TEST BANK FOR Financial Accounting, (International Edition), 11 Edition. Marian Powers, Belverd Need by StudyGuide

Chapter 01 - Uses of Accounting Information and the Financial Statements TRUE/FALSE 1. The processing stage of accounting is accomplished by the recording of data. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recording entries MSC: ACBSP-APC-01-Purpose 2. Two major goals of business are to achieve profitability and to achieve liquidity. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Business goals MSC: ACBSP-APC-01-Purpose 3. Profitability means having enough funds on hand to pay debts when they fall due. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Liquidity and current liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 4. Earned income is a measure of profitability. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Profitability MSC: ACBSP-APC-09-Financial Statements 5. Paying taxes to the government is an example of an operating activity. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Business activities MSC: ACBSP-APC-09-Financial Statements 6. Obtaining funds from a bank is an example of a financing activity. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Business activities MSC: ACBSP-APC-09-Financial Statements 7. Buying and selling goods and services are examples of financing activities. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Business activities MSC: ACBSP-APC-09-Financial Statements

8. The purchase of equipment is an example of a financing activity. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Business activities MSC: ACBSP-APC-09-Financial Statements 9. Management accounting focuses on internal decision making. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA BB Critical Thinking LOC: Recall KEY: Management functions MSC: ACBSP-APC-25-Managerial Characteristics/Terminology 10. A major function of management is to provide the accountant with relevant and useful information. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Management functions MSC: ACBSP-APC-01-Purpose 11. Accounting ratios are never used as management performance measures. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Reporting LOC: Recall KEY: Performance measures MSC: ACBSP-APC-23-Financial Statement Analysis 12. Financial accounting information is used primarily by management. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Decision Modeling LOC: Recall KEY: Role of financial accounting MSC: ACBSP-APC-01-Purpose 13. The terms bookkeeping and accounting are not synonymous. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Decision Modeling LOC: Recall KEY: Bookkeeping vs. accounting MSC: ACBSP-APC-01-Purpose 14. A company's management information system is a subsystem of its accounting information system. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Technology | AICPA FN Leveraging Technology LOC: Recall KEY: Management information systems MSC: ACBSP-APC-01-Purpose 15. The modern definition of accounting focuses on how to do accounting rather than the role of accounting in making economic decisions. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Decision Modeling LOC: Recall KEY: Accounting information and the Internet MSC: ACBSP-APC-01-Purpose © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

16. The unintentional preparation of misleading financial statements is referred to as fraudulent financial reporting. ANS: F PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 1 KEY: Ethical reporting

17. Fraudulent financial reporting can result from the misapplication of accounting principles. ANS: T PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 1 KEY: Ethical reporting

18. Depending on the circumstances, criminal penalties could be imposed on those who prepare fraudulent financial statements. ANS: T PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 1 KEY: Ethical reporting

19. The Sarbanes-Oxley Act orders the Financial Accounting Standards Board (FASB) to hold Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs) responsible for the accuracy of their company's financial statements. ANS: F PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 1 KEY: Ethical reporting

20. Responsibility for ethical financial reporting rests solely with management. ANS: F PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 1 KEY: Ethical reporting

21. The primary external users of accounting information are investors and management. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Financial information users MSC: ACBSP-APC-01-Purpose 22. Creditors are those who lend money to others or deliver goods and services before being paid. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Financial information users MSC: ACBSP-APC-01-Purpose

© 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

23. The Federal Reserve Board is an example of a labor union. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Financial information users MSC: ACBSP-APC-01-Purpose 24. The Securities and Exchange Commission (SEC) is an accounting information user with a direct financial interest. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Financial information users MSC: ACBSP-APC-01-Purpose 25. Taxing authorities are considered accounting information users with a direct financial interest. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Financial information users MSC: ACBSP-APC-01-Purpose 26. Regulatory agencies are considered information users with an indirect financial interest. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Financial information users MSC: ACBSP-APC-01-Purpose 27. Accountants consider the euro to be the common unit of measure for all business transactions. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Communication | AICPA FN Measurement LOC: Recall KEY: Money measure MSC: ACBSP-APC-06-Recording Transactions 28. Payment to a creditor is an example of a nonexchange business transaction. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Business transactions MSC: ACBSP-APC-06-Recording Transactions 29. For accounting purposes, a business and its owners are considered the same entity. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Separate entity concept MSC: ACBSP-APC-01-Purpose 30. Knowledge of the exchange rate is necessary to apply the money measure concept in case of international transactions. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Diversity | AICPA BB Global LOC: Recall KEY: Money measure MSC: ACBSP-APC-06-Recording Transactions © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

31. For reporting purposes, the personal assets and debts of a business owner should not be combined with the assets and debts of the business. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Separate entity concept MSC: ACBSP-APC-01-Purpose 32. Exchange rates for currency change daily according to the supply and demand for each currency. ANS: T PTS: 1 NAT: AACSB Diversity KEY: Money measure

DIF: Easy OBJ: 3 LOC: Comprehension MSC: ACBSP-APC-06-Recording Transactions

33. Sole proprietorships in the United States generate more revenue than partnerships and corporations put together. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Forms of business MSC: ACBSP-APC-03-Business Forms 34. In general, any partner can obligate the partnership to another party. ANS: T PTS: 1 DIF: Easy NAT: AACSB Communication | AICPA FN Reporting KEY: Partnerships MSC: ACBSP-APC-03-Business Forms

OBJ: 4 LOC: Recall

35. A partnership is not dissolved when any partner leaves the business or dies. ANS: F PTS: 1 DIF: Easy NAT: AACSB Communication | AICPA FN Reporting KEY: Partnerships MSC: ACBSP-APC-03-Business Forms

OBJ: 4 LOC: Recall

36. A corporation is an economic unit that is legally separate from its owners. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Corporations MSC: ACBSP-APC-03-Business Forms 37.

Partnerships represent the largest number of businesses in the United States. ANS: F PTS: 1 DIF: Easy NAT: AACSB Communication | AICPA FN Reporting KEY: Partnerships MSC: ACBSP-APC-03-Business Forms

OBJ: 4 LOC: Recall

38. The liability of corporate stockholders is limited to the amount of their investment. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Corporations MSC: ACBSP-APC-03-Business Forms

39. The audit committee appoints the board of directors, which in turn performs an independent audit of the company's records. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Corporations MSC: ACBSP-APC-03-Business Forms 40. The articles of incorporation may be found in the corporate charter. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Corporations MSC: ACBSP-APC-03-Business Forms 41. Authorized shares of stock refers to the number of shares authorized in the articles of incorporation.. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Corporations MSC: ACBSP-APC-03-Business Forms 42. Corporate governance is the oversight of a company's management performance and ethics by its board of directors. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Corporations MSC: ACBSP-APC-03-Business Forms 43. The board of directors decides on major business policies of a corporation. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Corporations MSC: ACBSP-APC-03-Business Forms 44. The number of authorized shares of stock may be less than the number of outstanding shares. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Corporations MSC: ACBSP-APC-03-Business Forms 45. The management of a corporation is appointed by the board of directors. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Corporations MSC: ACBSP-APC-03-Business Forms 46. Financial position may be assessed by referring to a balance sheet. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Financial statements MSC: ACBSP-APC-09-Financial Statements

47. One way of stating the accounting equation is: Assets + Stockholders’ Equity = Liabilities. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Effects of transactions on accounting equation MSC: ACBSP-APC-09-Financial Statements

OBJ: 5 LOC: Recall

48. The economic resources to which the owners have claim are represented by stockholders' equity. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 49. Land is an asset that is considered nonmonetary in nature. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 50. Net income is another term for revenues. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 51. Stockholder’s equity is another term for retained earnings. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 52. Contributed capital appears in the stockholders' equity section of a corporate balance sheet. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 53. Revenues have the effect of increasing retained earnings. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 54. The retained earnings figure is typically divided into par value and additional paid-in capital. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements

55. If a corporation has suffered only net losses since its inception, the Retained Earnings account will have a positive balance. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 56. Net assets equals assets plus liabilities. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 57. Stockholders' equity equals contributed capital minus retained earnings. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 58. Par value is the minimum amount that can be reported as contributed capital. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 59. An increase in revenue will result in an increase in stockholders' equity. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Effects of transactions on accounting equation MSC: ACBSP-APC-09-Financial Statements

