additional paid-in capital Total paid-in capital Retained earnings Treasury stock, 50,000 shares Total stockholders' equity

$2,000,000 22,000,000 24,000,000 15,000,000 (1,250,000) $37,750,000

210) Donnie Hilfiger has the following balances in its stockholders' equity accounts on December 31, 2021: Treasury Stock, $375,000; Common Stock, $350,000; Preferred Stock, $1,200,000; Retained Earnings, $1,675,000; and Additional Paid-in Capital, $3,150,000. Prepare the stockholders' equity section of the balance sheet for Donnie Hilfiger as of December 31, 2021. Answer: Donnie Hilfiger Balance Sheet (Stockholders' Equity Section) December 31, 2021 Stockholders' equity: Preferred stock Common stock Additional paid-in capital Total paid-in capital Retained earnings Treasury stock Total stockholders' equity

$1,200,000 350,000 3,150,000 4,700,000 1,675,000 (375,000) $6,000,000

211) Formal Footwear has the following beginning balances in its stockholders' equity accounts on January 1, 2021: Common Stock, $500,000; Additional Paid-in Capital, $8,200,000; and Retained Earnings, $2,400,000. Net income for the year ended December 31, 2021, is $900,000. Formal Footwear has the following transactions affecting stockholders' equity in 2021: May 18 July 1 July 31

Issues 10,000 additional shares of $5 par value common stock for $60 per share. Declares a cash dividend of $3 per share to all stockholders of record on July 15. Pays the cash dividend declared on July 1.

Taking into consideration all the entries described above, prepare the statement of stockholders' equity for the year ended December 31, 2021, using the format provided. Formal Footwear Statement of Stockholders' Equity For the year ended December 31, 2021 Common Stock Balance, January 1 Issue common stock Cash dividends Net income Balance, December 31

Additional Paid-in Capital $500,000 $8,200,000

Retained Earnings

Total Stockholders' Equity $2,400,000 $11,100,000

Answer: Formal Footwear Statement of Stockholders' Equity For the year ended December 31, 2021 Common Stock Balance, Jan. 1 Issue common stock Cash dividends Net income Balance, Dec. 31

Additional Paid-in Capital $500,000 $8,200,000 50,000 550,000

________ $550,000

_________ $8,750,000

Retained Earnings

Total Stockholders' Equity $2,400,000 $11,100,000 600,000 (330,000) (330,000) __900,000 __900,000 $2,970,000 $12,270,000

Difficulty: 3 Hard Topic: Statement of Stockholders' Equity Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 95 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

212) Court Casuals has the following beginning balances in its stockholders' equity accounts on January 1, 2021: Common Stock, $100,000; Additional Paid-in Capital, $4,100,000; and Retained Earnings, $3,000,000. Net income for the year ended December 31, 2021, is $800,000. Court Casuals has the following transactions affecting stockholders' equity in 2021: May 18 May 31 July 1 July 31 August 10

Taking into consideration all the entries described above, prepare the statement of stockholders' equity for the year ended December 31, 2021, using the format provided. Court Casuals Statement of Stockholders' Equity For the year ended December 31, 2021 Additional Total Paid-in Retained Treasury Stockholders' Stock Capital Earnings Stock Equity $100,000 $4,100,000 $3,000,000 $ -0$7,200,000

Common Balance, Jan. 1 Issue common stock Purchase treasury stock Cash dividends Resell treasury stock Net income Balance, Dec. 31

Answer: Court Casuals Statement of Stockholders' Equity For the year ended December 31, 2021 Additional Total Paid-in Retained Treasury Stockholders' Stock Capital Earnings Stock Equity $100,000 $4,100,000 $3,000,000 $ -0$7,200,000 25,000 975,000 1,000,000 (225,000) (225,000) (120,000) (120,000) 7,500 112,500 120,000 ______ _______ 800,000 _______ 800,000 $125,000 $5,082,500 $3,680,000 $(112,500) $8,775,000

Common Balance, Jan. 1 Issue common stock Purchase treasury stock Cash dividends Resell treasury stock Net income Balance, Dec. 31

Difficulty: 3 Hard Topic: Statement of Stockholders' Equity Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 213) The financial statements of Heatwave Athletic Wear include the following selected data ($ in millions): Sales, $22,502; Net income, $875; Beginning stockholders' equity, $3,567; Ending stockholders' equity, $4,102. Calculate the return on equity. Answer: Net Income

$875

Average Stockholders' Equity ($3,567 + 4,102)/2

= =

Return on Equity 22.8%

Difficulty: 3 Hard Topic: Analysis - Return on Equity Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

214) The financial statements of Trail Apparel include the following selected data (in millions): ($ in thousands, except stock price) Sales Net income Dividends Stockholders' equity, end of year Shares outstanding Average stock price

2021 $728,121 16,012 4,087 235,153 45,000 $5.40

2020 $751,558 13,626 3,885 221,457 40,000 $4.70

Calculate the following amounts for 2021: 1. Return on equity. 2. Dividend yield. 3. Earnings per share. 4. Price-earnings ratio. Answer: 1. Net Income

$16,012

Average Stockholders' Equity ($235,153 + 221,457)/2

2. Dividends Per Share ÷ $4,087/45,000 ÷

Stock Price $5.40

= =

Return on Equity

7.0% (rounded)

Dividend Yield 1.7% (rounded)

3. Net Income $16,012

÷ Shares Outstanding = Earnings Per Share ÷ 45,000 = $0.36 (rounded)

Stock Price

÷ Earnings Per Share =

$5.40

($16,012/45,000)

Price-Earnings Ratio 15.2% (rounded)

Difficulty: 3 Hard Topic: Analysis - Return on Equity; Analysis - Dividend Yield; Analysis - Earnings Per Share; Analysis - Price-Earnings Ratio Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 98 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

215) Match (by letter) the following terms with their definitions. Each letter is used only once. Terms _____ 1. _____ 2. _____ 3. _____ 4. _____ 5. _____ 6. _____ 7. _____ 8. _____ 9. _____ 10.

100% stock dividend Statement of stockholders' equity Treasury stock Value stocks PE ratio Stockholders' equity section of the balance sheet Return on equity Retained earnings Accumulated deficit Growth stocks

Definitions a. b. c. d. e. f. g. h. i. j.

Summarizes the changes in the balance in each stockholders' equity account over a period of time. Priced low in relation to current earnings. Measures the ability of company management to generate earnings from the resources that owners provide. Shows the balance in each equity account at a point in time. The corporation's own stock that it has purchased. A debit balance in retained earnings. Priced high in relation to current earnings as investors expect future earnings to be higher. Effectively the same as a 2-for-1 stock split. The earnings not paid out in dividends. The stock price divided by earnings per share.

Answer: __h__ 1. 100% stock dividend __a__ 2. Statement of stockholders' equity __e__ 3. Treasury stock __b__ 4. Value stocks __j__ 5. PE ratio __d__ 6. Stockholders' equity section of the balance sheet __c__ 7. Return on equity __i__ 8. Retained earnings __f__ 9. Accumulated deficit __g__ 10. Growth stocks Difficulty: 2 Medium Topic: Characteristics of Corporations; Retained Earnings; Stock Dividends and Stock Splits; Stockholders' Equity in the Balance Sheet; Statement of Stockholders' Equity; Analysis - Return on Equity; Analysis - Price-Earnings Ratio Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership.; 10-05 Describe retained earnings and record cash dividends.; 10-06 Explain the effect of stock dividends and stock splits.; 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity.; 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

216) Sweet Sixteen has two classes of stock authorized: $100 par value preferred and $1 par value common. As of the beginning of 2021, 1,000 shares of preferred stock have been issued and 20,000 shares of common stock have been issued. The following transactions affected stockholders' equity during 2021: March 1 April 1 June 1

Issues 3,000 additional shares of common stock for $22 per share. Issues 5,000 additional shares of preferred stock for $110 per share. Declares a cash dividend on common stock of $1 per share and a cash dividend on preferred stock of $5 per share to all stockholders of record on June 15. June 30 Pays the cash dividends declared on June 1. August 1 Purchases 2,000 shares of common treasury stock for $18 per share. October 1 Resells 1,000 shares of treasury stock purchased on August 1 for $20 per share. Required: 1. Record each of these transactions. 2. Indicate whether each of these transactions would increase (+), decrease (-), or have no effect (NE) on total assets, total liabilities, and total stockholders' equity by completing the following chart. Total Assets Transaction

Total Liabilities

Total Stockholders' Equity

Issue common stock Issue preferred stock Declare cash dividends Pay cash dividends Purchase treasury stock Resell treasury stock

Answer: Requirement 1 March 1, 2021 Cash (3,000 × $22) Common Stock (3,000 × $1.00) Additional Paid-in Capital (difference) (Issue common stock) April 1, 2021 Cash (5,000 shares × $110) Preferred Stock (5,000 shares × $100) Additional Paid-in Capital (difference) (Issue preferred stock) June 1, 2021 Dividends (23,000 × $1 + 6,000 × $5) Dividends Payable (Declare cash dividends) June 30, 2021 Dividends Payable (23,000 × $1 + 6,000 × $5) Cash (Pay cash dividends) August 1, 2021 Treasury Stock (2,000 shares × $18) Cash (Purchase treasury stock) October 1, 2021 Cash (1,000 shares × $20) Treasury Stock (1,000 shares × $18) Additional Paid-in Capital (1,000 × $2) (Resell treasury stock above cost)

Debit 66,000

Credit 3,000 63,000

550,000 500,000 50,000

53,000 53,000

36,000 36,000

20,000 18,000 2,000

Requirement 2 Total Assets

Total Liabilities

+ + NE +

NE NE + NE NE

Transaction Issue common stock Issue preferred stock Declare cash dividends Pay cash dividends Purchase treasury stock Resell treasury stock

Total Stockholders' Equity + + NE +

Difficulty: 3 Hard Topic: Accounting for Common Stock; Accounting for Preferred Stock; Accounting for Treasury Stock; Cash Dividends; Stockholders' Equity in the Balance Sheet Learning Objective: 10-02 Record the issuance of common stock.; 10-03 Understand unique features and recording of preferred stock.; 10-04 Account for treasury stock.; 10-05 Describe retained earnings and record cash dividends.; 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement; FN Reporting/Keyboard Navigation

217) Hoop It Up has two classes of stock authorized: 7%, $20 par value preferred and $1 par value common. The following transactions affected stockholders' equity during 2021, its first year of operations: February 2 February 4 June 15 August 15 November 1

Issues 1 million shares of common stock for $20 per share. Issues 50,000 shares of preferred stock for $21 per share. Purchases 100,000 shares of its own common stock for $18 per share. Resells 75,000 shares of treasury stock for $23 per share. Declares a cash dividend on its common stock of $1 per share and a $70,000 (7% of par value) cash dividend on its preferred stock payable to all stockholders on record on November 15. Hint: Dividends are not paid on treasury stock. November 30 Pays the dividends declared on November 1. Required: 1. Record each of these transactions. 2. Prepare the stockholders' equity section of the balance sheet as of December 31, 2021. Net income for the year was $3,200,000.

Answer: Requirement 1 February 2, 2021 Cash (1,000,000 × $20) Common Stock (1,000,000 × $1) Additional Paid-in Capital (difference) (Issue common stock above par) February 4, 2021 Cash (50,000 × $21) Preferred Stock (50,000 × $20) Additional Paid-in Capital (difference) (Issue preferred stock above par) June 15, 2021 Treasury Stock (100,000 shares × $18) Cash (Purchase treasury stock) August 15, 2021 Cash (75,000 shares × $23) Treasury Stock (75,000 shares × $18) Additional Paid-in Capital (75,000 × $5) (Resell treasury stock above cost) November 1, 2021 Dividends (975,000 shares × $1 + $70,000) Dividends Payable (Declare cash dividends) November 30, 2021 Dividends Payable Cash (Pay cash dividends)

Debit 20,000,000

Credit 1,000,000 19,000,000

1,050,000 1,000,000 50,000

1,800,000 1,800,000

1,725,000 1,350,000 375,000

1,045,000 1,045,000

Requirement 2 Hoop It Up Balance Sheet (Stockholders' Equity Section) December 31, 2021 Stockholders' equity: Preferred stock, $20 par value Common stock, $1 par value Additional paid-in capital Total paid-in capital Retained earnings* Treasury stock, 25,000 shares Total stockholders' equity

$1,000,000 1,000,000 19,425,000 21,425,000 2,155,000 (450,000) $23,130,000

*$3,200,000 net income minus $1,045,000 in dividends. Difficulty: 3 Hard Topic: Accounting for Common Stock; Accounting for Preferred Stock; Accounting for Treasury Stock; Cash Dividends; Stockholders' Equity in the Balance Sheet Learning Objective: 10-02 Record the issuance of common stock.; 10-03 Understand unique features and recording of preferred stock.; 10-04 Account for treasury stock.; 10-05 Describe retained earnings and record cash dividends.; 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement; FN Reporting/Keyboard Navigation

218) Brooks Brothers has done very well the past year and its stock price is now trading over $100 per share. Management is considering either a 100% stock dividend or a 2-for-1 stock split. Required: 1. Complete the following chart comparing the effects of a 100% stock dividend versus a 2-for-1 stock split on the stockholders' equity accounts, shares outstanding, par value, and share price.

Common stock, $1 par value Additional paid-in capital Total paid-in capital Retained earnings Total stockholders' equity Shares outstanding Par value per share Share price

After 100% Before Stock Dividend $10,000 250,000 260,000 150,000 $410,000 10,000 $1 $102

After 2-for-1 Stock Split

2. What is the primary reason companies declare a large stock dividend or a stock split? Answer: Requirement 1

Common stock, $1 par value Additional paid-in capital Total paid-in capital Retained earnings Total stockholders' equity Shares outstanding Par value per share Share price

After 100% Before Stock Dividend $10,000 $20,000 250,000 250,000 260,000 270,000 150,000 140,000 $410,000 $410,000 10,000 20,000 $1 $1 $102 $51

After 2-for-1 Stock Split $10,000 250,000 260,000 150,000 $410,000 20,000 $0.50 $51

Requirement 2 The primary reason companies declare a large stock dividend or a stock split is to lower the trading price of the stock to a more acceptable trading range, making it attractive to a larger number of potential investors. Difficulty: 3 Hard Topic: Stock Dividends and Stock Splits Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 107 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

219) The stockholders' equity section of University Fashions is presented here. University Fashions Balance Sheet (Stockholders' Equity Section) ($ in thousands) Stockholders' equity: Preferred stock, $50 par value Common stock, $5 par value Additional paid-in capital Total paid-in capital Retained earnings Treasury stock Total stockholders' equity

$50,000 $25,000 120,000 195,000 140,000 (20,900) $314,100

Required: Based on the stockholders' equity section of University Fashions, answer the following questions. Remember that all amounts are presented in thousands. 1. How many shares of preferred stock have been issued? 2. How many shares of common stock have been issued? 3. Assuming the preferred shares were issued at par value, at what average price per share were the common shares issued? 4. If retained earnings at the beginning of the period was $120 million and net income during the year was $30 million, how much was paid in dividends for the year? 5. If the treasury stock was purchased at $20 per share, how many shares were purchased?

Answer: Requirement 1: 1,000,000 shares = ($50,000/$50) × 1,000. Requirement 2: 5,000,000 shares = ($25,000/$5) × 1,000. Requirement 3: $29 per share = ($25,000 + $120,000) × 1,000 = $145,000,000. ($145,000,000/5,000,000 shares) = $29 per share. Requirement 4: Retained Earnings, Beginning + Net Income − Dividends = Retained Earnings, Ending

$120,000,000 30,000,000 ? $140,000,000

Dividends paid for the year were $10,000,000. Requirement 5: 1,045,000 shares = ($20,900/$20 per share) × 1,000. Difficulty: 3 Hard Topic: Stockholders' Equity in the Balance Sheet Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

220) Sweet Sixteen has the following beginning balances in its stockholders' equity accounts on January 1, 2021: preferred stock, $100,000, common stock, $20,000; additional paid-in capital, $380,000; and retained earnings, $450,000. Net income for the year ended December 31, 2021, is $65,000. The following transactions affected stockholders' equity during 2021: March 1 April 1

Issues 3,000 additional shares of $1 par value common stock for $22 per share. Issues 5,000 additional shares of $100 par value preferred stock for $110 per share. Declares a cash dividend on common stock of $1 per share and a cash dividend on preferred stock of $5 per share to all stockholders of record on June 15. Pays the cash dividends declared on June 1. Purchases 2,000 shares of common treasury stock for $18 per share. Resells 1,000 shares of treasury stock purchased on August 1 for $20 per share.

June 1

June 30 August 1 October 1 Required:

Taking into consideration the beginning balances and all the transactions during 2021, respond to the following for Sweet Sixteen: 1. Prepare the statement of stockholders' equity for the year ended December 31, 2021. 2. Prepare the stockholders' equity section of the balance sheet as of December 31, 2021. 3. Explain how requirements 1 and 2 are similar and how they are different. Answer: Requirement 1 Sweet Sixteen Statement of Stockholders' Equity For the Year Ended December 31, 2021 Preferred Common Additional Retained Treasury Total Stock Stock Paid-in Earnings Stock Stockholders' Capital Equity Balance, Jan. 1 $100,000 $20,000 $380,000 $450,000 $ -0$950,000

Issue common stock Issue preferred stock Purchase treasury stock Resell treasury stock Cash dividends Net income Balance, Dec. 31

3,000 500,000

63,000

66,000

50,000

550,000

2,000

$600,000

$23,000

$495,000

(53,000) 65,000 $462,000

(36,000)

18,000

20,000 (53,000) 65,000 $1,562,000

($18,000)

Requirement 2 Sweet Sixteen Balance Sheet (Stockholders' Equity Section) December 31, 2021 Stockholders' equity: Preferred stock, $100 par value Common stock, $1 par value Additional paid-in capital Total paid-in capital Retained earnings Treasury stock, 1,000 shares Total stockholders' equity

$600,000 23,000 495,000 1,118,000 462,000 (18,000) $1,562,000

Requirement 3 Requirements 1 and 2 are similar in that requirement 1 shows the equity balances across the bottom row and requirement 2 shows these same balances in a column format. However, requirements 1 and 2 serve different purposes. The statement of stockholders' equity in requirement 1 shows the change in each equity account balance over time The stockholders' equity section of the balance sheet in requirement 2 presents the balance of each equity account at a point in time. Difficulty: 3 Hard Topic: Stockholders' Equity in the Balance Sheet; Statement of Stockholders' Equity Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

221) Selected financial data is provided as follows: ($ in millions, except stock price) Sales Net income Dividends Total assets Total liabilities Stockholders' equity Total liabilities and stockholders' equity Average shares outstanding Average stock price

2021 $14,526 967 512 $7,564 3,177 4,387 $7,564 791 $19

2020 $15,763 833 468 $7,838 3,564 4,274 $7,838 694 $18

2019 $15,943 778 435 $8,544 3,370 5,174 $8,544 816 $18

Required: 1. Calculate the return on equity for 2021. How does it compare with the return on equity for 2020? 2. Calculate the dividend yield for 2021. How does it compare with the dividend yield for 2020? 3. Calculate earnings per share for 2021. How does it compare with earnings per share for 2020? What is the trend in the company's performance? 4. Calculate the price-earnings ratio for 2021. How does it compare with the price-earnings ratio for 2020? 2021

Answer: 1. ($ in millions) 2021 2020

Net Income $967 $833

÷ ÷ ÷

Average Stockholders' Equity ($4,387 + 4,274)/2 ($4,274 + 5,174)/2

= Return on Equity = =

22.3% (rounded) 17.6% (rounded)

The return on equity is higher in 2021 than in 2020.

2. ($ in millions) 2021 2020

Dividends Per Share $512/791 $468/694

Stock Price

Dividend Yield

÷ ÷

$19 $16

= =

3.4% (rounded) 4.2% (rounded)

The dividend yield is lower in 2021.

3. ($ in millions) 2021 2020

Net Income ÷ Shares Outstanding = Earnings Per Share $967 $833

÷ ÷

791 694

= =

$1.22 (rounded) $1.20 (rounded)

Based on earnings per share, the company's performance is improving.

4. ($ in millions) Stock Price 2021 2020

$19 $16

÷ ÷ ÷

Earnings Per Share ($967/791) ($833/694)

= = =

Price-Earnings Ratio 15.5 13.3

The price-earnings ratio in 2021 is higher than in 2020. Difficulty: 3 Hard Topic: Analysis - Return on Equity; Analysis - Dividend Yield; Analysis - Earnings Per Share; Analysis - Price-Earnings Ratio Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making; FN Measurement/Keyboard Navigation

222) Corporations typically do not start raising capital by issuing stock to the general public. What are the common stages of equity financing leading to an initial public offering (IPO)? Answer: Most corporations first raise money by selling stock to the founders of the business and their friends and family. As the equity financing needs of the corporation grow, companies prepare a business plan and seek outside investment from "angel" investors and venture capital firms. Angel investors are wealthy individuals in the business community willing to risk investment funds on a promising business venture. Venture capital firms provide additional financing, often in the millions, for a percentage ownership in the company. Many venture capital firms look to invest in promising companies to which they can add value through business contacts, financial expertise, or marketing channels. Most corporations do not consider issuing stock to the general public (going public) until their equity financing needs exceed $20 million. Difficulty: 2 Medium Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 223) Describe the primary advantages and disadvantages of a corporation in comparison to a sole-proprietorship or partnership. Answer: A corporation offers two primary advantages over sole-proprietorships and partnerships. These are (1) limited liability and (2) the ability to raise capital and transfer ownership. Because of limited liability, even in the event of bankruptcy, stockholders in a corporation can lose no more than the amount they invested in the company. Because corporations sell ownership interest in the form of shares of stock, ownership rights are easily transferred. An investor can sell his or her ownership interest (shares of stock) at any time and without affecting the structure of the corporation or its operations. A corporation has two primary disadvantages relative to sole-proprietorships and partnerships. These are (1) additional taxes and (2) more paperwork. Corporations have double taxation. Corporate income is taxed once on earnings at the corporate level, and again on dividends at the individual level. Corporations also have more paperwork as federal and state governments impose extensive reporting requirements on the company. Difficulty: 2 Medium Topic: Characteristics of Corporations Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

224) Explain the difference between authorized, issued, and outstanding shares. Answer: Authorized stock is the total number of shares available to sell, stated in the company's articles of incorporation. Issued stock is the number of shares that have been sold to investors. A company usually does not issue all its authorized stock. Outstanding stock is the number of shares held by investors. Issued and outstanding are the same amounts as long as the corporation has not purchased any of its own shares. Purchased shares, called treasury stock, are included as part of shares issued, but excluded from shares outstanding. Difficulty: 2 Medium Topic: Accounting for Common Stock Learning Objective: 10-02 Record the issuance of common stock. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 225) Explain why preferred stock often is said to have a mixture of attributes somewhere between common stock and bonds. Answer: Investors in common stock are the owners of the corporation because they have voting rights. Investors in bonds are creditors who have loaned money to the corporation. Preferred stock fits somewhere between common stock and bonds. There are other factors where preferred stock falls in the middle between common stock and bonds. For example, the risk and expected return are greatest for investments in common stock followed by preferred stock and then bonds. In contrast, preference for payments of interest and dividends are given first to bonds, then preferred stock, and then common stock. Difficulty: 2 Medium Topic: Accounting for Preferred Stock Learning Objective: 10-03 Understand unique features and recording of preferred stock. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 226) Contrast the effects of a cash dividend and a stock dividend on total assets, total liabilities, and total stockholders' equity. Answer: Declaration and payment of a cash dividend reduces total assets and total stockholders' equity. Declaration and payment of a stock dividend has no effect on total assets, total liabilities, and total stockholders' equity. Difficulty: 2 Medium Topic: Cash Dividends; Stock Dividends and Stock Splits Learning Objective: 10-05 Describe retained earnings and record cash dividends.; 10-06 Explain the effect of stock dividends and stock splits. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

Financial Accounting, 5e (Spiceland) Chapter 11 Statement of Cash Flows 1) A statement of cash flows provides a summary of cash inflows and cash outflows during the reporting period. Answer: TRUE Difficulty: 1 Easy Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 2) The three primary categories of cash flows are cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Answer: TRUE Difficulty: 1 Easy Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 3) Financing activities include cash receipts and cash payments for transactions relating to revenue and expense activities. Answer: FALSE Explanation: Operating activities include cash receipts and cash payments for transactions relating to revenue and expense activities. Difficulty: 1 Easy Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

4) Investing activities include cash transactions involving the purchase and sale of long-term assets and current investments. Answer: TRUE Difficulty: 1 Easy Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 5) Operating activities are both inflows and outflows of cash resulting from the external financing of a business. Answer: FALSE Explanation: Financing activities are both inflows and outflows of cash resulting from the external financing of a business. Difficulty: 1 Easy Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 6) We report interest and dividends received from investments with investing activities. Answer: FALSE Explanation: We report interest and dividends received from investments with operating activities. Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

7) We report interest paid on bonds or notes payable with operating activities rather than financing activities. Answer: TRUE Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 8) We record dividends received as a financing activity. Answer: FALSE Explanation: We record dividends received as an operating activity. Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 9) We record dividends paid as a financing activity. Answer: TRUE Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 10) Transactions that do not increase or decrease cash, but that result in significant investing and financing activities, are reported either directly after the cash flow statement or in a separate note to the financial statements as noncash activities. Answer: TRUE Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 3 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11) If no cash was exchanged in the purchase of equipment financed entirely with a note payable, we represent this as both an investing activity and a financing activity in the statement of cash flows. Answer: FALSE Explanation: We represent this as a noncash activity either directly after the cash flow statement or in a note to the financial statements. Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 12) The purchase of long-term assets by issuing debt is recorded as both an investing activity and a financing activity. Answer: FALSE Explanation: Purchase of long-term assets by issuing debt is reported as a noncash activity either directly after the cash flow statement or in a separate note to the financial statements. Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 13) The total net cash flows from operating activities differ between the direct and indirect methods. Answer: FALSE Explanation: The total net cash flows from operating activities are identical under both the direct and indirect methods. Difficulty: 2 Medium Topic: Basic Steps and Formatting of the Statement of Cash Flows Learning Objective: 11-02 Understand the steps and basic format in preparing the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

14) Using the indirect method, we begin with net income and then list adjustments to net income in order to arrive at operating cash flows. Answer: TRUE Difficulty: 1 Easy Topic: Classification of Transactions; Operating Activities - Indirect Method Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities.; 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 15) The total of the cash flows from operating, investing, and financing activities equals the net increase or decrease in cash for the period. Answer: TRUE Difficulty: 1 Easy Topic: Basic Steps and Formatting of the Statement of Cash Flows Learning Objective: 11-02 Understand the steps and basic format in preparing the statement of cash flows. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 16) Using the direct method, we adjust the items in the income statement to directly show the cash inflows and outflows from operations. Answer: TRUE Difficulty: 1 Easy Topic: Basic Steps and Formatting of the Statement of Cash Flows; Operating Activities - Direct Method Learning Objective: 11-02 Understand the steps and basic format in preparing the statement of cash flows.; 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

17) Because depreciation expense reduces net income, companies will add depreciation expense back to net income as a step in arriving at net cash flows from operating activities under the indirect method. Answer: TRUE Difficulty: 2 Medium Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 18) A loss on the sale of long-term assets is added back to net income to arrive at net cash flows from operating activities under the indirect method. Answer: TRUE Difficulty: 2 Medium Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 19) A gain on the sale of long-term assets is added back to net income to arrive at net cash flows from operating activities under the indirect method. Answer: FALSE Explanation: A gain on the sale of long-term assets is subtracted from net income to arrive at net cash flows from operating activities under the indirect method. Difficulty: 2 Medium Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

20) Under the indirect method, a decrease in accounts receivable is added to net income to arrive at net cash flows from operating activities. Answer: TRUE Difficulty: 2 Medium Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 21) Under the indirect method, an increase in prepaid rent is added to net income to arrive at net cash flows from operating activities. Answer: FALSE Explanation: We would subtract an increase in prepaid rent from net income to arrive at net cash flows from operating activities under the indirect method. Difficulty: 2 Medium Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 22) Under the indirect method, an increase in inventory is added to net income and a decrease in inventory is subtracted from net income to arrive at net cash flows from operating activities. Answer: FALSE Explanation: We would subtract an increase in inventory and add a decrease in inventory to net income to arrive at net cash flows from operating activities under the indirect method. Difficulty: 2 Medium Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

23) When preparing a statement of cash flows using the indirect method, a decrease in accounts payable is subtracted from net income. Answer: TRUE Difficulty: 2 Medium Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 24) Under the indirect method, an increase in accounts payable is added to net income to arrive at net cash flows from operating activities. Answer: TRUE Difficulty: 2 Medium Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 25) Under the indirect method, a decrease in accounts payable is added to net income to arrive at net cash flows from operating activities. Answer: FALSE Explanation: We would subtract a decrease in accounts payable from net income to arrive at net cash flows from operating activities under the indirect method. Difficulty: 2 Medium Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 26) The long-term assets section of the balance sheet is the place to look for investing activities. Answer: TRUE Difficulty: 1 Easy Topic: Investing Activities Learning Objective: 11-04 Prepare the investing activities section of the statement of cash flows. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 8 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

27) The sale of land is reported in the operating section of the statement of cash flows. Answer: FALSE Explanation: The sale of land is reported in the investing section of the statement of cash flows. Difficulty: 2 Medium Topic: Investing Activities Learning Objective: 11-04 Prepare the investing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 28) We report the purchase of stock in another corporation as a cash outflow from investing activities. Answer: TRUE Difficulty: 2 Medium Topic: Investing Activities Learning Objective: 11-04 Prepare the investing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 29) We report the actual amount of cash proceeds received from the sale of land as a cash inflow from investing activities. Answer: TRUE Difficulty: 2 Medium Topic: Investing Activities Learning Objective: 11-04 Prepare the investing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 30) We can find most financing activities by examining changes in long-term liabilities and stockholders' equity accounts. Answer: TRUE Difficulty: 1 Easy Topic: Financing Activities Learning Objective: 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

31) The inflow of cash received from issuing common stock is reported as an investing activity. Answer: FALSE Explanation: The inflow of cash received from issuing common stock is reported as a financing activity. Difficulty: 2 Medium Topic: Financing Activities Learning Objective: 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 32) The balance in Retained Earnings is increased by net income and is decreased by dividends. Answer: TRUE Difficulty: 1 Easy Topic: Financing Activities Learning Objective: 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 33) We report the cash payment of dividends as a cash outflow from investing activities. Answer: FALSE Explanation: We report the payment of cash dividends as a cash outflow from financing activities. Difficulty: 2 Medium Topic: Financing Activities Learning Objective: 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 34) We calculate cash return on assets as the change in cash divided by average total assets. Answer: FALSE Explanation: We calculate cash return on assets as operating cash flows divided by average total assets. Difficulty: 1 Easy Topic: Analysis - Cash Return on Assets Learning Objective: 11-06 Perform financial analysis using the statement of cash flows. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

35) Cash return on assets indicates the amount of operating cash flow generated for each dollar invested in assets. Answer: TRUE Difficulty: 2 Medium Topic: Analysis - Cash Return on Assets Learning Objective: 11-06 Perform financial analysis using the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 36) To maximize cash flow from operations, a company strives to increase both cash flows per dollar of sales and sales per dollar of assets invested. Answer: TRUE Difficulty: 2 Medium Topic: Analysis - Components of Cash Return on Assets Learning Objective: 11-06 Perform financial analysis using the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 37) Cash return on assets can be separated to examine two important business strategies: cash flow to sales and asset turnover. Answer: TRUE Difficulty: 1 Easy Topic: Analysis - Components of Cash Return on Assets Learning Objective: 11-06 Perform financial analysis using the statement of cash flows. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 38) Income statement items that have no cash effect are still reported under the direct method. Answer: FALSE Explanation: Income statement items that have no cash effect are simply not reported under the direct method. Difficulty: 1 Easy Topic: Operating Activities - Direct Method Learning Objective: 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

39) Using the direct method, we examine each account in the income statement and convert it from an accrual amount to a cash amount. Answer: TRUE Difficulty: 1 Easy Topic: Operating Activities - Direct Method Learning Objective: 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 40) If accounts receivable decreases, this indicates that revenues exceed cash receipts from customers. Answer: FALSE Explanation: If accounts receivable increases, this indicates that revenues exceed cash receipts from customers. Difficulty: 2 Medium Topic: Operating Activities - Direct Method Learning Objective: 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 41) When accounts payable decreases, cash paid to suppliers must have been more than purchases. Answer: TRUE Difficulty: 2 Medium Topic: Operating Activities - Direct Method Learning Objective: 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

42) If there are no current assets or liabilities associated with operating expenses, the amounts we report for these expenses in the income statement must equal the amount of cash we paid for these items. Answer: TRUE Difficulty: 2 Medium Topic: Operating Activities - Direct Method Learning Objective: 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 43) Depreciation expense is not reported on the statement of cash flows under the direct method. Answer: TRUE Difficulty: 1 Easy Topic: Operating Activities - Direct Method Learning Objective: 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 44) We add an increase in interest payable to interest expense in arriving at cash paid for interest under the direct method. Answer: FALSE Explanation: We deduct an increase in interest payable from interest expense in arriving at cash paid for interest under the direct method. Difficulty: 2 Medium Topic: Operating Activities - Direct Method Learning Objective: 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

45) We add a decrease in income tax payable to income tax expense to calculate cash paid for income taxes. Answer: TRUE Difficulty: 2 Medium Topic: Operating Activities - Direct Method Learning Objective: 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 46) The indirect method begins with net income, while the direct method considers each of the individual accounts that makes up net income. Answer: TRUE Difficulty: 2 Medium Topic: Operating Activities - Direct Method Learning Objective: 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 47) Which financial statement separates business activities into operating, investing, and financing activities? A) Statement of Stockholders' Equity B) Income Statement C) Statement of Cash Flows D) Balance Sheet Answer: C Difficulty: 1 Easy Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

48) The purchase of land is classified in the statement of cash flows as a(n): A) Operating activity. B) Investing activity. C) Financing activity. D) Noncash activity. Answer: B Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 49) The cash collection from the sale of a good or service is classified in the statement of cash flows as a(n): A) Investing activity. B) Operating activity. C) Financing activity. D) Noncash activity. Answer: B Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 50) The payment of salaries is classified in the statement of cash flows as a(n): A) Investing activity. B) Operating activity. C) Financing activity. D) Noncash activity. Answer: B Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

51) The issuance of notes payable for borrowing is classified in the statement of cash flows as a(n): A) Operating activity. B) Investing activity. C) Financing activity. D) Noncash activity. Answer: C Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 52) The purchase of treasury stock is classified in the statement of cash flows as a(n): A) Operating activity. B) Investing activity. C) Financing activity. D) Noncash activity. Answer: C Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 53) Operating cash flows exclude: A) Interest received. B) Interest paid. C) Dividends received. D) Dividends paid. Answer: D Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

54) The statement of cash flows reports cash flows from the activities of: A) Operating, purchasing, and investing. B) Borrowing, paying, and investing. C) Operating, investing, and financing. D) Using, investing, and financing. Answer: C Difficulty: 1 Easy Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 55) Which of the following is correct about the statement of cash flows? A) A company with a net loss will always have a net cash outflow from operating activities. B) Collecting interest earned from a note receivable creates a cash inflow from investing activities. C) Paying dividends to investors creates a cash outflow from financing activities. D) The repayment of long-term debt is a cash inflow from financing activities. Answer: C Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 56) Which of the following is correct about the statement of cash flows? A) A company with a net loss on the income statement will always have a net cash outflow from operating activities. B) A purchase of equipment is classified as a cash inflow from investing activities. C) Cash dividends received on stock investments are classified as cash flows from operating activities. D) Cash dividends paid are classified as cash flows from operating activities. Answer: C Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 17 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

57) Which of the following is not correct about the statement of cash flows? A) Paying dividends to investors creates a cash outflow from financing activities. B) A purchase of equipment is classified as a cash outflow from investing activities. C) Cash dividends paid are classified as cash flows from operating activities. D) Cash dividends received on stock investments are classified as cash flows from operating activities. Answer: C Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 58) Which of the following is not correct about the statement of cash flows? A) Paying dividends to investors creates a cash outflow from financing activities. B) A purchase of equipment is classified as a cash outflow from investing activities. C) A company with a net loss on the income statement will always have a net cash outflow from operating activities. D) Cash dividends received on stock investments are classified as cash flows from operating activities. Answer: C Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

59) All classifications on the Balance Sheet have a general relationship with sections identified on the Statement of Cash Flows. Indicate which relationships are correctly identified in the table below. # I II III IV V

Classification on the Balance Sheet Bonds Payable Equipment Common Stock Accounts Payable Accounts Receivable

Section on Statement of Cash Flows Financing Operating Financing Operating Operating

A) IV, V. B) I, II, III. C) I, III, IV, V. D) I, II, III, IV, V. Answer: C Difficulty: 3 Hard Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 60) Under what section of the Statement of Cash Flows would you classify dividends paid on common stock? A) Operating. B) Investing. C) Financing. D) Noncash activity. Answer: C Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

61) Under what section of the Statement of Cash Flows would you classify the purchase of equipment by issuing a long-term note payable? A) Operating. B) Investing. C) Financing. D) Noncash activity. Answer: D Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 62) Which of the following transactions would not create a cash flow? A) The company purchased some of its own stock from a stockholder. B) Payment of a dividend. C) The company purchased land by issuing common stock. D) Sale of equipment at book value. Answer: C Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 63) Which of the following is an example of a noncash activity? A) Sale of land for less than its cost. B) Purchase of land by issuing debt. C) Sale of land for more than its cost. D) Purchase of land using cash proceeds from issuance of common stock. Answer: B Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

64) Which of the following is not true regarding cash flows? A) Operating activities include the payment of dividends. B) Investing activities involve long-term investments. C) Financing activities involve long-term liabilities and equities. D) Purchasing a building with a note is considered a noncash activity. Answer: A Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 65) Dividends received from an investment is classified as a(n) ________ cash flow, and paying dividends on stock issued is classified as a(n) ________ cash flow on the Statement of Cash Flows. A) Operating; Operating B) Operating; Financing C) Financing; Operating D) Investing; Financing Answer: B Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 66) The collection of cash from customers would be classified as which type of cash flow on the Statement of Cash Flows? A) Financing. B) Investing. C) Operating. D) Not reported on the statement of cash flows. Answer: C Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 21 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

67) Arrow Printers paid $2,000 interest on short-term notes payable, $10,000 interest on long-term bonds, and $6,000 in dividends on its common stock. Arrow would report cash outflows from activities, as follows: A) Operating, $2,000; Financing, $16,000. B) Operating, $0; Financing, $18,000. C) Operating, $12,000; Financing, $6,000. D) Operating, $18,000; Financing, $0. Answer: C Difficulty: 3 Hard Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 68) The Statement of Cash Flows: A) Lists all cash flows over the life of a company. B) Breaks down all cash transactions into investing and financing cash flows. C) Shows that the change in total cash from one year to the next is equal to the net operating, investing, and financing cash flows. D) Has two methods for investing cash flows—direct and indirect. Answer: C Difficulty: 1 Easy Topic: Basic Steps and Formatting of the Statement of Cash Flows Learning Objective: 11-02 Understand the steps and basic format in preparing the statement of cash flows. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

69) The balance of cash reported in the balance sheet this year minus the balance of cash reported in the balance sheet last year equals: A) Net cash flows from operating activities only. B) Net income. C) Net cash flows from operating, investing, and financing activities. D) Net cash flows from financing activities only. Answer: C Difficulty: 1 Easy Topic: Basic Steps and Formatting of the Statement of Cash Flows Learning Objective: 11-02 Understand the steps and basic format in preparing the statement of cash flows. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 70) The indirect and direct methods: A) Are used by companies about equally in actual practice. B) Affect the presentations of operating, investing, and financing activities. C) Arrive at different amounts for net cash flows from operating activities. D) Are two allowable methods to present operating activities in the statement of cash flows. Answer: D Difficulty: 2 Medium Topic: Basic Steps and Formatting of the Statement of Cash Flows Learning Objective: 11-02 Understand the steps and basic format in preparing the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 71) In the operating activities section of the statement of cash flows, we start with net income when using: A) The direct method. B) The indirect method. C) Both the direct and the indirect method. D) Neither the direct nor the indirect method. Answer: B Difficulty: 2 Medium Topic: Basic Steps and Formatting of the Statement of Cash Flows Learning Objective: 11-02 Understand the steps and basic format in preparing the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 23 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

72) We can identify operating activities from income statement information and changes in: A) Long-term asset accounts. B) Long-term liability accounts. C) Current asset and current liability accounts. D) Stockholders' equity accounts. Answer: C Difficulty: 2 Medium Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 73) Operating cash flows can be described as: A) Change in total cash for the year. B) Purchase and sale of long-term assets. C) Cash-basis net income. D) Total revenues minus total expenses. Answer: C Difficulty: 2 Medium Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 74) In preparing a statement of cash flows under the indirect method, a decrease in accounts receivable would be reported as a(n): A) Addition to net income in the operating activities section. B) Deduction from net income in the operating activities section. C) Financing activity. D) Investing activity. Answer: A Difficulty: 2 Medium Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

75) In preparing a statement of cash flows under the indirect method, an increase in accounts payable would be reported as a(n): A) Addition to net income in the operating activities section. B) Deduction from net income in the operating activities section. C) Financing activity. D) Investing activity. Answer: A Difficulty: 2 Medium Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 76) Which of the following is not a correct practice when adjusting net income to net operating cash flows? A) Subtract depreciation expense. B) Add losses on sales of assets. C) Subtract increase in Accounts Receivable. D) Add increase in Accounts Payable. Answer: A Difficulty: 2 Medium Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 77) Which of the following is added to net income as an adjustment under the indirect method of preparing the statement of cash flows? A) Salaries payable increase. B) Gain on the sale of land. C) Inventory increase. D) Accounts receivable increase. Answer: A Difficulty: 2 Medium Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 25 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

78) Which of the following is subtracted from net income as an adjustment under the indirect method of preparing the statement of cash flows? A) Gain on the sale of land. B) Accounts receivable decrease. C) Inventory decrease. D) Salaries payable increase. Answer: A Difficulty: 2 Medium Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 79) Consider the following items:

(a) Decrease in accounts receivable (b) Issuance of common stock (c) Increase in interest receivable (d) Purchase of land (e) Decrease in accounts payable

(f) Gain on the sale of equipment (g) Depreciation expense (h) Payment of dividends (i) Decrease in utilities payable (j) Increase in inventory

How many of these items would be added to net income when using the indirect method to prepare the operating activities section of the statement of cash flows? A) 2 B) 4 C) 1 D) 3 Answer: A Explanation: (a) Decrease in accounts receivable and (g) Depreciation expense. Difficulty: 3 Hard Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation

80) Consider the following items:

(a) Decrease in accounts receivable (b) Issuance of common stock (c) Increase in interest receivable (d) Purchase of land (e) Decrease in accounts payable

(f) Gain on the sale of equipment (g) Depreciation expense (h) Payment of dividends (i) Decrease in utilities payable (j) Increase in inventory

How many of these items would be subtracted from net income when using the indirect method to prepare the operating activities section of the statement of cash flows? A) 5 B) 4 C) 1 D) 2 Answer: A Explanation: (c) Increase in interest receivable, (e) Decrease in accounts payable, (f) Gain on the sale of equipment, (i) Decrease in utilities payable, (j) Increase in inventory. Difficulty: 3 Hard Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 81) Which of the following is subtracted from net income as an adjustment under the indirect method of preparing the statement of cash flows? A) Salaries payable decrease. B) Inventory decrease. C) Depreciation expense. D) Accounts receivable decrease. Answer: A Difficulty: 2 Medium Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

82) Which of the following is not subtracted from net income as an adjustment under the indirect method of preparing the statement of cash flows? A) Depreciation expense. B) Interest receivable increase. C) Increase in inventory. D) Salaries payable decrease. Answer: A Difficulty: 2 Medium Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 83) Given the items below, which of the following is a subtraction from net income to arrive at operating cash flows using the indirect method? I. Loss on sale of assets II. Increase in Supplies III. Increase in Accounts Payable IV. Depreciation expense A) II. only. B) IV. only. C) I. and II. D) II. and III. Answer: A Difficulty: 2 Medium Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

84) Given the items below, which of the following is an addition to net income to arrive at operating cash flows using the indirect method? I. Loss on sale of assets II. Increase in Supplies III. Increase in Accounts Payable IV. Increase in Accounts Receivable A) I. and III. B) I. only. C) III. and IV. D) II. and III. Answer: A Difficulty: 2 Medium Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 85) Rachel's Recordings reported net income of $200,000. Beginning balances in Accounts Receivable and Accounts Payable were $15,000 and $20,000, respectively. Ending balances in these accounts were $12,000 and $22,000, respectively. Assuming that all relevant information has been presented, Rachel's net cash flows from operating activities would be: A) $200,000. B) $195,000. C) $205,000. D) $199,000. Answer: C Explanation: Net income Add decrease in A/R Add increase in A/P Net cash flows from operating activities

$ 200,000 3,000 2,000 $ 205,000

86) Mary's Music Store reported net income of $135,000. Beginning balances in Accounts Receivable and Accounts Payable were $29,000 and $26,000, respectively. Ending balances in these accounts were $30,000 and $24,000, respectively. Assuming that all relevant information has been presented, Mary's net cash flows from operating activities would be: A) $132,000. B) $134,000. C) $136,000. D) $138,000. Answer: A Explanation: Net income Subtract increase in A/R Subtract decrease in A/P Net cash flows from operating activities

$ 135,000 (1,000) (2,000) $ 132,000

Difficulty: 3 Hard Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 87) Kela Corporation reports net income of $450,000 that includes depreciation expense of $70,000. Also, cash of $50,000 was borrowed on a five-year note payable. Based on this data, total cash inflows from operating activities are: A) $380,000. B) $470,000. C) $520,000. D) $570,000. Answer: C Explanation: $450,000 + $70,000 = $520,000. The $50,000 cash borrowed is a financing activity. Difficulty: 3 Hard Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

88) Assume net income was $100,000, depreciation expense was $8,000, accounts receivable decreased by $7,500, and accounts payable decreased by $2,500. The amount of net cash flows from operating activities is: A) $103,000. B) $100,000. C) $108,000. D) $113,000. Answer: D Explanation: $100,000 + $8,000 + $7,500 − $2,500 = $113,000. Difficulty: 3 Hard Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 89) Innovative Products reported net income of $205,000. Beginning and ending Inventory balances were $40,000 and $45,000, respectively. Accounts Payable balances at the beginning and end of the year were $35,000 and $33,000, respectively. Assuming that all relevant information has been presented, the company would report net operating cash flows of: A) $202,000. B) $198,000. C) $212,000. D) $205,000. Answer: B Explanation: Net income Subtract increase in Inventory Subtract decrease in A/P Net cash flows from operating activities

$ 205,000 (5,000) (2,000) $ 198,000

90) Lenses Laboratories' net income was $250,000. Given the account information below, what is the net cash flows from operating activities for Lenses Laboratories?

Increase in Accounts Receivable Increase in Salaries Payable Decrease in Inventory Depreciation Expense Increase in Prepaid Insurance

$ $ $ $ $

60,000 50,000 30,000 45,000 3,000

A) $152,000. B) $278,000. C) $312,000. D) $438,000. Answer: C Explanation: Net income Adjustments to reconcile net income to net cash flows from operating activities Depreciation Expense: Increase in Accounts Receivable Decrease in Inventory Increase in Prepaid insurance Increase in Salaries Payable Net Cash Flows from Operating Activities

$ 205,000

45,000 (60,000) 30,000 (3,000) 50,000 $ 312,000

91) Servo Industries' net income was $300,000. Given the account information below, what is the net cash flows from operating activities for Servo Industries? Decrease in Accounts Receivable Decrease in Salaries Payable Decrease in Inventory Depreciation Expense Increase in Interest Payable

$ $ $ $ $

50,000 75,000 20,000 35,000 7,000

A) $487,000. B) $323,000. C) $337,000. D) $237,000. Answer: C Explanation: Net income Adjustments to reconcile net income to net cash flows from operating activities Depreciation Expense Decrease in Accounts Receivable Decrease in Inventory Increase in Interest Payable Decrease in Salaries Payable Net Operating Cash Flows from Operating Activities

$ 300,000

35,000 50,000 20,000 7,000 (75,000) $ 337,000

92) Laser World's income statement reported total revenues of $850,000 and total expenses (including $40,000 depreciation) of $720,000. The balance sheet reported the following: Accounts Receivable—beginning balance, $50,000 and ending balance, $60,000; Accounts Payable—beginning balance, $22,000 and ending balance, $28,000. Therefore, based only on this information, the net cash flows from operating activities were: A) $126,000. B) $166,000. C) $174,000. D) $186,000. Answer: B Explanation: Net income Adjustments to reconcile net income to net cash flows from operating activities Depreciation Expense Increase in Accounts Receivable Increase in Accounts Payable Net Cash Flows from Operating Activities

$ 130,000

40,000 (10,000) 6,000 $ 166,000

93) Assuming net income for the year is $115,000, what is the net cash flows from operating activities given the following information: Increase in Salaries Payable Depreciation Expense Increase in Prepaid Rent Loss on sale of asset Increase in Accounts Payable Increase in Inventory

$ $ $ $ $ $

15,000 6,000 24,000 1,000 25,000 50,000

A) $112,000. B) $88,000. C) $118,000. D) $188,000. Answer: B Explanation: Net income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation Expense Loss on sale of asset Increase in Prepaid Rent Increase in Inventory Increase in Accounts Payable Increase in Salaries Payable Net Operating Cash Flows from Operating Activities

$ 115,000

6,000 1,000 (24,000) (50,000) 25,000 15,000 $ 88,000

94) Which of the following statements is true? A) Investment in another company's common stock is classified as a cash outflow from financing activities in the statement of cash flows. B) Repayment of long-term debt is classified as a cash outflow from investing activities in the statement of cash flows. C) Losses on the sale of long-term assets are an adjustment reported in the operating activities section of the statement of cash flows under the indirect method. D) Dividends paid are classified as a cash outflow from operating activities in the statement of cash flows. Answer: C Difficulty: 2 Medium Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 95) Which of the following is an example of a cash outflow from an investing activity? A) Payment of cash for treasury stock. B) Payment of cash for the purchase of land. C) Payment of cash for inventory. D) Payment on a long-term note payable. Answer: B Difficulty: 2 Medium Topic: Investing Activities Learning Objective: 11-04 Prepare the investing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 96) Which of the following transactions would generally result in an investing cash inflow? A) Receive cash from borrowing at the bank. B) Receive cash from the sale of land. C) Receive cash from customers. D) Receive cash from stockholders for the issuance of common stock. Answer: B Difficulty: 2 Medium Topic: Investing Activities Learning Objective: 11-04 Prepare the investing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 36 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

97) Which of the following is an example of a cash inflow from a financing activity? A) Issuance of bonds. B) Sale of an intangible asset. C) Receipt of cash dividends. D) Purchase of land. Answer: A Difficulty: 2 Medium Topic: Financing Activities Learning Objective: 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 98) ________ is an investing cash flow and ________ is a financing cash flow, as reported in the Statement of Cash Flows. A) Issuing bonds; selling investments B) Purchasing land; repaying a bank loan C) Receiving cash from the sale of inventory; paying cash dividends D) Purchasing treasury stock; lending cash to an employee Answer: B Difficulty: 2 Medium Topic: Investing Activities; Financing Activities Learning Objective: 11-04 Prepare the investing activities section of the statement of cash flows.; 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 99) Cash flows from investing activities do not include cash flows from: A) Lending. B) The sale of equipment. C) Borrowing. D) The purchase of land and buildings. Answer: C Difficulty: 2 Medium Topic: Investing Activities Learning Objective: 11-04 Prepare the investing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

100) Cash flows from investing activities do not include: A) Proceeds from the sale of land. B) Proceeds from the issuance of common stock. C) Proceeds from the sale of marketable securities. D) Cash outflows from acquiring land. Answer: B Difficulty: 2 Medium Topic: Investing Activities Learning Objective: 11-04 Prepare the investing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 101) Cash flows from investing activities include: A) Proceeds from the issuance of common stock. B) Cash outflows from acquiring land. C) Retirement of bonds payable. D) Interest received. Answer: B Difficulty: 2 Medium Topic: Investing Activities Learning Objective: 11-04 Prepare the investing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 102) Shively Mfg. Co. sold land costing $10,000 for $12,000. Shively would report: A) Operating cash inflows of $12,000. B) Investing cash inflows of $12,000. C) Financing cash inflows of $12,000. D) Financing cash inflows of $2,000. Answer: B Difficulty: 3 Hard Topic: Investing Activities Learning Objective: 11-04 Prepare the investing activities section of the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

103) Cash flows from financing activities include: A) Interest received. B) Interest paid. C) Dividends received. D) Cash dividends paid. Answer: D Difficulty: 2 Medium Topic: Financing Activities Learning Objective: 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 104) Cash flows from financing activities do not include: A) Retirement of bonds payable. B) Cash dividends paid. C) Issuance of common stock. D) Interest received. Answer: D Difficulty: 2 Medium Topic: Financing Activities Learning Objective: 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

105) Sammy's Pizza had the following financial information for the year as follows ($ in millions): Net income Obtain loan from the bank Depreciation expense Purchase equipment Increase in accounts receivable Pay dividends Increase in salaries payable Sale of land

$ 9,200 4,600 1,800 5,400 3,900 2,200 1,700 3,500

Sammy's Pizza would report net cash inflows (outflows) from operating activities in the amount of: A) $7,000. B) $8,800. C) $6,600. D) $7,400. Answer: B Explanation: $8,800 = $9,200 + $1,800 − $3,900 + $1,700 Difficulty: 3 Hard Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

106) Sammy's Pizza had the following financial information for the year as follows ($ in millions): Net income Obtain loan from the bank Depreciation expense Purchase equipment Increase in accounts receivable Pay dividends Increase in salaries payable Sale of land

$ 9,200 4,600 1,800 5,400 3,900 2,200 1,700 3,500

Sammy's Pizza would report net cash inflows (outflows) from investing activities in the amount of: A) $(800). B) $2,400. C) $(1,900). D) $1,300. Answer: C Explanation: $(1,900) = $(5,400) + $3,500 Difficulty: 3 Hard Topic: Investing Activities Learning Objective: 11-04 Prepare the investing activities section of the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

107) Sammy's Pizza had the following financial information for the year as follows ($ in millions): Net income Obtain loan from the bank Depreciation expense Purchase equipment Increase in accounts receivable Pay dividends Increase in salaries payable Sale of land

$ 9,200 4,600 1,800 5,400 3,900 2,200 1,700 3,500

Sammy's Pizza would report net cash inflows (outflows) from financing activities in the amount of: A) $(7,600). B) $5,900. C) $(1,900). D) $2,400. Answer: D Explanation: $2,400 = $4,600 − $2,200 Difficulty: 3 Hard Topic: Financing Activities Learning Objective: 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

108) Bad Brad's BBQ had cash flows for the year as follows ($ in millions): CASH RECEIVED FROM: Customers Interest on investments Sale of land Sale of common stock Issuance of debt securities CASH PAID FOR: Interest on debt Income tax Debt principal reduction Purchase of equipment Purchase of inventory Dividends on common stock Operating expenses

$ 1,800 200 100 600 2,000 $

300 80 1,500 4,000 1,000 200 500

Bad Brad's would report net cash inflows (outflows) from operating activities in the amount of: A) ($80). B) $120. C) $200. D) $420. Answer: B Explanation: Customers Interest on investments Interest on debt Income tax Purchase of inventory Operating expenses

1,800 200 (300 ) (80 ) (1,000 ) (500 )

Net cash inflows from operating activities

120

109) Bad Brad's BBQ had cash flows for the year as follows ($ in millions):

CASH RECEIVED FROM: Customers Interest on investments Sale of land Sale of common stock Issuance of debt securities CASH PAID FOR: Interest on debt Income tax Debt principal reduction Purchase of equipment Purchase of inventory Dividends on common stock Operating expenses

$ 1,800 200 100 600 2,000 $

300 80 1,500 4,000 1,000 200 500

Bad Brad's would report net cash inflows (outflows) from investing activities in the amount of: A) ($4,000). B) $100. C) ($3,900). D) ($1,900). Answer: C Explanation: Sale of land Purchase of equipment

100 (4,000 )

Net cash outflows from investing activities

$ (3,900 )

Difficulty: 3 Hard Topic: Investing Activities Learning Objective: 11-04 Prepare the investing activities section of the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

110) Bad Brad's BBQ had cash flows for the year as follows ($ in millions):

$ 1,800 200 100 600 2,000 $

300 80 1,500 4,000 1,000 200 500

Bad Brad's would report net cash inflows (outflows) from financing activities in the amount of: A) $1,100. B) ($1,100). C) $820. D) $900. Answer: D Explanation: Sale of common stock Issuance of debt securities Debt principal reduction Dividends on common stock

600 2,000 (1,500 ) (200 )

Net cash inflows from financing activities

900

Difficulty: 3 Hard Topic: Financing Activities Learning Objective: 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

111) During the year, Next Tec Corp. had the following cash flows: receipt from customers, $10,000; receipt from the bank for long-term borrowing, $6,000; payment to suppliers, $5,000; payment of dividends, $1,000; payment to workers, $2,000; and payment for machinery, $8,000. What amount would be reported for net investing cash flows in the statement of cash flows? A) $5,000. B) $2,000. C) $6,000. D) ($8,000). Answer: D Explanation: Payment for machinery, $8,000. Difficulty: 3 Hard Topic: Investing Activities Learning Objective: 11-04 Prepare the investing activities section of the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 112) During the year, Next Tec Corp. had the following cash flows: receipt from customers, $10,000; receipt from the bank for long-term borrowing, $6,000; payment to suppliers, $5,000; payment of dividends, $1,000; payment to workers, $2,000; and payment for machinery, $8,000. What amount would be reported for net financing cash flows in the statement of cash flows? A) $5,000. B) $2,000. C) $6,000. D) ($8,000). Answer: A Explanation: Receipt from the bank for long-term borrowing, $6,000, minus payment of dividends, $1,000. Difficulty: 3 Hard Topic: Financing Activities Learning Objective: 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

113) A company had the following cash flows for the year: (a) (b) (c) (d) (e) (f) (g)

Purchased inventory, $60,000 Sold goods to customers, $90,000 Received loan from a local bank, $150,000 Purchased land, $180,000 Purchased treasury stock, $40,000 Paid dividends, $10,000 Sold delivery truck, $30,000

What amount would be reported for net investing cash flows in the statement of cash flows? A) ($150,000). B) ($180,000). C) $30,000. D) ($190,000). Answer: A Explanation: ($150,000) = $30,000 (g) − $180,000 (d) Difficulty: 3 Hard Topic: Investing Activities Learning Objective: 11-04 Prepare the investing activities section of the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

114) A company had the following cash flows for the year: (a) (b) (c) (d) (e) (f) (g)

Purchased land, $60,000 Borrowed from a local bank, $100,000 Paid employee salaries, $50,000 Issued common stock, $75,000 Paid dividends, $20,000 Sold equipment, $40,000 Sold services to customers, $120,000

What amount would be reported for net investing cash flows in the statement of cash flows? A) ($20,000). B) $70,000. C) $155,000. D) $40,000. Answer: A Explanation: ($20,000) = $40,000 (f) − $60,000 (a). Difficulty: 3 Hard Topic: Investing Activities Learning Objective: 11-04 Prepare the investing activities section of the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 115) Which of the following would be classified as an investing cash flow? A) Issue bonds. B) Receive cash in advance from a customer. C) Sell a piece of equipment below cost. D) Repurchase the company's own shares of common stock. Answer: C Difficulty: 2 Medium Topic: Investing Activities Learning Objective: 11-04 Prepare the investing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

116) A company had the following cash flows for the year: (a) (b) (c) (d) (e) (f) (g)

What amount would be reported for net financing cash flows in the statement of cash flows? A) $155,000. B) $70,000. C) ($20,000). D) $40,000. Answer: A Explanation: $155,000 = $100,000 (b) + $75,000 (d) − $20,000 (e). Difficulty: 3 Hard Topic: Financing Activities Learning Objective: 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 117) Financing activities would include cash paid for: A) The stock of another company. B) Dividends to stockholders. C) The purchase of treasury stock. D) Both dividends to stockholders and the purchase of treasury stock. Answer: D Difficulty: 2 Medium Topic: Financing Activities Learning Objective: 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

118) Cash received from issuing common stock would be classified in which section of the Statement of Cash Flows? A) Operating. B) Investing. C) Financing. D) Not shown in the Statement of Cash Flows. Answer: C Difficulty: 2 Medium Topic: Financing Activities Learning Objective: 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 119) During 2021, Victory Solutions had the following cash flows: (1) received cash of $5,000 billed to a customer in 2020; (2) earned $20,000 of net income; (3) paid interest of $6,000 on a corporate bond issued; (4) paid dividends of $8,000 to its stockholders; (5) borrowed $40,000 from a local bank; and (6) purchased its own shares of common stock for $10,000. What is Victory Solutions' net cash flows from financing activities for 2021? A) $40,000. B) $30,000. C) $22,000. D) $16,000. Answer: C Explanation: (1), (2), and (3) are operating activities. (4), (5), and (6) are financing activities. (5) is a financing inflow, and (4) and (6) are financing outflows. Therefore, $40,000 − $8,000 − $10,000 = $22,000. Difficulty: 3 Hard Topic: Financing Activities Learning Objective: 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

120) The following information pertains to Alpha Computing at the end of 2021:

Assets Liabilities Net Income Common Stock

$ 970,000 $ 560,000 $ 90,000 $ 350,000

Alpha Computing's Retained Earnings account had a zero balance at the beginning of 2021. What amount of dividends did the company declare in 2021? A) $280,000. B) $150,000. C) $30,000. D) $80,000. Answer: C Explanation: Assets = Liabilities + Common Stock + Retained Earnings. $970,000 = $560,000 + $350,000 + Retained Earnings. Therefore, Retained Earnings = $60,000. $60,000 = $0 + $90,000 − Dividends. Therefore, Dividends = $30,000. Difficulty: 3 Hard Topic: Financing Activities Learning Objective: 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

121) The balance sheet of Computer World reports total assets of $350,000 and $450,000 at the beginning and end of the year, respectively. Sales revenues are $800,000, net income is $100,000, and net cash flows from operating activities are $150,000. What is Computer World's cash return on assets? A) 33.3%. B) 42.9%. C) 25.0%. D) 37.5%. Answer: D Explanation: Operating Cash Flows $150,000

Average Total Assets ($350,000 + $450,000)/2

÷ ÷

= =

Cash Return on Assets 37.5%

Difficulty: 3 Hard Topic: Analysis - Cash Return on Assets Learning Objective: 11-06 Perform financial analysis using the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 122) The balance sheet of Computer World reports total assets of $350,000 and $450,000 at the beginning and end of the year, respectively. Sales revenues are $800,000, net income is $100,000, and net cash flows from operating activities are $150,000. What is Computer World's cash flow to sales? A) 15.6%. B) 25.0%. C) 18.8%. D) 37.5%. Answer: C Explanation: Operating Cash Flows $150,000

÷ ÷

Sales $800,000

= =

Cash Flow to Sales 18.8% (rounded)

123) The balance sheet of Computer World reports total assets of $350,000 and $450,000 at the beginning and end of the year, respectively. Sales revenues are $800,000, net income is $100,000, and net cash flows from operating activities are $150,000. What is Computer World's asset turnover? A) 2.0 times. B) 2.3 times. C) 0.5 times. D) 1.8 times. Answer: A Explanation: Sales $800,000

÷ ÷

Average Total Assets ($350,000 + $450,000)/2

= =

Asset Turnover 2.0 times

Difficulty: 3 Hard Topic: Analysis - Components of Cash Return on Assets Learning Objective: 11-06 Perform financial analysis using the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 124) The balance sheet of Sound Designs reports total assets of $750,000 and $800,000 at the beginning and end of the year, respectively. Sales revenues are $1.5 million ($1.2 million in the previous year), net income is $150,000, and net cash flows from operating activities are $175,000. What is Sound Designs' cash return on assets? A) 19.4%. B) 21.9%. C) 22.6%. D) 18.8%. Answer: C Explanation: Operating Cash Flows $175,000

÷ ÷

Average Total Assets ($750,000 + $800,000)/2

= =

Cash Return on Assets 22.6% (rounded)

125) The balance sheet of Sound Designs reports total assets of $750,000 and $800,000 at the beginning and end of the year, respectively. Sales revenues are $1.5 million ($1.2 million in the previous year), net income is $150,000, and net cash flows from operating activities are $175,000. What is Sound Designs' cash flow to sales? A) 22.6%. B) 11.7%. C) 14.6%. D) 13.0%. Answer: B Explanation: Operating Cash Flows $175,000

÷ ÷

Sales $1,500,000

= =

Cash Flow to Sales 11.7% (rounded)

Difficulty: 3 Hard Topic: Analysis - Components of Cash Return on Assets Learning Objective: 11-06 Perform financial analysis using the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 126) The balance sheet of Sound Designs reports total assets of $750,000 and $800,000 at the beginning and end of the year, respectively. Sales revenues are $1.5 million ($1.2 million in the previous year), net income is $150,000, and net cash flows from operating activities are $175,000. What is Sound Designs' asset turnover? A) 2.0 times. B) 1.7 times. C) 0.5 times. D) 1.9 times. Answer: D Explanation: Sales $1,500,000

÷ ÷

Average Total Assets ($750,000 + $800,000)/2

Asset = Turnover = 1.9 times (rounded)

127) The balance sheet of Tech Track reports total assets of $400,000 and $500,000 at the beginning and end of the year, respectively. Sales revenues are $1.1 million ($0.8 million in the previous year), net income is $40,000, and net cash flows from operating activities are $50,000. How does Tech Track's cash return on assets compare to the industry average of 10%? A) Better. B) Worse. C) Same as. D) Cannot be determined with the data provided. Answer: A Explanation: Operating Cash Flows $ 50,000

Average ÷ Total Assets = ÷ ($400,000 + $500,000)/2 =

Cash Return on Assets 11.1% (rounded)

Difficulty: 3 Hard Topic: Analysis - Cash Return on Assets Learning Objective: 11-06 Perform financial analysis using the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 128) The balance sheet of Tech Track reports total assets of $400,000 and $500,000 at the beginning and end of the year, respectively. Sales revenues are $1.1 million ($0.8 million in the previous year), net income is $40,000, and net cash flows from operating activities are $50,000. How does Tech Track's cash flow to sales ratio compare to the industry average of 5%? A) Better. B) Worse. C) Same as. D) Cannot be determined with the data provided. Answer: B Explanation: Operating Cash Flows $ 50,000

÷ ÷

Sales 1,100,000

= Cash Flow to Sales = 4.5% (rounded)

129) The balance sheet of Tech Track reports total assets of $400,000 and $600,000 at the beginning and end of the year, respectively. Sales revenue for the year is $1,000,000 ($800,000 in the previous year), net income is $40,000, and net cash flows from operating activities are $50,000. How does Tech Track's asset turnover compare to the industry average of 2.0 times? A) Better. B) Worse. C) Same as. D) Cannot be determined with the data provided. Answer: C Explanation: Sales $ 1,000,000

÷ ÷

Average Total Assets = ($400,000 + $600,000)/2 =

Asset Turnover 2.0 times

Difficulty: 3 Hard Topic: Analysis - Components of Cash Return on Assets Learning Objective: 11-06 Perform financial analysis using the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 130) We can separate cash return on assets into: A) Cash flow to sales and return on assets. B) Cash flow to sales and asset turnover. C) Cash flow to sales and profit margin. D) Profit margin and asset turnover. Answer: B Difficulty: 1 Easy Topic: Analysis - Components of Cash Return on Assets Learning Objective: 11-06 Perform financial analysis using the statement of cash flows. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

131) Some cash flow ratios are derived by substituting net cash flows from operating activities in place of: A) Average total assets. B) Net income. C) Average stockholders' equity. D) The change in cash. Answer: B Difficulty: 2 Medium Topic: Analysis - Cash Return on Assets Learning Objective: 11-06 Perform financial analysis using the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 132) The balance sheet of Technology World reports total assets of $800,000 and $900,000 at the beginning and end of the year, respectively. The cash return on assets for the year is 20%. What is Technology World's net operating cash flows for the year? A) $4,500,000. B) $170,000. C) $4,250,000. D) $85,000. Answer: B Explanation: Operating cash flows divided by average total assets equals 20%. Average total assets equal $850,000 [($800,000 + $900,000)/2]; therefore, operating cash flows must be $170,000 ($850,000 × 20%). Difficulty: 3 Hard Topic: Analysis - Cash Return on Assets Learning Objective: 11-06 Perform financial analysis using the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

133) The balance sheet of Orion Medical Equipment reports total assets of $450,000 and $550,000 at the beginning and end of the year, respectively. The cash return on assets for the year is 10%. What is Orion's net operating cash flows for the year? A) $5,000,000. B) $55,000. C) $5,500,000. D) $50,000. Answer: D Explanation: Operating cash flows divided by average total assets equals 10%. Average total assets equal $500,000 [($450,000 + $550,000)/2]; therefore, operating cash flows must be $50,000 ($500,000 × 10%). Difficulty: 3 Hard Topic: Analysis - Cash Return on Assets Learning Objective: 11-06 Perform financial analysis using the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 134) We calculate cash return on assets as A) The change in cash divided by average total assets. B) Net cash flows from operating activities divided by average total assets. C) The change in cash divided by ending total assets. D) Net cash flows from operating activities divided by ending total assets. Answer: B Difficulty: 1 Easy Topic: Analysis - Cash Return on Assets Learning Objective: 11-06 Perform financial analysis using the statement of cash flows. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

135) Which of the following statements is not true relating to cash flow analysis? A) Cash return on assets indicates the amount of operating cash flow generated for each dollar invested in assets. B) To maximize cash flow from operations, a company strives to increase both cash flow per dollar of sales and sales per dollar of assets invested. C) Cash return on assets can be separated to examine two important business strategies: cash flow to sales and asset turnover. D) Positive cash flow from operations is not important to a company's survival in the long run. Answer: D Difficulty: 2 Medium Topic: Analysis - Cash Return on Assets; Analysis - Components of Cash Return on Assets Learning Objective: 11-06 Perform financial analysis using the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 136) The balance sheet of Storage Solutions reports total assets of $300,000 and $350,000 at the beginning and end of the year, respectively. The cash return on assets for the year is 10%. What is Storage Solutions' net cash flows from operating activities for the year? A) $25,000. B) $30,000. C) $32,500. D) $35,000. Answer: C Explanation: Net cash flows for operating activities = 0.10 ×[($300,000 + $350,000) ÷ 2] = $32,500. Difficulty: 3 Hard Topic: Analysis - Cash Return on Assets Learning Objective: 11-06 Perform financial analysis using the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

137) In 2021, Hope Company incurred sales on account of $100,000. The company also has the following information:

Accounts Receivable Accounts Payable

December 31, 2021 December 31, 2020 $ 20,000 $ 50,000 $ 40,000 $ 65,000

What is the amount of cash received from customers for Hope Company in 2021? A) $100,000. B) $45,000. C) $130,000. D) $70,000. Answer: C Explanation: $100,000 + $30,000 decrease in accounts receivable = $130,000. Difficulty: 3 Hard Topic: Operating Activities - Direct Method Learning Objective: 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 138) Wireless Technologies reports sales of $50 million. Accounts receivable at the beginning and end of the year are $5 million and $7 million, respectively. What is the amount of cash received from customers? A) $50 million. B) $52 million. C) $48 million. D) $55 million. Answer: C Explanation: Sales − Increase in accounts receivable = Cash received from customers

$ 50 (2) $ 48

139) At the beginning of the period, Utilities Payable equals $500. At the end of the period, Utilities Payable equals $700. If Utilities Expense for the period equals $1,500, what was the cash paid for utilities for the period? A) $500. B) $1,500. C) $1,300. D) $700. Answer: C Explanation: Utilities Expense − Increase in Utilities Payable = Cash paid for utilities

$ 1,500 (200) $1,300

$ 15,400 (500) $ 14,900

141) A company reports cost of goods sold of $40 million. Inventory at the beginning and end of the year is $4 million and $3 million, respectively. Accounts payable at the beginning and end of the year are $3 million and $6 million, respectively. What is the amount of cash paid to suppliers? A) $40 million. B) $36 million. C) $44 million. D) $42 million. Answer: B Explanation: Cost of goods sold − Decrease in inventory = Purchases − Increase in accounts payable = Cash paid to suppliers

40 (1) 39 (3) 36

Difficulty: 3 Hard Topic: Operating Activities - Direct Method Learning Objective: 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 142) A company reports operating expenses of $2 million. Operating expenses include rent expense. Prepaid rent at the beginning and end of the year is $20,000 and $70,000, respectively. All other operating expenses were paid in cash as incurred. What is the amount of cash paid for operating expenses? A) $2,000,000. B) $2,070,000. C) $1,950,000. D) $2,050,000. Answer: D Explanation: Operating expenses + Increase in prepaid rent = Cash paid for operating expenses

$ 2,000,000 50,000 $ 2,050,000

143) A company reports income tax expense of $800,000. Income tax payable at the beginning and end of the year is $50,000 and $70,000, respectively. What is the amount of cash paid for income taxes? A) $780,000. B) $800,000. C) $820,000. D) $870,000. Answer: A Explanation: Income tax expense − Increase in income tax payable = Cash paid for income taxes

$ 800,000 (20,000) $ 780,000

$ 100 (3) $ 97

145) A company reports cost of goods sold of $75 million. Inventory at the beginning and end of the year is $8 million and $9 million, respectively. Accounts payable at the beginning and end of the year are $5 million and $3 million, respectively. What is the amount of cash paid to suppliers? A) $78 million. B) $72 million. C) $75 million. D) $76 million. Answer: A Explanation: Cost of goods sold + Increase in inventory = Purchases + Decrease in accounts payable = Cash paid to suppliers

$ 75 1 76 2 $ 78

Difficulty: 3 Hard Topic: Operating Activities - Direct Method Learning Objective: 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 146) A company reports operating expenses of $5 million. Operating expenses include rent expense. Prepaid rent at the beginning and end of the year is $120,000 and $80,000, respectively. All other operating expenses were paid in cash as incurred. What is the amount of cash paid for operating expenses? A) $5,000,000. B) $5,040,000. C) $4,960,000. D) $5,080,000. Answer: C Explanation: Operating expenses − Decrease in prepaid rent = Cash paid for operating expenses

$5,000,000 (40,000) $4,960,000

147) A company reports income tax expense of $1,700,000. Income taxes payable at the beginning and end of the year are $250,000 and $370,000, respectively. What is the amount of cash paid for income taxes? A) $1,700,000. B) $1,820,000. C) $2,070,000. D) $1,580,000. Answer: D Explanation: Income tax expense − Increase in income taxes payable Cash paid for income taxes

$ 1,700,000 (120,000) $ 1,580,000

148) A company purchases its inventory from suppliers on account. During the year, its Inventory account increased by $10 million and its accounts payable to suppliers decreased by $3 million. If cost of goods sold was $440 million, its cash outflows to inventory suppliers totaled: A) $453 million. B) $447 million. C) $433 million. D) $427 million. Answer: A Explanation: Cost of goods sold + Increase in inventory = Purchases + Decrease in accounts payable = Cash paid to suppliers

$ 440 10 450 3 $ 453

Difficulty: 3 Hard Topic: Operating Activities - Direct Method Learning Objective: 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 149) A company's Income Tax Payable account decreased from $14 million to $12 million during the year. If its income tax expense was $80 million, what would be shown as cash paid for income taxes under the direct method? A) A cash outflow of $12 million. B) A cash outflow of $78 million. C) A cash outflow of $80 million. D) A cash outflow of $82 million. Answer: D Explanation: $80 million + $2 million decrease in income tax payable = $82 million. Difficulty: 3 Hard Topic: Operating Activities - Direct Method Learning Objective: 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

150) A company began operations in Year 1. The following information is provided at the end of each year:

Total salaries earned by employees Salaries payable

Year 1 $ 150,000 20,000

Year 2 $ 180,000 30,000

What would be the cash paid to employees in Year 2? A) $150,000. B) $160,000. C) $170,000. D) $180,000. Answer: C Explanation: $170,000 = $180,000 − ($30,000 − $20,000). Difficulty: 3 Hard Topic: Operating Activities - Direct Method Learning Objective: 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 151) A company collects $50,000 from customers for the year. Accounts Receivable at the beginning of the year is $5,000, and Accounts Receivable at the end of the year is $15,000. What is Sales Revenue for the year? A) $60,000. B) $55,000. C) $65,000. D) $40,000. Answer: A Explanation: $X − ($15,000 − $5,000) = $50,000. Sales Revenue = $60,000 Difficulty: 3 Hard Topic: Operating Activities - Direct Method Learning Objective: 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

152) Which of the following items is not reported in the operating section of the statement of cash flows using the direct method? A) Depreciation expense. B) Cash paid to suppliers. C) Cash received from customers. D) Cash paid for income taxes. Answer: A Difficulty: 2 Medium Topic: Operating Activities - Direct Method Learning Objective: 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 153) Which of the following items is reported in the operating section of the statement of cash flows using the direct method? A) Depreciation expense. B) Gain on sale of an asset. C) Cash received from customers. D) Loss on sale of an asset. Answer: C Difficulty: 2 Medium Topic: Operating Activities - Direct Method Learning Objective: 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

Match the following: A) Inflow from investing activities B) Add to net income C) Subtract from net income D) Outflow from financing activities E) Outflow from investing activities F) Inflow from financing activities 154) Gain on sale of land. Difficulty: 2 Medium Topic: Classification of Transactions; Operating Activities - Indirect Method; Investing Activities; Financing Activities Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities.; 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method.; 11-04 Prepare the investing activities section of the statement of cash flows.; 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 155) Purchase equipment. Difficulty: 2 Medium Topic: Classification of Transactions; Operating Activities - Indirect Method; Investing Activities; Financing Activities Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities.; 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method.; 11-04 Prepare the investing activities section of the statement of cash flows.; 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 156) Obtain loan from the bank. Difficulty: 2 Medium Topic: Classification of Transactions; Operating Activities - Indirect Method; Investing Activities; Financing Activities Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities.; 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method.; 11-04 Prepare the investing activities section of the statement of cash flows.; 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