OBJ: 5 LOC: Recall

60. The statement of retained earnings discloses the dividends declared during the period. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Statement of stockholders' equity MSC: ACBSP-APC-09-Financial Statements 61. The heading for a balance sheet might include the line “For the Year Ended December 31, 2013.” ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 62. The income statement is also known as the statement of financial position. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements

63. The income statement discloses significant events related to the operating, investing, and financing activities of a business. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Statement of cash flows | Income statement MSC: ACBSP-APC-09-Financial Statements

OBJ: 5 LOC: Recall

64. The accounting fees earned by an accounting firm would appear on its balance sheet. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet | Income statement MSC: ACBSP-APC-09-Financial Statements 65. A proper heading for the income statement could include “As of December 31, 2013.” ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 66. The title “wages payable” would appear on the income statement. ANS: F PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Income statement | Balance sheet MSC: ACBSP-APC-09-Financial Statements 67. The declaration of a dividend will increase net income. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Effects of transactions on accounting equation MSC: ACBSP-APC-09-Financial Statements

OBJ: 5 LOC: Comprehension

68. The title “land” will appear as an expense on the income statement. ANS: F PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Income statement | Balance sheet MSC: ACBSP-APC-09-Financial Statements 69. Dividends are an example of a revenue. ANS: F PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 70. The statement of retained earnings relates the income statement to the balance sheet by showing how the Retained Earnings account changed during the accounting period. ANS: T PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Financial statements MSC: ACBSP-APC-09-Financial Statements © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

71. The purchase of equipment for cash would be disclosed on the statement of cash flows. ANS: T PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Statement of cash flows MSC: ACBSP-APC-09-Financial Statements 72. Generally accepted accounting principles (GAAP) encompass the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. ANS: T PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: GAAP

73. The Financial Accounting Standards Board (FASB) is the primary and most important determinant of generally accepted accounting principles. ANS: T PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Professional organizations

74. Companies whose securities are sold to the general public must adhere to standards established by the Securities and Exchange Commission (SEC). ANS: T PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Professional organizations

75. The Internal Revenue Service is an agency of the federal government that has the legal power to set and enforce accounting practices for companies. ANS: F PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Professional organizations

76. Independence is the avoidance of all relationships that impair or appear to impair the objectivity of the accountant. ANS: T PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Professional ethics

77. All public accountants but not management accountants are required to adhere to a code of professional conduct. ANS: F PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Professional ethics

78. Objectivity means carrying out one's professional responsibilities with competence and diligence. ANS: F PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Professional ethics

79. Objectivity means carrying out one's professional responsibilities honestly and impartially. ANS: T PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Professional ethics

80. The Public Company Accounting Oversight Board (PCAOB) was created to determine the standards that auditors must follow. ANS: T PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Professional organizations

MULTIPLE CHOICE 1. Which of the following is the most appropriate and modern definition of accounting? a. Electronic collection, organization, and communication of vast amounts of information b. The interconnected network of subsystems necessary to operate a business c. A means of recording transactions and keeping records d. The measurement, processing, and communication of financial information about an identifiable economic entity ANS: D PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Accounting information MSC: ACBSP-APC-01-Purpose 2. The correct order of the three stages of accounting is a. communication, processing, and measurement. b. measurement, communication, and processing. c. processing, measurement, and communication. d. none of these are correct. ANS: D PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA BB Critical Thinking LOC: Recall KEY: Stages of accounting MSC: ACBSP-APC-01-Purpose 3. Reporting to decision makers occurs at which state of the accounting process? a. Business activities b. Communication c. Processing d. Measurement ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Accounting information MSC: ACBSP-APC-01-Purpose © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

4. The measurement stage of accounting is accomplished by a. recording data. b. reporting to decision makers. c. processing data. d. storing data. ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Accounting information MSC: ACBSP-APC-01-Purpose 5. The processing stage of accounting is accomplished by a. reporting to decision makers. b. recording transactions. c. controlling and evaluating data. d. storing and processing data into useful information ANS: D PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Accounting information MSC: ACBSP-APC-01-Purpose 6. A company's ability to earn enough income to attract and hold investment capital ultimately depends on its a. budgeting. b. planning. c. liquidity. d. profitability. ANS: D PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Profitability MSC: ACBSP-APC-01-Purpose

OBJ: 1 LOC: Recall

7. The purchase of land is an example of a(n) a. investing activity. b. operating activity. c. capital activity. d. financing activity. ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Business activities MSC: ACBSP-APC-09-Financial Statements 8. Which of the following is an example of an operating activity? a. Obtaining capital from stockholders b. Selling goods and services to customers c. Purchasing equipment d. Selling land ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Business activities MSC: ACBSP-APC-09-Financial Statements

9. Which of the following is an example of an investing activity? a. Purchasing equipment b. Obtaining a bank loan c. Hiring employees d. Producing goods and services ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Business activities MSC: ACBSP-APC-09-Financial Statements 10. Which of the following is an example of a financing activity? a. Employing workers b. Selling equipment c. Paying off a loan d. Purchasing land ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Business activities MSC: ACBSP-APC-09-Financial Statements 11. The intentional preparation of misleading financial statements, known as fraudulent financial reporting, can result from all of the following except a. the misapplication of accounting principles. b. the manipulation of inventory records. c. fictitious sales or orders. d. recording a revenue that has been earned but not yet received. ANS: D PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 1 KEY: Ethical reporting

12. All of the following statements are false about the Sarbanes-Oxley Act except a. it does not apply to publicly traded companies. b. it shields chief executives from criminal penalties. c. it prevents the SEC from drawing up certain rules. d. its primary goal is to regulate financial reporting and the accounting profession. ANS: D PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 1 KEY: Ethical reporting

13. The group of users of accounting information charged with achieving the goals of the business is its a. auditors. b. creditors. c. management. d. investors. ANS: C PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Financial information users MSC: ACBSP-APC-01-Purpose

14. A primary user of accounting information with a direct financial interest in the business is a(n) a. regulatory agency. b. investor c. taxing authority. d. customer ANS: B PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Financial information users MSC: ACBSP-APC-01-Purpose 15. Those who lend money or deliver goods and services before being paid are called a. investors. b. debtors. c. underwriters. d. creditors. ANS: D PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Financial information users MSC: ACBSP-APC-01-Purpose 16. Which of the following groups uses accounting information primarily to help protect the public? a. Management b. Regulatory agencies c. Taxing authorities d. Economic planners ANS: B PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Financial information users MSC: ACBSP-APC-01-Purpose 17. One user of accounting information with an indirect financial interest in a business is a. a creditor. b. a customer. c. management. d. an investor. ANS: B PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Financial information users MSC: ACBSP-APC-01-Purpose 18. Companies listed on the stock exchanges are regulated by the a. Financial Accounting Standards Board. b. American Institute of Certified Public Accountants. c. Securities and Exchange Commission. d. Internal Revenue Service. ANS: C PTS: 1 NAT: AACSB Communication MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 2 KEY: Professional organizations

19. Which of the following is a regulatory agency of the U.S. government? a. IASB b. SEC c. FASB d. AICPA ANS: B PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Comprehension KEY: Professional organizations MSC: ACBSP-APC-01-Purpose 20. Which of the following transactions does not involve an exchange of value? a. Payment of taxes b. Purchase of a building on credit c. Selling of merchandise d. Loss from fire ANS: D PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Business transactions MSC: ACBSP-APC-06-Recording Transactions 21. An accounting measurement is concerned with all except which of the following? a. Money measure b. Financial position c. Separate entity d. Business transaction ANS: B PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-01-Purpose 22. The separate entity concept requires that a. a business have its own set of financial records that are kept separate from its owner’s financial records. b. transactions that involve an exchange of value be kept together with those that do not. c. tax records be kept separate from financial reporting records. d. a separate set of books be established for each segment of a business. ANS: A PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Separate entity concept MSC: ACBSP-APC-01-Purpose 23. The topic of foreign exchange rates relates most closely to the concept of a. separate entity. b. money measure. c. nonexchange transactions. d. business transactions. ANS: B PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Diversity | AICPA BB Global LOC: Comprehension KEY: Money measure MSC: ACBSP-APC-01-Purpose