157) Sale of investments. Difficulty: 2 Medium Topic: Classification of Transactions; Operating Activities - Indirect Method; Investing Activities; Financing Activities Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities.; 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method.; 11-04 Prepare the investing activities section of the statement of cash flows.; 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 158) Increase in salaries payable. Difficulty: 2 Medium Topic: Classification of Transactions; Operating Activities - Indirect Method; Investing Activities; Financing Activities Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities.; 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method.; 11-04 Prepare the investing activities section of the statement of cash flows.; 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 159) Pay dividends. Difficulty: 2 Medium Topic: Classification of Transactions; Operating Activities - Indirect Method; Investing Activities; Financing Activities Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities.; 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method.; 11-04 Prepare the investing activities section of the statement of cash flows.; 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 154) C 155) E 156) F 157) A 158) B 159) D

Match the following: A) Outflow from investing activities B) Inflow from financing activities C) Inflow from investing activities D) Subtract from net income E) Add to net income F) Outflow from financing activities 160) Depreciation expense. Difficulty: 2 Medium Topic: Classification of Transactions; Operating Activities - Indirect Method; Investing Activities; Financing Activities Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities.; 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method.; 11-04 Prepare the investing activities section of the statement of cash flows.; 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 161) Issue common stock. Difficulty: 2 Medium Topic: Classification of Transactions; Operating Activities - Indirect Method; Investing Activities; Financing Activities Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities.; 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method.; 11-04 Prepare the investing activities section of the statement of cash flows.; 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 162) Increase in prepaid rent. Difficulty: 2 Medium Topic: Classification of Transactions; Operating Activities - Indirect Method; Investing Activities; Financing Activities Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities.; 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method.; 11-04 Prepare the investing activities section of the statement of cash flows.; 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

163) Sale of building. Difficulty: 2 Medium Topic: Classification of Transactions; Operating Activities - Indirect Method; Investing Activities; Financing Activities Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities.; 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method.; 11-04 Prepare the investing activities section of the statement of cash flows.; 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 164) Repay amount borrowed from the bank. Difficulty: 2 Medium Topic: Classification of Transactions; Operating Activities - Indirect Method; Investing Activities; Financing Activities Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities.; 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method.; 11-04 Prepare the investing activities section of the statement of cash flows.; 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 165) Purchase of equipment. Difficulty: 2 Medium Topic: Classification of Transactions; Operating Activities - Indirect Method; Investing Activities; Financing Activities Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities.; 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method.; 11-04 Prepare the investing activities section of the statement of cash flows.; 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 160) E 161) B 162) D 163) C 164) F 165) A

Match the following: A) Indirect method B) Asset turnover C) Investing activities D) Operating activities E) Direct method F) Noncash activities G) Financing activities H) Statement of cash flows I) Cash return on assets J) Cash flow to sales 166) Begins with net income and then lists adjustments to net income in order to arrive at operating cash flows. Difficulty: 2 Medium Topic: Classification of Transactions; Basic Steps and Formatting of the Statement of Cash Flows; Operating Activities - Indirect Method; Investing Activities; Financing Activities; Analysis - Cash Return on Assets; Analysis - Components of Cash Return on Assets; Operating Activities Direct Method Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities.; 11-02 Understand the steps and basic format in preparing the statement of cash flows.; 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method.; 11-04 Prepare the investing activities section of the statement of cash flows.; 11-05 Prepare the financing activities section of the statement of cash flows.; 11-06 Perform financial analysis using the statement of cash flows.; 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 167) Significant investing and financing activities that do not affect cash. Difficulty: 2 Medium Topic: Classification of Transactions; Basic Steps and Formatting of the Statement of Cash Flows; Operating Activities - Indirect Method; Investing Activities; Financing Activities; Analysis - Cash Return on Assets; Analysis - Components of Cash Return on Assets; Operating Activities Direct Method Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities.; 11-02 Understand the steps and basic format in preparing the statement of cash flows.; 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method.; 11-04 Prepare the investing activities section of the statement of cash flows.; 11-05 Prepare the financing activities section of the statement of cash flows.; 11-06 Perform financial analysis using the statement of cash flows.; 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 73 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

168) Sales revenue divided by average total assets; measures the sales revenue generated per dollar of assets. Difficulty: 2 Medium Topic: Classification of Transactions; Basic Steps and Formatting of the Statement of Cash Flows; Operating Activities - Indirect Method; Investing Activities; Financing Activities; Analysis - Cash Return on Assets; Analysis - Components of Cash Return on Assets; Operating Activities Direct Method Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities.; 11-02 Understand the steps and basic format in preparing the statement of cash flows.; 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method.; 11-04 Prepare the investing activities section of the statement of cash flows.; 11-05 Prepare the financing activities section of the statement of cash flows.; 11-06 Perform financial analysis using the statement of cash flows.; 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 169) Includes cash receipts and cash payments for transactions relating to revenue and expense activities. Difficulty: 2 Medium Topic: Classification of Transactions; Basic Steps and Formatting of the Statement of Cash Flows; Operating Activities - Indirect Method; Investing Activities; Financing Activities; Analysis - Cash Return on Assets; Analysis - Components of Cash Return on Assets; Operating Activities Direct Method Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities.; 11-02 Understand the steps and basic format in preparing the statement of cash flows.; 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method.; 11-04 Prepare the investing activities section of the statement of cash flows.; 11-05 Prepare the financing activities section of the statement of cash flows.; 11-06 Perform financial analysis using the statement of cash flows.; 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

170) Net cash flows from operating activities divided by average total assets; measures the operating cash flow generated per dollar of assets. Difficulty: 2 Medium Topic: Classification of Transactions; Basic Steps and Formatting of the Statement of Cash Flows; Operating Activities - Indirect Method; Investing Activities; Financing Activities; Analysis - Cash Return on Assets; Analysis - Components of Cash Return on Assets; Operating Activities Direct Method Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities.; 11-02 Understand the steps and basic format in preparing the statement of cash flows.; 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method.; 11-04 Prepare the investing activities section of the statement of cash flows.; 11-05 Prepare the financing activities section of the statement of cash flows.; 11-06 Perform financial analysis using the statement of cash flows.; 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 171) A summary of cash inflows and cash outflows during the reporting period sorted by operating, investing, and financing activities. Difficulty: 2 Medium Topic: Classification of Transactions; Basic Steps and Formatting of the Statement of Cash Flows; Operating Activities - Indirect Method; Investing Activities; Financing Activities; Analysis - Cash Return on Assets; Analysis - Components of Cash Return on Assets; Operating Activities Direct Method Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities.; 11-02 Understand the steps and basic format in preparing the statement of cash flows.; 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method.; 11-04 Prepare the investing activities section of the statement of cash flows.; 11-05 Prepare the financing activities section of the statement of cash flows.; 11-06 Perform financial analysis using the statement of cash flows.; 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

172) Net cash flows from operating activities divided by sales revenue; measures the operating cash flow generated per dollar of sales. Difficulty: 2 Medium Topic: Classification of Transactions; Basic Steps and Formatting of the Statement of Cash Flows; Operating Activities - Indirect Method; Investing Activities; Financing Activities; Analysis - Cash Return on Assets; Analysis - Components of Cash Return on Assets; Operating Activities Direct Method Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities.; 11-02 Understand the steps and basic format in preparing the statement of cash flows.; 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method.; 11-04 Prepare the investing activities section of the statement of cash flows.; 11-05 Prepare the financing activities section of the statement of cash flows.; 11-06 Perform financial analysis using the statement of cash flows.; 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 173) Includes cash transactions resulting from the external financing of a business. Difficulty: 2 Medium Topic: Classification of Transactions; Basic Steps and Formatting of the Statement of Cash Flows; Operating Activities - Indirect Method; Investing Activities; Financing Activities; Analysis - Cash Return on Assets; Analysis - Components of Cash Return on Assets; Operating Activities Direct Method Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities.; 11-02 Understand the steps and basic format in preparing the statement of cash flows.; 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method.; 11-04 Prepare the investing activities section of the statement of cash flows.; 11-05 Prepare the financing activities section of the statement of cash flows.; 11-06 Perform financial analysis using the statement of cash flows.; 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

174) Includes cash transactions involving the purchase and sale of long-term assets and current investments. Difficulty: 2 Medium Topic: Classification of Transactions; Basic Steps and Formatting of the Statement of Cash Flows; Operating Activities - Indirect Method; Investing Activities; Financing Activities; Analysis - Cash Return on Assets; Analysis - Components of Cash Return on Assets; Operating Activities Direct Method Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities.; 11-02 Understand the steps and basic format in preparing the statement of cash flows.; 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method.; 11-04 Prepare the investing activities section of the statement of cash flows.; 11-05 Prepare the financing activities section of the statement of cash flows.; 11-06 Perform financial analysis using the statement of cash flows.; 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 175) Adjusts the items on the income statement to show items such as cash received from customers, and cash paid for inventory, salaries, rent, interest, and taxes. Difficulty: 2 Medium Topic: Classification of Transactions; Basic Steps and Formatting of the Statement of Cash Flows; Operating Activities - Indirect Method; Investing Activities; Financing Activities; Analysis - Cash Return on Assets; Analysis - Components of Cash Return on Assets; Operating Activities Direct Method Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities.; 11-02 Understand the steps and basic format in preparing the statement of cash flows.; 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method.; 11-04 Prepare the investing activities section of the statement of cash flows.; 11-05 Prepare the financing activities section of the statement of cash flows.; 11-06 Perform financial analysis using the statement of cash flows.; 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 166) A 167) F 168) B 169) D 170) I 171) H 172) J 173) G 174) C 175) E

176) For each of the following ten transactions, indicate by letter whether the cash effect of each transaction is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC) activity. Also, indicate whether the transaction is a cash inflow (CI), cash outflow (CO), or no effect on cash (NE). The first answer is provided as an example. Type of Activity O

Answer: Type of Activity O F O F F O I NC O F O

Cash Inflow or Outflow Transaction CO Payment of employee salaries 1. Issuance of bonds 2. Payment of income taxes 3. Payment of a long-term note payable 4. Sale of treasury stock 5. Payment of an account payable 6. Sale of land for cash 7. Purchase of long-term assets by issuing debt 8. Collection of an account receivable 9. Issuance of common stock 10. Purchase of inventory

Cash Inflow or Outflow Transaction CO Payment of employee salaries CI 1. Issuance of bonds CO 2. Payment of income taxes CO 3. Payment of a long-term note payable CI 4. Sale of treasury stock CO 5. Payment of an account payable CI 6. Sale of land for cash NE 7. Purchase of long-term assets by issuing debt CI 8. Collection of an account receivable CI 9. Issuance of common stock CO 10. Purchase of inventory

Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

177) For each of the following five transactions, indicate by letter whether the cash effect of each transaction is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC) activity. Type of Activity

Answer: Type of Activity I O F I I

Transaction 1. Investment in bonds 2. Payment of interest on bonds payable 3. Payment of a cash dividend 4. Purchase of a building 5. Collection of a note receivable

178) For each of the following five transactions, indicate by letter whether the cash effect of each transaction is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC) activity. Type of Activity

Answer: Type of Activity F I F O F

Transaction 1. Issuance of common stock 2. Sale of land for cash 3. Purchase of treasury stock 4. Collection of an account receivable 5. Issuance of a note payable

179) For each of the following five transactions, indicate by letter whether the cash effect of each transaction is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC) activity. Type of Activity

Answer: Type of Activity O F O NC F

Transaction 1. Purchase of inventory 2. Repayment of note payable 3. Payment of employee salaries 4. Sale of equipment for a note receivable 5. Issuance of bonds

180) Classify each of the following items as an operating, investing, or financing activity. 1. Dividends paid. 2. Sale of goods or services for cash. 3. Sale of equipment. 4. Purchase of inventory. 5. Repayment of notes payable. Answer: 1. Financing Activity. 2. Operating Activity. 3. Investing Activity. 4. Operating Activity. 5. Financing Activity. Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 181) Classify each of the following items as an operating, investing, or financing activity. 1. Payment of income taxes. 2. Sale of investments. 3. Receipt of interest. 4. Issuance of common stock. 5. Purchase of intangibles. Answer: 1. Operating Activity. 2. Investing Activity. 3. Operating Activity. 4. Financing Activity. 5. Investing Activity. Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

182) The following selected transactions occur during the first year of operations. Determine how each should be reported in the statement of cash flows. State whether it is a cash inflow or a cash outflow and whether it is an operating, investing, or financing activity. 1. Issued 1 million shares of common stock at $20 per share. 2. Purchased land and a building for $3 million. 3. Received $200,000 from a cash sale of merchandise to customers. 4. Paid a dividend of $1 per share to common stockholders. 5. Loaned $50,000 to an employee and accepted a note receivable. Answer: 1. Cash inflow, Financing activity. 2. Cash outflow, Investing activity. 3. Cash inflow, Operating activity. 4. Cash outflow, Financing activity. 5. Cash outflow, Investing activity. Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

183) Analysis of the income statement, balance sheets, and additional information from the accounting records of Gaming Strategies reveals the following items: 1. Collection of notes receivable. 2. Purchase of equipment. 3. Exchange of long-term assets. 4. Decrease in accounts payable. 5. Payment of dividends. 6. Purchase of a patent. 7. Depreciation expense. 8. Decrease in accounts receivable. 9. Issuance of note payable. 10. Increase in inventory. Indicate in which section of the statement of cash flows each of these items would be reported: operating activities (indirect method), investing activities, financing activities, or noncash activities. Answer: 1. Investing activities. 2. Investing activities. 3. Noncash activities. 4. Operating activities. 5. Financing activities. 6. Investing activities. 7. Operating activities. 8. Operating activities. 9. Financing activities. 10. Operating activities. Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

184) Place the following items in the correct order as they would appear in the statement of cash flows: 1. Beginning cash balance 2. Ending cash balance 3. Investing activities 4. Financing activities 5. Net increase (decrease) in cash 6. Operating activities Answer: Operating activities Investing activities Financing activities Net increase (decrease) in cash Beginning cash balance Ending cash balance Difficulty: 2 Medium Topic: Basic Steps and Formatting of the Statement of Cash Flows Learning Objective: 11-02 Understand the steps and basic format in preparing the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

185) Electronic Wonders reports net income of $95,000. The accounting records reveal Depreciation Expense of $50,000, as well as increases in Prepaid Rent, Accounts Payable, and Income Tax Payable of $40,000, $23,000, and $20,000, respectively. Prepare the operating activities section of Electronic Wonders' statement of cash flows using the indirect method. Answer: Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense Increase in prepaid rent Increase in accounts payable Increase in income tax payable Net cash flows from operating activities

$95,000

50,000 (40,000) 23,000 20,000 $148,000

Difficulty: 3 Hard Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 186) Micro Manufacturing reports net income of $850,000. Depreciation Expense is $60,000, Accounts Receivable increases $30,000 and Accounts Payable decreases $10,000. Calculate net cash flows from operating activities using the indirect method. Answer: Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense Increase in accounts receivable Decrease in accounts payable Net cash flows from operating activities

$850,000

60,000 (30,000) (10,000) $870,000

187) Fidelity Systems reports net income of $80 million. Included in that number is depreciation expense of $8 million, and a gain on the sale of equipment of $1 million. Records reveal increases in Accounts Receivable, Inventory, and Accounts Payable of $4 million, $3 million, and $2 million, respectively. Calculate Fidelity's net cash flows from operating activities using the indirect method. Answer: Cash Flows from Operating Activities ($ in millions) Net income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense Gain on sale of equipment Increase in accounts receivable Increase in inventory Increase in accounts payable Net cash flows from operating activities

$80

8 (1) (4) (3) 2 $82

188) Alpha Computers reports net income of $44 million. Included in that number is depreciation expense of $7 million, and a loss on the sale of land of $2 million. Records reveal decreases in Accounts Receivable, Inventory, and Accounts Payable of $4 million, $3 million, and $2 million, respectively. Calculate Alpha Computers' net cash flows from operating activities using the indirect method. Answer: Cash Flows from Operating Activities ($ in millions) Net income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense Loss on sale of land Decrease in accounts receivable Decrease in inventory Decrease in accounts payable Net cash flows from operating activities

$44

7 2 4 3 (2) $58

189) Portions of the financial statements for Horizon Telecom are provided below. Horizon Telecom Income Statement For the Year Ended December 31, 2021 Revenues Expenses: Cost of goods sold Operating expenses Depreciation expense Income tax expense Total expenses Net Income

$610,000 370,000 120,000 32,000 44,000 566,000 $44,000

Horizon Telecom Selected Balance Sheet Data December 31, 2021 Increase in accounts receivable Increase in inventory Decrease in prepaid rent Increase in operating expenses payable Decrease in accounts payable Increase in income tax payable

$6,000 13,000 9,000 5,000 8,000 20,000

Prepare the operating activities section of the statement of cash flows for Horizon Telecom using the indirect method.

Answer: Horizon Telecom Statement of Cash Flows For the Year Ended December 31, 2021 Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense Increase in accounts receivable Increase in inventory Decrease in prepaid rent Increase in operating expenses payable Decrease in accounts payable Increase in income tax payable Net cash flows from operating activities

$44,000

32,000 (6,000) (13,000) 9,000 5,000 (8,000) 20,000 $83,000

190) Nathan Herrmann has completed the basic format to be used in preparing the statement of cash flows (indirect method) for CEO Consultants. CEO Consultants Statement of Cash Flows For the Year Ended December 31, 2021 Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash flows from operating activities: Net cash flows from operating activities Cash Flows from Investing Activities Net cash flows from investing activities Cash Flows from Financing Activities Net cash flows from financing activities Net increase (decrease) in cash Cash at the beginning of the period Cash at the end of the period

(50,000) 95,000 $45,000

Listed below in random order are line items to be included in the statement of cash flows. Purchase of equipment Increase in inventory Increase in prepaid rent Payment of dividends Depreciation expense Increase in accounts receivable Increase in accounts payable Loss on sale of land Net income Repayment of notes payable Cash received from the sale of land Issuance of common stock

$220,000 30,000 10,000 40,000 20,000 60,000 10,000 7,000 70,000 50,000 3,000 250,000

Prepare the statement of cash flows for CEO Consultants using the indirect method.

Answer: CEO Consultants Statement of Cash Flows For the Year Ended December 31, 2021 Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense Loss on sale of land Increase in accounts receivable Increase in inventory Increase in prepaid rent Increase in accounts payable Net cash flows from operating activities Cash Flows from Investing Activities Cash received from sale of land Purchase of equipment Net cash flows from investing activities Cash Flows from Financing Activities Issuance of common stock Payment of dividends Repayment of notes payable Net cash flows from financing activities Net increase (decrease) in cash Cash at the beginning of the period Cash at the end of the period

$70,000

20,000 7,000 (60,000) (30,000) (10,000) 10,000 $7,000 3,000 (220,000) (217,000) 250,000 (40,000) (50,000) 160,000 (50,000) 95,000 $45,000

Difficulty: 3 Hard Topic: Operating Activities - Indirect Method; Investing Activities; Financing Activities Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method.; 11-04 Prepare the investing activities section of the statement of cash flows.; 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

191) Mobile Video Systems sold land, investments, and issued their own common stock for $10 million, $15 million, and $20 million, respectively. Mobile Video also purchased treasury stock, equipment, and a patent for $2 million, $4 million, and $6 million, respectively. What amount should the company report as net cash flows from investing activities? What amount should the company report as net cash flows from financing activities? Answer: Cash Flows from Investing Activities Sale of land Sale of investments Purchase equipment Purchase a patent Net cash flows from investing activities Cash Flows from Financing Activities Issuance of common stock Purchase treasury stock Net cash flows from financing activities

$10 15 (4) (6) $15

$20 (2) $18

Difficulty: 3 Hard Topic: Investing Activities; Financing Activities Learning Objective: 11-04 Prepare the investing activities section \ of the statement of cash flows.; 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

192) Two competitors in the construction supply industry report the following selected financial data: Company A Company B $47,220 $66,176 1,783 2,620 4,054 5,125 32,625 41,164 33,005 40,877

Sales Net income Operating cash flows Total assets, beginning Total assets, ending

Calculate the cash return on assets, cash flow to sales ratio, and asset turnover ratio for each company. Which company has the better cash flow to sales ratio and which company has the better asset turnover ratio? Answer: ($ in Operating ÷ millions) Cash Flows Company A $4,054 ÷ Company B $5,125 ÷

($ in Operating ÷ millions) Cash Flows Company A $4,054 ÷ Company B $5,125 ÷

Average Total Assets

($32,625 + $33,005)/2 ($41,164 + $40,877)/2

= =

Sales

$47,220 $66,176

= =

Cash Return on Assets 12.4% (rounded) 12.5% (rounded)

Cash Flow to Sales 8.6% (rounded) 7.7% (rounded)

($ in millions)

Sales

Average Total Assets

Company A

$47,220

($32,625 + $33,005)/2

Company B

$66,176

($41,164 + $40,877)/2

Asset Turnover 1.4 times (rounded) 1.6 times (rounded)

Company A has a better (higher) cash flow to sales ratio, while Company B has a better (higher) asset turnover. Difficulty: 3 Hard Topic: Analysis - Cash Return on Assets; Analysis - Components of Cash Return on Assets Learning Objective: 11-06 Perform financial analysis using the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making; FN Measurement/Keyboard Navigation

193) The balance sheets of Integrated Systems reports total assets of $890,000 and $950,000 at the beginning and end of the year, respectively. Sales revenues are $1.6 million, net income is $185,000, and net cash flows from operating activities are $155,000. Calculate the cash return on assets, cash flow to sales, and asset turnover for Integrated Systems. Answer: Operating Cash Flows $155,000

Average Total Assets

= Cash Return on Assets

($890,000 + $950,000)/2

16.8% (rounded)

Sales

Cash Flow to Sales

$1,600,000

9.7% (rounded)

Sales

Average Total Assets

$1,600,000

($890,000 + $950,000)/2

Operating Cash Flows $155,000

Asset Turnover 1.7 times (rounded)

Difficulty: 3 Hard Topic: Analysis - Cash Return on Assets; Analysis - Components of Cash Return on Assets Learning Objective: 11-06 Perform financial analysis using the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 194) The balance sheets of The Computer Doctor reports total assets of $160,000 and $220,000 at the beginning and end of the year, respectively. The cash return on assets for the year is 10%. Calculate The Computer Doctor's net cash flows from operating activities for the year. Answer: Operating Cash Flows = 0.10 * [($160,000 + $220,000) ÷ 2] = $19,000. Difficulty: 3 Hard Topic: Analysis - Cash Return on Assets Learning Objective: 11-06 Perform financial analysis using the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

195) Discount Computers' accounts receivable increases during the year by $3 million. What is the amount of cash received from customers during the reporting period if its sales are $47 million? Answer: Sales - Increase in accounts receivable Cash received from customers

$47 (3) $44

$81 (8) 73 (6) $67

197) Freedom Wireless reports operating expenses of $255,000. Operating expenses include both rent expense and salaries expense. Prepaid rent decreases during the year by $10,000 and salaries payable increases by $25,000. What is the cash paid for operating expenses during the year? Answer: Operating expenses − Decrease in prepaid rent − Increase in salaries payable = Cash paid for operating expenses

$255,000 (10,000) (25,000) $220,000

$150,000 (5,000) $145,000

199) Portions of the financial statements for Horizon Telecom are provided below. Horizon Telecom Income Statement For the Year Ended December 31, 2021 Revenues Expenses: Cost of goods sold Operating expenses Depreciation expense Income tax expense Total expenses Net Income

$610,000 391,000 120,000 32,000 44,000 587,000 $23,000

$6,000 13,000 9,000 5,000 8,000 20,000

Prepare the operating activities section of the statement of cash flows for Horizon Telecom using the direct method.

Answer: Horizon Telecom Statement of Cash Flows For the Year Ended December 31, 2021 Cash Flows from Operating Activities Cash received from customers Cash paid to suppliers Cash paid for operating expenses Cash paid for income taxes Net cash flows from operating activities

$604,000 (412,000) (106,000) (24,000) $62,000

Revenues − Increase in accounts receivable = Cash received from customers

$610,000 (6,000) $604,000

Cost of goods sold + Increase in inventory = Purchases + Decrease in accounts payable = Cash paid to suppliers

$391,000 13,000 404,000 8,000 $412,000

Operating expenses − Decrease in prepaid rent − Increase in operating expenses payable = Cash paid for operating expenses

$120,000 (9,000) (5,000) $106,000

Income tax expense − Increase in income tax payable = Cash paid for income taxes

$44,000 (20,000) $24,000

200) Listed below are several transactions. For each transaction, indicate by letter whether the cash effect of each transaction is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC) activity. Also, indicate whether the transaction is a cash inflow (CI), cash outflow (CO), or no effect on cash (NE). The first answer is provided as an example. Type of Activity

Cash Inflow or Outflow

Transaction 1. Issuance of common stock 2. Issuance of bonds 3. Investment in bonds 4. Collection of a note receivable 5. Sale of inventory 6. Repayment of note payable 7. Payment of a cash dividend 8. Purchase of land for cash 9. Reissue of treasury stock 10. Collection of an account receivable 11. Issuance of a note payable 12. Payment of employee salaries 13. Sale of equipment for a note receivable 14. Payment of interest on bonds payable 15. Sale of a building

Answer: Type of Activity

Cash Inflow or Outflow

1. Issuance of common stock

2. Issuance of bonds

3. Investment in bonds

4. Collection of a note receivable

5. Sale of inventory

6. Repayment of note payable

7. Payment of a cash dividend

8. Purchase of land for cash

9. Reissue of treasury stock

10. Collection of an account receivable

11. Issuance of a note payable

12. Payment of employee salaries

13. Sale of equipment for a note receivable

14. Payment of interest on bonds payable

15. Sale of a building

Transaction

201) Portions of the financial statements for Security Solutions are provided below. Security Solutions Income Statement For the Year Ended December 31, 2021 Revenues

$960,000

Expenses: Cost of goods sold Operating expenses Depreciation expense Income tax expense Total expenses Net Income

$650,000 210,000 25,000 20,000 905,000 $55,000

Security Solutions Selected Balance Sheet Data December 31, 2021 Increase in accounts receivable Decrease in inventory Increase in prepaid rent Decrease in salaries payable Increase in accounts payable Decrease in income tax payable

5,000 10,000 4,000 6,000 8,000 3,000

Required: Prepare the operating activities section of the statement of cash flows for Security Solutions using the indirect method.

Answer: Security Solutions Statement of Cash Flows For the Year Ended December 31, 2021 Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense Increase in accounts receivable Decrease in inventory Increase in prepaid rent Decrease in salaries payable Increase in accounts payable Decrease in income tax payable Net cash flows from operating activities

$55,000

25,000 (5,000) 10,000 (4,000) (6,000) 8,000 (3,000) $80,000

202) Amy Bourne completed the basic format to be used in preparing the statement of cash flows (indirect method) for Alpha Technologies. All amounts are in thousands (000's). Alpha Technologies Statement of Cash Flows For the Year Ended December 31, 2021 Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash flows from operating activities: Net cash flows from operating activities Cash Flows from Investing Activities Net cash flows from investing activities Cash Flows from Financing Activities Net cash flows from financing activities Net increase (decrease) in cash Cash at the beginning of the period Cash at the end of the period

(40,000) 80,000 $40,000

Listed below in random order are line items to be included in the statement of cash flows. Purchase of equipment Payment of dividends Net income Increase in inventory Increase in prepaid rent Repayment of notes payable Cash received from the sale of land Issuance of common stock Increase in accounts payable Loss on sale of land Depreciation expense Increase in accounts receivable

$220,000 40,000 80,000 30,000 10,000 50,000 3,000 250,000 10,000 7,000 20,000 60,000

Required: Prepare the statement of cash flows for Alpha Technologies using the indirect method.

Answer: Alpha Technologies Statement of Cash Flows For the Year Ended December 31, 2021 Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense Loss on sale of land Increase in accounts receivable Increase in inventory Increase in prepaid rent Increase in accounts payable Net cash flows from operating activities Cash Flows from Investing Activities Cash received from sale of land Purchase of equipment Net cash flows from investing activities Cash Flows from Financing Activities Issuance of common stock Payment of dividends Repayment of notes payable Net cash flows from financing activities Net increase (decrease) in cash Cash at the beginning of the period Cash at the end of the period

$80,000

20,000 7,000 (60,000) (30,000) (10,000) 10,000 $17,000 3,000 (220,000) (217,000) 250,000 (40,000) (50,000) 160,000 (40,000) 80,000 $40,000

203) The income statement, balance sheets, and additional information for Communication Accessories are provided. Communication Accessories Income Statement For the Year Ended December 31, 2021 Revenues Gain on sale of land Total revenues Expenses: Cost of goods sold Operating expenses Depreciation expense Interest expense Income tax expense Total expenses Net Income

$2,800,000 4,000 2,804,000 1,900,000 575,000 38,000 16,000 63,000 2,592,000 $212,000

Communication Accessories Balance Sheets December 31 Assets Current Assets: Cash Accounts receivable Inventory Prepaid rent Long-Term Assets: Investment in stock Land Equipment Accumulated depreciation Total Assets Liabilities and Stockholders' Equity Current Liabilities: Accounts payable Interest payable Income tax payable Long-Term Liabilities: Notes payable Stockholders' Equity: Common stock Retained earnings Total Liabilities and Equity

2021

2020

$182,000 83,000 121,000 7,000

$187,000 95,000 138,000 5,000

195,000 230,000 305,000 (138,000) $985,000

100,000 260,000 225,000 (100,000) $910,000

$40,000 1,000 12,000

$58,000 2,000 10,000

285,000

205,000

350,000 297,000 $985,000

350,000 285,000 $910,000

Additional Information for 2021: 1. Purchase additional investment in stocks for $95,000. 2. Sell land costing $30,000 for $34,000 resulting in a $4,000 gain on sale of land. 3. Purchase $80,000 in equipment by borrowing $80,000 with a note payable due in three years. No cash is exchanged in the transaction. 4. The company declares and pays a cash dividend of $200,000. Required: Prepare the statement of cash flows using the indirect method. Disclose any noncash transactions in an accompanying note. Answer: Communication Accessories Statement of Cash Flows For the Year Ended December 31, 2021 Cash Flows from Operating Activities Net income $212,000 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense 38,000 Gain on sale of land (4,000) Decrease in accounts receivable 12,000 Decrease in inventory 17,000 Increase in prepaid rent (2,000) Decrease in accounts payable (18,000) Decrease in interest payable (1,000) Increase in income tax payable 2,000 Net cash flows from operating activities Cash Flows from Investing Activities Purchase investment in stock (95,000) Sale of land 34,000 Net cash flows from investing activities Cash Flows from Financing Activities Payment of cash dividends (200,000) Net cash flows from financing activities Net increase (decrease) in cash Cash at the beginning of the period Cash at the end of the period Note: Noncash Activities Purchase equipment issuing a note payable

$256,000

(61,000)

(200,000) (5,000) 187,000 $182,000 $80,000

Difficulty: 3 Hard Topic: Operating Activities - Indirect Method; Investing Activities; Financing Activities 107 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method.; 11-04 Prepare the investing activities section \ of the statement of cash flows.; 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 204) Selected financial data for two competitors in the telecommunications industry are as follows: ($ in millions) Company A Net Sales Net Income Net Cash Flows from Operations Total Assets Company B Net Sales Net Income Net Cash Flows from Operations Total Assets

2021

2020

$71,486 5,622 4,507 55,799

$475,203 10,612 11,609 55,380

$39,540 8,052 12,089 58,734

$34,922 7,333 10,104 53,340

Required: 1. Calculate the return on assets for 2021 for both companies. Which company has the better return on assets? 2. Calculate the cash return on assets for 2021 for both companies. Which company has the better cash return on assets? 3. Calculate the cash flow to sales ratio and the asset turnover ratio for 2021 for both companies. Which company has the better ratios?

Answer: 1. ($ in Net Income ÷ millions) Company A 5,622 ÷ Company B 8,052 ÷

Average Total Assets

= Return on Assets

(55,799 + 55,380)/2 (58,734 + 53,340)/2

= =

10.1% (rounded) 14.4% (rounded)

Company B has a higher return on assets (14.4%) compared to Company A (10.1%). 2. ($ in Operating ÷ millions) Cash Flows Company A 4,507 ÷ Company B 12,089 ÷

Average Total Assets

(55,799 + 55,380)/2 (58,734 + 53,340)/2

= =

Cash Return on Assets 8.1% (rounded) 21.6% (rounded)

Company B also has a higher cash return on assets (21.6%) compared to Company A (8.1%). 3. ($ in Operating ÷ millions) Cash Flows Company A 4,507 ÷ Company B 12,089 ÷

Sales

71,486 39,540

= =

Cash Flow to Sales 6.3% (rounded) 30.6% (rounded)

($ in millions)

Sales

Average Total Assets

Company A

71,486

(55,799 + 55,380)/2

Company B

39,540

(58,734 + 53,340)/2

Asset Turnover 1.29 times (rounded) 0.71 times (rounded)

Company B has a higher cash flow to sales (30.6%) compared to Company A (6.3%); however, Company A has a higher asset turnover (1.29 times) compared to Company B (0.71 times). Difficulty: 3 Hard Topic: Analysis - Return on Assets; Analysis - Cash Return on Assets; Analysis - Components of Cash Return on Assets Learning Objective: 11-06 Perform financial analysis using the statement of cash flows. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making; FN Measurement/Keyboard Navigation

205) Cash flows from operating activities for both the indirect and direct methods are presented for Audio Systems. Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense Decrease in accounts receivable Increase in accounts payable Decrease in income tax payable Net cash flows from operating activities Cash Flows from Operating Activities Cash received from customers Cash paid for operating expenses Cash paid for income taxes Net cash flows from operating activities

$45,000

7,000 9,000 4,000 (6,000) $59,000

$93,000 (22,000) (12,000) $59,000

Required: Complete the following income statement for Audio Systems. Assume all accounts payable are for operating expenses. Audio Systems Income Statement For the Year Ended December 31, 2021 Revenues Expenses: Operating expenses Depreciation expense Income tax expense Total expenses Net Income

$? ? 7,000 ? ? $45,000

Hint: Use the following calculations and work backwards from bottom to top for each item. Revenues ± Change in accounts receivable = Cash received from customers Operating expenses ± Change in accounts payable = Cash paid for operating expenses Income tax expense ± Change in income tax payable = Cash paid for income taxes 110 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Answer: Audio Systems Income Statement For the Year Ended December 31, 2021 Revenues Expenses: Operating expenses Depreciation expense Income tax expense Total expenses Net Income

Revenues + Decrease in accounts receivable = Cash received from customers Operating expenses - Increase in accounts payable = Cash paid for operating expenses Income tax expense + Decrease in income tax payable = Cash paid for income taxes

$84,000 $26,000 7,000 6,000 39,000 $45,000

$84,000 9,000 $93,000 $26,000 (4,000) $22,000 $6,000 6,000 $12,000

Difficulty: 3 Hard Topic: Operating Activities - Indirect Method; Operating Activities - Direct Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method.; 11-07 Prepare the operating activities section of the statement of cash flows using the direct method. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

206) The income statement, balance sheets, and additional information for Communication Accessories are provided. Communication Accessories Income Statement For the Year Ended December 31, 2021 Revenues Gain on sale of land Total revenues Expenses: Cost of goods sold Operating expenses Depreciation expense Interest expense Income tax expense Total expenses Net Income

$2,800,000 4,000 2,804,000 1,900,000 575,000 38,000 16,000 63,000 2,592,000 $212,000

Communication Accessories Balance Sheets December 31 2021

Assets Current Assets: Cash Accounts receivable Inventory Prepaid rent Long-Term Assets: Investment in stock Land Equipment Accumulated depreciation Total Assets Liabilities and Stockholders' Equity Current Liabilities: Accounts payable Interest payable Income tax payable Long-Term Liabilities: Notes payable Stockholders' Equity: Common stock Retained earnings Total Liabilities and Equity

2020

$182,000 83,000 121,000 7,000

$187,000 95,000 138,000 5,000

195,000 230,000 305,000 (138,000) $985,000

100,000 260,000 225,000 (100,000) $910,000

$40,000 1,000 12,000

$58,000 2,000 10,000

285,000

205,000

350,000 297,000 $985,000

350,000 285,000 $910,000

Answer: Communication Accessories Statement of Cash Flows For the Year Ended December 31, 2021 Cash Flows from Operating Activities Cash received from customers $2,812,000 Cash paid to suppliers (1,901,000) Cash paid for operating expenses (577,000) Cash paid for interest (17,000) Cash paid for income taxes (61,000) Net cash flows from operating activities Cash Flows from Investing Activities Purchase investment in stock (95,000) Sale of land 34,000 Net cash flows from investing activities Cash Flows from Financing Activities Payment of cash dividends (200,000) Net cash flows from financing activities Net increase (decrease) in cash Cash at the beginning of the period Cash at the end of the period Note: Noncash Activities Purchase equipment issuing a note payable

Revenues + Decrease in accounts receivable = Cash received from customers Cost of goods sold - Decrease in inventory = Purchases + Decrease in accounts payable = Cash paid to suppliers Operating expenses + Increase in prepaid rent = Cash paid for operating expenses Interest expense + Decrease in interest payable = Cash paid for interest Income tax expense - Increase in income tax payable = Cash paid for income taxes

$256,000

(61,000)

(200,000) (5,000) 187,000 $182,000 $80,000

$2,800,000 12,000 $2,812,000 $1,900,000 (17,000) 1,883,000 18,000 $1,901,000 $575,000 2,000 $577,000 $16,000 1,000 $17,000 $63,000 (2,000) $61,000

$960,000 $650,000 210,000 25,000 20,000 905,000 $55,000

5,000 10,000 4,000 6,000 8,000 3,000

Required: Prepare the operating activities section of the statement of cash flows for Security Solutions using the direct method.