24. All of the following are considered nonexchange transactions except a. the daily accumulation of interest. b. the wear and tear on machinery. c. the repayment of a loan. d. losses from fire, flood, and theft. ANS: C PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Business transactions MSC: ACBSP-APC-01-Purpose 25. Which of the following transactions involves an exchange of value? a. Accumulation of interest b. Sale of services c. Flood loss d. Wear and tear on equipment ANS: B PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Business transactions MSC: ACBSP-APC-01-Purpose 26. Which of the following is legally a separate entity from its owner(s)? a. Sole proprietorship and corporation only b. Sole proprietorship and partnership only c. Corporation only d. Corporation and partnership only ANS: C PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Forms of business MSC: ACBSP-APC-03-Business Forms 27. Most business enterprises in the United States are a. government units. b. partnerships. c. sole proprietorships. d. corporations. ANS: C PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Sole proprietorships MSC: ACBSP-APC-03-Business Forms 28. The corporate officers are responsible for a. arranging for major loans with banks. b. determining corporate policy. c. carrying out corporate policy. d. appointing the board of directors. ANS: C PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Corporations MSC: ACBSP-APC-03-Business Forms

29. The board of directors of a corporation is responsible for all of the following except a. arranging for major bank loans. b. authorizing contracts. c. carrying out the daily operations of the business. d. declaring dividends. ANS: C PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Corporations MSC: ACBSP-APC-03-Business Forms 30. The audit committee is responsible for all of the following except a. engaging the company's independent auditors. b. assuring that reliable accounting records are kept. c. carrying out the daily operations of a company d. ascertaining that the company safeguards its resources. ANS: C PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Corporations MSC: ACBSP-APC-03-Business Forms 31. Dividends of a corporation are declared by its a. board of directors. b. officers. c. stockholders. d. creditors. ANS: A PTS: 1 NAT: AACSB Communication KEY: Corporations

DIF: Moderate OBJ: 4 LOC: Comprehension MSC: ACBSP-APC-03-Business Forms

32. Transfer of ownership will not affect the continuity of a a. corporation.. b. sole proprietorship. c. partnership d. corporation or partnership. ANS: A PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Comprehension KEY: Corporations MSC: ACBSP-APC-03-Business Forms 33. Which of the following is not a satisfactory statement of the accounting equation? a. Assets = Liabilities + Stockholders' Equity b. Assets – Stockholders' Equity = Liabilities c. Assets = Liabilities – Stockholders' Equity d. Assets – Liabilities = Stockholders' Equity ANS: C PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Effects of transactions on accounting equation MSC: ACBSP-APC-09-Financial Statements

OBJ: 5 LOC: Recall

34. The best definition of assets is the a. cash owned by the company. b. resources belonging to a company having future benefit to the company. c. collection of resources belonging to the company and the claims on these resources. d. owners' investment in the business. ANS: B PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Assets MSC: ACBSP-APC-09-Financial Statements 35. All of the following will affect retained earnings except a. expenses incurred. b. dividends declared and paid. c. revenues earned. d. investments by owners. ANS: D PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Owner's equity MSC: ACBSP-APC-09-Financial Statements 36. Which of the following assets could be described as nonphysical? a. Land b. Inventory c. Patents d. Equipment ANS: C PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Assets MSC: ACBSP-APC-09-Financial Statements 37. Which of the following financial statements is concerned with the enterprise at a point in time? a. Statement of retained earnings b. Income statement c. Statement of cash flows d. Balance sheet ANS: D PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 38. Which of the following financial ratios has not been shown to be most predictive of company performance? a. Debt to equity ratio b. Inventory turnover c. Profit margin d. Cash flow yield ANS: B PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Financial ratios MSC: ACBSP-APC-09-Financial Statements

39. Which of the following items has no effect on stockholders' equity? a. Land purchased b. Revenue c. Expense d. Dividends declared and paid ANS: A PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Owner's equity MSC: ACBSP-APC-09-Financial Statements 40. Which of the following accounts is not considered an asset? a. Cash b. Inventory c. Common stock d. Trademark ANS: C PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Assets MSC: ACBSP-APC-09-Financial Statements 41. An example of a monetary asset is a. Accounts Receivable. b. Copyright. c. Equipment d. Inventory ANS: A PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Assets MSC: ACBSP-APC-09-Financial Statements 42. Stockholders' equity of a corporation would not show a. retained earnings. b. additional paid-in capital on stock issued. c. the par value of stock issued. d. revenues and expenses. ANS: D PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Owner's equity MSC: ACBSP-APC-09-Financial Statements 43. A liability would not include an obligation to a. transfer assets. b. hire an employee. c. pay cash. d. provide services. ANS: B PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Liabilities MSC: ACBSP-APC-09-Financial Statements

44. The statement of cash flows would disclose the purchase of a building for cash a. nowhere on the statement. b. in the operating activities section. c. in the investing activities section. d. in the financing activities section. ANS: C PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Statement of cash flows MSC: ACBSP-APC-09-Financial Statements 45. Which of the following represents the proper order of financial statement preparation? a. Statement of cash flows, balance sheet, income statement, statement of retained earnings b. Statement of retained earnings, income statement, statement of cash flows, balance sheet c. Balance sheet, statement of cash flows, statement of retained earnings, income statement d. Income statement, statement of retained earnings, balance sheet, statement of cash flows ANS: D PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Financial statements MSC: ACBSP-APC-09-Financial Statements 46. All of the following items would appear on the balance sheet except a. Dividends b. Accounts Payable c. Common Stock d. Inventory ANS: A PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 47. The net income figure appears in all the following financial statements except the a. statement of cash flows. b. income statement. c. statement of retained earnings. d. balance sheet. ANS: D PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Net income MSC: ACBSP-APC-09-Financial Statements 48. The statement of cash flows would disclose the payment of a dividend a. in the financing activities section. b. in the investing activities section. c. in the operating activities section. d. nowhere on the statement. ANS: A PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Statement of cash flows MSC: ACBSP-APC-09-Financial Statements

49. Use this information to answer the following question. Here is the balance sheet for Marron Pickle Company, Inc.:

Assets Cash Accounts receivable Land Building Equipment

Total assets

Marron Pickle Company, Inc. Balance Sheet December 31, 2013 Liabilities $ 16,000 Accounts payable 2,000 28,000 Stockholders' Equity 88,000 Common stock $80,000 26,000 Retained earnings 48,000 Total stockholders' equity $160,000 Total liabilities and stockholders' equity

$32,000

128,000 $160,000

If the equipment were sold for $26,000 cash, then the Retained Earnings account would a. increase by $74,000. b. increase by $26,000. c. decrease by $26,000. d. stay the same. ANS: D The sale of equipment would decrease the equipment account to $0 and increase the cash account to $42,000. There would be no effect on retained earnings. PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements

50. Use this information to answer the following question. Here is the balance sheet for Marron Pickle Company, Inc.:

Assets Cash Accounts receivable Land Building Equipment

Total assets

$32,000

128,000 $160,000

If the balance in the Cash account were used to pay part of Accounts Payable, then total liabilities and stockholders' equity would a. decrease by $16,000. b. increase by $16,000. c. increase by $32,000. d. decrease by $32,000. ANS: A The accounts payable payment would decrease the cash account to $0 and decrease the Accounts Payable account to $16,000, thus decreasing total liabilities and stockholders’ equity by $16,000. PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements

51. Use this information to answer the following question. Here is the balance sheet for Marron Pickle Company, Inc.:

Assets Cash Accounts receivable Land Building Equipment

Total assets

$32,000

128,000

$160,000 Total liabilities and stockholders' equity

$160,000

If the balance in the Cash account were used to buy more equipment, then the total assets would a. remain unchanged. b. increase by $16,000. c. decrease by $16,000. d. increase by $42,000. ANS: A The purchase of more equipment would reduce the cash account to $0 and increase the equipment account to $42,000, thus causing total assets to remain unchanged. PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 52. Palm Textile Corporation had the following balance sheet accounts and balances: Accounts Payable Accounts Receivable Building Cash

$12,000 2,000 ? 6,000

Common Stock Equipment Land Retained Earnings

? $14,000 14,000 4,000

If the balance of the Common Stock account were $59,000, what would be the balance of the Building account? a. $29,000 b. $71,000 c. $63,000 d. $39,000

ANS: D 2,000 + X + 6,000 + 14,000 + 14,000 = 12,000 + 59,000 + 4,000 36,000 + X = 75,000 X = $39,000 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 53. Palm Textile Corporation had the following balance sheet accounts and balances: Accounts Payable Accounts Receivable Building Cash