Answer: Security Solutions Statement of Cash Flows For the Year Ended December 31, 2021 Cash Flows from Operating Activities Cash received from customers Cash paid to suppliers Cash paid for operating expenses Cash paid for income taxes Net cash flows from operating activities

$955,000 (632,000) (220,000) (23,000)

Revenues - Increase in accounts receivable = Cash received from customers Cost of goods sold - Decrease in inventory = Purchases - Increase in accounts payable = Cash paid to suppliers Operating expenses + Increase in prepaid rent + Decrease in operating expenses payable = Cash paid for operating expenses Income tax expense + Decrease in income tax payable = Cash paid for income taxes

$960,000 5,000 $955,000 $650,000 (10,000) 640,000 (8,000) $632,000 $210,000 4,000 6,000 $220,000 $20,000 3,000 $23,000

$80,000

208) Identify and briefly describe the three categories of cash flows reported in the statement of cash flows. Answer: The three categories of cash flows are operating activities, investing activities, and financing activities. Operating activities include cash receipts and cash payments for transactions relating to revenue and expense activities, essentially the very same activities reported in the income statement. Investing activities include cash transactions involving the purchase and sale of long-term assets and current investments. Financing activities are cash flows resulting from the external financing of a business such as long-term liabilities and stockholders' equity. Difficulty: 2 Medium Topic: Classification of Transactions Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 209) Distinguish between the indirect method and the direct method for reporting net cash flows from operating activities. Which method is more common in practice? Which method provides a more logical presentation of cash flows? Answer: Using the indirect method, we begin with net income and then list adjustments to net income in order to arrive at operating cash flows. Using the direct method, we adjust the items in the income statement to directly show the cash inflows and outflows from operations such as cash received from customers, and cash paid for inventory, salaries, rent, interest and taxes. The indirect method is more common in practice, while the direct method provides a more logical presentation of cash flows. Difficulty: 2 Medium Topic: Basic Steps and Formatting of the Statement of Cash Flows Learning Objective: 11-02 Understand the steps and basic format in preparing the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

210) Highland Park Homes reports net income of $300,000, and yet its net cash flow from operating activities is a negative $200,000 during the same period. Is this possible? Explain. Answer: It is possible to report net income and negative operating cash flows at the same time. Increases in current assets and decreases in current liabilities both result in net income that is higher than operating cash flows. As one specific example, an increase in accounts receivable of $500,000 would result in net income exceeding operating cash flows by $500,000. Difficulty: 3 Hard Topic: Operating Activities - Indirect Method Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 211) A $10,000 investment on the books of the company is sold for $11,000. How does this transaction affect operating, investing, and financing activities under the indirect method? Answer: The $1,000 gain on sale of the investment is subtracted from net income in arriving at net operating cash flows. The sale of the investment is also reported as an $11,000 increase to cash flows from investing activities. This transaction has no effect on financing activities Difficulty: 3 Hard Topic: Operating Activities - Indirect Method; Investing Activities; Financing Activities Learning Objective: 11-03 Prepare the operating activities section of the statement of cash flows using the indirect method.; 11-04 Prepare the investing activities section of the statement of cash flows.; 11-05 Prepare the financing activities section of the statement of cash flows. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 212) Explain the difference in the calculation of return on assets and cash return on assets. How can cash-based ratios supplement the analysis of ratios based on income statement and balance sheet information? Answer: Return on assets has net income in the numerator while cash return on assets has cash flows from operations in the numerator. Both ratios divide by average total assets. Analysts often supplement their investigation of income statement and balance sheet amounts with cash flow ratios. Some cash flow ratios are derived by substituting net cash flows from operating activities in place of net income. Cash flow ratios offer additional insight in the evaluation of a company's profitability and financial strength. Difficulty: 2 Medium Topic: Analysis - Return on Assets; Analysis - Cash Return on Assets Learning Objective: 11-06 Perform financial analysis using the statement of cash flows. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 118 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Financial Accounting, 5e (Spiceland) Chapter 12 Financial Statement Analysis 1) We can use ratios to help evaluate a firm's performance and financial position. Answer: TRUE Difficulty: 1 Easy Topic: Vertical Analysis Learning Objective: 12-01 Perform vertical analysis. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 2) Vertical analysis expresses each item in a financial statement as a percentage of the same base amount. Answer: TRUE Difficulty: 1 Easy Topic: Vertical Analysis Learning Objective: 12-01 Perform vertical analysis. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 3) Vertical analysis calculates the amount and percentage change of an account over time. Answer: FALSE Explanation: Horizontal analysis calculates the amount and percentage change of an account over time. Difficulty: 1 Easy Topic: Vertical Analysis Learning Objective: 12-01 Perform vertical analysis. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 4) We use vertical analysis for income statement accounts, but not balance sheet accounts. Answer: FALSE Explanation: We use vertical analysis for income statement and balance sheet accounts. Difficulty: 2 Medium Topic: Vertical Analysis Learning Objective: 12-01 Perform vertical analysis. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 1 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

5) We use vertical analysis to express each income statement item as a percentage of sales. Answer: TRUE Difficulty: 1 Easy Topic: Vertical Analysis Learning Objective: 12-01 Perform vertical analysis. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 6) For vertical analysis, we express each balance sheet item as a percentage of sales. Answer: FALSE Explanation: For vertical analysis, we express each balance sheet items as a percentage of total assets. Difficulty: 1 Easy Topic: Vertical Analysis Learning Objective: 12-01 Perform vertical analysis. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 7) Horizontal analysis analyzes trends in financial statement data for a single company over time. Answer: TRUE Difficulty: 1 Easy Topic: Horizontal Analysis Learning Objective: 12-02 Perform horizontal analysis. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 8) If the base-year amount is zero, we can't calculate a percentage change under horizontal analysis. Answer: TRUE Difficulty: 2 Medium Topic: Horizontal Analysis Learning Objective: 12-02 Perform horizontal analysis. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

9) Using horizontal analysis, if the base year is negative and the following year is positive, the percentage change is just as useful as if the base year and the following year were both positive. Answer: FALSE Explanation: If the base year is negative and the following year is positive, the percentage change is not useful. Difficulty: 2 Medium Topic: Horizontal Analysis Learning Objective: 12-02 Perform horizontal analysis. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 10) We use horizontal analysis to analyze trends in financial statement data, such as the dollar amount of change and the percentage change, for one company over time. Answer: TRUE Difficulty: 1 Easy Topic: Horizontal Analysis Learning Objective: 12-02 Perform horizontal analysis. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 11) We measure income statement accounts at a point in time and balance sheet accounts over a period of time. Answer: FALSE Explanation: We measure income statement accounts over a period of time and balance sheet accounts at a point in time. Difficulty: 2 Medium Topic: Risk Analysis - General; Profitability Analysis - General Learning Objective: 12-03 Use ratios to analyze a company's risk.; 12-04 Use ratios to analyze a company's profitability. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

12) Ratios that compare an income statement account with a balance sheet account should express the balance sheet account as an average of the beginning and ending balances. Answer: TRUE Difficulty: 1 Easy Topic: Risk Analysis - General; Profitability Analysis - General Learning Objective: 12-03 Use ratios to analyze a company's risk.; 12-04 Use ratios to analyze a company's profitability. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 13) Every liquidity ratio is calculated using one or more current asset accounts. Answer: TRUE Difficulty: 1 Easy Topic: Risk Analysis - General Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 14) Solvency refers to a company's ability to pay its current liabilities while liquidity refers to a company's ability to pay its long-term liabilities. Answer: FALSE Explanation: Liquidity refers to a company's ability to pay its current liabilities. Solvency refers to a company's ability to pay its long-term liabilities. Difficulty: 2 Medium Topic: Risk Analysis - General Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 15) The receivables turnover ratio measures how many times, on average, a company collects its receivables during the year. Answer: TRUE Difficulty: 1 Easy Topic: Risk Analysis - Receivables Turnover Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

16) A low receivables turnover ratio is a positive sign that a company can quickly turn its receivables into cash. Answer: FALSE Explanation: A high receivables turnover ratio is a positive sign that a company can quickly turn its receivables into cash. Difficulty: 2 Medium Topic: Risk Analysis - Receivables Turnover Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 17) The average collection period converts the receivables turnover ratio into days. Answer: TRUE Difficulty: 1 Easy Topic: Risk Analysis - Average Collection Period Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 18) A low inventory turnover ratio usually is a positive sign and indicates that inventory is selling quickly. Answer: FALSE Explanation: A high inventory turnover ratio usually is a positive sign and indicates that inventory is selling quickly. Difficulty: 2 Medium Topic: Risk Analysis - Inventory Turnover Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 19) An extremely high inventory turnover ratio may be a signal that the company is losing sales due to inventory shortages. Answer: TRUE Difficulty: 2 Medium Topic: Risk Analysis - Inventory Turnover Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 5 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

20) The average days in inventory converts the inventory turnover ratio into days. Answer: TRUE Difficulty: 1 Easy Topic: Risk Analysis - Average Days in Inventory Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 21) A low current ratio indicates that a company has sufficient current assets to pay current liabilities as they become due. Answer: FALSE Explanation: A high current ratio indicates that a company has sufficient current assets to pay current liabilities as they become due. Difficulty: 2 Medium Topic: Risk Analysis - Current Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 22) The acid-test ratio is always smaller than the current ratio. Answer: TRUE Difficulty: 2 Medium Topic: Risk Analysis - Acid-Test Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 23) Other things being equal, the higher the debt to equity ratio, the higher the risk of bankruptcy. Answer: TRUE Difficulty: 2 Medium Topic: Risk Analysis - Debt to Equity Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation

24) We use the times interest earned ratio to compare interest payments with a company's income available to pay those charges. Answer: TRUE Difficulty: 1 Easy Topic: Risk Analysis - Times Interest Earned Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 25) We calculate the times interest earned ratio by dividing net income by interest expense. Answer: FALSE Explanation: We calculate the times interest earned ratio by dividing net income before interest expense and income taxes by interest expense. Difficulty: 1 Easy Topic: Risk Analysis - Times Interest Earned Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 26) The gross profit ratio is calculated as gross profit divided by net sales. Answer: TRUE Difficulty: 1 Easy Topic: Profitability Analysis - Gross Profit Ratio Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 27) Return on assets is calculated as net income divided by ending total assets. Answer: FALSE Explanation: Return on assets is calculated as net income divided by average total assets. Difficulty: 1 Easy Topic: Profitability Analysis - Return on Assets Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

28) Profit margin measures the income earned on each dollar of sales, and is calculated by dividing net income by net sales. Answer: TRUE Difficulty: 1 Easy Topic: Profitability Analysis - Profit Margin Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 29) Asset turnover measures sales volume in relation to the investment in assets, and is calculated as net sales divided by average total assets. Answer: TRUE Difficulty: 1 Easy Topic: Profitability Analysis - Asset Turnover Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 30) Return on equity is calculated by dividing the stock return by average stockholders' equity. Answer: FALSE Explanation: Return on equity is calculated by dividing net income by average stockholders' equity. Difficulty: 1 Easy Topic: Profitability Analysis - Return on Equity Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 31) The price-earnings (PE) ratio compares a company's share price with its earnings per share. Answer: TRUE Difficulty: 1 Easy Topic: Profitability Analysis - Price-Earnings Ratio Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

32) Growth stocks have high expectations of future earnings growth, and therefore, usually trade at higher PE ratios. Answer: TRUE Difficulty: 1 Easy Topic: Profitability Analysis - Price-Earnings Ratio Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 33) Value stocks have lower share prices in relationship to their fundamental ratios, and therefore, trade at lower PE ratios. Answer: TRUE Difficulty: 1 Easy Topic: Profitability Analysis - Price-Earnings Ratio Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 34) A discontinued operation is the sale or disposal of any long-term asset. Answer: FALSE Explanation: A discontinued operation is the sale or disposal of a significant component of a business. Difficulty: 1 Easy Topic: Earnings Persistence and One-Time Income Items Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 35) We report any profits or losses on discontinued operations in the current year, separately from profits and losses on the portion of the business that will continue. Answer: TRUE Difficulty: 2 Medium Topic: Earnings Persistence and One-Time Income Items Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

36) We report discontinued items separately, net of taxes, as the last item in an income statement before net income. Answer: TRUE Difficulty: 2 Medium Topic: Earnings Persistence and One-Time Income Items Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 37) Managers can choose the location of where to report a loss in the income statement, as long as the loss is reported and deducted in calculating net income. Answer: FALSE Explanation: The location of a loss in the income statement depends on whether the item is required to be reported as part of continuing operations or discontinued operations. Difficulty: 2 Medium Topic: Earnings Persistence and One-Time Income Items Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 38) When using a company's current earnings to estimate future earnings performance, investors normally should exclude discontinued operations. Answer: TRUE Difficulty: 2 Medium Topic: Earnings Persistence and One-Time Income Items Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation

39) Conservative accounting practices are those that result in reporting higher income, higher assets, and lower liabilities. Answer: FALSE Explanation: Conservative accounting practices are those that result in reporting lower income, lower assets, and higher liabilities. Difficulty: 2 Medium Topic: Quality of Earnings Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 40) Conservative accounting practices are those that result in reporting lower income, lower assets, and higher liabilities. Answer: TRUE Difficulty: 2 Medium Topic: Quality of Earnings Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 41) A larger estimation of the allowance for uncollectible accounts, the write-down of overvalued inventory and the use of a shorter useful life for depreciation are all examples of conservative accounting. Answer: TRUE Difficulty: 2 Medium Topic: Quality of Earnings Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

42) Use of a longer useful life for depreciation is an example of conservative accounting. Answer: FALSE Explanation: Use of a shorter useful life for depreciation is an example of conservative accounting. Difficulty: 2 Medium Topic: Quality of Earnings Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 43) Aggressive accounting practices result in reporting higher income, higher assets, and lower liabilities. Answer: TRUE Difficulty: 2 Medium Topic: Quality of Earnings Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 44) Changes in accounting estimates usually have no effect on a company's underlying cash flows. Answer: TRUE Difficulty: 2 Medium Topic: Quality of Earnings Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

45) Which of the following is not a common type of comparison in accounting? A) Comparisons of sales growth between companies. B) Comparisons of earnings per share between companies. C) Comparisons of earnings this year with earnings for the same company last year. D) Comparisons to industry. Answer: B Difficulty: 2 Medium Topic: Vertical Analysis Learning Objective: 12-01 Perform vertical analysis. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 46) When using vertical analysis, we express income statement accounts as a percentage of: A) Net income. B) Gross profit. C) Sales. D) Total assets. Answer: C Difficulty: 1 Easy Topic: Vertical Analysis Learning Objective: 12-01 Perform vertical analysis. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 47) When using vertical analysis, we express balance sheet accounts as a percentage of: A) Sales. B) Total assets. C) Total liabilities. D) Total stockholders' equity. Answer: B Difficulty: 1 Easy Topic: Vertical Analysis Learning Objective: 12-01 Perform vertical analysis. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

48) ________ analysis identifies the relative contribution made by each financial statement line item. A) Ratio B) Vertical C) Horizontal D) Diagonal Answer: B Difficulty: 1 Easy Topic: Vertical Analysis Learning Objective: 12-01 Perform vertical analysis. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 49) Common-size analysis is another term used for ________ analysis. A) Ratio B) Vertical C) Horizontal D) Diagonal Answer: B Difficulty: 1 Easy Topic: Vertical Analysis Learning Objective: 12-01 Perform vertical analysis. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 50) Which of the following types of analysis allows for the comparison of financial statement items between companies of different size? A) Horizontal approach B) Vertical approach C) Diagonal approach D) Circular approach Answer: B Difficulty: 2 Medium Topic: Vertical Analysis Learning Objective: 12-01 Perform vertical analysis. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

51) Which of the following is an example of vertical analysis? A) Comparing gross profit across companies. B) Comparing income statement items as a percentage of sales. C) Comparing debt with industry averages. D) Comparing the change in sales over time. Answer: B Difficulty: 2 Medium Topic: Vertical Analysis Learning Objective: 12-01 Perform vertical analysis. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 52) Comparing operating expenses as a percentage of sales is an example of: A) Vertical analysis. B) Horizontal analysis. C) Diagonal analysis. D) Both vertical and horizontal analysis. Answer: A Difficulty: 2 Medium Topic: Vertical Analysis Learning Objective: 12-01 Perform vertical analysis. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 53) To perform a vertical analysis of an income statement, you would divide each line item on the statement by ________. A) sales B) net income C) total assets D) operating expenses Answer: A Difficulty: 2 Medium Topic: Vertical Analysis Learning Objective: 12-01 Perform vertical analysis. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

54) To perform a vertical analysis of a balance sheet, you would divide each line item on the statement by ________. A) total assets B) net income C) sales D) operating expenses Answer: A Difficulty: 2 Medium Topic: Vertical Analysis Learning Objective: 12-01 Perform vertical analysis. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 55) Ronaldo Soccer Shop's income statement reports sales of $100,000; cost of goods sold of $46,000, operating expenses of $34,000, interest expense of $15,000, income tax expense of $2,000, and net income of $3,000. If you were to perform a vertical analysis of this income statement, you would divide each of these income statement line items by: A) $100,000 B) $46,000 C) $34,000 D) $3,000 Answer: A Difficulty: 2 Medium Topic: Vertical Analysis Learning Objective: 12-01 Perform vertical analysis. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

56) The following is an example of: Amount $ 300,000 500,000 800,000 3,400,000 $ 5,000,000

Cash Accounts receivable Inventory Long-term assets Total assets

% 6 10 16 68 100

A) Vertical analysis. B) Horizontal analysis. C) Diagonal analysis. D) Both vertical and horizontal analysis. Answer: A Difficulty: 2 Medium Topic: Vertical Analysis Learning Objective: 12-01 Perform vertical analysis. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 57) The following is an example of:

Cash Accounts receivable Inventory Long-term assets Total assets

Year 2021 300,000 $

2020 800,000

500,000 800,000

200,000 700,000

300,000 100,000

150.0 14.3

3,400,000 $ 5,000,000

2,300,000 $ 4,000,000

1,100,000 $ 1,000,000

47.8 25.0

Increase (Decrease) Amount % $ (500,000) (62.5)

A) Vertical analysis. B) Horizontal analysis. C) Diagonal analysis. D) Both vertical and horizontal analysis. Answer: B Difficulty: 2 Medium Topic: Horizontal Analysis Learning Objective: 12-02 Perform horizontal analysis. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 17 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

58) Trend analysis and time-series analysis refer to ________ analysis. A) horizontal B) vertical C) ratio D) diagonal Answer: A Difficulty: 1 Easy Topic: Horizontal Analysis Learning Objective: 12-02 Perform horizontal analysis. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 59) To calculate a year-to-year percentage change in any financial statement line item such as sales, you should take the current year's amount, subtract the prior year's amount, then divide by ________, and finally multiply the result by 100. A) net income B) total assets C) the current year's amount D) the prior year's amount Answer: D Difficulty: 2 Medium Topic: Horizontal Analysis Learning Objective: 12-02 Perform horizontal analysis. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 60) Brady's Inflation Needle Co. reports accounts receivable of $100,000 in 2020 and $250,000 in 2021. Using horizontal analysis, what would be the percentage increase or decrease in accounts receivable? A) 60% decrease B) 60% increase C) 150% decrease D) 150% increase Answer: D Difficulty: 3 Hard Topic: Horizontal Analysis Learning Objective: 12-02 Perform horizontal analysis. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 18 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

61) The type of analysis used to analyze trends in financial statement data over time is: A) Horizontal analysis B) Vertical analysis C) Diagonal analysis D) Both horizontal and vertical analysis Answer: A Difficulty: 1 Easy Topic: Horizontal Analysis Learning Objective: 12-02 Perform horizontal analysis. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 62) Horizontal analysis is used to analyze trends in financial statement data over time: A) For one company B) Between two companies C) Across an industry D) None of the other answer choices are correct Answer: A Difficulty: 1 Easy Topic: Horizontal Analysis Learning Objective: 12-02 Perform horizontal analysis. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 63) Horizontal analysis examines trends in a company A) Over time. B) Between income statement accounts in the same year. C) Between balance sheet accounts in the same year. D) Between income statement and balance sheet accounts in the same year. Answer: A Difficulty: 1 Easy Topic: Horizontal Analysis Learning Objective: 12-02 Perform horizontal analysis. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

64) Which of the following is an example of horizontal analysis? A) Comparing COGS with sales. B) Comparing net income across companies. C) Comparing debt with equity. D) Comparing the growth in sales over time. Answer: D Difficulty: 2 Medium Topic: Horizontal Analysis Learning Objective: 12-02 Perform horizontal analysis. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 65) Which of the following is an example of horizontal analysis? A) Comparing gross profit across companies. B) Comparing gross profit with operating expenses. C) Comparing assets with equity. D) Comparing the change in sales over time. Answer: D Difficulty: 2 Medium Topic: Horizontal Analysis Learning Objective: 12-02 Perform horizontal analysis. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 66) Comparing changes in net income for one company over time is an example of: A) Vertical analysis. B) Horizontal analysis. C) Diagonal analysis. D) Both vertical and horizontal analysis. Answer: B Difficulty: 2 Medium Topic: Horizontal Analysis Learning Objective: 12-02 Perform horizontal analysis. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

67) Which of the following is correct? A) The receivables turnover ratio depicts the company's frequency of cash collections. B) The inventory turnover ratio can be used to assess the company's frequency of selling inventory. C) The current ratio reflects the company's ability to pay current debt. D) All of the other answer choices are correct. Answer: D Difficulty: 2 Medium Topic: Risk Analysis - Receivables Turnover Ratio; Risk Analysis - Inventory Turnover Ratio; Risk Analysis - Current Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 68) Which of the following ratios is most useful in evaluating liquidity? A) Return on assets. B) Return on equity. C) Debt to equity ratio. D) Current ratio. Answer: D Difficulty: 2 Medium Topic: Risk Analysis - Current Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 69) Liquidity measures: A) The company's ability to pay current obligations using current assets. B) The company's ability to efficiently collect cash from customers. C) The company's ability to generate profits on inventory sold. D) The company's ability to return cash to stockholders. Answer: A Difficulty: 2 Medium Topic: Risk Analysis - General Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

70) The current ratio measures: A) The ability of a company to quickly sell its inventory to customers. B) The amount of profits retained in the business. C) The ability of a company to quickly collect cash from customers. D) The ability of a company to pay its current obligations. Answer: D Difficulty: 2 Medium Topic: Risk Analysis - Current Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 71) Which of the following ratios is most useful in evaluating liquidity? A) Acid-test ratio. B) Return on equity. C) Profit margin ratio. D) Asset turnover. Answer: A Difficulty: 2 Medium Topic: Risk Analysis - Acid-Test Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 72) Which of the following ratios is most useful in evaluating solvency? A) Debt to equity ratio. B) Current ratio. C) Receivables turnover ratio. D) Inventory turnover ratio. Answer: A Difficulty: 2 Medium Topic: Risk Analysis - Debt to Equity Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

73) Which of the following is a sign that a company can quickly turn its receivables into cash? A) A low receivables turnover ratio. B) A high receivables turnover ratio. C) A high average collection period. D) Both a low receivables turnover ratio and a high average collection period. Answer: B Difficulty: 3 Hard Topic: Risk Analysis - Receivables Turnover Ratio; Risk Analysis - Average Collection Period Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Evaluate AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 74) Which of the following is a sign that a company cannot quickly turn its receivables into cash? A) A high receivables turnover ratio. B) A low receivables turnover ratio. C) A low average collection period. D) Both a high receivables turnover ratio and a low average collection period. Answer: B Difficulty: 3 Hard Topic: Risk Analysis - Receivables Turnover Ratio; Risk Analysis - Average Collection Period Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Evaluate AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 75) Which of the following is a negative sign that a company is not selling its inventory quickly? A) A low inventory turnover ratio. B) A high inventory turnover ratio. C) A low average days in inventory. D) Both a high inventory turnover ratio and a low average days in inventory. Answer: A Difficulty: 3 Hard Topic: Risk Analysis - Inventory Turnover Ratio; Risk Analysis - Average Days in Inventory Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Evaluate AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation

76) Which of the following is a positive sign that a company is selling its inventory quickly? A) A low inventory turnover ratio. B) A high inventory turnover ratio. C) A low average days in inventory. D) Both a high inventory turnover ratio and a low average days in inventory. Answer: D Difficulty: 3 Hard Topic: Risk Analysis - Inventory Turnover Ratio; Risk Analysis - Average Days in Inventory Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Evaluate AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 77) The current ratio is calculated as: A) Current assets divided by noncurrent assets. B) Current assets divided by current liabilities. C) Current liabilities divided by noncurrent liabilities. D) Current liabilities divided by current assets. Answer: B Difficulty: 1 Easy Topic: Risk Analysis - Current Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 78) The acid-test ratio is most similar to the: A) Current ratio. B) Debt to equity ratio. C) Times interest earned ratio. D) Inventory turnover ratio. Answer: A Difficulty: 2 Medium Topic: Risk Analysis - Acid-Test Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

79) The acid-test ratio is: A) The liquidity ratio divided by the equity ratio. B) Current assets minus inventory divided by current liabilities minus accounts payable. C) Cash, net receivables, and current investments divided by current liabilities. D) Cash divided by accounts payable. Answer: C Difficulty: 1 Easy Topic: Risk Analysis - Acid-Test Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 80) Which of the following is not a solvency ratio? A) Time interest earned ratio. B) The debt to equity ratio. C) The current ratio. D) All of the other answer choices are correct. Answer: C Difficulty: 2 Medium Topic: Risk Analysis - Current Ratio; Risk Analysis - Debt to Equity Ratio; Risk Analysis Times Interest Earned Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 81) When a company with a current ratio of 1.2 pays a current liability: A) Its current ratio decreases. B) Its current ratio increases. C) Its current ratio remains unchanged. D) Its debt to equity ratio increases. Answer: B Difficulty: 3 Hard Topic: Risk Analysis - Current Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Evaluate AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation

82) Assuming a current ratio of 1.0, how will the purchase of inventory with cash affect the ratio? A) Increase the current ratio. B) No change to the current ratio. C) Decrease the current ratio. D) Could either increase or decrease the current ratio. Answer: B Difficulty: 3 Hard Topic: Risk Analysis - Current Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Evaluate AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 83) Assuming an acid-test ratio of 1.0, how will the purchase of inventory with cash affect the ratio? A) Increase the acid-test ratio. B) No change to the acid-test ratio. C) Decrease the acid-test ratio. D) Could either increase or decrease the acid-test ratio. Answer: C Difficulty: 3 Hard Topic: Risk Analysis - Acid-Test Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Evaluate AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 84) Assuming a current ratio of 1.0 and an acid-test ratio of 0.75, how will the purchase of inventory with cash affect each ratio? A) Increase the current ratio and increase the acid-test ratio. B) No change to the current ratio and decrease the acid-test ratio. C) Decrease the current ratio and decrease the acid-test ratio. D) Increase the current ratio and decrease the acid-test ratio. Answer: B Difficulty: 3 Hard Topic: Risk Analysis - Current Ratio; Risk Analysis - Acid-Test Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Evaluate AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation

85) When a company sells land for cash and makes a $25,000 gain: A) Its acid-test ratio decreases. B) Its current ratio decreases. C) Its debt to equity ratio decreases. D) Cannot determine from the given information. Answer: C Difficulty: 3 Hard Topic: Risk Analysis - Current Ratio; Risk Analysis - Acid-Test Ratio; Risk Analysis - Debt to Equity Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Evaluate AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation 86) Assume a company's current ratio and acid-test ratio are less than 1.0 before it purchases inventory on credit. When it makes the purchase: A) Its current ratio decreases. B) Its acid-test ratio decreases. C) Its current ratio remains unchanged. D) Its acid-test ratio remains unchanged. Answer: B Difficulty: 3 Hard Topic: Risk Analysis - Current Ratio; Risk Analysis - Acid-Test Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Evaluate AACSB: Reflective Thinking AICPA/Accessibility: FN Decision Making/Keyboard Navigation

87) A partial balance sheet for Captain D's Sportswear is shown below. (dollars in thousands) Assets: Cash Accounts receivable (net) Investments Inventory Prepaid rent Total current assets Property & Equipment, (net)

Total assets

Liabilities: Accounts payable Other liabilities Total current liabilities Long-term liabilities Total liabilities Stockholders' equity: Common stock Retained earnings Total stockholders' equity $ 760 Total liabilities and equity $

60 170 50 200 25 505 255

$ 240 80 320 110 430 150 180 330 $ 760

The current ratio is: (Round your answer to 2 decimal places.) A) 1.98. B) 1.58. C) 1.17. D) 0.66. Answer: B Explanation: $505/$320 = 1.58. Difficulty: 3 Hard Topic: Risk Analysis - Current Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

88) A partial balance sheet for Captain D's Sportswear is shown below. (dollars in thousands) Assets: Cash Accounts receivable (net) Investments Inventory Prepaid rent Total current assets Property & Equipment, (net)

Total assets

60 170 50 200 25 505 255

$ 240 80 320 110 430 150 180 330 $ 760

The acid-test ratio is: (Round your answer to 2 decimal places.) A) 0.25. B) 0.88. C) 1.17. D) 1.58. Answer: B Explanation: ($505 − $200 − $25) / %320 = 0.88. Difficulty: 3 Hard Topic: Risk Analysis - Acid-Test Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

89) A partial balance sheet for Captain D's Sportswear is shown below. (dollars in thousands) Assets: Cash Accounts receivable (net) Investments Inventory Prepaid rent Total current assets Property & Equipment, (net)

Total assets

60 170 50 200 25 505 255

$ 240 80 320 110 430 150 180 330 $ 760

The debt to equity ratio is: (Round your answer to 2 decimal places.) A) 0.33. B) 0.77. C) 1.17. D) 1.30. Answer: D Explanation: $430/$330 = 1.30. Difficulty: 3 Hard Topic: Risk Analysis - Debt to Equity Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

90) Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below. Current liabilities 10% Bonds, long-term Total liabilities Stockholders' equity Common stock Retained earnings Total stockholders' equity Total liabilities and equity

180 Income before interest and taxes 360 Interest expense 540 Income before tax Income tax 200 Net income 280 480 $ 1,020

$ 125 36 89 27 $ 62

HHF's debt to equity ratio is: (Round your answer to 2 decimal places.) A) 0.75. B) 1.13. C) 0.38. D) 1.80. Answer: B Explanation: $540/$480 = 1.13. Difficulty: 3 Hard Topic: Risk Analysis - Debt to Equity Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

91) Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below: Current liabilities 10% Bonds, long-term Total liabilities Stockholders' equity Common stock Retained earnings Total stockholders' equity Total liabilities and equity

180 Income before interest and taxes 360 Interest expense 540 Income before tax Income tax 200 Net income 280 480 $ 1,020

$ 125 36 89 27 $ 62

HHF's times interest earned ratio is: (Round your answer to 2 decimal places.) A) 3.47. B) 1.72. C) 2.47. D) 10.0. Answer: A Explanation: ($62 + $27 + 36)/$36 = 3.47. Difficulty: 3 Hard Topic: Risk Analysis - Times Interest Earned Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

92) Excerpts from Stealth Company's December 31, 2021 and 2020, financial statements are presented below:

Accounts receivable Inventory Net sales (all credit) Cost of goods sold Total assets Total stockholders' equity Net income

2021 40,000 28,000 190,000 114,000 425,000 240,000 32,500

2020 36,000 35,000 186,000 108,000 405,000 225,000 28,000

Stealth Company's 2021 receivables turnover ratio is: A) 2.85 times. B) 4.70 times. C) 5.00 times. D) 10.63 times. Answer: C Explanation: Receivables turnover =

= 5.0 times

Difficulty: 3 Hard Topic: Risk Analysis - Receivables Turnover Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

93) Excerpts from Stealth Company's December 31, 2021 and 2020, financial statements are presented below:

Accounts receivable Inventory Net sales (all credit) Cost of goods sold Total assets Total stockholders' equity Net income

2021 40,000 28,000 190,000 114,000 425,000 240,000 32,500

2020 36,000 35,000 186,000 108,000 405,000 225,000 28,000

Stealth Company's 2021 average collection period is: A) 73 days. B) 104 days. C) 109 days. D) 128 days. Answer: A Explanation: Receivables turnover =

= 5.0 times

Average collection period = 365/5.0 = 73 days. Difficulty: 3 Hard Topic: Risk Analysis - Receivables Turnover Ratio; Risk Analysis - Average Collection Period Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

94) Excerpts from Stealth Company's December 31, 2021 and 2020, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2021 40,000 28,000 190,000 114,000 425,000 240,000 32,500

2020 36,000 35,000 186,000 108,000 405,000 225,000 28,000

Stealth Company's 2021 inventory turnover is: (Round your answer to 2 decimal places.) A) 3.62 times. B) 3.96 times. C) 4.07 times. D) 6.03 times. Answer: A Explanation: Inventory turnover =

= 3.62 times

Difficulty: 3 Hard Topic: Risk Analysis - Inventory Turnover Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

95) Excerpts from Stealth Company's December 31, 2021 and 2020, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2021 40,000 28,000 190,000 114,000 425,000 240,000 32,500

2020 36,000 35,000 186,000 108,000 405,000 225,000 28,000

Stealth Company's 2021 average days in inventory is: (Round your intermediate calculations to 2 decimal places and final answer to 1 decimal place.) A) 60.5 days. B) 92.2 days. C) 100.8 days. D) 89.7 days. Answer: C Explanation: Inventory turnover =

= 3.62 times

Average days in inventory = 365/3.62 = 100.8 days. Difficulty: 3 Hard Topic: Risk Analysis - Average Days in Inventory Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

96) Excerpts from Stealth Company's December 31, 2021 and 2020, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2021 40,000 28,000 190,000 114,000 425,000 240,000 32,500

2020 36,000 35,000 186,000 108,000 405,000 225,000 28,000

Stealth Company's 2021 debt to equity ratio is: (Round your answer to 1 decimal place.) A) 77.1%. B) 80.0%. C) 40.0%. D) 60.0%. Answer: A Explanation: Assets = Liabilities + Stockholders' Equity. $425,000 = Liabilities + $240,000. Liabilities = $185,000. Debt to equity ratio = $185,000/$240,000 = 77.1% Difficulty: 3 Hard Topic: Risk Analysis - Debt to Equity Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

97) Excerpts from TPX Company's December 31, 2021 and 2020, financial statements are presented below:

Accounts receivable Inventory Net sales (all credit) Cost of goods sold Total assets Total stockholders' equity Net income

2021 80,000 84,000 400,000 254,000 850,000 500,000 75,000

2020 72,000 70,000 372,000 216,000 810,000 450,000 56,000

TPX Company's 2021 receivables turnover ratio is: (Round your answer to 1 decimal place.) A) 5.3 times. B) 5.6 times. C) 5.0 times. D) 0.2 times. Answer: A Explanation: Receivables turnover =

= 5.3 times

98) Excerpts from TPX Company's December 31, 2021 and 2020, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2021 80,000 84,000 400,000 254,000 850,000 500,000 75,000

2020 72,000 70,000 372,000 216,000 810,000 450,000 56,000

TPX Company's 2021 average collection period is: (Round your intermediate calculations to 1 decimal place and final answer to the nearest day.) A) 69 days. B) 65 days. C) 73 days. D) 1,825 days. Answer: A Explanation: Receivables turnover =

= 5.3 times

Average collection period = 365/5.3 = 69 days. Difficulty: 3 Hard Topic: Risk Analysis - Receivables Turnover Ratio; Risk Analysis - Average Collection Period Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

99) Excerpts from TPX Company's December 31, 2021 and 2020, financial statements are presented below:

Accounts receivable Inventory Net sales (all credit) Cost of goods sold Total assets Total stockholders' equity Net income

2021 80,000 84,000 400,000 254,000 850,000 500,000 75,000

2020 72,000 70,000 372,000 216,000 810,000 450,000 56,000

TPX Company's 2021 inventory turnover is: (Round your answer to 1 decimal place.) A) 3.0 times. B) 5.2 times. C) 3.3 times. D) 3.6 times. Answer: C Explanation: Inventory turnover =

= 3.3 times

100) Excerpts from TPX Company's December 31, 2021 and 2020, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2021 80,000 84,000 400,000 254,000 850,000 500,000 75,000

2020 72,000 70,000 372,000 216,000 810,000 450,000 56,000

TPX Company's 2021 average days in inventory is: (Round all calculations to 1 decimal place.) A) 121.7 days. B) 70.2 days. C) 110.6 days. D) 101.4 days. Answer: C Explanation: Inventory turnover =

= 3.3 times

Average days in inventory = 365/3.3 = 110.6 days. Difficulty: 3 Hard Topic: Risk Analysis - Inventory Turnover Ratio; Risk Analysis - Average Days in Inventory Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

101) Excerpts from TPX Company's December 31, 2021 and 2020, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2021 80,000 84,000 400,000 254,000 850,000 500,000 75,000

2020 72,000 70,000 372,000 216,000 810,000 450,000 56,000

TPX Company's 2021 debt to equity ratio is: A) 50.0%. B) 60.0%. C) 70.0%. D) 80.0%. Answer: C Explanation: Assets = Liabilities = Stockholders' Equity. $850,000 = Liabilities + $500,000. Liabilities = $350,000. Debt to equity ratio = $350,000/$500,000 = 70.0%. Difficulty: 3 Hard Topic: Risk Analysis - Debt to Equity Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

102) Excerpts from Stealth Company's December 31, 2021 and 2020, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2021 40,000 28,000 190,000 114,000 425,000 240,000 32,500

2020 36,000 35,000 186,000 108,000 405,000 225,000 28,000

Stealth Company's 2021 gross profit ratio is: A) 77.1%. B) 80.0%. C) 40.0%. D) 60.0%. Answer: C Explanation: ($190,000 − $114,000)/$190,000 = 40.0%. Difficulty: 3 Hard Topic: Profitability Analysis - Gross Profit Ratio Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

103) Excerpts from Stealth Company's December 31, 2021 and 2020, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2021 40,000 28,000 190,000 114,000 425,000 240,000 32,500

2020 36,000 35,000 186,000 108,000 405,000 225,000 28,000

Stealth Company's 2021 return on assets is: (Round your answer to 1 decimal place.) A) 7.1%. B) 7.8%. C) 13.5%. D) 44.7%. Answer: B Explanation: = 7.8% Difficulty: 3 Hard Topic: Profitability Analysis - Return on Assets Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

104) Excerpts from Stealth Company's December 31, 2021 and 2020, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2021 40,000 28,000 190,000 114,000 425,000 240,000 32,500

2020 36,000 35,000 186,000 108,000 405,000 225,000 28,000

Stealth Company's 2021 profit margin is: (Round your answer to 1 decimal place.) A) 17.1%. B) 13.5%. C) 7.6%. D) 4.5%. Answer: A Explanation: $32,500/$190,000 = 17.1%. Difficulty: 3 Hard Topic: Profitability Analysis - Profit Margin Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

105) Excerpts from Stealth Company's December 31, 2021 and 2020, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2021 40,000 28,000 190,000 114,000 425,000 240,000 32,500

2020 36,000 35,000 186,000 108,000 405,000 225,000 28,000

Stealth Company's 2021 asset turnover is: (Round your answer to 1 decimal place.) A) 3.7 times. B) 2.8 times. C) 2.2 times. D) 0.5 times. Answer: D Explanation: = 0.5 times Difficulty: 3 Hard Topic: Profitability Analysis - Asset Turnover Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

106) Excerpts from Stealth Company's December 31, 2021 and 2020, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2021 40,000 28,000 190,000 114,000 425,000 240,000 32,500

2020 36,000 35,000 186,000 108,000 405,000 225,000 28,000

Stealth Company's 2021 return on equity is: (Round your answer to 1 decimal place.) A) 17.1%. B) 14.0%. C) 12.6%. D) 7.1%. Answer: B Explanation: = 14.0% Difficulty: 3 Hard Topic: Profitability Analysis - Return on Equity Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

107) Excerpts from TPX Company's December 31, 2021 and 2020, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2021 80,000 84,000 400,000 254,000 850,000 500,000 75,000

2020 72,000 70,000 372,000 216,000 810,000 450,000 56,000

TPX Company's 2021 gross profit ratio is: A) 57.5%. B) 36.5%. C) 63.5%. D) 60.0%. Answer: B Explanation: ($400,000 − $254,000)/$400,000 = 36.5%. Difficulty: 3 Hard Topic: Profitability Analysis - Gross Profit Ratio Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

108) Excerpts from TPX Company's December 31, 2021 and 2020, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2021 80,000 84,000 400,000 254,000 850,000 500,000 75,000

2020 72,000 70,000 372,000 216,000 810,000 450,000 56,000

TPX Company's 2021 return on assets is: (Round your answer to 1 decimal place.) A) 48.2%. B) 9.3%. C) 8.8%. D) 9.0%. Answer: D Explanation: = 9.0% Difficulty: 3 Hard Topic: Profitability Analysis - Return on Assets Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

109) Excerpts from TPX Company's December 31, 2021 and 2020, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2021 80,000 84,000 400,000 254,000 850,000 500,000 75,000

2020 72,000 70,000 372,000 216,000 810,000 450,000 56,000

TPX Company's 2021 profit margin is: (Round your answer to 1 decimal place.) A) 18.8%. B) 9.0%. C) 19.4%. D) 15.1%. Answer: A Explanation: $75,000/$400,000 = 18.8%. Difficulty: 3 Hard Topic: Profitability Analysis - Profit Margin Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

110) Excerpts from TPX Company's December 31, 2021 and 2020, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2021 80,000 84,000 400,000 254,000 850,000 500,000 75,000

2020 72,000 70,000 372,000 216,000 810,000 450,000 56,000

TPX Company's 2021 asset turnover is: (Round your answer to 1 decimal place.) A) 3.7 times. B) 2.8 times. C) 2.2 times. D) 0.5 times. Answer: D Explanation: = 0.5 times Difficulty: 3 Hard Topic: Profitability Analysis - Asset Turnover Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

111) Excerpts from TPX Company's December 31, 2021 and 2020, financial statements are presented below:

Accounts receivable Inventory Net sales Cost of goods sold Total assets Total stockholders' equity Net income

2021 80,000 84,000 400,000 254,000 850,000 500,000 75,000

2020 72,000 70,000 372,000 216,000 810,000 450,000 56,000

TPX Company's 2021 return on equity is: (Round your answer to 1 decimal place.) A) 16.7%. B) 15.0%. C) 15.8%. D) 21.4%. Answer: C Explanation: = 15.8% Difficulty: 3 Hard Topic: Profitability Analysis - Return on Equity Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

112) Given the information below, what is the company's gross profit?

Sales Revenue Accounts Receivable Ending Inventory Cost of Goods Sold Sales Returns

$ 320,000 50,000 100,000 250,000 20,000

A) $250,000. B) $70,000. C) $220,000. D) $50,000. Answer: D Explanation: [($320,000 − $20,000) − $250,000] = $50,000. Difficulty: 3 Hard Topic: Profitability Analysis - Gross Profit Ratio Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 113) Return on assets equals: A) Gross profit ratio × Inventory turnover. B) Profit margin × Inventory turnover. C) Gross profit ratio × Asset turnover. D) Profit margin × Asset turnover. Answer: D Difficulty: 1 Easy Topic: Profitability Analysis - Return on Assets Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

114) The profit margin ratio indicates the amount of net income achieved for each: A) collection on a receivable. B) dollar of inventory. C) dollar of total assets. D) dollar of sales. Answer: D Difficulty: 1 Easy Topic: Profitability Analysis - Profit Margin Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 115) Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The return on assets is: A) 200%. B) 25%. C) 50%. D) 12.5%. Answer: B Explanation: $500,000/$2,000,000 = 25%. Difficulty: 3 Hard Topic: Profitability Analysis - Return on Assets Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 116) Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The profit margin is: A) 12.5%. B) 25%. C) 50%. D) 8 times. Answer: A Explanation: $500,000/$4,000,000 = 12.5%. Difficulty: 3 Hard Topic: Profitability Analysis - Profit Margin Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

117) Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The asset turnover is: A) 0.25 times. B) 0.5 times. C) 2 times. D) 8 times. Answer: C Explanation: $4,000,000/$2,000,000 = 2 times. Difficulty: 3 Hard Topic: Profitability Analysis - Asset Turnover Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 118) Richard's Sporting Goods reports net income of $100,000, net sales of $500,000, and average assets of $1,000,000. The return on assets is: A) 10%. B) 20%. C) 50%. D) 5 times. Answer: A Explanation: $100,000/$1,000,000 = 10%. Difficulty: 3 Hard Topic: Profitability Analysis - Return on Assets Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 119) Richard's Sporting Goods reports net income of $100,000, net sales of $500,000, and average assets of $1,000,000. The profit margin is: A) 10%. B) 20%. C) 50%. D) 5 times. Answer: B Explanation: $100,000/$500,000 = 20%. Difficulty: 3 Hard Topic: Profitability Analysis - Profit Margin Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 55 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

120) Richard's Sporting Goods reports net income of $100,000, net sales of $500,000, and average assets of $1,000,000. The asset turnover is: A) 0.1 times. B) 0.5 times. C) 2 times. D) 5 times. Answer: B Explanation: $500,000/$1,000,000 = 0.5 times. Difficulty: 3 Hard Topic: Profitability Analysis - Asset Turnover Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 121) The price-earnings (PE) ratio is calculated as: A) Earnings per share divided by the stock price B) Retained earnings times the stock price C) Stock price divided by net income D) Stock price divided by earnings per share Answer: D Difficulty: 1 Easy Topic: Profitability Analysis - Price-Earnings Ratio Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 122) Curry Footwear reports net income of $500,000, earnings per share of $1.50, and has a stock price of $45.00 at the end of the year. What is Curry Footwear's price-earnings ratio? A) 30.0 B) 11,111.1 C) 67.5 D) 46.5 Answer: A Explanation: $45.00/$1.50 = 30.0 Difficulty: 3 Hard Topic: Profitability Analysis - Price-Earnings Ratio Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 56 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

123) Compared to growth stocks, value stocks' price-earnings ratio is typically: A) There is no relationship between the price-earnings ratios of growth and value stocks. B) The same. C) Higher. D) Lower. Answer: D Difficulty: 2 Medium Topic: Profitability Analysis - Price-Earnings Ratio Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 124) All of the following are profitability ratios except: A) Profit margin B) Return on equity C) Asset turnover D) Current ratio Answer: D Difficulty: 1 Easy Topic: Profitability Analysis - Profit Margin; Profitability Analysis - Asset Turnover; Profitability Analysis - Return on Equity Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

125) Below is information related to two companies:

Return on assets Debt to equity

Company 1 8.2% 67.2%

Company 2 6.3% 53.4%

Based on the ratios above, what is generally true about these two companies? A) Company 1 has lower profitability and higher risk. B) Company 1 has higher profitability and higher risk. C) Company 1 has lower profitability and lower risk. D) Company 1 has higher profitability and lower risk. Answer: B Difficulty: 2 Medium Topic: Risk Analysis - Debt to Equity Ratio; Profitability Analysis - Return on Assets Learning Objective: 12-03 Use ratios to analyze a company's risk.; 12-04 Use ratios to analyze a company's profitability. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 126) Investors generally view which of the following as the measure most indicative of company success? A) Liquidity B) Solvency C) Employee satisfaction D) Profitability Answer: D Difficulty: 1 Easy Topic: Profitability Analysis - General Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

127) Which of the following items would be reported at the very bottom of the income statement just before net income? A) Gain on the sale of long-term assets. B) Discontinued operations. C) Loss due to business restructuring. D) Loss due to write-down of receivables. Answer: B Difficulty: 1 Easy Topic: Earnings Persistence and One-Time Income Items Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 128) The sale or disposal of a significant component of a company's operations is referred to as: A) A discontinued operation. B) Other gains and losses. C) Other revenues and expenses. D) Gain or loss on sale of assets. Answer: A Difficulty: 1 Easy Topic: Earnings Persistence and One-Time Income Items Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 129) A discontinued operation refers to: A) The sale or disposal of a significant component of a company's operations. B) Discontinued inventory items. C) Inventory items that have been completed and sold. D) The sale of most long-term assets. Answer: A Difficulty: 1 Easy Topic: Earnings Persistence and One-Time Income Items Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

130) What is the correct order to present the following items in the income statement? A) Other revenues and expenses, income tax expense, discontinued operations, net income. B) Other revenues and expenses, income tax expense, net income, discontinued operations. C) Discontinued operations, net income, other revenues and expenses, income tax expense. D) Discontinued operations, net income, income tax expense, other revenues and expenses. Answer: A Difficulty: 2 Medium Topic: Earnings Persistence and One-Time Income Items Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 131) A company incurred a material loss due to the write-down of inventory. This loss should be reported as: A) Other revenues. B) A loss from discontinued operations. C) Other expenses. D) A separate line item in retained earnings. Answer: C Difficulty: 2 Medium Topic: Earnings Persistence and One-Time Income Items Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 132) A company incurred a material gain on the sale of land. This gain should be reported as: A) Other revenues. B) A gain from discontinued operations. C) Other expenses. D) A separate line item in retained earnings. Answer: A Difficulty: 2 Medium Topic: Earnings Persistence and One-Time Income Items Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

133) Which of the following statements is not true? A) We report any profits or losses on discontinued operations in the current year separately from profits and losses on the portion of the business that will continue. B) We report discontinued items separately, net of taxes, just before net income. C) The decision of whether to report a loss as part of continuing operations or discontinued operations depends on the preference of management. D) When using a company's current earnings to estimate future earnings performance, investors normally exclude discontinued operations. Answer: C Difficulty: 2 Medium Topic: Earnings Persistence and One-Time Income Items Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 134) Examples of discontinued operations include all of the following except: A) A disposal of a major geographical area. B) A disposal of a major piece of equipment. C) A disposal of a major line of business. D) A disposal of a major investment in which the company has significant influence. Answer: B Difficulty: 2 Medium Topic: Earnings Persistence and One-Time Income Items Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 135) Which of the following income statement items is least likely to persist into future periods? A) Sales revenue. B) Discontinued operations. C) Cost of goods sold. D) Salaries expense. Answer: B Difficulty: 1 Easy Topic: Earnings Persistence and One-Time Income Items Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

136) LeBron's Bookstores has two divisions: media and books. The media division had another great year with net sales of $14 million, cost of goods sold of $8 million, operating expenses of $3 million, and income tax expense of $900,000. The book division did not do as well and was sold during the year. The loss from operations and sale of the book division was $400,000 before taxes and $280,000 after taxes. Assuming the sale of the book division is reported as a discontinued operation, at what amount did LeBron's Bookstores report the discontinued operations? A) Gain of $1,820,000. B) Loss of $280,000. C) Loss of $400,000. D) Gain of $1,700,000. Answer: B Difficulty: 3 Hard Topic: Earnings Persistence and One-Time Income Items Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 137) LeBron's Bookstores has two divisions: media and books. The media division had another great year with net sales of $14 million, cost of goods sold of $8 million, operating expenses of $3 million, and income tax expense of $900,000. The book division did not do as well and was sold during the year. The loss from operations and sale of the book division was $400,000 before taxes and $280,000 after taxes. Assuming the sale of the book division is reported as a discontinued operation, at what amount did LeBron's Bookstores report net income? A) $3,000,000. B) $1,820,000. C) $2,100,000. D) $1,700,000. Answer: B Explanation: $14,000,000 − $8,000,000 − $3,000,000 − $900,000 − $280,000 = $1,820,000. Difficulty: 3 Hard Topic: Earnings Persistence and One-Time Income Items Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

138) LeBron's Bookstores has two divisions: media and books. The media division had another great year with net sales of $14 million, cost of goods sold of $8 million, operating expenses of $3 million, and income tax expense of $900,000. The book division did not do as well and was sold during the year. The loss from operations and sale of the book division was $400,000 before taxes and $280,000 after taxes. Assuming the sale of the book division is reported as a discontinued operation, at what amount did LeBron's Bookstores report income before tax? A) $1,820,000. B) $3,000,000. C) $2,100,000. D) $1,700,000. Answer: B Explanation: $14,000,000 − $8,000,000 − $3,000,000 = $3,000,000. Difficulty: 3 Hard Topic: Earnings Persistence and One-Time Income Items Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 139) Quality of earnings refers to: A) Positive net income. B) Ability of reported earnings to reflect the company's true earnings. C) An increasing trend in profitability. D) All of the other answer choices are correct. Answer: B Difficulty: 1 Easy Topic: Quality of Earnings Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

140) The usefulness of reported earnings to predict future earnings is often referred to as: A) Conservative accounting practices. B) Aggressive accounting practices. C) Quality of earnings. D) Horizontal analysis. Answer: C Difficulty: 1 Easy Topic: Quality of Earnings Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 141) Which of the following is a result of conservative accounting practices? A) Higher income, higher assets, and lower liabilities. B) Lower income, higher assets, and lower liabilities. C) Higher income, lower assets, and lower liabilities. D) Lower income, lower assets, and higher liabilities. Answer: D Difficulty: 2 Medium Topic: Quality of Earnings Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 142) Which of the following is a result of aggressive accounting practices? A) Lower income, higher assets, and higher liabilities. B) Higher income, higher assets, and lower liabilities. C) Lower income, lower assets, and higher liabilities. D) Higher income, lower assets, and higher liabilities. Answer: B Difficulty: 2 Medium Topic: Quality of Earnings Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

143) The financial statements of a firm that uses more conservative accounting practices would be likely to report: A) Higher profitability. B) Higher dividends. C) Higher liabilities. D) Higher stockholders' equity. Answer: C Difficulty: 2 Medium Topic: Quality of Earnings Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 144) The financial statements of a firm that uses more aggressive accounting practices would be likely to report: A) Higher profitability. B) Higher dividends. C) Higher liabilities. D) Lower assets. Answer: A Difficulty: 2 Medium Topic: Quality of Earnings Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 145) Which of the following is not an example of applying conservatism in accounting? A) Recording contingent losses that are probable. B) Expensing all research and development costs as they are incurred. C) Using the lower of cost and net realizable value for inventory accounting. D) Increasing the useful life used in calculating depreciation. Answer: D Difficulty: 2 Medium Topic: Quality of Earnings Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 65 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

146) Which of the following is not an example of aggressive accounting practices? A) Recording contingent losses that are probable. B) Recording research and development costs as assets. C) Using a lower estimate of bad debts. D) Increasing the useful life used in calculating depreciation. Answer: A Difficulty: 2 Medium Topic: Quality of Earnings Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 147) Which of the following is a conservative accounting practice? A) The use of a longer service life for depreciation. B) Waiting to record a litigation loss. C) Adjust the allowance for uncollectible accounts to a smaller amount. D) The write-down of overvalued inventory. Answer: D Difficulty: 2 Medium Topic: Quality of Earnings Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 148) Which of the following is an aggressive accounting practice? A) The use of a shorter service life for depreciation. B) Waiting to record a litigation loss. C) Adjust the allowance for uncollectible accounts to a larger amount. D) The write-down of overvalued inventory. Answer: B Difficulty: 2 Medium Topic: Quality of Earnings Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

149) Which of the following is a conservative accounting practice? A) Change from double-declining balance to straight-line depreciation. B) Record sales revenue before it is actually earned. C) Adjust the allowance for uncollectible accounts to a larger amount. D) Record inventory at market rather than lower of cost or market. Answer: C Difficulty: 2 Medium Topic: Quality of Earnings Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 150) Which of the following is an aggressive accounting practice? A) Change from straight-line to double-declining balance depreciation. B) Record sales revenue before it is actually earned. C) Adjust the allowance for uncollectible accounts to a larger amount. D) Record inventory at the lower of cost and net realizable value. Answer: B Difficulty: 2 Medium Topic: Quality of Earnings Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 151) Which of the following is a conservative accounting practice? A) The use of a longer service life for depreciation. B) Waiting to record a litigation loss. C) Recording a lower amount for bad debt expense. D) Taking an asset write-down early. Answer: D Difficulty: 2 Medium Topic: Quality of Earnings Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

152) Which of the following is an aggressive accounting practice? A) The use of a shorter service life for depreciation. B) Waiting to record a litigation loss. C) Recording a higher amount for bad debt expense. D) Taking an asset write-down early. Answer: B Difficulty: 2 Medium Topic: Quality of Earnings Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 153) Which of the following would be an example of conservative accounting? A) Estimating warranty costs to be 4% of sales instead of 9% of sales. B) Estimating the percentage of bad debts as 6% of accounts receivable instead of 10% of accounts receivable. C) Estimating that none of the inventory has a market value below cost rather than estimating that some inventory has a market value below cost. D) Assessing the probability of a contingent liability as probable. Answer: D Difficulty: 2 Medium Topic: Quality of Earnings Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

Match the following: A) Vertical analysis B) Growth stocks C) Profitability ratios D) Value Stocks E) Solvency F) Horizontal analysis G) Liquidity 154) Analyzes trends in financial statement data for a single company over time. Difficulty: 2 Medium Topic: Vertical Analysis; Horizontal Analysis; Risk Analysis - General; Profitability Analysis – General Learning Objective: 12-01 Perform vertical analysis.; 12-02 Perform horizontal analysis.; 12-03 Use ratios to analyze a company's risk.; 12-04 Use ratios to analyze a company's profitability. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 155) Have lower share prices in relationship to their fundamental ratios and therefore trade at lower PE ratios. Difficulty: 2 Medium Topic: Vertical Analysis; Horizontal Analysis; Risk Analysis - General; Profitability Analysis General Learning Objective: 12-01 Perform vertical analysis.; 12-02 Perform horizontal analysis.; 12-03 Use ratios to analyze a company's risk.; 12-04 Use ratios to analyze a company's profitability. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 156) Expresses each item in a financial statement as a percentage of the same base amount. Difficulty: 2 Medium Topic: Vertical Analysis; Horizontal Analysis; Risk Analysis - General; Profitability Analysis General Learning Objective: 12-01 Perform vertical analysis.; 12-02 Perform horizontal analysis.; 12-03 Use ratios to analyze a company's risk.; 12-04 Use ratios to analyze a company's profitability. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

157) Refers to a company's ability to pay its current liabilities. Difficulty: 2 Medium Topic: Vertical Analysis; Horizontal Analysis; Risk Analysis - General; Profitability Analysis General Learning Objective: 12-01 Perform vertical analysis.; 12-02 Perform horizontal analysis.; 12-03 Use ratios to analyze a company's risk.; 12-04 Use ratios to analyze a company's profitability. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 158) Refers to a company's ability to pay its long-term liabilities. Difficulty: 2 Medium Topic: Vertical Analysis; Horizontal Analysis; Risk Analysis - General; Profitability Analysis General Learning Objective: 12-01 Perform vertical analysis.; 12-02 Perform horizontal analysis.; 12-03 Use ratios to analyze a company's risk.; 12-04 Use ratios to analyze a company's profitability. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 159) Have high expectations of future earnings and therefore usually trade at higher P/E ratios. Difficulty: 2 Medium Topic: Vertical Analysis; Horizontal Analysis; Risk Analysis - General; Profitability Analysis General Learning Objective: 12-01 Perform vertical analysis.; 12-02 Perform horizontal analysis.; 12-03 Use ratios to analyze a company's risk.; 12-04 Use ratios to analyze a company's profitability. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 160) Measure the earnings or operating effectiveness of a company. Difficulty: 2 Medium Topic: Vertical Analysis; Horizontal Analysis; Risk Analysis - General; Profitability Analysis General Learning Objective: 12-01 Perform vertical analysis.; 12-02 Perform horizontal analysis.; 12-03 Use ratios to analyze a company's risk.; 12-04 Use ratios to analyze a company's profitability. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 154) F 155) D 156) A 157) G 158) E 159) B 160) C

Match the following: A) Aggressive accounting practices B) Horizontal analysis C) Liquidity D) Other revenues and expenses E) Discontinued operation F) Vertical analysis G) Solvency H) Conservative accounting practices 161) A company's ability to pay its current liabilities. Difficulty: 2 Medium Topic: Earnings Persistence and Earnings Quality; Vertical Analysis; Horizontal Analysis; Risk Analysis - General; Profitability Analysis - General; Earnings Persistence and One-Time Income Items; Quality of Earnings Learning Objective: 12-01 Perform vertical analysis.; 12-02 Perform horizontal analysis.; 12-03 Use ratios to analyze a company's risk.; 12-04 Use ratios to analyze a company's profitability.; 12-05 Distinguish persistent earnings from one-time items.; 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 162) Accounting choices that result in reporting lower income, lower assets, and higher liabilities. Difficulty: 2 Medium Topic: Earnings Persistence and Earnings Quality; Vertical Analysis; Horizontal Analysis; Risk Analysis - General; Profitability Analysis - General; Earnings Persistence and One-Time Income Items; Quality of Earnings Learning Objective: 12-01 Perform vertical analysis.; 12-02 Perform horizontal analysis.; 12-03 Use ratios to analyze a company's risk.; 12-04 Use ratios to analyze a company's profitability.; 12-05 Distinguish persistent earnings from one-time items.; 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

163) The sale or disposal of most long-term assets. Difficulty: 2 Medium Topic: Earnings Persistence and Earnings Quality; Vertical Analysis; Horizontal Analysis; Risk Analysis - General; Profitability Analysis - General; Earnings Persistence and One-Time Income Items; Quality of Earnings Learning Objective: 12-01 Perform vertical analysis.; 12-02 Perform horizontal analysis.; 12-03 Use ratios to analyze a company's risk.; 12-04 Use ratios to analyze a company's profitability.; 12-05 Distinguish persistent earnings from one-time items.; 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 164) Accounting choices that result in reporting higher income, higher assets, and lower liabilities. Difficulty: 2 Medium Topic: Earnings Persistence and Earnings Quality; Vertical Analysis; Horizontal Analysis; Risk Analysis - General; Profitability Analysis - General; Earnings Persistence and One-Time Income Items; Quality of Earnings Learning Objective: 12-01 Perform vertical analysis.; 12-02 Perform horizontal analysis.; 12-03 Use ratios to analyze a company's risk.; 12-04 Use ratios to analyze a company's profitability.; 12-05 Distinguish persistent earnings from one-time items.; 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 165) A tool to analyze trends in financial statement data for a single company over time. Difficulty: 2 Medium Topic: Earnings Persistence and Earnings Quality; Vertical Analysis; Horizontal Analysis; Risk Analysis - General; Profitability Analysis - General; Earnings Persistence and One-Time Income Items; Quality of Earnings Learning Objective: 12-01 Perform vertical analysis.; 12-02 Perform horizontal analysis.; 12-03 Use ratios to analyze a company's risk.; 12-04 Use ratios to analyze a company's profitability.; 12-05 Distinguish persistent earnings from one-time items.; 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

166) The sale or disposal of a significant component of a company's operations. Difficulty: 2 Medium Topic: Earnings Persistence and Earnings Quality; Vertical Analysis; Horizontal Analysis; Risk Analysis - General; Profitability Analysis - General; Earnings Persistence and One-Time Income Items; Quality of Earnings Learning Objective: 12-01 Perform vertical analysis.; 12-02 Perform horizontal analysis.; 12-03 Use ratios to analyze a company's risk.; 12-04 Use ratios to analyze a company's profitability.; 12-05 Distinguish persistent earnings from one-time items.; 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 167) A means to express each item in a financial statement as a percentage of a base amount. Difficulty: 2 Medium Topic: Earnings Persistence and Earnings Quality; Vertical Analysis; Horizontal Analysis; Risk Analysis - General; Profitability Analysis - General; Earnings Persistence and One-Time Income Items; Quality of Earnings Learning Objective: 12-01 Perform vertical analysis.; 12-02 Perform horizontal analysis.; 12-03 Use ratios to analyze a company's risk.; 12-04 Use ratios to analyze a company's profitability.; 12-05 Distinguish persistent earnings from one-time items.; 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 168) A company's ability to pay its long-term liabilities. Difficulty: 2 Medium Topic: Earnings Persistence and Earnings Quality; Vertical Analysis; Horizontal Analysis; Risk Analysis - General; Profitability Analysis - General; Earnings Persistence and One-Time Income Items; Quality of Earnings Learning Objective: 12-01 Perform vertical analysis.; 12-02 Perform horizontal analysis.; 12-03 Use ratios to analyze a company's risk.; 12-04 Use ratios to analyze a company's profitability.; 12-05 Distinguish persistent earnings from one-time items.; 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 161) C 162) H 163) D 164) A 165) B 166) E 167) F 168) G

Match the following: A) Current ratio B) Acid-test ratio C) Inventory turnover ratio D) Average collection period E) Average days in inventory F) Receivables turnover ratio G) Debt to equity ratio H) Times interest earned ratio 169) Cost of goods sold divided by average inventory; the number of times the firm sells its average inventory balance during a reporting period. Difficulty: 2 Medium Topic: Risk Analysis - Receivables Turnover Ratio; Risk Analysis - Average Collection Period; Risk Analysis - Inventory Turnover Ratio; Risk Analysis - Average Days in Inventory; Risk Analysis - Current Ratio; Risk Analysis - Acid-Test Ratio; Risk Analysis - Debt to Equity Ratio; Risk Analysis - Times Interest Earned Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 170) Total liabilities divided by total stockholders' equity; measure a company's solvency risk. Difficulty: 2 Medium Topic: Risk Analysis - Receivables Turnover Ratio; Risk Analysis - Average Collection Period; Risk Analysis - Inventory Turnover Ratio; Risk Analysis - Average Days in Inventory; Risk Analysis - Current Ratio; Risk Analysis - Acid-Test Ratio; Risk Analysis - Debt to Equity Ratio; Risk Analysis - Times Interest Earned Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 171) Approximate number of days the average inventory is held. Difficulty: 2 Medium Topic: Risk Analysis - Receivables Turnover Ratio; Risk Analysis - Average Collection Period; Risk Analysis - Inventory Turnover Ratio; Risk Analysis - Average Days in Inventory; Risk Analysis - Current Ratio; Risk Analysis - Acid-Test Ratio; Risk Analysis - Debt to Equity Ratio; Risk Analysis - Times Interest Earned Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

172) Ratio that compares interest expense with income available to pay those charges. Difficulty: 2 Medium Topic: Risk Analysis - Receivables Turnover Ratio; Risk Analysis - Average Collection Period; Risk Analysis - Inventory Turnover Ratio; Risk Analysis - Average Days in Inventory; Risk Analysis - Current Ratio; Risk Analysis - Acid-Test Ratio; Risk Analysis - Debt to Equity Ratio; Risk Analysis - Times Interest Earned Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 173) Net sales divided by average accounts receivable; the number of times during a year that the average accounts receivable balance is collected. Difficulty: 2 Medium Topic: Risk Analysis - Receivables Turnover Ratio; Risk Analysis - Average Collection Period; Risk Analysis - Inventory Turnover Ratio; Risk Analysis - Average Days in Inventory; Risk Analysis - Current Ratio; Risk Analysis - Acid-Test Ratio; Risk Analysis - Debt to Equity Ratio; Risk Analysis - Times Interest Earned Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 174) Cash, short-term investments, and accounts receivable divided by current liabilities; measures the availability of liquid current assets to pay current liabilities. Difficulty: 2 Medium Topic: Risk Analysis - Receivables Turnover Ratio; Risk Analysis - Average Collection Period; Risk Analysis - Inventory Turnover Ratio; Risk Analysis - Average Days in Inventory; Risk Analysis - Current Ratio; Risk Analysis - Acid-Test Ratio; Risk Analysis - Debt to Equity Ratio; Risk Analysis - Times Interest Earned Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 175) Current assets divided by current liabilities; measures the availability of current assets to pay current liabilities. Difficulty: 2 Medium Topic: Risk Analysis - Receivables Turnover Ratio; Risk Analysis - Average Collection Period; Risk Analysis - Inventory Turnover Ratio; Risk Analysis - Average Days in Inventory; Risk Analysis - Current Ratio; Risk Analysis - Acid-Test Ratio; Risk Analysis - Debt to Equity Ratio; Risk Analysis - Times Interest Earned Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 75 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

176) Approximate number of days the average accounts receivable balance is outstanding. Difficulty: 2 Medium Topic: Risk Analysis - Receivables Turnover Ratio; Risk Analysis - Average Collection Period; Risk Analysis - Inventory Turnover Ratio; Risk Analysis - Average Days in Inventory; Risk Analysis - Current Ratio; Risk Analysis - Acid-Test Ratio; Risk Analysis - Debt to Equity Ratio; Risk Analysis - Times Interest Earned Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 169) C 170) G 171) E 172) H 173) F 174) B 175) A 176) D

Match the following: A) Asset turnover B) Price-earnings (PE) ratio C) Profit margin D) Gross profit ratio E) Return on assets F) Return on equity 177) Net income divided by average total assets; measures the amount of net income generated for each dollar invested in assets. Difficulty: 2 Medium Topic: Profitability Analysis - Gross Profit Ratio; Profitability Analysis - Return on Assets; Profitability Analysis - Profit Margin; Profitability Analysis - Asset Turnover; Profitability Analysis - Return on Equity; Profitability Analysis - Price-Earnings Ratio Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 178) Compares a company's share price with its earnings per share. Difficulty: 2 Medium Topic: Profitability Analysis - Gross Profit Ratio; Profitability Analysis - Return on Assets; Profitability Analysis - Profit Margin; Profitability Analysis - Asset Turnover; Profitability Analysis - Return on Equity; Profitability Analysis - Price-Earnings Ratio Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 179) Net income divided by average stockholders' equity; measures the income generated per dollar of equity. Difficulty: 2 Medium Topic: Profitability Analysis - Gross Profit Ratio; Profitability Analysis - Return on Assets; Profitability Analysis - Profit Margin; Profitability Analysis - Asset Turnover; Profitability Analysis - Return on Equity; Profitability Analysis - Price-Earnings Ratio Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

180) Gross profit divided by net sales; measures the amount by which the sale price of inventory exceeds its cost per dollar of sales. Difficulty: 2 Medium Topic: Profitability Analysis - Gross Profit Ratio; Profitability Analysis - Return on Assets; Profitability Analysis - Profit Margin; Profitability Analysis - Asset Turnover; Profitability Analysis - Return on Equity; Profitability Analysis - Price-Earnings Ratio Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 181) Net sales divided by average total assets; which measures the sales per dollar of assets invested. Difficulty: 2 Medium Topic: Profitability Analysis - Gross Profit Ratio; Profitability Analysis - Return on Assets; Profitability Analysis - Profit Margin; Profitability Analysis - Asset Turnover; Profitability Analysis - Return on Equity; Profitability Analysis - Price-Earnings Ratio Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 182) Net income divided by net sales; indicates the earnings per dollar of sales. Difficulty: 2 Medium Topic: Profitability Analysis - Gross Profit Ratio; Profitability Analysis - Return on Assets; Profitability Analysis - Profit Margin; Profitability Analysis - Asset Turnover; Profitability Analysis - Return on Equity; Profitability Analysis - Price-Earnings Ratio Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 177) E 178) B 179) F 180) D 181) A 182) C

Match the following: A) Other revenues and expenses B) Quality of earnings C) Discontinued operation D) Aggressive accounting practices E) Conservative accounting practices 183) The sale or disposal of most long-term assets. Difficulty: 2 Medium Topic: Earnings Persistence and One-Time Income Items; Quality of Earnings Learning Objective: 12-05 Distinguish persistent earnings from one-time items.; 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 184) The sale or disposal of a significant component of a company's operations. Difficulty: 2 Medium Topic: Earnings Persistence and One-Time Income Items; Quality of Earnings Learning Objective: 12-05 Distinguish persistent earnings from one-time items.; 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 185) Refers to the ability of reported earnings to reflect the company's true earnings, as well as the usefulness of reported earnings to predict future earnings. Difficulty: 2 Medium Topic: Earnings Persistence and One-Time Income Items; Quality of Earnings Learning Objective: 12-05 Distinguish persistent earnings from one-time items.; 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 186) Practices that result in reporting lower income, lower assets, and higher liabilities. Difficulty: 2 Medium Topic: Earnings Persistence and One-Time Income Items; Quality of Earnings Learning Objective: 12-05 Distinguish persistent earnings from one-time items.; 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

187) Practices that result in reporting higher income, higher assets, and lower liabilities. Difficulty: 2 Medium Topic: Earnings Persistence and One-Time Income Items; Quality of Earnings Learning Objective: 12-05 Distinguish persistent earnings from one-time items.; 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 183) A 184) C 185) B 186) E 187) D 188) Perform a vertical analysis on the following information:

Cash Accounts receivable Inventory Long-term assets Total assets

2021 $500,000 900,000 700,000 2,200,000 $4,300,000

2020 $200,000 800,000 500,000 2,500,000 $4,000,000

Answer:

Difficulty: 3 Hard Topic: Vertical Analysis Learning Objective: 12-01 Perform vertical analysis. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

189) Perform a horizontal analysis on the following information providing both the dollar amount and percentage change:

Cash Accounts receivable Inventory Long-term assets Total assets

2021 $500,000 900,000 700,000 2,200,000 $4,300,000

2020 $200,000 800,000 500,000 2,500,000 $4,000,000

Answer:

Difficulty: 3 Hard Topic: Horizontal Analysis Learning Objective: 12-02 Perform horizontal analysis. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

190) Assume a company's sales are $1.6 million in 2020, $1.8 million in 2021, and $1.7 million in 2022. What is the percentage change from 2020 to 2021? What is the percentage change from 2021 to 2022? Be sure to indicate whether the percentage change is an increase or a decrease. Answer: % change from 2020 to 2021 = ($1.8 million − 1.6 million)/$1.6 million = 12.5% increase. % change from 2021 to 2022 = ($1.7 million − $1.8 million)/$1.8 million = 5.6% decrease. Difficulty: 3 Hard Topic: Horizontal Analysis Learning Objective: 12-02 Perform horizontal analysis. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 191) If a company's sales are $648,000 in 2021, and this represents an 8% increase over sales in 2020, what were sales in 2020? Answer: $648,000/1.08 = $600,000. Difficulty: 3 Hard Topic: Horizontal Analysis Learning Objective: 12-02 Perform horizontal analysis. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 192) A company began the year with an Accounts Receivable balance of $250,000, and had a year-end balance of $280,000. Credit sales of $800,000 generated a gross profit of $150,000. Calculate the receivables turnover ratio for the year. Answer: Receivables turnover ratio

= 3.0 times (rounded)

193) A company began the year with an Inventory balance of $180,000, and had a year-end balance of $200,000. Sales of $800,000 generated a gross profit of $150,000. Calculate the inventory turnover ratio for the year. Answer: Inventory turnover ratio

= 3.4 times (rounded)

*800,000 (sales) − $150,000 (gross profit) = $650,000 COGS Difficulty: 3 Hard Topic: Risk Analysis - Inventory Turnover Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 194) BC Training reports sales revenue of $2,200,000. Average inventory during the year was $200,000. The inventory turnover ratio for the year is 8.0. What amount of gross profit would the company report in its income statement? Answer: Inventory turnover ratio

= 8.0 times

*COGS = $200,000 × 8.0 = $1,600,000. Given sales of $2,200,000 and calculating COGS of $1,600,000, gross profit is $600,000. Sales − Cost of goods sold = Gross profit

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

195) LeBron's Kids Camps has a current ratio of 0.75 to 1, based on current assets of $3 million and current liabilities of $4 million. How, if at all, will a $500,000 cash purchase of inventory affect the current ratio? How, if at all, will a $500,000 purchase of inventory on account affect the current ratio? Answer: A cash purchase of inventory will not affect the current ratio, but a purchase of inventory on account will increase the current ratio as shown below: Current ratio before purchase of inventory: = 0.75 to 1

Current ratio after $500,000 cash purchase of inventory: = 0.75 to 1

Current ratio after $500,000 purchase of inventory on account: = 0.78 to 1 Difficulty: 3 Hard Topic: Risk Analysis - Current Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

196) he following income statement and balance sheets for Laser World are provided: Laser World Income Statement For the year-ended December 31, 2021 Sales revenue $2,200,000 Cost of goods sold 1,500,000 Gross profit 700,000 Expenses: Operating expenses 350,000 Depreciation expense 70,000 Loss on sale of land 5,000 Interest expense 25,000 Income tax expense 60,000 Total expenses 510,000 Net income $190,000

Laser World Balance Sheets December 31 Assets Current assets: Cash Accounts receivable Inventory Prepaid rent Long-term assets: Land Equipment Accumulated depreciation Total assets Liabilities and Stockholders' Equity Current liabilities: Accounts payable Interest payable Income tax payable Long-term liabilities: Notes payable Stockholders' equity: Common stock Retained earnings Total liabilities and equity

2021

2020

$120,000 90,000 120,000 10,000

$112,000 70,000 100,000 10,000

260,000 350,000 (70,000) $880,000

200,000 210,000 (42,000) $660,000

$55,000 8,000 15,000

$75,000 7,000 12,000

400,000

300,000

200,000 202,000 $880,000

200,000 66,000 $660,000

Assuming that all sales were on account, calculate the following risk ratios for 2021 (round to one decimal place): 1. Receivables turnover ratio 2. Average collection period 3. Inventory turnover ratio 4. Average days in inventory 5. Current ratio 6. Acid-test ratio 7. Debt to equity ratio 8. Times interest earned ratio

Answer:

Difficulty: 3 Hard Topic: Risk Analysis - Receivables Turnover Ratio; Risk Analysis - Average Collection Period; Risk Analysis - Inventory Turnover Ratio; Risk Analysis - Average Days in Inventory; Risk Analysis - Current Ratio; Risk Analysis - Acid-Test Ratio; Risk Analysis - Debt to Equity Ratio; Risk Analysis - Times Interest Earned Ratio Learning Objective: 12-03 Use ratios to analyze a company's risk. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

197) The following income statement and balance sheets for Worlds of Fun are provided: Worlds of Fun Income Statement For the year-ended December 31, 2021 Sales revenue $2,200,000 Cost of goods sold 1,500,000 Gross profit 700,000 Expenses: Operating expenses 350,000 Depreciation expense 70,000 Loss on sale of land 5,000 Interest expense 25,000 Income tax expense 60,000 Total expenses 510,000 Net income $190,000

Worlds of Fun Balance Sheet December 31 Assets Current assets: Cash Accounts receivable Inventory Prepaid rent Long-term assets: Land Equipment Accumulated depreciation Total assets Liabilities and Stockholders' Equity Current liabilities: Accounts payable Interest payable Income tax payable Long-term liabilities: Notes payable Stockholders' equity: Common stock Retained earnings Total liabilities and equity

2021

2020

$120,000 90,000 120,000 10,000

$112,000 70,000 100,000 10,000

260,000 350,000 (70,000) $880,000

200,000 210,000 (42,000) $660,000

$55,000 8,000 15,000

$75,000 7,000 12,000

400,000

300,000

200,000 202,000 $880,000

200,000 66,000 $660,000

Earnings per share for the year ended December 31, 2021, is $1.90. The closing stock price on December 31, 2021, is $30.40. Calculate the following profitability ratios for 2021 (round to one decimal place): 1. Gross profit ratio 2. Return on assets 3. Profit margin 4. Asset turnover 5. Return on equity 6. Price-earnings ratio Answer:

Difficulty: 3 Hard Topic: Profitability Analysis - Gross Profit Ratio; Profitability Analysis - Return on Assets; Profitability Analysis - Profit Margin; Profitability Analysis - Asset Turnover; Profitability Analysis - Return on Equity; Profitability Analysis - Price-Earnings Ratio Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 89 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

198) Barry's BBQ had sales revenue for the year of $200 million and net income of $20 million. Total assets were $70 million at the beginning of the year, and $80 million at the end of the year. Calculate Barry's return on assets, profit margin, and asset turnover ratios (round to one decimal place). Answer: (dollars in millions) Return on assets

= 26.7%

Profit margin

= 10.0%

Asset turnover

= 2.7 times

Difficulty: 3 Hard Topic: Profitability Analysis - Return on Assets; Profitability Analysis - Profit Margin; Profitability Analysis - Asset Turnover Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 199) Paul Pierce Enterprises reports net income of $800,000, average total assets of $2,400,000, and average total liabilities of $400,000. Calculate the return on assets and return on equity ratios (round to one decimal place). Answer: (dollars in millions) Return on assets

= 33.3%

Return on equity

= 40.0%

*($2,400,000 − $400,000) Difficulty: 3 Hard Topic: Profitability Analysis - Return on Assets; Profitability Analysis - Return on Equity Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

200) Phillip's Fun Center has several playgrounds areas, go-karts, miniature golf, bumper boats, paintball, and laser tag. Determine whether the company should report each of the following items as discontinued operations, other revenues, or other expenses: 1. The company sells an outdoor playground at a gain of $5,000. 2. The company sold its old go-karts at a loss of $25,000 and replaced them with all new go-karts. 3. The company sold its laser tag center at a loss of $10,000 to focus on the other more profitable segments. Laser tag is considered to be a separate business segment. 4. The company restructured its business at a cost of $75,000, replacing some employee positions with automated equipment. Answer: 1. Other revenues. 2. Other expenses. 3. Discontinued operations. 4. Other expenses. Difficulty: 2 Medium Topic: Earnings Persistence and One-Time Income Items Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 201) Classify each of the following accounting practices as conservative or aggressive: 1. Increase the allowance for uncollectible accounts. 2. When costs are rising, change from FIFO to LIFO. 3. Increase the estimated useful life of equipment. Answer: 1. Conservative 2. Conservative 3. Aggressive Difficulty: 2 Medium Topic: Quality of Earnings Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

202) Classify each of the following accounting practices as conservative or aggressive: 1. Choosing a shorter life for calculating depreciation. 2. The write-down of inventory. 3. Decrease the allowance for uncollectible accounts. 4. Recording revenues sooner. Answer: 1. Conservative 2. Conservative 3. Aggressive 4. Aggressive Difficulty: 2 Medium Topic: Quality of Earnings Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

203) The Sports Warehouse operates in two distinct segments; equipment and apparel. The income statements for each operating segment are presented below.