$12,000 2,000 ? 6,000

Common Stock Equipment Land Retained Earnings

? $14,000 14,000 4,000

If the balance of the Building account were $53,000, what would be the total of liabilities and stockholders' equity? a. $53,000 b. $89,000 c. $83,000 d. $73,000 ANS: B Assets = Liabilities + Stockholders’ Equity Assets = 2,000 + 53,000 + 6,000 + 14,000 + 14,000 Assets = 89,000 Liabilities + Stockholders’ Equity = 89,000 PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 54. Palm Textile Corporation had the following balance sheet accounts and balances: Accounts Payable Accounts Receivable Building Cash

$12,000 2,000 ? 6,000

Common Stock Equipment Land Retained Earnings

? $14,000 14,000 4,000

If the balance of the Building account were $30,000 and if the equipment were sold for $14,000 cash, what would be the total of stockholders' equity? a. $54,000 b. $32,000 c. $30,000 d. $66,000

ANS: A Assets = Liabilities + Stockholders’ Equity The sale of the equipment would reduce the equipment account to 0 and increase the cash account to 20,000 Assets = 2,000 + 30,000 + 20,000 + 0 + 14,000 = 66,000 Stockholders’ Equity = 66,000 - 12,000 = 54,000 PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 55. Palm Textile Corporation had the following balance sheet accounts and balances: Accounts Payable Accounts Receivable Building Cash

$12,000 2,000 ? 6,000

Common Stock Equipment Land Retained Earnings

? $14,000 14,000 4,000

If the balance of the Building account were $28,000 and $6,000 of Accounts Payable were paid in cash, what would be the balance of the Common Stock account? a. $48,000 b. $42,000 c. $64,000 d. $68,000 ANS: A Assets = Liabilities + Stockholders’ Equity The Accounts Payable payment would decrease the Accounts Payable account to 6,000 and decrease the cash account to 0. Assets = 2,000 + 28,000 + 0 + 14,000 + 14,000 = 58,000 Common Stock = 58,000 - 6,000 - 4,000 = 48,000 PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 56. Palm Textile Corporation had the following balance sheet accounts and balances: Accounts Payable Accounts Receivable Building Cash

$12,000 2,000 ? 6,000

Common Stock Equipment Land Retained Earnings

? $14,000 14,000 4,000

If the balance of the Building account were $16,000 and $6,000 of Accounts Payable were paid in cash, what would be the total liabilities and stockholders' equity? a. $28,000 b. $46,000 c. $36,000 d. $38,000

ANS: B Assets = Liabilities + Stockholders’ Equity The Accounts Payable payment would decrease the Accounts Payable account to 6,000 and decrease the cash account to 0. Assets = 2,000 + 16,000 + 0 + 14,000 + 14,000 = 46,000 Liabilities and Stockholders’ Equity = 46,000 PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 57. Which of the following is a regulatory agency? a. International Accounting Standards Board (IASB) b. Securities and Exchange Commission (SEC) c. Financial Accounting Standards Board (FASB) d. Governmental Accounting Standards Board (GASB) ANS: B PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Professional organizations

58. The most important body for developing rules on accounting practice is currently the a. Governmental Accounting Standards Board (GASB). b. Financial Accounting Standards Board (FASB). c. Public Company Accounting Oversight Board (PCAOB). d. Internal Revenue Service (IRS). ANS: B PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Professional organizations

59. Generally accepted accounting principles (GAAP) a. are changing continually. b. are sound in theory but rarely used in practice. c. have eliminated all the weaknesses in accounting practice. d. are accounting rules formulated by the Internal Revenue Service (IRS). ANS: A PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Financial statements

60. Standards for state and local governments are established by the a. Securities and Exchange Commission (SEC). b. Financial Accounting Standards Board (FASB). c. Governmental Accounting Standards Board (GASB). d. Public Company Accounting Oversight Board (PCAOB). ANS: C PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Professional organizations

61. The purpose of an audit is to a. determine whether or not a company is a good investment. b. comply with income tax regulations. c. determine whether or not a company is a good credit risk. d. ascertain that the financial statements follow Generally Accepted Accounting Principles (GAAP). ANS: D PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Independent CPA report MSC: ACBSP-APC-01-Purpose 62. An auditor is impartial and intellectually honest. The principle being followed is a. independence. b. integrity. c. objectivity. d. due care. ANS: C PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Business ethics

63. Carrying out professional responsibilities with competence and diligence is called a. integrity. b. independence. c. objectivity. d. due care. ANS: D PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Business ethics

64. Which of the following is one of the broad principles underlying the accountant's code of professional ethics? a. Certification b. Integrity c. Loyalty d. Trust ANS: B PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Business ethics

65. The development of international accounting standards is the primary function of the a. Internal Revenue Service (IRS). b. American Institute of Certified Public Accountants (AICPA). c. International Accounting Standards Board (IASB). d. Public Company Accounting Oversight Board (PCAOB). ANS: C PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Ethics | AICPA BB Global LOC: Recall KEY: Professional organizations MSC: ACBSP-APC-01-Purpose © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

66. The Public Company Accounting Oversight Board (PCAOB) was created by the a. Sarbanes-Oxley Act. b. American Institute of Certified Public Accountants (AICPA). c. Financial Accounting Standards Board (FASB). d. International Accounting Standard Board (IASB). ANS: A PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 6 KEY: Professional organizations

SHORT ANSWER 1. Distinguish between profitability and liquidity. ANS: Profitability is the ability to earn enough income to attract and hold investment capital, whereas liquidity means having enough funds on hand to pay debts when they fall due. PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Business goals MSC: ACBSP-APC-01-Purpose 2. List the input(s), the major process(es), and the output(s) of an accounting system. ANS: The data about business activities is the input to an accounting system. There are three major processes in an accounting system: measurement, processing, and communication. The output of an accounting system is the information for decision makers. PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Business goals MSC: ACBSP-APC-01-Purpose 3. State whether each of the following users of financial statements has a direct or an indirect financial interest in the financial statements. a. Local taxing authority b. Financial advisors c. Customers d. Governmental regulatory agency e. Existing creditor f. Potential investor g. Economic planners h. Potential creditor ANS: a. Indirect interest b. Indirect interest c. Indirect interest d. Indirect interest e. Direct interest © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

f. Direct interest g. Indirect interest h. Direct interest PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Financial information users MSC: ACBSP-APC-01-Purpose 4. List five possible users of financial statements and state what each would be interested in learning from its review. ANS: Possible users and their reasons for interest could be: Existing creditors who would be concerned about being repaid on time. Possible creditors who are considering extending credit or making loans to the corporation and being repaid in a timely fashion. Current stockholders who want to follow and manage their investment. Individuals or corporations considering an investment in the company. College students who would use the statements to learn about financial statement analysis. Managers of the company who would use the statements to evaluate their areas of operations and make decisions to improve them. Government bodies such as the SEC, which would review the financial statements to ensure conformity to laws that protect the general public. Labor unions involved with the company, which would review the statements to evaluate present profitability as part of preparing for contract negotiations. PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Financial information users MSC: ACBSP-APC-01-Purpose 5. Define the following terms: Business transactions Money measure Separate entity ANS: Business transaction - An economic event that affects the financial position of a business. Money measure - The only factor common to all business transactions is money. Thus, all business transactions are recorded in terms of money. Separate entity - A business is distinct from its owners and thus should have its own set of financial records. PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Business transactions | Separate entity concept | Money measure MSC: ACBSP-APC-01-Purpose

6. Tell whether each of the following words or phrases relates most closely to a business transaction, a separate entity, or a money measure. a. b. c. d. e. f.

Sole proprietorship Sale of goods or services U.S. dollar Payment on a loan Exchange rate Owners of a corporation

ANS: a. Sole proprietorship b. Sale of goods or services c. U.S. dollar d. Payment on a loan e. Exchange rate f. Owners of a corporation

a separate entity a business transaction a money measure a business transaction a money measure a separate entity

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Communication | AICPA FN Reporting LOC: Comprehension KEY: Business transactions | Separate entity concept | Money measure MSC: ACBSP-APC-01-Purpose 7. Why would it be less risky for a wealthy individual to incorporate his or her business rather than to operate it as a sole proprietorship or partnership? ANS: With a sole proprietorship or partnership, the owner or owners have unlimited liability. That is, they may be required to use personal assets to satisfy business debts. The liability of a corporate shareholder, however, is limited to his or her investment in the business. PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA BB Critical Thinking LOC: Comprehension KEY: Corporations MSC: ACBSP-APC-03-Business Forms 8. Indicate by letter whether each statement below applies to a sole proprietorship (S), partnership (P), or corporation (C). You may use more than one business organization for an answer. ________ a. Separate economic unit ________ b. Life limited by death of owner(s) ________ c. Separate legal entity ________ d. Unlimited liability of owner(s) ________ e. Separation of ownership and control ________ f. Transfer of ownership does not affect the continuity of business. ________ g. Ownership evidenced by stock certificates

ANS: a. S, P, C b. S, P c. C d. S, P e. C f. C g. C PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Reporting LOC: Comprehension KEY: Forms of business MSC: ACBSP-APC-03-Business Forms 9. Indicate by letter whether each item below would appear on the income statement (IS), balance sheet (BS), or statement of retained earnings (E). ________ a. Common Stock ________ b. Dividends ________ c. Wages Expense ________ d. Commissions Earned ________ e. Buildings ________ f. Accounts Payable ________ g. Utilities Expense ________ h. Beginning Retained Earnings ________ i. Accounts Receivable ________ j. Notes Payable ANS: a. BS b. E c. IS d. IS e. BS

f. BS g. IS h. E i. BS j. BS

PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Financial statements MSC: ACBSP-APC-09-Financial Statements 10. At the beginning of the year, Catoosa Corporation's assets were $300,000 and its stockholders' equity was $200,000. During the year, assets decreased $60,000 and liabilities increased $30,000. What was the stockholders' equity at the end of the year? ANS: Liabilities at beginning of year = $300,000 - $200,000 = $100,000 Stockholders’ equity at end of year = [($300,000 – $60,000) – ($100,000 + $30,000)] Stockholders’ equity at end of year = $110,000 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Accounting equation MSC: ACBSP-APC-09-Financial Statements © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

11. At the beginning of the year, Fourman Corporation's assets were $270,000 and its stockholders' equity was $243,000. During the year, assets decreased $35,000 and liabilities increased $10,000. What was the stockholders' equity at the end of the year? ANS: Liabilities at beginning of year = $270,000 - $243,000 = $27,000 Stockholders’ equity at end of year = [($270,000 – $35,000) – ($27,000 + $10,000)] Stockholders’ equity at end of year = $198,000 $198,000 [($270,000 – $35,000) – ($27,000 + $10,000)] PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Accounting equation MSC: ACBSP-APC-09-Financial Statements 12. Which three types of transactions affect retained earnings, and how do they affect it? ANS: Revenues increase retained earnings, whereas expenses and dividends decrease retained earnings. PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions MSC: ACBSP-APC-09-Financial Statements 13. How does the statement of retained earnings relate to the income statement and the balance sheet? ANS: The statement of retained earnings provides a link between the income statement and the balance sheet. Specifically, it takes the net income figure from the income statement and uses it (along with dividends) to arrive at the retained earnings figure to be presented on the balance sheet. PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Financial statements MSC: ACBSP-APC-09-Financial Statements 14. Barrett Company's stockholders' equity equals one-fourth of the company's total assets. The company's liabilities are $360,000. What is the amount of the company's stockholders' equity? ANS: Assets = Liabilities + Stockholders’ Equity Liabilities = .75(Assets) $360,000 = .75(Assets) Assets = $480,000 Stockholders’ Equity = $480,000 - $360,000 = $120,000 PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Accounting equation MSC: ACBSP-APC-09-Financial Statements

15. Cochran Corporation's stockholders' equity equals one-third of the company's total assets. The company's liabilities are $240,000. What is the amount of the company's stockholders' equity? ANS: Assets = Liabilities + Stockholders’ Equity Liabilities = 2/3(Assets) $240,000 = 2/3(Assets) Assets = $360,000 Stockholders’ Equity = $360,000 - $240,000 = $120,000 PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Accounting equation MSC: ACBSP-APC-09-Financial Statements 16. Barrow Corporation's stockholders' equity equals one-half of the company's total assets. The company's liabilities are $346,000. What is the amount of the company's stockholders' equity? ANS: Assets = Liabilities + Stockholders’ Equity Liabilities = 1/2(Assets) $346,000 = 1/2(Assets) Assets = $692,000 Stockholders’ Equity = $692,000 - $346,000 = $346,000 PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Accounting equation MSC: ACBSP-APC-09-Financial Statements 17. What is the responsibility of the auditing firm? Who is responsible for the content of the financial statements? ANS: The responsibility of the auditing firm is to express an opinion on the financial statements of the corporation being audited. The company’s management is responsible for the content of the published financial statements. PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Ethics | AICPA BB Legal LOC: Comprehension KEY: Ethical reporting | Independent CPA report MSC: ACBSP-APC-01-Purpose 18. What is independence, and why is it important for a Certified Public Accountant (CPA) to maintain it when conducting an audit? ANS: Independence means having no financial or other compromising ties with the company under audit. To give the public confidence in their work, Certified Public Accountants (CPAs) must maintain their independence whenever they conduct an audit. PTS: 1 DIF: Moderate NAT: AACSB Ethics | AICPA BB Legal KEY: Business ethics

OBJ: 6 LOC: Comprehension MSC: ACBSP-APC-01-Purpose

MATCHING Match each definition with the correct term below. a. The group of people who are responsible for ensuring that a company meets its goals of profitability and liquidity. b. A unit of ownership in a corporation. c. The inflows and outflows of cash into and out of a business. d. An information system that measures, processes, and communicates financial information about an economic entity. e. A set of practices that has been developed to provide guidelines for financial accounting. f. The value of one currency in terms of another. g. The government body that regulates the issuing, buying, and selling of stocks in the United States. h. The ability to earn enough income to attract and hold investment capital. i. The oversight of a corporation’s management and ethics by its board of directors. j. The accumulated earnings generated by a business’s income-producing activities less amounts that have been paid out to the stockholder’s. k. Economic events that affect a business’s financial position. l. An examination of a company’s financial statements and the accounting systems, controls, and records that produced them. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Accounting Management Cash flows Securities and Exchange Commission Corporate governance Business transactions Exchange rate Profitability Audit Generally Accepted Accounting Principles Retained earnings Share of stock

1. ANS: D PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA BB Critical Thinking LOC: Recall KEY: Accounting systems MSC: ACBSP-APC-01-Purpose 2. ANS: A PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA BB Critical Thinking LOC: Recall KEY: Role of management MSC: ACBSP-APC-01-Purpose 3. ANS: C PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Statement of cash flows MSC: ACBSP-APC-09-Financial Statements 4. ANS: G PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA BB Legal LOC: Recall KEY: Governmental bodies MSC: ACBSP-APC-01-Purpose

5. ANS: I PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Corporations MSC: ACBSP-APC-03-Business Forms 6. ANS: K PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Business transactions MSC: ACBSP-APC-01-Purpose 7. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Diversity | AICPA BB Global LOC: Recall KEY: Business transactions MSC: ACBSP-APC-01-Purpose 8. ANS: H PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA BB Critical Thinking LOC: Recall KEY: Business goals MSC: ACBSP-APC-01-Purpose 9. ANS: L PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Ethics | AICPA BB Legal LOC: Recall KEY: Professional standards MSC: ACBSP-APC-01-Purpose 10. ANS: E PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Ethics | AICPA BB Legal LOC: Recall KEY: Professional standards MSC: ACBSP-APC-01-Purpose 11. ANS: J PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Retained earnings MSC: ACBSP-APC-09-Financial Statements 12. ANS: B PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Corporations MSC: ACBSP-APC-03-Business Forms PROBLEM 1. State whether the following business activities are an operating activity, an investing activity or a financing activity.

1. 2. 3. 4. 5. 6. 7. 8.

Business Activity Hiring employees Purchasing land Obtaining a loan from a bank Paying off a loan Selling equipment Selling goods and services Issuing stock Paying taxes

Type of Activity

ANS: 1. 2. 3. 4. 5. 6. 7. 8.