Required: 1. Complete the "%" columns to be used in a vertical analysis of The Sports Warehouse's two operating segments. Express each amount as a percentage of sales. 2. Use vertical analysis to compare the profitability of the two operating segments. Which segment is more profitable?

Answer: Requirement 1

Requirement 2 The apparel segment is more profitable. Net income is 21.4% of sales in that segment compared to only 16.8% of sales in the equipment segment. If these results continue, the company may want to place greater focus on the expansion of the more profitable apparel segment. Difficulty: 3 Hard Topic: Vertical Analysis Learning Objective: 12-01 Perform vertical analysis. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making; FN Measurement/Keyboard Navigation 94 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

204) The following balance sheets for The Sports Shack are provided. The Sports Shack Balance Sheets December 31 Assets Current assets: Cash Accounts receivable Inventory Supplies Long-term assets: Equipment Less: Accumulated depreciation Total assets Liabilities and Stockholders' Equity Current liabilities: Accounts payable Interest payable Income tax payable Long-term liabilities: Notes payable Stockholders' equity: Common stock Retained earnings Total liabilities and equity

2021

2020

$218,000 680,000 1,250,000 90,000

$196,000 880,000 1,100,000 65,000

1,200,000 (350,000) $3,088,000

900,000 (250,000) $2,891,000

$65,000 4,000 40,000

$55,000 6,000 30,000

400,000

300,000

900,000 1,679,000 $3,088,000

900,000 1,600,000 $2,891,000

Required: 1. Prepare a vertical analysis of The Sports Shack's 2021 and 2020 balance sheets. Express each amount as a percentage of total assets for that year. 2. Prepare a horizontal analysis of The Sports Shack's 2021 balance sheet using 2020 as the base year.

Answer: Requirement 1

Requirement 2

Difficulty: 3 Hard Topic: Vertical Analysis; Horizontal Analysis Learning Objective: 12-01 Perform vertical analysis.; 12-02 Perform horizontal analysis. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

205) The income statements for The Sports Warehouse for the years ending December 31, 2022, and 2021, are provided.

Required: 1. Complete the "Amount" and "%" columns to be used in a horizontal analysis of The Sports Warehouse's income statement. 2. Discuss the major fluctuations in income statement items during the year.

Answer: Requirement 1

Requirement 2 Sales and gross profit both increased about 3%. The company also managed to decrease operating expenses by 8%. This resulted in increases to operating income, income before tax, and net income around 8% as well. Difficulty: 3 Hard Topic: Horizontal Analysis Learning Objective: 12-02 Perform horizontal analysis. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

206) The following income statement and balance sheets for The Sports Shack are provided. The Sports Shack Income Statement For the year ended December 31, 2021 Sales revenue Cost of goods sold Gross profit Expenses: Operating expenses Depreciation expense Interest expense Income tax expense Total expenses Net income

$6,600,000 4,700,000 1,900,000 1,400,000 100,000 50,000 80,000 1,630,000 $270,000

The Sports Shack Balance Sheets December 31 Assets Current assets: Cash Accounts receivable Inventory Supplies Long-term assets: Equipment Less: Accumulated depreciation Total assets Liabilities and Stockholders' Equity Current liabilities: Accounts payable Interest payable Income tax payable Long-term liabilities: Notes payable Stockholders' equity: Common stock Retained earnings Total liabilities and equity

2021

2020

$218,000 680,000 1,250,000 90,000

$196,000 880,000 1,100,000 65,000

1,200,000 (350,000) $3,088,000

900,000 (250,000) $2,891,000

$65,000 4,000 40,000

$55,000 6,000 30,000

400,000

300,000

900,000 1,679,000 $3,088,000

900,000 1,600,000 $2,891,000

Required: Assuming that all sales were on account, calculate the following risk ratios for 2021 (round to one decimal place). 1. Receivables turnover ratio 2. Average collection period 3. Inventory turnover ratio 4. Average days in inventory 5. Current ratio 6. Acid-test ratio 7. Debt to equity ratio 8. Times interest earned ratio

Answer:

207) Income statement and balance sheet data for The Sports Shack are provided below. The Sports Shack Income Statements For the years ended December 31 2022 $8,200,000 6,100,000 2,100,000

2021 $6,600,000 4,700,000 1,900,000

1,450,000 90,000 25,000 95,000 1,660,000 $440,000

1,400,000 100,000 50,000 80,000 1,630,000 $270,000

The Sports Shack Balance Sheets December 31 2022

2021

2020

$290,000 1,050,000 919,000 80,000

$218,000 680,000 1,250,000 90,000

$196,000 880,000 1,100,000 65,000

1,100,000 (440,000) $2,999,000

1,200,000 (350,000) $3,088,000

(250,000) (250,000) $2,891,000

$50,000 2,000 38,000

$65,000 4,000 40,000

$55,000 6,000 30,000

200,000

400,000

300,000

900,000 1,809,000 $2,999,000

900,000 1,679,000 $3,088,000

900,000 1,600,000 $2,891,000

Sales revenue Cost of goods sold Gross profit Expenses: Operating expenses Depreciation expense Interest expense Income tax expense Total expenses Net income

Assets Current assets: Cash Accounts receivable Inventory Supplies Long-term assets: Equipment Less: Accumulated depreciation Total assets Liabilities and Stockholders' Equity Current liabilities: Accounts payable Interest payable Income tax payable Long-term liabilities: Notes payable Stockholders' equity: Common stock Retained earnings Total liabilities and equity

Required: 1. Calculate the following risk ratios for 2021 and 2022 (round to one decimal place). Receivables turnover ratio Inventory turnover ratio Current ratio Debt to equity ratio 2. Calculate the following profitability ratios for 2021 and 2022 (round to one decimal place). Gross profit ratio Return on assets Profit margin Asset turnover 3. Based on the ratios calculated, determine whether overall risk and profitability improved from 2021 to 2022.

Answer: Requirement 1

Requirement 2

Requirement 3 Based on the ratios calculated, the company's overall risk improved in 2022. The receivables turnover ratio, the inventory turnover ratio, and the current ratio all increased, while the debt to equity ratio decreased from 2021 to 2022. These are all positive signs of less risk for the company. Based on the ratios calculated, the company's overall profitability improved in 2022. The return on assets, profit margin, and asset turnover ratios all increased, while the gross profit ratio decreased from 28.8% to 25.6%. Gross profit measures the amount by which the sales price of inventory exceeds its cost per dollar of sales. One factor that may cause a decrease in gross profit is increased competition in the industry resulting in a lower markup. Difficulty: 3 Hard Topic: Risk Analysis - Receivables Turnover Ratio; Risk Analysis - Inventory Turnover Ratio; Risk Analysis - Current Ratio; Risk Analysis - Debt to Equity Ratio; Profitability Analysis - Gross Profit Ratio; Profitability Analysis - Return on Assets; Profitability Analysis - Profit Margin; Profitability Analysis - Asset Turnover Learning Objective: 12-03 Use ratios to analyze a company's risk.; 12-04 Use ratios to analyze a company's profitability. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making; FN Measurement/Keyboard Navigation 208) A company has the following data for the year. Sales revenue Cost of goods sold Net income Average total assets Average total equity Average shares of common stock Closing stock price

$7,200,000 $5,800,000 $1,600,000 $9,100,000 $6,300,000 4,000,000 $5.40

Required: Calculate the following profitability ratios (round to one decimal place). 1. Gross profit ratio 2. Return on assets 3. Profit margin 4. Asset turnover 5. Return on equity 6. Price-earnings ratio

Answer:

209) Explain the difference between vertical and horizontal analysis. Answer: For vertical analysis, we express each item as a percentage of the same base amount, such as a percentage of sales in the income statement or as a percentage of total assets in the balance sheet. We use horizontal analysis to analyze trends in financial statement data, such as the dollar amount of change and the percentage change, for one company over time. Difficulty: 2 Medium Topic: Vertical Analysis; Horizontal Analysis Learning Objective: 12-01 Perform vertical analysis.; 12-02 Perform horizontal analysis. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 210) Explain why ratios that compare an income statement account with a balance sheet account should express the balance sheet account as an average of the beginning and ending balances. Answer: We measure income statement accounts over a period of time (like a video), while we measure balance sheet accounts at a point in time (like a photograph). Therefore, ratios that compare an income statement account with a balance sheet account should express the balance sheet account as an average of the beginning and ending balances. Difficulty: 2 Medium Topic: Risk Analysis - General; Profitability Analysis - General Learning Objective: 12-03 Use ratios to analyze a company's risk.; 12-04 Use ratios to analyze a company's profitability. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 211) Sideline Sports Products reports a return on assets of 6%, and a return on equity of 10%. Why do these two ratios differ? Answer: The return on assets and the return on equity differ due to financial leverage – the amount of debt a company carries. If a company earns a return on investment about the interest cost of borrowing, then the additional debt will benefit investors in the company. The result, as is the case for Sideline Sports Products, is that the return on equity will exceed the return on assets. Difficulty: 2 Medium Topic: Profitability Analysis - Return on Assets; Profitability Analysis - Return on Equity Learning Objective: 12-04 Use ratios to analyze a company's profitability. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

212) Define earnings persistence. How does earnings persistence relate to the reporting of discontinued operations? Answer: Earnings persistence is the ability of current earnings to continue or persist into future years. Certain items are part of net income in the current year but are not expected to persist. We refer to these as one-time income items. A primary example is discontinued operations. Difficulty: 2 Medium Topic: Earnings Persistence and One-Time Income Items Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 213) Explain the difference between conservative and aggressive accounting practices. Provide an example of a conservative accounting practice and explain why this practice is conservative. Provide an example of an aggressive accounting practice and explain why this practice is aggressive. Answer: Conservative accounting practices are those that result in reporting lower income, lower assets, and higher liabilities. In contrast, aggressive accounting practices result in reporting higher income, higher assets, and lower liabilities. A larger estimation of the allowance for uncollectible accounts, the write-down of overvalued inventory, the use of a shorter useful life for depreciation, and the recording of a contingent litigation loss are all examples of conservative accounting. They are conservative because all of these practices report lower net income. A lower estimation of the allowance for uncollectible accounts, waiting to report an inventory write-down, choosing a longer useful life for depreciation, and waiting to record a litigation loss all are examples of more aggressive accounting. They are aggressive because all of these practices report higher net income. Difficulty: 3 Hard Topic: Quality of Earnings Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation

Fina ncial Accounting, 5e (Spiceland) Appendix C: Time Value of Money 1) The value of $1 today is worth more than $1 one year from now. Answer: TRUE Difficulty: 1 Easy Topic: Simple Versus Compound Interest Learning Objective: C-01 Contrast simple and compound interest. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 2) The time value of money is a concept, which means that the value of $1 increases over time. Answer: FALSE Explanation: Time value of money means that interest causes the value of money received today to be greater than the value of that same amount of money received in the future. Difficulty: 1 Easy Topic: Simple Versus Compound Interest Learning Objective: C-01 Contrast simple and compound interest. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 3) Simple interest is interest earned on the initial investment only. Answer: TRUE Difficulty: 1 Easy Topic: Simple Versus Compound Interest Learning Objective: C-01 Contrast simple and compound interest. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 4) If you put $500 into a savings account that pays simple interest of 8% per year and then withdraw the money two years later, you will earn interest of $80. Answer: TRUE Explanation: Simple interest = ($500 × 8%) + ($500 × 8%) = $80. Difficulty: 3 Hard Topic: Simple Versus Compound Interest Learning Objective: C-01 Contrast simple and compound interest. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 1 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

5) If you put $600 into a savings account that pays simple interest of 10% per year and then withdraw the money two years later, you will earn interest of $126. Answer: FALSE Explanation: Simple interest = ($600 × 10%) + ($600 × 10%) = $120. Difficulty: 3 Hard Topic: Simple Versus Compound Interest Learning Objective: C-01 Contrast simple and compound interest. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 6) Compound interest is interest you earn on the initial investment and on previous interest. Answer: TRUE Difficulty: 1 Easy Topic: Simple Versus Compound Interest Learning Objective: C-01 Contrast simple and compound interest. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 7) If you put $200 into a savings account that pays annual compound interest of 8% per year and then withdraw the money two years later, you will earn interest of $32. Answer: FALSE Explanation: Compound interest = ($200 × 8%) + ($216 × 8%) = $33.28. Difficulty: 3 Hard Topic: Simple Versus Compound Interest Learning Objective: C-01 Contrast simple and compound interest. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 8) If you put $300 into a savings account that pays annual compound interest of 10% per year and then withdraw the money two years later, you will earn interest of $63. Answer: TRUE Explanation: ($300 × 10%) + ($330 × 10%) = $63. Difficulty: 3 Hard Topic: Simple Versus Compound Interest Learning Objective: C-01 Contrast simple and compound interest. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

9) Future value is how much an amount today will grow to be in the future. Answer: TRUE Difficulty: 1 Easy Topic: Future Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 10) The more frequent the rate of compounding, the more interest that is earned on previous interest, resulting in a higher future value. Answer: TRUE Difficulty: 2 Medium Topic: Future Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 11) Present value indicates how much a present amount of money will grow to in the future. Answer: FALSE Explanation: Present value indicates the value today of receiving some larger amount in the future. Difficulty: 1 Easy Topic: Present Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 12) The discount rate is the rate at which someone is willing to give up current dollars for future dollars. Answer: TRUE Difficulty: 1 Easy Topic: Present Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

13) The future value of $1,000 invested today for three years that earns 10% compounded annually is greater than the future value of a $500 annuity with the same interest rate over the same period. Answer: FALSE Explanation: The three-year annuity represents three payments of $500 (= $1,500), so the annuity is greater. Difficulty: 3 Hard Topic: Future Value of a Single Amount; Future Value of an Annuity Learning Objective: C-02 Calculate the future value and present value of a single amount.; C-03 Calculate the future value and present value of an annuity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 14) The present value of $1,000 received three years from today with a discount rate of 10% is less than the present value of a $500 annuity with the same discount rate over the same period. Answer: TRUE Explanation: The three-year annuity represents three payments of $500 (= $1,500), so the present value of the annuity is greater. Difficulty: 3 Hard Topic: Present Value of a Single Amount; Present Value of an Annuity Learning Objective: C-02 Calculate the future value and present value of a single amount.; C-03 Calculate the future value and present value of an annuity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 15) An annuity includes cash payments of equal amounts over time periods of equal length. Answer: TRUE Difficulty: 1 Easy Topic: Future Value of an Annuity; Present Value of an Annuity Learning Objective: C-03 Calculate the future value and present value of an annuity. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

16) The concept that interest causes the value of money received today to be greater than the value of that same amount of money received in the future is referred to as the: A) Monetary unit assumption. B) Historical cost principle. C) Time value of money. D) Matching principle. Answer: C Difficulty: 1 Easy Topic: Simple Versus Compound Interest Learning Objective: C-01 Contrast simple and compound interest. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 17) Simple interest is computed as the: A) Interest rate times the difference between the initial investment and any previous interest. B) Interest rate times the initial investment only. C) Interest rate times any previous interest. D) Interest rate times the sum of the initial investment plus any previous interest. Answer: B Difficulty: 1 Easy Topic: Simple Versus Compound Interest Learning Objective: C-01 Contrast simple and compound interest. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 18) Which of the following is a correct statement? A) The future value table should be used when determining how much an amount today will grow to be in the future. B) The present value table should be used when determining how much an amount in the future is worth today. C) The number of compounding periods and interest rate per compounding period are needed to use the future value table and the present value table. D) All of the other answer choices are correct. Answer: D Difficulty: 2 Medium Topic: Future Value of a Single Amount; Present Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

19) Mattison is trying to decide how much an investment of $10,000 today will grow to be in the future. Which of the following will she not need to help calculate that amount? A) Future value table. B) Present value table. C) Number of compounding periods. D) Interest rate. Answer: B Difficulty: 2 Medium Topic: Future Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 20) Anna Beth would like to save $10,000 by the time she finishes college and is trying to calculate how much she should invest today. Which of the following will she not need to help calculate that amount? A) Future value table. B) Present value table. C) Number of compounding periods. D) Interest rate. Answer: A Difficulty: 2 Medium Topic: Present Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 21) The value today of receiving an amount in the future is referred to as the: A) Future value of a single amount. B) Present value of a single amount. C) Future value of an annuity. D) Present value of an annuity. Answer: B Difficulty: 1 Easy Topic: Present Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

22) The value that an amount today will grow to in the future is referred to as the: A) Future value of a single amount. B) Present value of a single amount. C) Future value of an annuity. D) Present value of an annuity. Answer: A Difficulty: 1 Easy Topic: Future Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 23) Reba wishes to know how much would be in her savings account in five years if she deposits a given sum in an account that earns 6% interest. She should use a table for the: A) Future value of $1. B) Present value of $1. C) Future value of an annuity of $1. D) Present value of an annuity of $1. Answer: A Difficulty: 2 Medium Topic: Future Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 24) LeAnn wishes to know how much she should set aside now at 7% interest in order to accumulate a sum of $5,000 in four years. She should use a table for the: A) Future value of $1. B) Present value of $1. C) Future value of an annuity of $1. D) Present value of an annuity of $1. Answer: B Difficulty: 2 Medium Topic: Present Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

25) Samuel is trying to determine what it's worth today to receive $10,000 in four years at a 7% interest rate. He should use a table for the: A) Future value of $1. B) Present value of $1. C) Future value of an annuity of $1. D) Present value of an annuity of $1. Answer: B Difficulty: 2 Medium Topic: Present Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 26) Below are excerpts from interest tables for 8% interest. 1

1.0000

0.92593

1.08000

0.92593

2.0800

0.85734

1.16640

1.78326

3.2464

0.79383

1.25971

2.57710

4.5061

0.73503

1.36049

3.31213

Column 2 is an interest table for the: A) Future value of $1. B) Present value of $1. C) Future value of an annuity of $1. D) Present value of an annuity of $1. Answer: B Difficulty: 2 Medium Topic: Present Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

27) Below are excerpts from interest tables for 8% interest. 1

1.0000

0.92593

1.08000

0.92593

2.0800

0.85734

1.16640

1.78326

3.2464

0.79383

1.25971

2.57710

4.5061

0.73503

1.36049

3.31213

Column 3 is an interest table for the: A) Future value of $1. B) Present value of $1. C) Future value of an annuity of $1. D) Present value of an annuity of $1. Answer: A Difficulty: 2 Medium Topic: Future Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 28) How much will $25,000 grow to in seven years, assuming an interest rate of 12% compounded annually? (Use appropriate factor(s) from Table 1, FV of $1; Table 2, PV of $1; Table 3, FVA of $1; and Table 4, PVA of $1 contained within a separate file.) A) $55,267. B) $46,000. C) $61,899. D) $52,344. Answer: A Explanation: FV = $25,000 × 2.21068 (Table 1; n = 7; i = 12%) = $55,267. Difficulty: 3 Hard Topic: Future Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

29) How much will $8,000 grow to in five years, assuming an interest rate of 8% compounded quarterly? (Use appropriate factor(s) from Table 1, FV of $1; Table 2, PV of $1; Table 3, FVA of $1; and Table 4, PVA of $1 contained within a separate file.) A) $10,989. B) $11,755. C) $11,888. D) $12,013. Answer: C Explanation: FV = $8,000 × 1.48595 (Table 1; n = 20; i = 2%) = $11,888. Difficulty: 3 Hard Topic: Future Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 30) What is the value today of receiving $2,500 at the end of three years, assuming an interest rate of 9% compounded annually? (Use appropriate factor(s) from Table 1, FV of $1; Table 2, PV of $1; Table 3, FVA of $1; and Table 4, PVA of $1 contained within a separate file.) A) $1,984. B) $1,930. C) $2,104. D) $3,238. Answer: B Explanation: PV = $2,500 × 0.77218 (Table 2; n = 3; i = 9%) = $1,930. Difficulty: 3 Hard Topic: Present Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

31) What is the value today of receiving $5,000 at the end of six years, assuming an interest rate of 8% compounded semiannually? (Use appropriate factor(s) from Table 1, FV of $1; Table 2, PV of $1; Table 3, FVA of $1; and Table 4, PVA of $1 contained within a separate file.) A) $3,151. B) $3,203. C) $3,428. D) $3,123. Answer: D Explanation: PV = $5,000 × 0.62460 (Table 2; n = 12; i = 4%) = $3,123. Difficulty: 3 Hard Topic: Present Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 32) Davenport Inc. offers a new employee two options. First, the employee can receive a one-time signing bonus at the date of employment. Second, the employee can take $30,000 at the date of employment and another $50,000 two years later. Assuming the employee's time value of money is 8% annually, what single payment in the first option would be equal to the total of the payments in the second option? (Use appropriate factor(s) from Table 1, FV of $1; Table 2, PV of $1; Table 3, FVA of $1; and Table 4, PVA of $1 contained within a separate file.) A) $60,000. B) $62,867. C) $72,867. D) $80,000. Answer: C Explanation: The one-time equivalent would be $30,000 + the present value of $50,000 where n = 2 and i = 8%. That is, $30,000 + ($50,000 × 0.85734 from Table 2) = $72,867. Difficulty: 3 Hard Topic: Present Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

33) Today, Thomas deposited $100,000 in a three-year, 12% CD that compounds quarterly. What is the maturity value of the CD? (Use appropriate factor(s) from Table 1, FV of $1; Table 2, PV of $1; Table 3, FVA of $1; and Table 4, PVA of $1 contained within a separate file.) A) $109,270. B) $119,410. C) $142,576. D) $309,090. Answer: C Explanation: FV = $100,000 × 1.42576 (Table 1; n = 12; i = 3%) = $142,576. Difficulty: 3 Hard Topic: Future Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 34) Today, King deposited $500,000 in an investment account that is expected to return 8%, compounded semiannually. What amount is expected to be in the account in four years? ((Use appropriate factor(s) from Table 1, FV of $1; Table 2, PV of $1; Table 3, FVA of $1; and Table 4, PVA of $1 contained within a separate file.) A) $680,245. B) $687,129. C) $684,285. D) $668,352. Answer: C Explanation: FV = $500,000 × 1.36857 (Table 1; n = 8; i = 4%) = $684,285. Difficulty: 3 Hard Topic: Future Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

35) Carol wants to invest money in a 6% CD that compounds semiannually. Carol would like the account to have a balance of $50,000 five years from now. How much must Carol deposit to accomplish her goal? (Use appropriate factor(s) from Table 1, FV of $1; Table 2, PV of $1; Table 3, FVA of $1; and Table 4, PVA of $1 contained within a separate file.) A) $35,069. B) $43,131. C) $37,205. D) $35,000. Answer: C Explanation: PV = $50,000 × 0.74409 (Table 2; n = 10; i = 3%) = $37,205. Difficulty: 3 Hard Topic: Present Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 36) Shane wants to invest money in a 6% CD that compounds semiannually. Shane would like the account to have a balance of $100,000 four years from now. How much must Shane deposit to accomplish his goal? (Use appropriate factor(s) from Table 1, FV of $1; Table 2, PV of $1; Table 3, FVA of $1; and Table 4, PVA of $1 contained within a separate file.) A) $88,848. B) $78,941. C) $25,336. D) $22,510. Answer: B Explanation: PV = $100,000 × 0.78941 (Table 2; n = 8; i = 3%) = $78,941. Difficulty: 3 Hard Topic: Present Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

37) Bill wants to give Maria a $500,000 gift in seven years. If money is worth 6% compounded semiannually, what is Maria's gift worth today? (Use appropriate factor(s) from Table 1, FV of $1; Table 2, PV of $1; Table 3, FVA of $1; and Table 4, PVA of $1 contained within a separate file.) A) $66,110. B) $81,310. C) $406,550. D) $330,560. Answer: D Explanation: PV = $500,000 × 0.66112 (Table 2; n = 14; i = 3%) = $330,560. Difficulty: 3 Hard Topic: Present Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 38) At the end of each of the next four years, a new machine is expected to generate net cash flows of $8,000, $12,000, $10,000, and $15,000, respectively. What are the cash flows worth today if a 3% interest rate properly reflects the time value of money in this situation? (Use appropriate factor(s) from Table 1, FV of $1; Table 2, PV of $1; Table 3, FVA of $1; and Table 4, PVA of $1 contained within a separate file.) A) $41,557. B) $47,700. C) $32,403. D) $38,108. Answer: A Explanation: PV = ($8,000 × 0.97087) + ($12,000 × 0.94260) + ($10,000 × 0.91514) + ($15,000 × 0.88849) = $41,557. Difficulty: 3 Hard Topic: Present Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

39) At the end of each of the next five years, an investment is expected to generate net cash flows of $5,000, $6,000, $7,000, $5,000, and $4,000, respectively. What are the cash flows worth today if a 6% interest rate properly reflects the time value of money in this situation? (Use appropriate factor(s) from Table 1, FV of $1; Table 2, PV of $1; Table 3, FVA of $1; and Table 4, PVA of $1 contained within a separate file.) A) $21,781. B) $22,884. C) $22,560. D) $23,142. Answer: B Explanation: PV = ($5,000 × 0.94340) + ($6,000 × 0.89000) + ($7,000 × 0.83962) + ($5,000 × 0.79209) + ($4,000 × 0.74726) = $22,884. Difficulty: 3 Hard Topic: Present Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 40) Monica wants to sell her share of an investment to Barney for $50,000 in three years. If money is worth 6% compounded semiannually, what would Monica accept today? (Use appropriate factor(s) from Table 1, FV of $1; Table 2, PV of $1; Table 3, FVA of $1; and Table 4, PVA of $1 contained within a separate file.) A) $8,375. B) $41,874. C) $11,941. D) $41,000. Answer: B Explanation: PV = $50,000 × 0.83748 (Table 2; n = 6; i = 3%) = $41,874. Difficulty: 3 Hard Topic: Present Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

41) How much must be invested now at 9% interest to accumulate to $10,000 in five years? (Use appropriate factor(s) from Table 1, FV of $1; Table 2, PV of $1; Table 3, FVA of $1; and Table 4, PVA of $1 contained within a separate file.) A) $9,176. B) $6,499. C) $5,500. D) $5,960. Answer: B Explanation: PV = $10,000 × 0.64993 (Table 2; n = 5, i = 9%) = $6,499. Difficulty: 3 Hard Topic: Present Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 42) How much must be invested now at 6% interest to accumulate to $50,000 in ten years? (Use appropriate factor(s) from Table 1, FV of $1; Table 2, PV of $1; Table 3, FVA of $1; and Table 4, PVA of $1 contained within a separate file.) A) $29,937. B) $22,366. C) $28,224. D) $27,920. Answer: D Explanation: PV = $50,000 × 0.55839 (Table 2; n = 10, i = 6%) = $27,920. Difficulty: 3 Hard Topic: Present Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 43) The value today of receiving a series of equal payments in the future is referred to as the: A) Future value of a single amount. B) Present value of a single amount. C) Future value of an annuity. D) Present value of an annuity. Answer: D Difficulty: 1 Easy Topic: Present Value of an Annuity Learning Objective: C-03 Calculate the future value and present value of an annuity. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 16 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

44) The value that a series of equal payments will grow to in the future is referred to as the: A) Future value of a single amount. B) Present value of a single amount. C) Future value of an annuity. D) Present value of an annuity. Answer: C Difficulty: 1 Easy Topic: Future Value of an Annuity Learning Objective: C-03 Calculate the future value and present value of an annuity. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 45) A series of equal periodic payments is referred to as: A) The time value of money. B) An annuity. C) The future value. D) Interest. Answer: B Difficulty: 1 Easy Topic: Future Value of an Annuity; Present Value of an Annuity Learning Objective: C-03 Calculate the future value and present value of an annuity. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 46) How much will $5,000 invested at the end of each year grow to in six years, assuming an interest rate of 7% compounded annually? (Use appropriate factor(s) from Table 1, FV of $1; Table 2, PV of $1; Table 3, FVA of $1; and Table 4, PVA of $1 contained within a separate file.) A) $35,766. B) $26,813. C) $23,833. D) $7,504. Answer: A Explanation: FVA = $5,000 × 7.1533 (Table 3; n = 6; i = 7%) = $35,766. Difficulty: 3 Hard Topic: Future Value of an Annuity Learning Objective: C-03 Calculate the future value and present value of an annuity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 17 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

47) How much will $1,000 invested at the end of each year grow to in 20 years, assuming an interest rate of 10% compounded annually? (Use appropriate factor(s) from Table 1, FV of $1; Table 2, PV of $1; Table 3, FVA of $1; and Table 4, PVA of $1 contained within a separate file.) A) $6,728. B) $8,514. C) $83,159. D) $57,275. Answer: D Explanation: FVA = $1,000 × 57.2750 (Table 3; n = 20; i = 10%) = $57,275. Difficulty: 3 Hard Topic: Future Value of an Annuity Learning Objective: C-03 Calculate the future value and present value of an annuity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 48) What is the value today of receiving $5,000 at the end of each year for the next 10 years, assuming an interest rate of 12% compounded annually? (Use appropriate factor(s) from Table 1, FV of $1; Table 2, PV of $1; Table 3, FVA of $1; and Table 4, PVA of $1 contained within a separate file.) A) $87,744. B) $28,251. C) $50,000. D) $15,529. Answer: B Explanation: PVA = $5,000 × 5.65022 (Table 4; n = 10; i = 12%) = $28,251. Difficulty: 3 Hard Topic: Present Value of an Annuity Learning Objective: C-03 Calculate the future value and present value of an annuity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

49) What is the value today of receiving $3,000 at the end of each year for the next three years, assuming an interest rate of 3% compounded annually? (Use appropriate factor(s) from Table 1, FV of $1; Table 2, PV of $1; Table 3, FVA of $1; and Table 4, PVA of $1 contained within a separate file.) A) $8,486. B) $8,251. C) $9,000. D) $9,273. Answer: A Explanation: PVA = $3,000 × 2.82861 (Table 4; n = 3; i = 3%) = $8,486. Difficulty: 3 Hard Topic: Present Value of an Annuity Learning Objective: C-03 Calculate the future value and present value of an annuity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 50) What is the value today of receiving $5,000 at the end of each six-month period for the next four years, assuming an interest rate of 4% compounded semi-annually? A) $34,512. B) $32,459. C) $33,664. D) $36,627. Answer: D Explanation: PVA = $5,000 × 7.32548 (Table 4; n = 8; i = 2%) = $36,627. Difficulty: 3 Hard Topic: Present Value of an Annuity Learning Objective: C-03 Calculate the future value and present value of an annuity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

51) Tammy wants to buy a car that costs $10,000 and wishes to know the amount of the monthly payments, which will be made at the end of the month, with interest of 12% on the unpaid balance. She should use a table for the: A) Future value of $1. B) Present value of $1. C) Future value of an annuity of $1. D) Present value of an annuity of $1. Answer: D Difficulty: 2 Medium Topic: Present Value of an Annuity Learning Objective: C-03 Calculate the future value and present value of an annuity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 52) George Jones is planning on a cruise for his 70th birthday party. He wants to know how much he should set aside at the end of each month at 6% interest to accumulate the sum of $4,800 in five years. He should use a table for the: A) Future value of $1. B) Present value of $1. C) Future value of an annuity of $1. D) Present value of an annuity of $1. Answer: C Difficulty: 2 Medium Topic: Future Value of an Annuity Learning Objective: C-03 Calculate the future value and present value of an annuity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 53) Zulu Corporation hires a new chief executive officer and promises to pay her a signing bonus of $2 million per year for 10 years, starting at the end of the first year. The value of this signing bonus is: A) The present value of the annuity. B) The future value of the annuity. C) $20 million. D) $0 because no cash is owed immediately. Answer: A Difficulty: 2 Medium Topic: Present Value of an Annuity Learning Objective: C-03 Calculate the future value and present value of an annuity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 20 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

54) Sandra won $5,000,000 in the state lottery, which she has elected to receive at the end of each month over the next thirty years. She will receive 7% interest on unpaid amounts. To determine the amount of her monthly check, she should use a table for the: A) Future value of $1. B) Present value of $1. C) Future value of an annuity of $1. D) Present value of an annuity of $1. Answer: D Difficulty: 2 Medium Topic: Present Value of an Annuity Learning Objective: C-03 Calculate the future value and present value of an annuity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 55) Below are excerpts from interest tables for 8% interest. 1

1.0000

0.92593

1.08000

0.92593

2.0800

0.85734

1.16640

1.78326

3.2464

0.79383

1.25971

2.57710

4.5061

0.73503

1.36049

3.31213

Column 4 is an interest table for the: A) Future value of $1. B) Present value of $1. C) Future value of an annuity of $1. D) Present value of an annuity of $1. Answer: D Difficulty: 2 Medium Topic: Present Value of an Annuity Learning Objective: C-03 Calculate the future value and present value of an annuity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

56) Below are excerpts from interest tables for 8% interest. 1

1.0000

0.92593

1.08000

0.92593

2.0800

0.85734

1.16640

1.78326

3.2464

0.79383

1.25971

2.57710

4.5061

0.73503

1.36049

3.31213

Column 1 is an interest table for the: A) Future value of $1. B) Present value of $1. C) Future value of an annuity of $1. D) Present value of an annuity of $1. Answer: C Difficulty: 2 Medium Topic: Future Value of an Annuity Learning Objective: C-03 Calculate the future value and present value of an annuity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 57) Quaker State Inc. offers a new employee two options. First, the employee can receive a one-time signing bonus at the date of employment. Second, the employee can take $8,000 at the date of employment plus $20,000 at the end of each of his first three years of service. Assuming the employee's time value of money is 10% annually, what single payment in the first option would be equal to the total of the payments in the second option? (Use appropriate factor(s) from Table 1, FV of $1; Table 2, PV of $1; Table 3, FVA of $1; and Table 4, PVA of $1 contained within a separate file.) A) $23,026. B) $57,737. C) $62,711. D) None of the choices are correct. Answer: B Explanation: The one-time equivalent would be $8,000 + the present value of a $20,000 annuity where n = 3, and i = 10%. That is, $8,000 + ($20,000 × 2.48685 from Table 4) = $57,737. Difficulty: 3 Hard Topic: Present Value of an Annuity Learning Objective: C-03 Calculate the future value and present value of an annuity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 22 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

58) At the end of each quarter, Patti deposits $500 into an account that pays 12% interest compounded quarterly. How much will Patti have in the account in three years? (Use appropriate factor(s) from Table 1, FV of $1; Table 2, PV of $1; Table 3, FVA of $1; and Table 4, PVA of $1 contained within a separate file.) A) $7,096. B) $7,013. C) $7,129. D) $8,880. Answer: A Explanation: FVA = $500 × 14.1920 (Table 3; n = 12; i = 3%) = $7,096. Difficulty: 3 Hard Topic: Future Value of an Annuity Learning Objective: C-03 Calculate the future value and present value of an annuity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 59) Every six months, Scott deposits $2,500 into an account that pays 10% interest compounded semi-annually. How much will Scott have in the account in four years? (Use appropriate factor(s) from Table 1, FV of $1; Table 2, PV of $1; Table 3, FVA of $1; and Table 4, PVA of $1 contained within a separate file.) A) $22,749. B) $23,873. C) $23,205. D) $28,590. Answer: B Explanation: FVA = $2,500 × 9.5491 (Table 3; n = 8; i = 5%) = $23,873. Difficulty: 3 Hard Topic: Future Value of an Annuity Learning Objective: C-03 Calculate the future value and present value of an annuity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

60) Miller borrows $300,000 to be paid off in three years. The loan payments are semiannual with the first payment due in six months, and interest is at 6%. What is the amount of each payment? (Use appropriate factor(s) from Table 1, FV of $1; Table 2, PV of $1; Table 3, FVA of $1; and Table 4, PVA of $1 contained within a separate file.) A) $55,379. B) $106,059. C) $30,138. D) $60,276. Answer: A Explanation: $300,000/5.41719 (Table 4; n = 6; i = 3%) = $55,379. Difficulty: 3 Hard Topic: Present Value of an Annuity Learning Objective: C-03 Calculate the future value and present value of an annuity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 61) Claudine Corporation will deposit $5,000 into a money market account at the end of each year for the next five years. How much will accumulate by the end of the fifth and final payment if the account earns 9% interest? (Use appropriate factor(s) from Table 1, FV of $1; Table 2, PV of $1; Table 3, FVA of $1; and Table 4, PVA of $1 contained within a separate file.) A) $32,617. B) $29,924. C) $27,250. D) $26,800. Answer: B Explanation: FVA = $5,000 × 5.9847 (Table 3; n = 5; i = 9%) = $29,924. Difficulty: 3 Hard Topic: Future Value of an Annuity Learning Objective: C-03 Calculate the future value and present value of an annuity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

62) What is the value today of receiving five annual payments of $500,000, beginning one year from now, assuming an 11% discount rate? (Use appropriate factor(s) from Table 1, FV of $1; Table 2, PV of $1; Table 3, FVA of $1; and Table 4, PVA of $1 contained within a separate file.) A) $2,500,000. B) $2,225,000. C) $1,847,950. D) $2,115,270. Answer: C Explanation: PVA = $500,000 × 3.69590 (Table 4; n = 5; i = 11%) = $1,847,950. Difficulty: 3 Hard Topic: Present Value of an Annuity Learning Objective: C-03 Calculate the future value and present value of an annuity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

63) Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the best term placing the letter designating the term in the space provided. Terms: a. Annuity b. Future value of a single amount c. Discount rate d. Future value of an annuity e. Interest f. Compound interest g. Present value of a single amount h. Time value of money i. Simple interest j. Present value of an annuity Phrases: _____ A dollar now is worth more than a dollar later. _____ A series of equal periodic payments. _____ Accumulation of a series of equal payments. _____ Interest earned on the initial investment and on previous interest. _____ Accumulation of an amount with interest. Answer: h; a; d; f; b Difficulty: 2 Medium Topic: Simple Versus Compound Interest; Future Value of a Single Amount; Present Value of a Single Amount; Future Value of an Annuity; Present Value of an Annuity Learning Objective: C-01 Contrast simple and compound interest.; C-02 Calculate the future value and present value of a single amount.; C-03 Calculate the future value and present value of an annuity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

64) Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the best term placing the letter designating the term in the space provided. Terms: a. Annuity b. Future value of a single amount c. Discount rate d. Future value of an annuity e. Interest f. Compound interest g. Present value of a single amount h. Time value of money i. Simple interest j. Present value of an annuity Phrases: _____ Amount today equivalent to a specified future amount. _____ The rate at which future dollars are equal to current dollars. _____ Interest earned on the initial investment only. _____ The factor that causes money today to be worth more than the same amount in the future. _____ Current worth of a series of equal payments received in the future. Answer: g; c; i; e; j Difficulty: 2 Medium Topic: Simple Versus Compound Interest; Future Value of a Single Amount; Present Value of a Single Amount; Future Value of an Annuity; Present Value of an Annuity Learning Objective: C-01 Contrast simple and compound interest.; C-02 Calculate the future value and present value of a single amount.; C-03 Calculate the future value and present value of an annuity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

65) Compute the future value of the following invested amounts at the specified periods and interest rates.