Business Activity Hiring employees Purchasing land Obtaining a loan from a bank Paying off a loan Selling equipment Selling goods and services Issuing stock Paying taxes

Type of Activity Operating Investing Financing Financing Investing Operating Financing Operating

PTS: 1 DIF: Challenging OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Business activities MSC: ACBSP-APC-09-Financial Statements 2. Explain why each of the following persons or groups would be interested in seeing the financial statements of a company. Also state whether each has a direct or indirect financial interest. a. Potential investor b. Internal Revenue Service c. A labor union d. Securities and Exchange Commission e. Potential creditor f. Management g. Economic planners ANS: a. To help determine if the prospects for a profitable investment is good relative to other investment opportunities (direct interest) b. To help determine the tax that should be levied against the company (indirect interest) c. To give the labor union negotiators a basis for negotiating for higher wages and benefits (indirect interest) d. To help determine if the investing public is being given accurate and complete information (indirect interest) e. To help determine if the creditor should extend credit to the company (direct interest) f. To help the company achieve goals such as profitability and liquidity (neither direct nor indirect) g. To set economic policies and judge economic programs (indirect interest) PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Comprehension KEY: Financial information users MSC: ACBSP-APC-01-Purpose

3. How do the balance sheets of corporations illustrate the accounting concept of separate entity? ANS: Balance sheets (statements of financial position) of corporations illustrate the accounting concept of separate entity in the shareholders' equity section. Individual names of stockholders are not shown. Instead, their ownership is evidenced by shares of stock. The assets and liabilities shown on the consolidated balance sheets are those of the corporation itself, not of the individual stockholders. PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Communication | AICPA FN Reporting LOC: Application KEY: Separate entity concept MSC: ACBSP-APC-01-Purpose 4. In which form of business does CVS operate? List two places where this would be revealed in the financial statements. ANS: CVS operates as a corporate form of business. This would be evidenced in several places in the financial statements: The title of each statement shows the name of the company as CVS Corporation. The shareholders' equity section of the consolidated balance sheets contains accounts for stock and retained earnings transactions. The consolidated statements of earnings contains a line for income taxes. Corporations are subject to income taxes. The consolidated statements of cash flows also shows stock transactions. PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA BB Critical Thinking LOC: Application KEY: Corporations MSC: ACBSP-APC-03-Business Forms 5. Glascock Corporation had a balance in Retained Earnings on December 31, 2012, of $520,000. During 2013, the company reported a net income of $224,000 after taxes. During 2013, the company declared and paid cash dividends totaling $32,000. Prepare the company's statement of retained earnings for the year ended December 31, 2013. ANS: Glascock Corporation Statement of Retained Earnings For the Year Ended December 31, 2013 Retained earnings, December 31, 2012 Net income for the year Subtotal Less dividends Retained earnings, December 31, 2013

$520,000 224,000 $744,000 32,000 $712,000

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Statement of Retained Earnings MSC: ACBSP-APC-09-Financial Statements

6. Lin Wo Corporation had a balance in Retained Earnings on December 31, 2012, of $360,000. During 2013, the company reported a net income of $24,000 after taxes. During 2013, the company declared and paid cash dividends totaling $18,000. Prepare the company's statement of retained earnings for the year ended December 31, 2013. ANS: Lin Wo Corporation Statement of Retained Earnings For the Year Ended December 31, 2013 Retained earnings, December 31, 2012 Net income for the year Subtotal Less dividends Retained earnings, December 31, 2013

$360,000 24,000 $384,000 18,000 $366,000

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Statement of Retained Earnings MSC: ACBSP-APC-09-Financial Statements 7. Use the following accounts and information to prepare, in good form, an income statement, statement of retained earnings, and balance sheet for Jasper Enterprises for the year ended December 31, 2013. Accounts Payable Accounts Receivable Buildings Cash

$9,600 1,200 104,000 52,400

Sales Revenues Common Stock Dividends Utilities Expense

38,000 40,000 6,000 2,000

Land Notes Payable Rent Expense Retained Earnings, December 31, 2012 Salaries Expense Inventory

$78,000 12,000 7,200 168,800 16,800 800

ANS: Jasper Enterprises Income Statement For the Year Ended December 31, 2013 Revenues Sales revenues Expenses Utilities expense Rent expense Salaries expense Net income

$38,000

$2,000 7,200 16,800

26,000 $ 12,000

Jasper Enterprises Statement of Retained Earnings For the Year Ended December 31, 2013 Retained earnings, December 31, 2012 Net income for the year Subtotal Less dividends Retained earnings, December 31, 2013

$168,800 12,000 $180,800 6,000 $174,800

Jasper Enterprises Balance Sheet December 31, 2013 Assets Cash Accounts receivable Inventory Land Buildings

Total assets

Liabilities $ 52,400Accounts payable $ 9,600 1,200Notes payable 12,000 800Total liabilities 78,000 104,000 Stockholders' Equity Common stock $40,000 Retained earnings 174,800 Total stockholders' equity $236,400Total liabilities and stockholders' equity

$ 21,600

214,800 $236,400

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Financial statements MSC: ACBSP-APC-09-Financial Statements 8. Use the following accounts and information to prepare, in good form, an income statement, statement of retained earnings, and balance sheet for Hometown Industries for the month ended July 31, 2013. Accounts Payable Accounts Receivable Buildings Cash

$3,100 1,400 22,000 15,600

Service Revenue Common Stock Dividends Insurance Expense

12,700 20,000 8,000 2,200

Land Notes Payable Rent Expense Retained Earnings, June 30, 2013 Salaries Expense Supplies

$35,000 3,300 2,400 57,900 10,000 400

ANS: Hometown Industries Income Statement For the Month Ended July 31, 2013 Revenues Service Revenue $12,700 Expenses Insurance expense Rent expense Salaries expense

$ 2,200 2,400 10,000 14,600 ($ 1,900)

Net loss Hometown Industries Statement of Retained Earnings For the Month Ended July 31, 2013 Retained earnings, June 30, 2013

$57,900 (1,900)

Net loss for the month Subtotal

$56,000 Less dividends 8,000 Retained earnings, July 31, 2013 $48,000 Hometown Industries Balance Sheet July 31, 2013 Assets Cash Accounts Receivable Supplies Land Buildings

Total assets

PTS: 1

Liabilities $15,600Accounts payable $ 3,100 1,400Notes payable 3,300 400Total liabilities 35,000 22,000 Stockholders' Equity Common stock $20,000 Retained earnings 48,000 Total stockholders' equity $74,400Total liabilities and Stockholders' equity

DIF: Moderate

$ 6,400

68,000 $74,400

OBJ: 5

NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Financial statements MSC: ACBSP-APC-09-Financial Statements 9. Use the following information to calculate at, or for the year ended, December 31, 2013 (a) net income, (b) retained earnings, (c) total liabilities and stockholders' equity, and (d) accounts receivable. Supplies Wages Expense Accounts Payable Retained Earnings, December 31, 2012

$ 2,000 28,000 44,000 16,000

Cash Dividends Notes Payable Patents

$64,000 32,000 8,000 14,000

Retained Earnings, December 31, 2013 Accounts Receivable Rent Expense Sales Revenue

? 12,000 60,000

Common Stock

40,000

ANS: a. $60,000 - $12,000 - $28,000 = $20,000 b. $16,000 + $20,000 - $32,000 = $4,000 c. $44,000 + $8,000 + $40,000 + $4,000 = $96,000 d. $96,000 - $2,000 - $64,000 - $14,000 = $16,000 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Financial statements MSC: ACBSP-APC-09-Financial Statements 10. Use the following information to calculate at, or for the year ended, December 31, 2013, (a) net income, (b) retained earnings, (c) total assets, and (d) cash. Salaries Expense Accounts Payable

$4,000 7,000

Dividends Accounts Receivable

6,000 8,000

Inventories Cash Salaries Payable

22,000 ? 1,000

Sales Revenue Retained Earnings, December 31, 2013 Utilities Expense Retained Earnings, December 31, 2012 Common Stock

$20,000 ? 2,000 16,000 10,000

ANS: a. $20,000 - $4,000 - $2,000 = $14,000 b. $16,000 + $14,000 - $6,000 = $24,000 c. Total liabilities and stockholder’s equity = Total assets = $7,000 + $1,000 + $24,000 + $10,000 = $42,000 d. $42,000 - $8,000 - $22,000 = $12,000 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Financial statements MSC: ACBSP-APC-09-Financial Statements © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

11. Use the following accounts and balances to prepare a balance sheet for Paulding Company at December 31, 2013. Accounts Payable Common Stock Cash Retained Earnings, Dec. 31, 2013 Equipment Accounts Receivable

$20,000 24,000 9,600 4,800 26,400 12,800

ANS: Paulding Company Balance Sheet December 31, 2013 Assets Cash Accounts receivable Equipment

Total assets

Liabilities $ 9,600 Accounts payable 12,800 26,400 Stockholders' Equity Common stock $24,000 Retained earnings 4,800 Total stockholders' equity $48,800 Total liabilities and stockholders' equity

$20,000

28,800 $48,800

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 12. Following are the total assets and liabilities at the beginning and end of the year for Maren Corporation:

Beginning of the year End of the year

Assets Liabilities $70,000 $45,000 130,000 40,000

Determine the net income or loss for the year in each of the following situations: a. The stockholders made no investments in the business and no dividends were paid during the year. b. The stockholders made an investment of $20,000 and a dividend of $12,000 was paid during the year.