Item a. b. c.

Invested Amount $20,000 $30,000 $10,000

Interest Rate 8% 4% 12%

Number of Periods 10 8 15

Answer: a. $43,178; b. $41,057; c. $54,736. a. FV = $20,000 × 2.15892 (Table 1; n = 10; i = 8%) = $43,178. b. FV = $30,000 × 1.36857 (Table 1; n = 8; i = 4%) = $41,057. c. FV = $10,000 × 5.47357 (Table 1; n = 15; i = 12%) = $54,736. Difficulty: 3 Hard Topic: Future Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 66) Anthony would like to have $18,000 to buy a new car in three years. Currently, he has saved $15,000. If he puts $15,000 in an account that earns 6% interest, compounded annually, will he be able to buy the car in three years? Answer: No. FV = $15,000 × 1.19102 (Table 1; n = 3; i = 6%) = $17,865, which is less than the $18,000 desired amount. Difficulty: 3 Hard Topic: Future Value of a Singe Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

67) Michaela would like to have $10,000 for a European vacation in four years. Currently, she has saved $8,000. If she puts $8,000 in an account that earns 6% interest, compounded annually, will she be able to take the vacation in four years? Answer: Yes. FV = $8,000 × 1.26248 (Table 1; n = 4; i = 6%) = $10,100, which is more than the $10,000 desired amount. Difficulty: 3 Hard Topic: Future Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 68) Compute the present value of the following single amounts to be received at the end of the specified period at the given interest rate.

Item a. b. c.

Invested Amount $40,000 $20,000 $50,000

Interest Rate 7% 6% 11%

Number of Periods 20 25 10

Answer: a. $10,337; b. $4,660; c. $17,609. a. PV = $40,000 × 0.25842 (Table 2; n = 20; i = 7%) = $10,337. b. PV = $20,000 × 0.23300 (Table 2; n = 25; i = 6%) = $4,660. c. PV = $50,000 × 0.35218 (Table 2; n = 10; i = 11%) = $17,609. Difficulty: 3 Hard Topic: Present Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

69) Compute the present value of the following single amounts to be received at the end of the specified period at the given interest rate.

Item a. b. c. d.

Invested Amount $1,500 $1,500 $1,500 $1,500

Interest Rate 10% 10% 10% 10%

Number of Periods 1 2 3 4

Answer: a. $1,364; b. $1,240; c. $1,127; d. $1,025. a. PV = $1,500 × 0.90909 (Table 2; n = 1; i = 10%) = $1,364. b. PV = $1,500 × 0.82645 (Table 2; n = 2; i = 10%) = $1,240. c. PV = $1,500 × 0.75131 (Table 2; n = 3; i = 10%) = $1,127. d. PV = $1,500 × 0.68301 (Table 2; n = 4; i = 10%) = $1,025. Difficulty: 3 Hard Topic: Present Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 70) If you had an investment opportunity that promises to pay you $20,000 in three years and you could earn a 10% annual return investing your money elsewhere, what is the most you should be willing to invest today in this opportunity? Answer: $15,026. PV = $20,000 × 0.75131 (Table 2; n = 3; i = 10%) = $15,026. Difficulty: 3 Hard Topic: Present Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

71) Touche Manufacturing is considering a rearrangement of its manufacturing operations. A consultant estimates that the rearrangement should result in after-tax cash savings of $6,000 the first year, $10,000 for the next two years, and $12,000 for the next two years. Assuming a 12% discount rate, calculate the total present value of the cash flows. Answer: $34,882

Year 1 2 3 4 5

Cash Flow $ 6,000 10,000 10,000 12,000 12,000

PV 0.89286 (Table 2; n = 1; i = 12%) 0.79719 (Table 2; n = 2; i = 12%) 0.71178 (Table 2; n = 3; i = 12%) 0.63552 (Table 2; n = 4; i = 12%) 0.56743 (Table 2; n = 5; i = 12%) Total PV of Cash Savings

Present Value $ 5,357 7,972 7,118 7,626 6,809 $34,882

Difficulty: 3 Hard Topic: Present Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 72) Price Mart is considering outsourcing its billing operations. A consultant estimates that outsourcing should result in after-tax cash savings of $9,000 the first year, $15,000 for the next two years, and $18,000 for the next two years. Assuming a 12% discount rate, calculate the total present value of the cash flows. Answer: $52,324.

Year 1 2 3 4 5

Cash Flow $ 9,000 15,000 15,000 18,000 18,000

PV 0.89286 (Table 2; n = 1; i = 12%) 0.79719 (Table 2; n = 2; i = 12%) 0.71178 (Table 2; n = 3; i = 12%) 0.63552 (Table 2; n = 4; i = 12%) 0.56743 (Table 2; n = 5; i = 12%) Total PV of Cash Savings

Present Value $ 8,036 11,958 10,677 11,439 10,214 $52,324

73) Hillsdale is considering two options for comparable computer software. Option A will cost $25,000 plus annual license renewals of $1,000 for three years, which includes technical support. Option B will cost $20,000 with technical support being an add-on charge. The estimated cost of technical support is $4,000 the first year, $3,000 the second year, and $2,000 the third year. Assume the software is purchased and paid for at the beginning of year one, but that technical support is paid for at the end of each year. The discount rate is 8%. Ignore income taxes. Determine which option should be chosen based on present value considerations. Answer: Option A should be chosen because it has the lower cost based on present value considerations. Option A.

Year 0 1 2 3

Cash Flow PV $25,000 1.00000 1,000 0.92593 (Table 2; n = 1; i = 8%) 1,000 0.85734 (Table 2; n = 2; i = 8%) 1,000 0.79383 (Table 2; n = 3; i = 8%)

Present Value $25,000 926 857 794 $27,577

Cash Flow PV $20,000 1.00000 4,000 0.92593 (Table 2; n = 1; i = 8%) 3,000 0.85734 (Table 2; n = 2; i = 8%) 2,000 0.79383 (Table 2; n = 3; i = 8%)

Present Value $20,000 3,704 2,572 1,588 $27,864

Option B.

Year 0 1 2 3

74) DON Corp. is contemplating the purchase of a machine that will produce net after-tax cash savings of $20,000 per year for 5 years. At the end of five years, the machine can be sold to realize after-tax cash flows of $5,000. Assuming a 12% discount rate, calculate the total present value of the cash inflows and the cash savings from the machine. Answer: $74,933. PVA = $20,000 × 3.60478 (Table 4; n = 5; i = 12%) PV = $5,000 × 0.56743 (Table 2; n = 5; i = 12%) PV of Cash Savings

$72,096 2,837 $74,933

Difficulty: 3 Hard Topic: Present Value of a Single Amount; Present Value of an Annuity Learning Objective: C-02 Calculate the future value and present value of a single amount.; C-03 Calculate the future value and present value of an annuity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 75) Baird Bros. Construction is considering the purchase of a machine at a cost of $125,000. The machine is expected to generate cash flows of $20,000 per year for ten years and can be sold at the end of ten years for $10,000. The discount rate is 10%. Assume the machine would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations. Determine if Baird should purchase the machine. Answer: Baird Bros. Construction should buy the machine. Present value of cash outflows Present value of cash inflows: Annual cash flows − $20,000 × 6.14457 (Table 4; n = 10; i = 10%) Residual value − $10,000 × 0.38554 (Table 2; n = 10; i = 10%) Positive present value of net cash flows

$125,000

$122,891 3,855

126,746 $ 1,746

76) Dobson Contractors is considering buying equipment at a cost of $75,000. The equipment is expected to generate cash flows of $15,000 per year for eight years and can be sold at the end of eight years for $5,000. The discount rate is 12%. Assume the equipment would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations. Determine if Dobson should purchase the machine. Answer: Dobson Construction should buy the machine. Present value of cash outflows $75,000 Present value of cash inflows: Annual cash flows − $15,000 × 4.96764 (Table 4; n = 8; i = 12%)$74,515 Residual value − $5,000 × 0.40388 (Table 2; n = 8; i = 12%) 2,019 76,534 Positive present value of net cash flows $ 1,534 Difficulty: 3 Hard Topic: Present Value of a Single Amount; Present Value of an Annuity Learning Objective: C-02 Calculate the future value and present value of a single amount.; C-03 Calculate the future value and present value of an annuity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Decision Making; FN Measurement/Keyboard Navigation 77) Incognito Company is contemplating the purchase of a machine that provides it with net after-tax cash savings of $80,000 per year for 5 years. Assuming an 8% discount rate, calculate the present value of the cash savings. Answer: $319,417. PVA = $80,000 × 3.99271 (Table 4; n = 5; i =8%) = $319,417. Difficulty: 3 Hard Topic: Present Value of an Annuity Learning Objective: C-03 Calculate the future value and present value of an annuity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 78) Samson Inc. is contemplating the purchase of a machine that will provide it with net after-tax cash savings of $100,000 per year for 8 years. Assuming a 10% discount rate, calculate the present value of the cash savings. Answer: $533,493. PVA = $100,000 × 5.33493 (Table 4; n = 8; i = 10%) = $533,493. Difficulty: 3 Hard Topic: Present Value of an Annuity Learning Objective: C-03 Calculate the future value and present value of an annuity. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 34 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

79) Briefly explain why the value of $100 received today is greater than the value of $100 received one year from now. Answer: The following answer points out the key phrases that should appear in students' answers. It is not intended to be an example of complete student response. It might be helpful to provide detailed instructions to students on how brief or in depth you want their answers to be. The $100 received today can be invested to receive interest. Simple interest is computed only on the initial investment amount. Compound interest includes not only interest on the initial investment, but also interest on the accumulated interest to date. Difficulty: 2 Medium Topic: Simple Versus Compound Interest Learning Objective: C-01 Contrast simple and compound interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 80) Briefly describe the difference between simple interest and compound interest. Answer: The following answer points out the key phrases that should appear in students' answers. It is not intended to be an example of complete student response. It might be helpful to provide detailed instructions to students on how brief or in depth you want their answers to be. Simple interest is computed only on the initial investment amount. Compound interest includes not only interest on the initial investment, but also interest on the accumulated interest to date. Difficulty: 2 Medium Topic: Simple Versus Compound Interest Learning Objective: C-01 Contrast simple and compound interest. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

81) Two banks each have stated CD rates of 12%. Bank A compounds quarterly and Bank B compounds semiannually. Explain which bank offers the better CD. Answer: The following answer points out the key phrases that should appear in students' answers. It is not intended to be an example of complete student response. It might be helpful to provide detailed instructions to students on how brief or in depth you want their answers to be. The yield on a CD increases with more frequent compounding periods. Therefore, since both CDs have the same stated rate of 12%, Bank A, that compounds quarterly, offers a better yield than Bank B with semiannual compounding. Difficulty: 3 Hard Topic: Simple Versus Compound Interest Learning Objective: C-01 Contrast simple and compound interest. Bloom's: Evaluate AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 82) Explain the difference between present value and future value. Answer: The following answer points out the key phrases that should appear in students' answers. It is not intended to be an example of complete student response. It might be helpful to provide detailed instructions to students on how brief or in depth you want their answers to be. Present value tells us the value today of receiving some amount in the future. Future value is the value that an amount today will grow to in the future. The difference between the present value and the future value is the time value of money. Difficulty: 2 Medium Topic: Future Value of a Single Amount; Present Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 83) Which three factors are necessary in calculating the present value of a single amount? Answer: The following answer points out the key phrases that should appear in students' answers. It is not intended to be an example of complete student response. It might be helpful to provide detailed instructions to students on how brief or in depth you want their answers to be. You need to know (1) the future amount, (2) the interest rate per period, and (3) the number of periods. Difficulty: 1 Easy Topic: Present Value of a Single Amount Learning Objective: C-02 Calculate the future value and present value of a single amount. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 36 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

84) What is the relationship between the present value of a single amount and the present value of an annuity? Answer: The following answer points out the key phrases that should appear in students' answers. It is not intended to be an example of complete student response. It might be helpful to provide detailed instructions to students on how brief or in depth you want their answers to be. The present value of a single amount is the value today of receiving that amount in the future; whereas, the present value of an annuity is the sum of the present values of a series of equal cash payments. Difficulty: 2 Medium Topic: Present Value of a Single Amount; Present Value of an Annuity Learning Objective: C-02 Calculate the future value and present value of a single amount.; C-03 Calculate the future value and present value of an annuity. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

Financial Accounting, 5e (Spiceland) Appendix D: Investments 1) Companies with large expansion plans, called growth companies, prefer to reinvest earnings in the growth of the company rather than distribute earnings back to investors in the form of cash dividends. Answer: TRUE Difficulty: 1 Easy Topic: Why Companies Invest in Other Companies Learning Objective: D-01 Explain why companies invest in other companies. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 2) Seasonal refers to the revenue activities of a company varying based on the time (or season) of the year. Answer: TRUE Difficulty: 1 Easy Topic: Why Companies Invest in Other Companies Learning Objective: D-01 Explain why companies invest in other companies. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 3) When insignificant influence exists, an investment in equity securities should be accounted for by the equity method. Answer: FALSE Explanation: When insignificant influence exists, the investment should be accounted for by the fair value method. Difficulty: 2 Medium Topic: Why Companies Invest in Other Companies; Equity Investments with Insignificant Influence Learning Objective: D-01 Explain why companies invest in other companies.; D-02 Account for investments in equity securities when the investor has insignificant influence. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

4) When significant influence exists, an investment in equity securities should be accounted for by the equity method. Answer: TRUE Difficulty: 2 Medium Topic: Why Companies Invest in Other Companies; Equity Investments with Significant Influence Learning Objective: D-01 Explain why companies invest in other companies.; D-03 Account for investments in equity securities when the investor has significant influence. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 5) When the investor has insignificant influence, the receipt of cash dividends from an equity investment is recorded as dividend revenue. Answer: TRUE Difficulty: 2 Medium Topic: Equity Investments with Insignificant Influence Learning Objective: D-02 Account for investments in equity securities when the investor has insignificant influence. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 6) Investments in equity securities are reported at fair value when a company has an insignificant influence over another company in which it invests. Answer: TRUE Difficulty: 2 Medium Topic: Equity Investments with Insignificant Influence Learning Objective: D-02 Account for investments in equity securities when the investor has insignificant influence. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

7) Unrealized holding gains and losses from changes in the fair value of investments in equity securities are reported as a separate component of stockholders' equity when an investor has insignificant influence. Answer: FALSE Explanation: Unrealized holding gains and losses from changes in the fair value of investments in equity securities are reported as part of current net income when an investor has insignificant influence. Difficulty: 2 Medium Topic: Equity Investments with Insignificant Influence Learning Objective: D-02 Account for investments in equity securities when the investor has insignificant influence. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 8) Unrealized holding gains and losses from changes in the fair value of investments in equity securities are reported as part of current net income when an investor has insignificant influence. Answer: TRUE Difficulty: 2 Medium Topic: Equity Investments with Insignificant Influence Learning Objective: D-02 Account for investments in equity securities when the investor has insignificant influence. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 9) Gains and losses on the sale of equity investments are reported as nonoperating revenues and expenses in the income statement. Answer: TRUE Difficulty: 2 Medium Topic: Equity Investments with Insignificant Influence Learning Objective: D-02 Account for investments in equity securities when the investor has insignificant influence. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

10) Equity investments are reported at fair value when a company has a significant influence over another company in which it invests. Answer: FALSE Explanation: When a company has significant influence over another company, the investment is recorded using the equity method and not adjusted to fair value. Difficulty: 2 Medium Topic: Equity Investments with Significant Influence Learning Objective: D-03 Account for investments in equity securities when the investor has significant influence. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 11) Under the equity method, the investor includes in net income its portion of the investee's net income. Answer: TRUE Difficulty: 2 Medium Topic: Equity Investments with Significant Influence Learning Objective: D-03 Account for investments in equity securities when the investor has significant influence. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 12) When the investor has significant influence, the receipt of cash dividends is recorded as dividend revenue. Answer: FALSE Explanation: When the investor has significant influence, the receipt of cash dividends is recorded as a reduction in the Investments account. Difficulty: 2 Medium Topic: Equity Investments with Significant Influence Learning Objective: D-03 Account for investments in equity securities when the investor has significant influence. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

13) Consolidated financial statements combine the separate financial statements of the purchasing company and the acquired company into a single set of financial statements. Answer: TRUE Difficulty: 1 Easy Topic: Equity Investments with Controlling Influence Learning Objective: D-04 Account for investments in equity securities when the investor has controlling influence. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 14) Bond investments are long-term assets that earn interest revenue, while bonds payable are long-term liabilities that incur interest expense. Answer: TRUE Difficulty: 2 Medium Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 15) The cash received from interest equals the face value of the investment in bonds times the stated interest rate. Answer: TRUE Difficulty: 1 Easy Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 16) Interest revenue is calculated as the amortized cost of the investment in bonds times the stated interest rate. Answer: FALSE Explanation: Interest revenue is calculated as the amortized cost of the investment in bonds times the market interest rate. Difficulty: 1 Easy Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 5 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

17) Because the amortized cost of bonds purchased at a premium increases over time, interest revenue will also increase each semi-annual interest period. Answer: FALSE Explanation: The amortized cost of bonds purchased at a premium decreases over time. Therefore, interest revenue will also decrease each semi-annual interest period. Difficulty: 2 Medium Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 18) Because the amortized cost of bonds purchased at a discount increases over time, interest revenue will also increase each semiannual interest period. Answer: TRUE Difficulty: 2 Medium Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 19) The statement of comprehensive income is a statement in which we report all changes in stockholders' equity other than investments by stockholders and payment of dividends. Answer: TRUE Difficulty: 1 Easy Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement; FN Reporting/Keyboard Navigation 20) The statement of comprehensive income is a statement that includes net income plus investments by stockholders less payment of dividends. Answer: FALSE Explanation: The statement of comprehensive income is a statement in which we report all changes in stockholders' equity other than investments by stockholders and payment of dividends. Difficulty: 1 Easy Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement; FN Reporting/Keyboard Navigation 6 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

21) One of the primary reasons for investing in equity securities includes: A) Acquiring debt of competing companies. B) Appreciation in the value of the stock. C) Earning interest revenue. D) Deducting dividend payments for tax purposes. Answer: B Difficulty: 1 Easy Topic: Why Companies Invest in Other Companies Learning Objective: D-01 Explain why companies invest in other companies. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 22) One of the primary reasons for investing in debt securities includes: A) Receiving dividend payments. B) Acquiring significant influence. C) Earning interest revenue. D) Deducting interest payments for tax purposes. Answer: C Difficulty: 1 Easy Topic: Why Companies Invest in Other Companies Learning Objective: D-01 Explain why companies invest in other companies. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 23) Which of the following is true with regard to how to account for company A's investment in company B's common stock? A) The fair value method is used when A owns more than 50% of B. B) The equity method is used when A owns from 20% to 50% of B. C) Consolidated financial statements are prepared when A owns less than 20% of B. D) All of the other answer choices are correct. Answer: B Difficulty: 1 Easy Topic: Why Companies Invest in Other Companies Learning Objective: D-01 Explain why companies invest in other companies. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

24) Which of the following is true with regard to how to account for company A's investment in company B's common stock? A) The fair value method is used when A's ownership is presumed to have insignificant influence. B) The fair value method is used when A's ownership is presumed to be temporary. C) The fair value method is used when A's ownership is presumed to have significant influence. D) The fair value method is used when A's ownership is presumed to be long-term. Answer: A Difficulty: 1 Easy Topic: Why Companies Invest in Other Companies Learning Objective: D-01 Explain why companies invest in other companies. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 25) Libby Company purchased 10% of the equity securities in another company for $100,000. At the end of the year, the fair value of the securities was $105,000. How should the investment be reported in the year-end financial statements? A) The investment in equity securities would be reported in the balance sheet at its $100,000 cost. B) The investment in equity securities would be reported in the balance sheet at its $105,000 fair value. C) An unrealized holding gain of $5,000 would be reported as a separate component of stockholders' equity. D) The investment in equity securities would be reported in the balance sheet at its $105,000 fair value; an unrealized holding gain of $5,000 would be reported as a separate component of stockholders' equity. Answer: B Difficulty: 3 Hard Topic: Equity Investments with Insignificant Influence Learning Objective: D-02 Account for investments in equity securities when the investor has insignificant influence. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

26) Ronald Company purchased 5% of the equity securities of another company for $100,000. At the end of the year, the fair value of the securities was $105,000. How should the investment be reported in the year-end financial statements? A) The investment in equity securities would be reported in the balance sheet at its $100,000 cost. B) The investment in equity securities would be reported in the balance sheet at its $100,000 purchase cost; an unrealized holding gain of $5,000 would be reported in net income. C) An unrealized holding gain of $5,000 would be reported as a separate component of stockholders' equity. D) The investment in equity securities would be reported in the balance sheet at its $105,000 fair value; an unrealized holding gain of $5,000 would be reported in net income. Answer: D Difficulty: 3 Hard Topic: Equity Investments with Insignificant Influence Learning Objective: D-02 Account for investments in equity securities when the investor has insignificant influence. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 27) Sports Spectacular purchased 1,000 shares (8%) of stock in The Athletic Warehouse for $30 per share. By the end of the year, the stock price has increased to $32 per share. How would the change in stock price affect Sports Spectacular's net income? A) Increase net income by $32,000. B) Increase net income by $30,000. C) Increase net income by $2,000. D) No effect. Answer: C Difficulty: 3 Hard Topic: Equity Investments with Insignificant Influence Learning Objective: D-02 Account for investments in equity securities when the investor has insignificant influence. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation

28) Sports Science purchased 1,000 shares (4%) of stock in Silver's Gym for $30 per share. By the end of the year, the stock price has decreased to $28 per share. How would the change in stock price affect Sports Science's net income? A) Decrease net income by $28,000. B) Decrease net income by $30,000. C) Decrease net income by $2,000. D) No effect. Answer: C Difficulty: 3 Hard Topic: Equity Investments with Insignificant Influence Learning Objective: D-02 Account for investments in equity securities when the investor has insignificant influence. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 29) Sports Spectacular purchased 1,000 shares (8%) of stock in The Athletic Warehouse for $30 per share. By the end of the year, the Athletic Warehouse has paid dividends of $2 per share. How would Sports Spectacular account for the dividend? A) Decrease in the investment account B) Unrealized holding gain. C) Dividend revenue. D) Sports Spectacular would not recognize the dividend. Answer: C Difficulty: 1 Easy Topic: Equity Investments with Insignificant Influence Learning Objective: D-02 Account for investments in equity securities when the investor has insignificant influence. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

30) At the beginning of the year, Gilman Company purchased 10,000 of the 200,000 shares of common stock of Burke Corporation at $40 per share as a long-term investment. The records of Burke Corporation showed the following by the end of the year:

Net Income Dividends Paid Market Price per Share

$ 500,000 $ 200,000 $ 38

What amount should Gilman Company report in its year-end balance sheet for its investment in Burke? A) $380,000. B) $400,000. C) $415,000. D) $425,000. Answer: A Explanation: $38 × 10,000 shares = $380,000. Difficulty: 3 Hard Topic: Equity Investments with Insignificant Influence Learning Objective: D-02 Account for investments in equity securities when the investor has insignificant influence. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 31) On January 1, 2021, Nana Company paid $100,000 for 8,000 shares of Papa Company's common stock. The ownership in Papa Company is 10%. Papa reported net income of $52,000 for the year ended December 31, 2021. The fair value of the Papa stock on that date was $45 per share. What amount will be reported in the balance sheet of Nana Company for the investment in Papa at December 31, 2021? A) $284,400. B) $300,000. C) $315,600. D) $360,000. Answer: D Explanation: $45 × 8,000 shares = $360,000. Difficulty: 3 Hard Topic: Equity Investments with Insignificant Influence Learning Objective: D-02 Account for investments in equity securities when the investor has insignificant influence. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

32) On January 2, 2021, Howdy Doody Corporation purchased 12% of Ranger Corporation's common stock for $50,000. During 2021, Ranger had net income of $100,000 and declared and paid a dividend of $60,000. On December 31, 2021, the fair value of the Ranger stock owned by Howdy Doody had increased to $70,000. How much should Howdy Doody show in the 2021 income statement as income from this investment? A) $26,000. B) $7,200. C) $20,000. D) $27,200. Answer: D Explanation: ($60,000 × 12%) + ($70,000 − $50,000) = $27,200. Difficulty: 3 Hard Topic: Equity Investments with Insignificant Influence Learning Objective: D-02 Account for investments in equity securities when the investor has insignificant influence. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 33) If Pop Company exercises significant influence over Son Company and owns 40% of its common stock, then Pop Company: A) Would record dividends received from Son Company as investment revenue. B) Would increase Investments account when Son Company declares dividends. C) Would record 40% of the net income of Son Company as investment income each year. D) All of these answer choices are correct. Answer: C Difficulty: 2 Medium Topic: Equity Investments with Significant Influence Learning Objective: D-03 Account for investments in equity securities when the investor has significant influence. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

34) When the equity method of accounting for investments is used by the investor, the Investments account increases when: A) A cash dividend is received from the investee. B) The investee reports a net income for the year. C) The investor records additional depreciation related to the investment. D) The investee reports a net loss for the year. Answer: B Difficulty: 2 Medium Topic: Equity Investments with Significant Influence Learning Objective: D-03 Account for investments in equity securities when the investor has significant influence. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 35) Which of the following increases the Investments account under the equity method of accounting? A) Decreases in the market price of the investee's stock. B) Dividends paid by the investee that were declared in the previous year. C) Net loss of the investee company. D) None of these answer choices are correct. Answer: D Difficulty: 2 Medium Topic: Equity Investments with Significant Influence Learning Objective: D-03 Account for investments in equity securities when the investor has significant influence. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 36) When using the equity method to account for an investment, cash dividends received by the investor from the investee should be recorded: A) As a reduction in the Investments account. B) As an increase in the Investments account. C) As dividend income. D) As a contra item to stockholders' equity. Answer: A Difficulty: 2 Medium Topic: Equity Investments with Significant Influence Learning Objective: D-03 Account for investments in equity securities when the investor has significant influence. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 13 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

37) The equity method of accounting for investments in voting common stock is appropriate when: A) The investor can significantly influence the investee. B) The investor has voting control over the investee. C) The investor intends to hold the common stock indefinitely. D) The investor is assured of a continued supply of a valuable raw material. Answer: A Difficulty: 1 Easy Topic: Equity Investments with Significant Influence Learning Objective: D-03 Account for investments in equity securities when the investor has significant influence. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 38) Sports International purchased 100,000 shares of stock in The Gaming Warehouse for $30 per share. The investment is properly recorded using the equity method. By the end of the year, the stock price has increased to $32 per share. How would the change in stock price affect Sports International's net income under the equity method? A) Increase net income by $32,000. B) Increase net income by $30,000. C) Increase net income by $2,000. D) No effect. Answer: D Difficulty: 3 Hard Topic: Equity Investments with Significant Influence Learning Objective: D-03 Account for investments in equity securities when the investor has significant influence. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation

39) At the beginning of the year, Goldman Company purchased 10,000 of the 40,000 shares of common stock of Buchanan Corporation at $40 per share as a long-term investment. Goldman can exercise significant influence over Buchanan and properly records the investment using the equity method. The records of Buchanan Corporation showed the following by the end of the year:

Net Income Dividends Paid Market Price per Share

$ 500,000 $ 200,000 $ 38

What amount should Goldman Company report in its year-end balance sheet for its investment in Buchanan? A) $380,000. B) $400,000. C) $475,000. D) $425,000. Answer: C Explanation: $400,000 + ($500,000 × 25%) − ($200,000 × 25%) = $475,000. Difficulty: 3 Hard Topic: Equity Investments with Significant Influence Learning Objective: D-03 Account for investments in equity securities when the investor has significant influence. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 40) On January 1, 2021, Tremen Corporation acquired 40% of the shares of Delany Company. Tremen paid $3,000,000 for the investment. For 2021, Delany recognized net income of $500,000 and paid $300,000 of dividends. At December 31, 2021, Tremen's investment in Delany Company would be reported for: A) $3,200,000. B) $3,120,000. C) $3,000,000. D) $3,080,000. Answer: D Explanation: $3,000,000 + (40% × $500,000) − (40% × $300,000) = $3,080,000 Difficulty: 3 Hard Topic: Equity Investments with Significant Influence Learning Objective: D-03 Account for investments in equity securities when the investor has significant influence. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

41) On January 1, 2021, Clement Corporation purchased 30% of Meyer Corporation's common stock for $200,000. During 2021, Meyer had net income of $400,000 and declared and paid a dividend of $100,000. On December 31, 2021, the fair value of the Meyer stock owned by Clement had decreased to $180,000. How much should Clement report in its 2021 income statement as income from this investment? A) $10,000. B) $30,000. C) $120,000. D) $(20,000). Answer: C Explanation: $400,000 × 30% = $120,000. Difficulty: 3 Hard Topic: Equity Investments with Significant Influence Learning Objective: D-03 Account for investments in equity securities when the investor has significant influence. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 42) Consolidated financial statements are prepared when one company has: A) Accounted for the investment using the equity method. B) Accounted for the investment as available-for-sale securities. C) Control over another company. D) None of the other answer choices are correct. Answer: C Difficulty: 1 Easy Topic: Equity Investments with Controlling Influence Learning Objective: D-04 Account for investments in equity securities when the investor has controlling influence. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

43) Which of the following investment securities held by Zoogle Inc. may be classified as held-to-maturity securities in its balance sheet? A) Debt securities. B) Equity securities. C) Common stock. D) All of the other answer choices are correct. Answer: A Difficulty: 2 Medium Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 44) A company purchased bonds on January 1, 2021, for $207,913. This price represents a market rate of 9% on bonds that have a face amount of $200,000, have a stated rate of 10%, pay semiannual interest, and mature in 5 years. For what amount would these bonds be recorded when purchased? A) $7,913. B) $207,913. C) $200,000. D) $220,000. Answer: B Difficulty: 2 Medium Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Understand AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

45) A company purchased bonds on July 1, 2021, for $281,859. This price represents a market rate of 7% on bonds that have a face amount of $300,000, have a stated rate of 6%, pay semiannual interest, and mature in 8 years. Calculate the amount of interest revenue as of December 31, 2021. A) $19,730. B) $9,000. C) $9,865. D) $18,000. Answer: C Explanation: $281,859 × 7% × 1/2 = $9,865. Difficulty: 3 Hard Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 46) A company purchased bonds on July 1, 2021, for $107,106. This price represents a market rate of 7% on bonds that have a face amount of $100,000, have a stated rate of 8%, pay semiannual interest, and mature in 10 years. Calculate the amount of interest revenue as of December 31, 2021. A) $7,497. B) $4,000. C) $3,749. D) $8,000. Answer: C Explanation: $107,106 × 7% × 1/2 = $3,749 Difficulty: 3 Hard Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

47) A company purchased bonds on July 1, 2021, for $274,885. This price represents a market rate of 6% on bonds that have a face amount of $250,000, have a stated rate of 8%, pay semiannual interest, and mature in 6 years. Calculate the amortized cost of the bonds as of December 31, 2021. A) $273,132. B) $264,885. C) $276,638. D) $266,638. Answer: A Explanation: Interest payment = $250,000 × 8% × 1/2 = $10,000. Interest revenue = $274,885 × 6% × 1/2 = $8,247. Amortization of premium = $10,000 − $8,247 = $1,753. Amortized cost = $274,885 − $1,753 = $273,132. Difficulty: 3 Hard Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 48) A company purchased bonds on July 1, 2021, for $193,404. This price represents a market rate of 9% on bonds that have a face amount of $200,000, have a stated rate of 8%, pay semiannual interest, and mature in 4 years. As of December 31, 2021, the fair value of the bonds has increased to $195,000. Assuming the investment is classified as held-to-maturity securities, what amount would the company report for its investment in bonds on December 31, 2021? A) $193,404. B) $195,703. C) $194,107. D) $195,000. Answer: C Explanation: Interest payment = $200,000 × 8% × 1/2 = $8,000. Interest revenue = $193,404 × 9% × 1/2 = $8,703. Amortization of discount = $8,703 − $8,000 = $703. Amortized cost = $193,404 + $703 = $194,107. Difficulty: 3 Hard Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

49) A company purchased bonds on July 1, 2021, for $193,404. This price represents a market rate of 9% on bonds that have a face amount of $200,000, have a stated rate of 8%, pay semiannual interest, and mature in 4 years. As of December 31, 2021, the fair value of the bonds has increased to $195,000. Assuming the investment is classified as trading securities, what amount would the company report for its investment in bonds on December 31, 2021? A) $193,404. B) $195,703. C) $194,107. D) $195,000. Answer: D Difficulty: 3 Hard Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 50) A company purchased bonds on July 1, 2021, for $193,404. This price represents a market rate of 9% on bonds that have a face amount of $200,000, have a stated rate of 8%, pay semiannual interest, and mature in 4 years. As of December 31, 2021, the fair value of the bonds has increased to $195,000. Assuming the investment is classified as available-for-sale securities, what amount would the company report for its investment in bonds on December 31, 2021? A) $193,404. B) $195,703. C) $194,107. D) $195,000. Answer: D Difficulty: 3 Hard Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

51) A company purchased bonds on July 1, 2021, for $94,352. This price represents a market rate of 6% on bonds that have a face amount of $100,000, have a stated rate of 5%, pay semiannual interest, and mature in 7 years. As of December 31, 2021, the fair value of the bonds has increased to $95,000. Assuming the investment is classified as trading securities, calculate the unrealized holding gain or loss recognized in the income statement in 2021. A) $648 gain. B) $317 gain. C) $5,000 loss. D) No gain or loss is recognized in the income statement. Answer: B Explanation: Interest payment = $100,000 × 5% × 1/2 = $2,500. Interest revenue = $94,352 × 6% × 1/2 = $2,831. Amortization of discount = $2,831 − $2,500 = $331. Amortized cost = $94,352 + $331 = $94,683. Unrealized holding gain = $95,000 − $94,683 = $317. Difficulty: 3 Hard Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 52) A company purchased bonds on July 1, 2021, for $94,352. This price represents a market rate of 6% on bonds that have a face amount of $100,000, have a stated rate of 5%, pay semiannual interest, and mature in 7 years. As of December 31, 2021, the fair value of the bonds has increased to $95,000. Assuming the investment is classified as available-for-sale securities, calculate the unrealized holding gain or loss recognized in the income statement in 2021. A) $648 gain. B) $317 gain. C) $5,000 loss. D) No gain or loss is recognized in the income statement. Answer: D Explanation: Unrealized gains and losses on available-for-sale securities are reported as other comprehensive income. Difficulty: 3 Hard Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

53) A company purchased bonds on July 1, 2021, for $419,908. This price represents a market rate of 6% on bonds that have a face amount of $400,000, have a stated rate of 7%, pay semiannual interest, and mature in 6 years. As of December 31, 2021, the fair value of the bonds is $418,000. In early 2022, the company sells the investment for $417,500. Assuming the investment is classified as trading securities, calculate the gain or loss on the sale to be reported in the income statement in 2022 (ignore any amortization in 2022). A) $500 gain. B) $1,005 gain. C) $1,005 loss. D) $500 loss. Answer: D Explanation: $418,000 − $417,500 = $500 loss Difficulty: 3 Hard Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 54) A company purchased bonds on July 1, 2021, for $419,908. This price represents a market rate of 6% on bonds that have a face amount of $400,000, have a stated rate of 7%, pay semiannual interest, and mature in 6 years. As of December 31, 2021, the fair value of the bonds is $418,000. In early 2022, the company sells the investment for $417,500. Assuming the investment is classified as available-for-sale securities, calculate the gain or loss on the sale to be reported in the income statement in 2022 (ignore any amortization in 2022). A) $500 gain. B) $1,005 gain. C) $1,005 loss. D) $500 loss. Answer: C Explanation: Interest payment = $400,000 × 7% × 1/2 = $14,000. Interest revenue = $419,908 × 6% × 1/2 = $12,597. Amortization of premium = $14,000 − $12,597 = $1,403. Amortized cost = $419,908 − $1,403 = $418,505. Loss on sale = $418,505 − $417,500 = $1,005. Difficulty: 3 Hard Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

55) General Investment Co. (GIC) purchased bonds on January 1, 2021. GIC's accountant has projected the following amortization schedule from purchase until maturity:

Date 1/1/2021 6/30/2021 12/31/2021 6/30/2022 12/31/2022 6/30/2023 12/31/2023

Cash Received

Interest Revenue

$ 7,000 7,000 7,000 7,000 7,000 7,000

$ 7,790 7,822 7,855 7,889 7,925 7,961

Amortization of Discount $ 790 822 855 889 925 961

Amortized Cost $ 194,758 195,548 196,370 197,225 198,114 199,039 200,000

GIC purchased the bonds: A) At par. B) At a discount. C) At a premium. D) Cannot be determined from the given information. Answer: B Difficulty: 1 Easy Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

56) General Investment Co. (GIC) purchased bonds on January 1, 2021. GIC's accountant has projected the following amortization schedule from purchase until maturity:

Date 1/1/2021 6/30/2021 12/31/2021 6/30/2022 12/31/2022 6/30/2023 12/31/2023

Cash Received

Interest Revenue

$ 7,000 7,000 7,000 7,000 7,000 7,000

$ 7,790 7,822 7,855 7,889 7,925 7,961

Amortization of Discount $ 790 822 855 889 925 961

Amortized Cost $ 194,758 195,548 196,370 197,225 198,114 199,039 200,000

GIC purchased the bonds for: A) $200,000. B) $194,758. C) $242,000. D) Cannot be determined from the given information. Answer: B Difficulty: 1 Easy Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Remember AACSB: Analytical Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

57) General Investment Co. (GIC) purchased bonds on January 1, 2021. GIC's accountant has projected the following amortization schedule from purchase until maturity:

Date 1/1/2021 6/30/2021 12/31/2021 6/30/2022 12/31/2022 6/30/2023 12/31/2023

Cash Received

Interest Revenue

$ 7,000 7,000 7,000 7,000 7,000 7,000

$ 7,790 7,822 7,855 7,889 7,925 7,961

Amortization of Discount $ 790 822 855 889 925 961

Amortized Cost $ 194,758 195,548 196,370 197,225 198,114 199,039 200,000

Recording the bond purchase would have what effect on the financial statements? A) Increase assets. B) Increase liabilities. C) Increase assets and liabilities. D) No effect on total assets and total liabilities. Answer: D Difficulty: 3 Hard Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation

58) General Investment Co. (GIC) purchased bonds on January 1, 2021. GIC's accountant has projected the following amortization schedule from purchase until maturity:

Date 1/1/2021 6/30/2021 12/31/2021 6/30/2022 12/31/2022 6/30/2023 12/31/2023

Cash Received

Interest Revenue

$ 7,000 7,000 7,000 7,000 7,000 7,000

$ 7,790 7,822 7,855 7,889 7,925 7,961

Amortization of Discount $ 790 822 855 889 925 961

Amortized Cost $ 194,758 195,548 196,370 197,225 198,114 199,039 200,000

The investment in bonds has a maturity in: A) Two years. B) Three years. C) Six years. D) Cannot be determined from the given information. Answer: B Difficulty: 1 Easy Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

59) General Investment Co. (GIC) purchased bonds on January 1, 2021. GIC's accountant has projected the following amortization schedule from purchase until maturity:

Date 1/1/2021 6/30/2021 12/31/2021 6/30/2022 12/31/2022 6/30/2023 12/31/2023

Cash Received

Interest Revenue

$ 7,000 7,000 7,000 7,000 7,000 7,000

$ 7,790 7,822 7,855 7,889 7,925 7,961

Amortization of Discount $ 790 822 855 889 925 961

Amortized Cost $ 194,758 195,548 196,370 197,225 198,114 199,039 200,000

What is the annual market interest rate on the bonds? A) 4%. B) 3.5%. C) 7%. D) 8%. Answer: D Explanation: ($7,790/$194,758) × 2 payments per year = 8%. Difficulty: 3 Hard Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

60) General Investment Co. (GIC) purchased bonds on January 1, 2021. GIC's accountant has projected the following amortization schedule from purchase until maturity:

Date 1/1/2021 6/30/2021 12/31/2021 6/30/2022 12/31/2022 6/30/2023 12/31/2023

Cash Received

Interest Revenue

$ 7,000 7,000 7,000 7,000 7,000 7,000

$ 7,790 7,822 7,855 7,889 7,925 7,961

Amortization of Discount $ 790 822 855 889 925 961

Amortized Cost $ 194,758 195,548 196,370 197,225 198,114 199,039 200,000

GIC sells the bonds for $196,000 immediately after the interest payment on 12/31/21. What gain or loss, if any, would GIC record on this date? A) No gain or loss. B) $370 loss. C) $4,000 loss. D) $4,000 gain. Answer: B Explanation: The amortized cost at 12/31/21 is 196,370. GIC sells the bonds for $196,000, at a loss of $370. Difficulty: 3 Hard Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

Listed below are five terms with a list of phrases that describe or characterize the terms. Match each phrase with the best term. A) Consolidated financial statements B) Available-for-sale securities C) Trading securities D) Held-to-maturity securities E) Equity method 61) Used when an investor is presumed to have controlling influence through an equity investment. Difficulty: 2 Medium Topic: Equity Investments with Insignificant Influence; Equity Investments with Significant Influence; Equity Investments with Controlling Influence; Debt Investments Learning Objective: D-02 Account for investments in equity securities when the investor has insignificant influence.; D-03 Account for investments in equity securities when the investor has significant influence.; D-04 Account for investments in equity securities when the investor has controlling influence.; D-05 Account for investments in debt securities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 62) Debt securities that a company expects to hold until they mature. Difficulty: 2 Medium Topic: Equity Investments with Insignificant Influence; Equity Investments with Significant Influence; Equity Investments with Controlling Influence; Debt Investments Learning Objective: D-02 Account for investments in equity securities when the investor has insignificant influence.; D-03 Account for investments in equity securities when the investor has significant influence.; D-04 Account for investments in equity securities when the investor has controlling influence.; D-05 Account for investments in debt securities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 63) Debt investments held for reasons other than attempting to profit from trading in the near future Difficulty: 2 Medium Topic: Equity Investments with Insignificant Influence; Equity Investments with Significant Influence; Equity Investments with Controlling Influence; Debt Investments Learning Objective: D-02 Account for investments in equity securities when the investor has insignificant influence.; D-03 Account for investments in equity securities when the investor has significant influence.; D-04 Account for investments in equity securities when the investor has controlling influence.; D-05 Account for investments in debt securities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 29 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

64) Used when an investor is presumed to have significant influence through an equity investment. Difficulty: 2 Medium Topic: Equity Investments with Insignificant Influence; Equity Investments with Significant Influence; Equity Investments with Controlling Influence; Debt Investments Learning Objective: D-02 Account for investments in equity securities when the investor has insignificant influence.; D-03 Account for investments in equity securities when the investor has significant influence.; D-04 Account for investments in equity securities when the investor has controlling influence.; D-05 Account for investments in debt securities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 65) Debt investments that the investor expects to sell (trade) in the near future. Difficulty: 2 Medium Topic: Equity Investments with Insignificant Influence; Equity Investments with Significant Influence; Equity Investments with Controlling Influence; Debt Investments Learning Objective: D-02 Account for investments in equity securities when the investor has insignificant influence.; D-03 Account for investments in equity securities when the investor has significant influence.; D-04 Account for investments in equity securities when the investor has controlling influence.; D-05 Account for investments in debt securities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 61) A 62) D 63) B 64) E 65) C

Listed below are five terms with a list of phrases that describe or characterize the terms. Match each phrase with the best term. A) Equity method B) Consolidated financial statements C) Fair value method D) Trading securities E) Held-to-maturity securities 66) Debt security that is recorded at amortized cost. Difficulty: 2 Medium Topic: Equity Securities with Insignificant Influence; Equity Securities with Significant Influence; Equity Securities with Controlling Influence; Debt Investments Learning Objective: D-02 Account for investments in equity securities when the investor has insignificant influence.; D-03 Account for investments in equity securities when the investor has significant influence.; D-04 Account for investments in equity securities when the investor has controlling influence.; D-05 Account for investments in debt securities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 67) An investor owns 40% of the common voting shares in the company and can exercise significant influence. Difficulty: 2 Medium Topic: Equity Securities with Insignificant Influence; Equity Securities with Significant Influence; Equity Securities with Controlling Influence; Debt Investments Learning Objective: D-02 Account for investments in equity securities when the investor has insignificant influence.; D-03 Account for investments in equity securities when the investor has significant influence.; D-04 Account for investments in equity securities when the investor has controlling influence.; D-05 Account for investments in debt securities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 68) Investor owns 2% of the outstanding shares of another company's common voting shares. Difficulty: 2 Medium Topic: Equity Securities with Insignificant Influence; Equity Securities with Significant Influence; Equity Securities with Controlling Influence; Debt Investments Learning Objective: D-02 Account for investments in equity securities when the investor has insignificant influence.; D-03 Account for investments in equity securities when the investor has significant influence.; D-04 Account for investments in equity securities when the investor has controlling influence.; D-05 Account for investments in debt securities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking

69) An investor owns over 50% of the common voting shares in the company. Difficulty: 2 Medium Topic: Equity Securities with Insignificant Influence; Equity Securities with Significant Influence; Equity Securities with Controlling Influence; Debt Investments Learning Objective: D-02 Account for investments in equity securities when the investor has insignificant influence.; D-03 Account for investments in equity securities when the investor has significant influence.; D-04 Account for investments in equity securities when the investor has controlling influence.; D-05 Account for investments in debt securities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 70) Debt investments that the investor expects to sell (trade) in the near future. Difficulty: 2 Medium Topic: Equity Securities with Insignificant Influence; Equity Securities with Significant Influence; Equity Securities with Controlling Influence; Debt Investments Learning Objective: D-02 Account for investments in equity securities when the investor has insignificant influence.; D-03 Account for investments in equity securities when the investor has significant influence.; D-04 Account for investments in equity securities when the investor has controlling influence.; D-05 Account for investments in debt securities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 66) E 67) A 68) C 69) B 70) D

71) On September 1, Investors, Inc. purchases 1,000 shares (insignificant influence) of $1 par value common stock of Hamilton International at $15 per share. On October 15, the investment is sold for $18 per share. Record the purchase and sale of the investment in Hamilton International. Answer: September 1 Investments Cash (Purchase common stock) ($15,000 = $15 × 1,000 shares)

15,000 15,000

October 15 Cash ($18 × 1,000 shares) 18,000 Gain (difference) 3,000 Investments ($15 × 1,000 shares) 15,000 (Sale of investments above recorded amount) Difficulty: 3 Hard Topic: Equity Investments with Insignificant Influence Learning Objective: D-02 Account for investments in equity securities when the investor has insignificant influence. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

72) California Designs is diversifying its investment portfolio by making a small investment (less than 5%) in the common stock of Oregon Outfitters. California Designs engages in the following transactions relating to its investment: January 1

Purchases 1,000 shares of Oregon Outfitters common stock for $20 per share. July 12 Sells 300 shares of Oregon Outfitters stock for $18 per share. September 30 Receives a cash dividend of $1 per share. December 31 Adjusts the investment to fair value. The fair value of Oregon Outfitters stock is now $15 per share. 1. Record each of these transactions, including the December 31 adjustment to fair value. 2. Calculate the balance of the Investments account on December 31. Answer: January 1 Investments Cash (Purchase common stock) ($20,000 = $20 × 1,000 shares)

20,000 20,000

July 12 Cash ($18 × 300 shares) Loss (difference) Investments ($20 × 300 shares) (Sell investments below recorded amount)

5,400 600 6,000

September 30 Cash ($1 × 700 shares) Dividend revenue (Receive cash dividends)

700 700

December 31 Unrealized Holding Loss—Net Income Investments ($5 × 700 shares) (Adjust Investments to fair value)

3,500 3,500

The balance in the Investments account on December 31 is $10,500, equal to the 700 remaining shares times $15 per share fair value. The balance in the Investments account can be verified by posting all transactions to a T-account.

Difficulty: 3 Hard Topic: Equity Investments with Insignificant Influence Learning Objective: D-02 Account for investments in equity securities when the investor has insignificant influence. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

73) Athletic Accessories has the following transactions related to investments in common stock. May 1

Purchases 5,000 shares (insignificant influence) of Endurance Wear common stock for $22 per share. June 30 Receives a cash dividend of $1 per share. October 18 Sells 2,000 shares of Endurance Wear common stock at $25 per share. December 31 Adjusts the investments to fair value. The fair value of Endurance Wear common stock is now $30 per share. 1. Record each of these transactions, including an entry on December 31 to adjust the investment to fair value. 2. Calculate the balance of the investment account on December 31. Answer: May 1 Investments Cash (Purchase common stock) ($22 × 5,000 shares)

110,000 110,000

June 30 Cash

5,000

Dividend revenue (Receive cash dividends) ($1 × 5,000 shares)

5,000

October 18 Cash ($25 × 2,000 shares) Investments ($22 × 2,000 shares) Gain (difference) (Sell investments above recorded amount)

50,000 44,000 6,000

December 31 Investments Unrealized Holding Gain—Net Income (Adjust Investments to fair value) ($8 × 3,000 shares)

24,000 24,000

The balance in the Investments account on December 31 is $90,000, equal to the 3,000 remaining shares times $30 per share fair value. The balance in the Investments account can be verified by posting all transactions to a T-account. 36 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

74) Sandy Sensations purchases twenty $1,000, 7%, 10-year bonds issued by Pizza Pier for $20,000 on January 1, 2021. The market interest rate for bonds of similar risk and maturity is 7%. Interest is received semiannually on June 30 and December 31. 1. Record the investment in bonds. 2. Record receipt of the first interest payment on June 30, 2021. Answer: January 1, 2021 Investments Cash (Purchase bonds)

20,000 20,000

June 30, 2021 Cash

700

Interest Revenue 700 (Receive semiannual interest revenue) ($20,000 × 7% × 1/2) Difficulty: 3 Hard Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

75) Sanders Company purchases twenty $1,000, 7%, 10-year bonds issued by Poole Company for $18,641 on January 1, 2021. The market interest rate for bonds of similar risk and maturity is 8%. Interest is received semiannually on June 30 and December 31. 1. Record the investment in bonds. 2. Record receipt of the first interest payment on June 30, 2021. 3. What is the amortized cost of the investment after the first interest payment? Answer: January 1, 2021 Investments Cash (Purchase bonds)

18,641 18,641

June 30, 2021 Cash ($20,000 × 7% × 1/2) Investments (difference) Interest Revenue ($18,641 × 8% × 1/2) (Receive semiannual interest revenue)

700 46 746

Amortized cost = $18,641 + $46 = $18,687. Difficulty: 3 Hard Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

76) Sanders Company purchases twenty $1,000, 7%, 10-year bonds issued by Poole Company for $21,488 on January 1, 2021. The market interest rate for bonds of similar risk and maturity is 6%. Interest is received semiannually on June 30 and December 31. 1. Record the investment in bonds. 2. Record receipt of the first interest payment on June 30, 2021. 3. What is the amortized cost of the investment after the first interest payment? Answer: January 1, 2021 Investments Cash (Purchase bonds)

21,488 21,488

June 30, 2021 Cash ($20,000 × 7% × 1/2) Investments (difference) Interest Revenue ($21,488 × 6% × 1/2) (Receive semiannual interest revenue)

700 55 645

Amortized cost = $21,488 - $55 = $21,433. Difficulty: 3 Hard Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

77) How can an investor benefit from an equity investment that does not pay dividends? Answer: The following answer points out the key phrases that should appear in students' answers. It is not intended to be an example of complete student response. It might be helpful to provide detailed instructions to students on how brief or in depth you want their answers to be. Companies can gain from the increase in the value of their investment. Even without receiving dividends, investors still benefit when companies reinvest earnings, leading to even more profits in the future, and eventually higher stock prices. Many companies also make investments for strategic purposes to develop closer business ties, increase market share, or expand into new industries. Difficulty: 2 Medium Topic: Why Companies Invest in Other Companies Learning Objective: D-01 Explain why companies invest in other companies. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 78) Investments in equity securities for which the investor has insignificant influence over the investee are classified for reporting purposes under the fair value method. How do we report unrealized holding gains and losses for these securities? Answer: The following answer points out the key phrases that should appear in students' answers. It is not intended to be an example of complete student response. It might be helpful to provide detailed instructions to students on how brief or in depth you want their answers to be. These securities are reported at fair value, and resulting holding gains and losses are included in the determination of net income for the period. Difficulty: 2 Medium Topic: Equity Investments with Insignificant Influence Learning Objective: D-02 Account for investments in equity securities when the investor has insignificant influence. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

79) Under what circumstances do we use the equity method to account for an investment in stock? Explain how we record dividends received from an investment in a company accounted for using the equity method. Answer: The following answer points out the key phrases that should appear in students' answers. It is not intended to be an example of complete student response. It might be helpful to provide detailed instructions to students on how brief or in depth you want their answers to be. The equity method is used when an investor can't control, but can "significantly influence" the investee. For example, if effective control is absent, the investor still might be able to exercise significant influence over the operating and financial policies of the investee if the investor owns a large percentage of the outstanding shares relative to other shareholders. By voting those shares as a block, the investor often can sway decisions in the direction desired. We presume, in the absence of evidence to the contrary, that the investor exercises significant influence over the investee when it owns between 20% and 50% of the investee's voting shares. The investor should account for dividends from the investee as a reduction in the Investments account. Since investment revenue is recognized as the investee earns it, it would be inappropriate to recognize revenue again when earnings are distributed as dividends. Difficulty: 2 Medium Topic: Equity Investments with Significant Influence Learning Objective: D-03 Account for investments in equity securities when the investor has significant influence. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 80) Discuss the meaning of consolidated financial statements. When is it appropriate to consolidate financial statements of two companies? Answer: The following answer points out the key phrases that should appear in students' answers. It is not intended to be an example of complete student response. It might be helpful to provide detailed instructions to students on how brief or in depth you want their answers to be. Consolidated financial statements combine the parent and subsidiary operating activities as if the two companies were a single reporting company, even though both companies continue to operate as separate legal entities. It is appropriate to consolidate financial statements of two companies when the parent company owns a controlling interest (more than 50%) in the voting stock of the subsidiary. Difficulty: 2 Medium Topic: Equity Investments with Controlling Influence Learning Objective: D-04 Account for investments in equity securities when the investor has controlling influence. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

81) Investments in debt securities are classified for reporting purposes in one of three categories. List these three categories and explain which investments are included in each category. Also, briefly describe how the reporting differs for each category. Answer: The following answer points out the key phrases that should appear in students' answers. It is not intended to be an example of complete student response. It might be helpful to provide detailed instructions to students on how brief or in depth you want their answers to be. Investments in debt securities are classified as held-to-maturity, trading, or available-for-sale securities. Held-to-maturity securities are debt securities that the company expects to hold until they mature, which means until they become payable. Trading securities are securities that the investor expects to sell in the near future. These investments are adjusted to fair value with the unrealized gain or loss included in net income. Available-for-sale securities are investments that do not fit the other two categories; they are not expected to be sold in the near future, yet they are not expected to be held to maturity either. These investments are adjusted to fair value with the unrealized gain or loss included in comprehensive income. Difficulty: 2 Medium Topic: Debt Investments Learning Objective: D-05 Account for investments in debt securities. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

Financial Accounting, 5e (Spiceland) Online Appendix E: International Financial Reporting Standards 1) In common-law countries (such as the U.S., the U.K., and Canada), greater emphasis is placed on public information than in code-law countries (such as Germany, France, and Japan). Answer: TRUE Difficulty: 2 Medium Topic: Differences in Accounting Practices Learning Objective: E-01 Explain the reasons for differences in accounting practices across countries. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 2) For countries whose tax standards are closely tied to financial reporting standards (Central Europe and Japan), accounting earnings tend to be lower so companies can minimize tax payments. Answer: TRUE Difficulty: 2 Medium Topic: Differences in Accounting Practices Learning Objective: E-01 Explain the reasons for differences in accounting practices across countries. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 3) In countries where debt financing is more common (Germany and Japan) compared to equity financing, there is greater emphasis on reporting the ability of the company to earn profits for its investors rather than the ability to repay debt. Answer: FALSE Explanation: In countries where debt financing is more common (Germany and Japan) compared to equity financing, there is less emphasis on reporting the ability of the company to earn profits, and greater emphasis on the ability of a company to repay debt. Difficulty: 2 Medium Topic: Differences in Accounting Practices Learning Objective: E-01 Explain the reasons for differences in accounting practices across countries. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

4) Some countries are more secretive (Brazil and Switzerland), leading to fewer financial disclosures. Answer: TRUE Difficulty: 1 Easy Topic: Differences in Accounting Practices Learning Objective: E-01 Explain the reasons for differences in accounting practices across countries. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 5) More economically developed economies (the U.S. and the U.K.) have a need for more complex accounting standards. Answer: TRUE Difficulty: 1 Easy Topic: Differences in Accounting Practices Learning Objective: E-01 Explain the reasons for differences in accounting practices across countries. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 6) Convergence of accounting practices is expected to increase the flow of resources across borders. Answer: TRUE Difficulty: 1 Easy Topic: Differences in Accounting Practices Learning Objective: E-01 Explain the reasons for differences in accounting practices across countries. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 7) Most countries around the world require or permit the use of IFRS. Answer: TRUE Difficulty: 1 Easy Topic: International Financial Reporting Standards Learning Objective: E-02 Understand the role of the International Accounting Standards Board (IASB) in the development of International Financial Reporting Standards (IFRS). Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 2 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

8) The primary objective of the IASB is to develop accounting standards in the U.S. Answer: FALSE Explanation: The Financial Accounting Standards Board develops accounting standards in the U.S., while the IASB's primary objective is to develop a single set of high-quality, understandable, and enforceable global accounting standards. Difficulty: 1 Easy Topic: International Financial Reporting Standards Learning Objective: E-02 Understand the role of the International Accounting Standards Board (IASB) in the development of International Financial Reporting Standards (IFRS). Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 9) The Norwalk Agreement formalized the commitment between the FASB and IASB to the convergence of U.S. GAAP and IFRS. Answer: TRUE Difficulty: 1 Easy Topic: International Financial Reporting Standards Learning Objective: E-02 Understand the role of the International Accounting Standards Board (IASB) in the development of International Financial Reporting Standards (IFRS). Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 10) The FIFO inventory method is not allowed under IFRS. Answer: FALSE Explanation: The LIFO method is not allowed under IFRS. Difficulty: 1 Easy Topic: Differences between U.S. GAAP and IFRS Learning Objective: E-03 Recognize the major differences between U.S. GAAP and IFRS. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 11) IFRS allows, but does not require, revaluation of property, plant, and equipment to fair value. Answer: TRUE Difficulty: 1 Easy Topic: Differences between U.S. GAAP and IFRS Learning Objective: E-03 Recognize the major differences between U.S. GAAP and IFRS. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 3 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

12) Under U.S. GAAP, development expenditures are capitalized, while under IFRS, these expenditures must be expensed immediately. Answer: FALSE Explanation: U.S. GAAP requires immediate expensing, while IFRS allows capitalization. Difficulty: 2 Medium Topic: Differences between U.S. GAAP and IFRS Learning Objective: E-03 Recognize the major differences between U.S. GAAP and IFRS. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 13) Under IFRS, inventory write-downs due to using the lower of cost and net realizable value are allowed to be reversed in a future year if net realizable value subsequently increases. Answer: TRUE Difficulty: 2 Medium Topic: Differences between U.S. GAAP and IFRS Learning Objective: E-03 Recognize the major differences between U.S. GAAP and IFRS. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 14) When preparing a statement of cash flows, IFRS allows companies to report cash outflows from interest payments as either operating or financing cash flows, while U.S. GAAP requires these outflows to be reported as only operating activities. Answer: TRUE Difficulty: 2 Medium Topic: Differences between U.S. GAAP and IFRS Learning Objective: E-03 Recognize the major differences between U.S. GAAP and IFRS. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 15) When preparing a statement of cash flows, IFRS allows companies to report cash inflows from interest and dividends as either operating or investing cash flows, while U.S. GAAP requires these inflows to be reported as only operating activities. Answer: TRUE Difficulty: 2 Medium Topic: Differences between U.S. GAAP and IFRS Learning Objective: E-03 Recognize the major differences between U.S. GAAP and IFRS. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 4 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

16) IFRS allows a category in the income statement for extraordinary gains and losses, while U.S. GAAP does not allow such a category. Answer: FALSE Explanation: Neither U.S. GAAP nor IFRS allows the separate classification of extraordinary gains and losses in the income statement. Difficulty: 2 Medium Topic: Differences between U.S. GAAP and IFRS Learning Objective: E-03 Recognize the major differences between U.S. GAAP and IFRS. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 17) Which of the following characteristics of a country most likely results in lower reported earnings, all else being equal? A) Inflation. B) Tax laws. C) Population. D) Culture. Answer: B Difficulty: 2 Medium Topic: Differences in Accounting Practices Learning Objective: E-01 Explain the reasons for differences in accounting practices across countries. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 18) Which of the following is not a reason why accounting differs across countries? A) Culture. B) Population. C) Tax laws. D) Sources of financing. Answer: B Difficulty: 2 Medium Topic: Differences in Accounting Practices Learning Objective: E-01 Explain the reasons for differences in accounting practices across countries. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

19) Countries that have different rules for financial accounting and tax accounting, rely more on equity financing, and have historic political and economic ties with Great Britain are referred to as what types of countries? A) Code-law countries. B) European Union countries. C) Common-law countries. D) Conformist countries. Answer: C Difficulty: 1 Easy Topic: Differences in Accounting Practices Learning Objective: E-01 Explain the reasons for differences in accounting practices across countries. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 20) Countries that have similar rules for financial accounting and tax accounting, rely more on debt financing, and have historic political and economic ties with Germany are referred to as what types of countries? A) Code-law countries. B) European Union countries. C) Common-law countries. D) Conformist countries. Answer: A Difficulty: 1 Easy Topic: Differences in Accounting Practices Learning Objective: E-01 Explain the reasons for differences in accounting practices across countries. Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

21) When a country establishes financial reporting rules that closely resemble tax reporting rules, reported accounting profits tend to be: A) Negative. B) Higher. C) Lower. D) Misreported. Answer: C Difficulty: 3 Hard Topic: Differences in Accounting Practices Learning Objective: E-01 Explain the reasons for differences in accounting practices across countries. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 22) One motivation for reducing differences in accounting practices across countries is to: A) Decrease the flow of international capital. B) Allow greater competition among companies. C) Reduce companies' tax burdens. D) Make it easier for investors to compare companies from different countries. Answer: D Difficulty: 2 Medium Topic: Differences in Accounting Practices Learning Objective: E-01 Explain the reasons for differences in accounting practices across countries. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 23) IFRS stands for: A) Independent Financial Reporting System. B) International Financing Reform System. C) International Financial Reporting Standards. D) International Financial Regulation of Securities. Answer: C Difficulty: 1 Easy Topic: Differences in Accounting Practices; International Financial Reporting Standards Learning Objective: E-01 Explain the reasons for differences in accounting practices across countries.; E-02 Understand the role of the International Accounting Standards Board (IASB) in the development of International Financial Reporting Standards (IFRS). Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 7 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

24) The body primarily responsible for establishing a single set of global accounting standards is the: A) IASB. B) SEC. C) FASB. D) IOSCO. Answer: A Difficulty: 1 Easy Topic: International Financial Reporting Standards Learning Objective: E-02 Understand the role of the International Accounting Standards Board (IASB) in the development of International Financial Reporting Standards (IFRS). Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 25) Principles-based accounting standards: A) Are more characteristic of U.S. GAAP than international standards. B) Emphasize detailed implementation rules. C) Emphasize broad concepts. D) Offer less room for judgment. Answer: C Difficulty: 1 Easy Topic: International Financial Reporting Standards Learning Objective: E-02 Understand the role of the International Accounting Standards Board (IASB) in the development of International Financial Reporting Standards (IFRS). Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 26) The Norwalk Agreement: A) Allowed foreign companies listed on U.S. stock exchanges to prepare financial statements in accordance with IFRS. B) Formalized the commitment between the FASB and IASB to converge U.S. GAAP and IFRS. C) Eliminated the requirement that U.S. firms report under U.S. GAAP. D) Gave authority to the IASB to set accounting standards for U.S. companies. Answer: B Difficulty: 1 Easy Topic: International Financial Reporting Standards Learning Objective: E-02 Understand the role of the International Accounting Standards Board (IASB) in the development of International Financial Reporting Standards (IFRS). Bloom's: Remember AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 8 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

27) For which of the following topics is accounting under both U.S. GAAP and IFRS essentially the same? A) Receivables. B) Long-term assets. C) Inventory. D) Research and development expenditures. Answer: A Difficulty: 2 Medium Topic: Differences between U.S. GAAP and IFRS Learning Objective: E-03 Recognize the major differences between U.S. GAAP and IFRS. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 28) Which inventory cost flow assumption is allowed under U.S. GAAP but not under IFRS? A) Specific identification. B) FIFO. C) LIFO. D) Average cost. Answer: C Difficulty: 2 Medium Topic: Differences between U.S. GAAP and IFRS Learning Objective: E-03 Recognize the major differences between U.S. GAAP and IFRS. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 29) Which of the following statements is correct for revaluation of property, plant, and equipment to fair value under IFRS? A) If one asset is chosen for revaluation, then all property, plant, and equipment must be revalued. B) Only buildings and other real estate property may be revalued. C) If one parcel of land is revalued, then all parcels of land must be revalued. D) All property, plant, and equipment are required to be revalued each year. Answer: C Difficulty: 2 Medium Topic: Differences between U.S. GAAP and IFRS Learning Objective: E-03 Recognize the major differences between U.S. GAAP and IFRS. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

30) Which of the following statements is true regarding revaluation of property, plant, and equipment to fair value? A) Only IFRS allows revaluation of property, plant, and equipment to fair value. B) Only U.S. GAAP allows revaluation of property, plant, and equipment to fair value. C) Both U.S. GAAP and IFRS allow revaluation of property, plant, and equipment to fair value. D) Neither U.S. GAAP nor IFRS allows revaluation of property, plant, and equipment to fair value. Answer: A Difficulty: 2 Medium Topic: Differences between U.S. GAAP and IFRS Learning Objective: E-03 Recognize the major differences between U.S. GAAP and IFRS. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 31) Compared to that in the U.S., the cost to companies in other countries of documenting effective internal controls is: A) Much greater. B) Slightly greater. C) About the same. D) Much less. Answer: D Difficulty: 2 Medium Topic: Differences between U.S. GAAP and IFRS Learning Objective: E-03 Recognize the major differences between U.S. GAAP and IFRS. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 32) Why are some U.S. companies opposed to the elimination of the LIFO inventory method? A) Inventory amounts are more difficult to calculate under FIFO. B) LIFO most likely matches actual flow of inventory. C) Increased tax burden. D) Most international companies use LIFO. Answer: C Difficulty: 3 Hard Topic: Differences between U.S. GAAP and IFRS Learning Objective: E-03 Recognize the major differences between U.S. GAAP and IFRS. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

33) Assuming rising costs, the switch from LIFO to FIFO or average cost would most likely have what effect(s)? A) Increase reported net income in the income statement. B) Decrease tax obligations to the Internal Revenue Service (IRS). C) Increase reported net income and tax obligations. D) Decrease reported net income and tax obligations. Answer: C Difficulty: 3 Hard Topic: Differences between U.S. GAAP and IFRS Learning Objective: E-03 Recognize the major differences between U.S. GAAP and IFRS. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 34) Suppose a company has research costs of $100,000 and development costs of $200,000 for the year. Under IFRS, what amount would be reported as an expense in the current year's income statement? A) $100,000. B) $150,000. C) $200,000. D) $300,000. Answer: A Difficulty: 3 Hard Topic: Differences between U.S. GAAP and IFRS Learning Objective: E-03 Recognize the major differences between U.S. GAAP and IFRS. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 35) Suppose a company has research costs of $100,000 and development costs of $200,000 for the year. Under U.S. GAAP, what amount would be reported as an expense in the current year's income statement? A) $100,000. B) $150,000. C) $200,000. D) $300,000. Answer: D Difficulty: 3 Hard Topic: Differences between U.S. GAAP and IFRS Learning Objective: E-03 Recognize the major differences between U.S. GAAP and IFRS. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 11 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

36) Would a company be more likely to report a contingent liability under U.S. GAAP or IFRS? A) U.S. GAAP. B) IFRS. C) Equally likely. D) Contingent liabilities are not reported under IFRS. Answer: B Difficulty: 2 Medium Topic: Differences between U.S. GAAP and IFRS Learning Objective: E-03 Recognize the major differences between U.S. GAAP and IFRS. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation 37) Suppose a company pays interest of $10,000 for the year on borrowed amounts due in two years. Under IFRS, what is the most the company can report this year as cash outflows from financing activities related to this item? A) $10,000. B) $2,000. C) $5,000. D) $0. Answer: A Difficulty: 3 Hard Topic: Differences between U.S. GAAP and IFRS Learning Objective: E-03 Recognize the major differences between U.S. GAAP and IFRS. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation 38) Suppose a company pays interest of $10,000 for the year on borrowed amounts due in two years. Under U.S. GAAP, what is the most the company can report this year as cash outflows from financing activities related to this item? A) $10,000. B) $2,000. C) $5,000. D) $0. Answer: D Difficulty: 3 Hard Topic: Differences between U.S. GAAP and IFRS Learning Objective: E-03 Recognize the major differences between U.S. GAAP and IFRS. Bloom's: Analyze AACSB: Analytical Thinking AICPA/Accessibility: FN Measurement/Keyboard Navigation

Listed below are seven reasons why accounting practices differ across countries, followed by a list of descriptions. Match each description with the best reason. A) Legal system B) Sources of financing C) Political and economic ties D) Inflation E) Stockholders' equity F) Tax laws G) Economic development 39) The extent of public disclosure depends on the secretiveness of society. Difficulty: 2 Medium Topic: Learning Objective: Differences in Accounting Practices E-01 Explain the reasons for differences in accounting practices across countries. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 40) In some countries, asset values increase rapidly because of the general price level changes. Difficulty: 2 Medium Topic: Differences in Accounting Practices Learning Objective: E-01 Explain the reasons for differences in accounting practices across countries. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 41) Countries share business activities and have political connections. Difficulty: 2 Medium Topic: Differences in Accounting Practices Learning Objective: E-01 Explain the reasons for differences in accounting practices across countries. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 42) Some countries rely more heavily on debt capital than on equity capital to fund operations. Difficulty: 2 Medium Topic: Differences in Accounting Practices Learning Objective: E-01 Explain the reasons for differences in accounting practices across countries. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 13 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

43) Common-law countries rely more heavily on public information. Difficulty: 2 Medium Topic: Differences in Accounting Practices Learning Objective: E-01 Explain the reasons for differences in accounting practices across countries. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 44) More developed economies have more complex business transactions. Difficulty: 2 Medium Topic: Differences in Accounting Practices Learning Objective: E-01 Explain the reasons for differences in accounting practices across countries. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking 45) Alignment between financial reporting and tax reporting rules. Difficulty: 2 Medium Topic: Differences in Accounting Practices Learning Objective: E-01 Explain the reasons for differences in accounting practices across countries. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking Answers: 39) D 40) E 41) C 42) B 43) A 44) G 45) F

46) Below are seven reasons for differences in accounting practices among countries. For each reason, at least two options are provided. For each reason, select the option that best describes the United States. Reason: 1. Legal system 2. Tax laws 3. Sources of financing 4. Inflation 5. Culture 6. Political and economic ties

7. Economic development

Options: (a) Common law (b) Code law (a) Different tax and financial accounting rules (b) Similar tax and financial accounting rules (a) More equity financing (b) More debt financing (a) Low inflation (b) High inflation (a) Transparent (b) Secretive (a) British ties (b) German ties (c) Spanish ties (a) Developed economy (b) Developing economy (c) Underdeveloped economy

Answer: a, a, a, a, a, a, a Difficulty: 2 Medium Topic: Differences in Accounting Practices Learning Objective: E-01 Explain the reasons for differences in accounting practices across countries. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

47) Below are seven reasons for differences in accounting practices among countries. For each reason, at least two options are provided. For each reason, select the option that best describes Germany. Reason: 1. Legal system 2. Tax laws 3. Sources of financing 4. Inflation 5. Culture 6. Political and economic ties

7. Economic development

Answer: b, b, b, a, b, b, a Difficulty: 2 Medium Topic: Differences in Accounting Practices Learning Objective: E-01 Explain the reasons for differences in accounting practices across countries. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

48) Describe at least five reasons why accounting practices differ across countries. Which reason do you think is most important? Explain why. Answer: The following answer points out the key phrases that should appear in students' answers. It is not intended to be an example of complete student response. It might be helpful to provide detailed instructions to students on how brief or in depth you want their answers to be. Financial accounting standards and practices differ from country to country for many reasons, including different legal systems, the influence of tax laws, sources of financing, inflation, culture, political influence of other countries, and the level of economic development. See Illustration E-1 in the textbook for further details. Legal system (common law vs. code law) is often used as a way to describe overall differences in accounting practices between countries. Common-law countries, such as the U.S., U.K., Australia, and Canada, have separate rules for financial accounting and tax accounting, rely more on equity financing, and have political and economic ties with Britain. Code-law countries such as those in Central Europe and Japan have similar rules for financial accounting and tax accounting, rely more on debt financing, and many have political and economic ties with Germany. Difficulty: 3 Hard Topic: Differences in Accounting Practices Learning Objective: E-01 Explain the reasons for differences in accounting practices across countries. Bloom's: Evaluate AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation 49) What is the main objective of the International Accounting Standards Board (the IASB)? Answer: The following answer points out the key phrases that should appear in students' answers. It is not intended to be an example of complete student response. It might be helpful to provide detailed instructions to students on how brief or in depth you want their answers to be. The main objective of the IASB is to develop a single set of high-quality, understandable, and enforceable global accounting standards to help participants in the world's capital markets and other users make economic decisions. Difficulty: 2 Medium Topic: International Accounting Standards Board (IASB) Learning Objective: E-02 Understand the role of the International Accounting Standards Board (IASB) in the development of International Financial Reporting Standards (IFRS). Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: BB Critical Thinking/Keyboard Navigation

50) Which inventory cost flow assumption is allowed under U.S. GAAP but not under IFRS? Explain why some U.S. companies will lobby strongly to keep this method as an allowable alternative. Answer: The following answer points out the key phrases that should appear in students' answers. It is not intended to be an example of complete student response. It might be helpful to provide detailed instructions to students on how brief or in depth you want their answers to be. LIFO is allowed under U.S. GAAP, but not under IFRS. U.S. companies currently using LIFO will lobby to keep this method because a switch from LIFO would greatly increase taxes for many U.S. companies. Difficulty: 3 Hard Topic: Differences between U.S. GAAP and IFRS Learning Objective: E-03 Recognize the major differences between U.S. GAAP and IFRS. Bloom's: Apply AACSB: Knowledge Application AICPA/Accessibility: FN Reporting/Keyboard Navigation 51) What does it mean to revalue a long-term asset? How do U.S. GAAP and IFRS differ regarding revaluation of long-term assets? Answer: The following answer points out the key phrases that should appear in students' answers. It is not intended to be an example of complete student response. It might be helpful to provide detailed instructions to students on how brief or in depth you want their answers to be. To revalue a long-term asset is to periodically adjust the asset to fair value. Under U.S. GAAP, companies are not allowed to revalue long-term assets to fair value for financial reporting purposes. IFRS allows, but does not require, revaluation of long-term assets to fair value. Difficulty: 2 Medium Topic: Differences between U.S. GAAP and IFRS Learning Objective: E-03 Recognize the major differences between U.S. GAAP and IFRS. Bloom's: Understand AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation

52) How is preferred stock reported differently under U.S. GAAP and IFRS? Do you think preferred stock is a liability or an equity item? Why? Answer: The following answer points out the key phrases that should appear in students' answers. It is not intended to be an example of complete student response. It might be helpful to provide detailed instructions to students on how brief or in depth you want their answers to be. Under U.S. GAAP, preferred stock is usually recorded as stockholders' equity with dividends reported as a reduction of retained earnings. Under IFRS, most preferred stock is reported as debt with the dividends reported in the income statement as interest expense. As we learned in Chapter 10, preferred stock has characteristics of both liabilities and stockholders' equity. Preferred stock can have characteristics nearly identical to bonds or characteristics nearly identical to common stock. Difficulty: 3 Hard Topic: Differences between U.S. GAAP and IFRS Learning Objective: E-03 Recognize the major differences between U.S. GAAP and IFRS. Bloom's: Evaluate AACSB: Reflective Thinking AICPA/Accessibility: FN Reporting/Keyboard Navigation