ANS: a. $65,000 [($130,000 – $40,000) – ($70,000 – $45,000)] b. $57,000 [($130,000 – $40,000) – ($70,000 – $45,000) – $20,000 + $12,000] PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Critical Thinking KEY: Net income MSC: ACBSP-APC-09-Financial Statements 13. Selected amounts from the condensed financial statements of Timson Corporation for 2012 and 2013 are presented below with several amounts missing. The 2011 year-end balance of retained earnings is $82,883. Income Statement

2013

Revenues

2012

$490,304

$ (a) (h) (501,295) (853) (3,603) $__ (i) $ _ _(b)

Costs and expenses Income taxes Net income Statement of Retained Earnings Beginning-of-year balance Net income Dividends End-of-year balance

(j) $ (c) 3,747 (d) (k) (3,845) (l) $_ _ (e)

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

$ (m) $246,481 $110,192 $102,239 57,968 56,800 (n) $ (f) $255,473 $ (g)

a. Determine the missing amounts indicated by the letters. (Hint: You should not try to find them in alphabetical order.) b. Given the data presented, did the company's profitability improve from 2012 to 2013? ANS: a. Income Statement

2013

2012

Revenues Costs and expenses Income taxes Net income

$490,304 (485,704)(h) (853) $ 3,747(i)

$513,302(a) (501,295) (3,603) $ 8,404(b)

Statement of Retained Earnings Beginning-of-year balance Net income Dividends End-of-year balance

$ 87,442(j) 3,747 (3,876)(k) $ 87,313(l)

$ 82,883(c) 8,404(d) (3,845) $ 87,442(e)

$255,473(m) $110,192 57,968 87,313(n) $255,473

$246,481 $102,239 56,800 87,442(f) $246,481(g)

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

b. Timson's profitability did not improve from 2012 to 2013, as indicated by a decrease in net income from $8,404 to $3,747. PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Critical Thinking KEY: Financial statements MSC: ACBSP-APC-09-Financial Statements 14. Following are the definitions of several accounting organizations. For each definition, list the name of the corresponding organization. a. Responsible for interpreting and enforcing tax laws b.. Establishes standards for state and local governments c. Developer of international accounting standards d. Consists mainly of industrial accountants e. Protector of the investing public f. Current authoritative body for developing GAAP g. The accounting profession's main organization of certified public accountants ANS: a. Internal Revenue Service (IRS) b. Governmental Accounting Standards Board (GASB) c. International Accounting Standards Board (IASB) d. Institute of Managerial Accountants (IMA) e. Securities and Exchange Commission (SEC) f. Financial Accounting Standards Board (FASB) g. American Institute of Certified Public Accountants (AICPA) PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

OBJ: 6 LOC: Recall

KEY: Professional organizations

Chapter 02 - Analyzing Business Transactions TRUE/FALSE 1. When a company receives a product previously ordered, a recordable transaction has occurred. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 2. When a business pays a new employee for the first time, a recordable transaction has occurred. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 3. The valuation issue deals with how the components of a transaction should be categorized. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 4. In accounting, to value means to record a transaction or event. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 5. The cost principle is a solution to the recognition issue. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 6. The recognition issue deals with when a business transaction should be recorded. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic LOC: Recall MSC: ACBSP-APC-06-Recording Transactions

OBJ: 1 KEY: Measurement issues

7. The most generally accepted value used in accounting is market value. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions

8. Cost Value is the exchange price associated with a business transaction at the time the transaction is recognized. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 9. The classification issue involves the assignment of accounts to business transactions. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 10. When a company makes an order, a transaction has occurred. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 11. All business transactions require the application of two basic accounting concepts: recording a transaction at the right time and placing the right value on it. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 12. Purchase requisitions are recognized in the accounting records. ANS: F PTS: 1 NAT: AACSB Analytic KEY: Measurement issues

DIF: Moderate OBJ: 1 LOC: Comprehension MSC: ACBSP-APC-06-Recording Transactions

13. When a company purchases goods that it will resell, it must record the goods in an asset account. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 14. A credit to an asset account means that asset account has been increased. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: T accounts MSC: ACBSP-APC-05-Accounting Cycle 15. A debit has a favorable effect on an account. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: T accounts MSC: ACBSP-APC-05-Accounting Cycle © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

16. For a T account, an account balance is the difference in total dollars between total debit footings and total credit footings. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: T accounts MSC: ACBSP-APC-05-Accounting Cycle 17. Column totals are called account balances. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: T accounts MSC: ACBSP-APC-05-Accounting Cycle 18. A decrease in a liability is recorded by a debit. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: T accounts | Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle 19. An increase in an asset is recorded by a debit. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: T accounts | Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle 20. The double-entry system is possible because all business transactions have two equal and opposite aspects. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle 21. A decrease in a dividend account is recorded with a credit. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Analyze transactions | Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle 22. An increase in revenue is recorded with a credit. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Analyze transactions | Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle

23. Dividends should appear on the balance sheet. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Dividends MSC: ACBSP-APC-05-Accounting Cycle 24. The dividends account has a normal credit balance. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Account balances MSC: ACBSP-APC-05-Accounting Cycle 25. Revenues have a normal debit balance. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Account balances MSC: ACBSP-APC-05-Accounting Cycle 26. Retained Earnings has a normal debit balance. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Account balances MSC: ACBSP-APC-05-Accounting Cycle 27. Accounts Payable has a normal debit balance. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Account balances MSC: ACBSP-APC-05-Accounting Cycle 28. A basic storage unit for accounting data is the account. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Accounts MSC: ACBSP-APC-05-Accounting Cycle 29. When stockholders make an investment, the Common Stock account is debited. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle 30. When a dividend is declared and paid, the Dividends account is credited and Cash is debited. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Analyze transactions MSC: ACBSP-APC-06-Recording Transactions

31. Liabilities are established with debits and eliminated with credits. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Analyze transactions | Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle 32. When payment is received for services not yet rendered, no entry is recorded until that service has been rendered. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle 33. When revenue has been earned, an entry can often be recorded before the related cash has been collected. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle 34. A contract is an example of a source document. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle 35. Wages payable is a type of liability. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Liabilities MSC: ACBSP-APC-05-Accounting Cycle 36. Dividends are classified as an expense. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Owner's equity MSC: ACBSP-APC-05-Accounting Cycle 37. Unearned revenues are classified as assets on the balance sheet. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Liabilities MSC: ACBSP-APC-05-Accounting Cycle 38. Another word for expense is debt. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Accounts MSC: ACBSP-APC-05-Accounting Cycle © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

39. Office supplies are classified as an asset. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Assets MSC: ACBSP-APC-05-Accounting Cycle 40. Investments by stockholders are recorded in the Common Stock account, not in the Retained Earnings account. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Owner's equity MSC: ACBSP-APC-06-Recording Transactions 41. Revenue should be recorded when the related cash has been collected, not when it has been earned. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-05-Accounting Cycle 42. Expenses should be recorded when they have been incurred, not when they are paid. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 43. A net income of $10,000 means that the business received $10,000 more in cash from its customers than it spent to run the business. ANS: F PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Recording transactions MSC: ACBSP-APC-05-Accounting Cycle 44. Accounts Receivable and Accounts Payable are used when there is a time delay between a transaction and its related cash flow. ANS: T PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Recording transactions MSC: ACBSP-APC-05-Accounting Cycle 45. Generally, before Accounts Payable is credited, it is debited. ANS: F PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions | Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle

46. Generally, before Accounts Receivable is credited, it is debited. ANS: T PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions | Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle 47. In a trial balance, accounts are listed in the order they appear on the financial statements. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle 48. A trial balance is normally prepared at the end of each week. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle 49. When the columns of the trial balance equal each other, it means that no errors have occurred in recording and posting the transactions. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle 50. A transposition error will cause the trial balance to be out of balance by an amount that is evenly divisible by 7. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle 51. Recording an account with a debit balance as a credit, or vice versa, will cause the trial balance to be out of balance by an amount that is evenly divisible by 2. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle 52. The ledger is a chronological record of all transactions. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recording transactions MSC: ACBSP-APC-05-Accounting Cycle

53. Entering transactions into the journal is called posting. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recording transactions MSC: ACBSP-APC-05-Accounting Cycle 54. In a journal entry, debits are always recorded before credits. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recording transactions MSC: ACBSP-APC-05-Accounting Cycle 55. In a journal entry, credits are always indented. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recording transactions MSC: ACBSP-APC-05-Accounting Cycle 56. In a journal entry, the Post. Ref. column is always left blank. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle 57. It is sometimes correct for a compound entry's debit totals and credit totals to be unequal. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle 58. The journal account form has a Balance column. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle 59. One might see “J2” correctly placed in the Post. Ref. column of the journal. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle 60. Despite the advantages of a computer accounting information system, the ledger still must be maintained manually. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle

61. Journal entries are typically posted only at the end of the year. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle 62. In a financial report, a single line is placed below the final total(s). ANS: F PTS: 1 DIF: Easy NAT: AACSB Communication | AICPA FN Reporting KEY: Financial statements | Recording transactions MSC: ACBSP-APC-05-Accounting Cycle

OBJ: 5 LOC: Recall

63. Another name for the ledger is the book of original entry. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle 64. The general journal makes finding accounts in the ledger easier. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Chart of accounts MSC: ACBSP-APC-05-Accounting Cycle 65. All companies use the same standard set of accounts. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Chart of accounts MSC: ACBSP-APC-05-Accounting Cycle 66. The accounts in a chart of accounts are normally listed in order of their account number. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Chart of accounts MSC: ACBSP-APC-05-Accounting Cycle 67. The numbering scheme of a chart of accounts usually contains gaps. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Chart of accounts MSC: ACBSP-APC-05-Accounting Cycle 68. The amount of profit would always be equal to the ending cash balance. ANS: F PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Business goals MSC: ACBSP-APC-05-Accounting Cycle

69. One can obtain a clear picture of a company's liquidity by referring to its income statement. ANS: F PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Liquidity and current liabilities MSC: ACBSP-APC-05-Accounting Cycle 70. One can obtain a clear picture of a company's liquidity by referring to its statement of cash flows. ANS: T PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Liquidity and current liabilities MSC: ACBSP-APC-05-Accounting Cycle MULTIPLE CHOICE 1. A purchase is recognized in the accounting records when a. an order is placed with the seller b. the purchase requisition is sent to the purchasing department. c. title transfers from the seller to the buyer. d. the buyer receives the bill from the seller ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 2. Which of the following is not a measurement issue in accounting? a. When to record a business transaction b. How to classify the items of a business transaction c. What value to place on a business transaction d. Where to record a business transaction ANS: D PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 3. The issue of deciding when to record a transaction is solved by a. properly classifying the transaction. b. determining a point of recognition. c. assigning actual cost to the transaction. d. assigning a recurring order date. ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions

4. Which of the following is not a measurement issue in accounting? a. Valuation b. Recognition c. Evaluation d. Classification ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 5. Fair value relates most closely to the a. recognition point. b. recognition issue. c. valuation issue. d. classification issue. ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 6. The practice of recording transactions at cost is called a. cost classification. b. the cost principle. c. the valuation issue. d. cost recognition. ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 7. Which of the following business events is not a transaction? a. Signing a contract b. Paying wages c. Receiving goods d. Purchasing a service ANS: A PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 8. When a business records revenue when it has been earned, it is addressing the measurement issue of a. recognition. b. evaluation. c. classification. d. valuation. ANS: A PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions

9. When a business reports an asset at an inflated dollar amount, it has violated the measurement issue of a. recognition. b. valuation. c. classification. d. realization. ANS: B PTS: 1 NAT: AACSB Analytic KEY: Measurement issues

DIF: Moderate OBJ: 1 LOC: Comprehension MSC: ACBSP-APC-06-Recording Transactions

10. When a business correctly records its expenses and assets, it has correctly addressed the measurement issue of a. communication. b. classification. c. valuation. d. recognition. ANS: B PTS: 1 NAT: AACSB Analytic KEY: Measurement issues

DIF: Moderate OBJ: 1 LOC: Comprehension MSC: ACBSP-APC-06-Recording Transactions

11. Which of the following is a business event that is not considered a recordable transaction? a. A company receives a product previously ordered. b. A company pays an employee for work performed. c. A customer inquires about the availability of a service. d. A customer purchases a service. ANS: C PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 12. Which of the following is a business event that is considered a recordable transaction? a. A company hires a new employee. b. A customer purchases merchandise. c. A customer inquires about the availability of a product. d. The purchasing department sends a purchase order to the supplier. ANS: B PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 13. Which of the following is an illustration of the classification issue? a. At what amount should an old machine be shown on the balance sheet? b. At what point should the purchase of art supplies be recorded? c. Should tools be recorded as an asset or as an expense? d. At what point should a bill be paid for the purchase of an item? ANS: C PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions

14. Which of the following events does not require a journal entry? a. Purchase of a one-year insurance policy b. Agreement to perform a service at a future date c. Performance of a service agreed to at a past date d. Payment for a service performed previously ANS: B PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions MSC: ACBSP-APC-06-Recording Transactions 15. Which of the following accounts has a normal credit balance? a. Dividends b. Automotive Equipment c. Advertising Fees Earned d. Interest Expense ANS: C PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Account balances MSC: ACBSP-APC-05-Accounting Cycle 16. Which of the following accounts has a normal debit balance? a. Dividends b. Common Stock c. Accounts Payable d. Retained Earnings ANS: A PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Account balances MSC: ACBSP-APC-05-Accounting Cycle 17. Which of the following accounts has a normal debit balance? a. Revenues Earned b. Accounts Payable c. Inventory d. Retained Earnings ANS: C PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Account balances MSC: ACBSP-APC-05-Accounting Cycle 18. Which of the following accounts has a normal credit balance? a. Accounts Receivable b. Common Stock c. Wages Expense d. Dividends ANS: B PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Account balances MSC: ACBSP-APC-05-Accounting Cycle

19. Which of the following accounts has a normal debit balance? a. Wages Payable b. Fees Earned c. Rent Expense d. Common Stock ANS: C PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Account balances MSC: ACBSP-APC-05-Accounting Cycle 20. Which of the following accounts is decreased with a debit? a. Accounts Payable b. Accounts Receivable c. Rent Expense d. Dividends ANS: A PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle

OBJ: 2 LOC: Recall

21. Which of the following accounts is decreased with a credit? a. Advertising Fees Earned b. Utilities Expense c. Common Stock d. Loan Payable ANS: B PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle

OBJ: 2 LOC: Recall

22. Which of the following accounts is increased with a debit? a. Common Stock b. Rent Payable c. Legal Fees Earned d. Dividends ANS: D PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle

OBJ: 2 LOC: Recall

23. Which of the following accounts is increased with a credit? a. Cash b. Revenues Earned c. Rent Expense d. Dividends ANS: A PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle

OBJ: 2 LOC: Recall

24. Which account does not affect retained earnings? a. Dividends b. Sales Revenue c. Rent Expense d. Common Stock ANS: D PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle

OBJ: 2 LOC: Recall

25. Which pair of accounts follows the rules of debit and credit in the same manner? a. Revenue from Services and Equipment b. Inventory and Advertising Expense c. Repair Expense and Accounts Payable d. Common Stock and Cash ANS: B PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Account balances MSC: ACBSP-APC-05-Accounting Cycle 26. Which pair of accounts follows the rules of debit and credit in the opposite manner? a. Fixed Assets and Dividends b. Advertising Expense and Equipment c. Dividends and Medical Fees Earned d. Rent Payable and Common Stock ANS: C PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Account balances MSC: ACBSP-APC-05-Accounting Cycle

27. If Accounts Receivable has debit postings of $58,000, credit postings of $44,000, and a normal ending balance of $48,000, which of the following was its beginning balance? a. $62,000 Dr. b. $34,000 Dr. c. $34,000 Cr. d. $62,000 Cr. ANS: B $48,000 = X + $58,000 - $44,000 X = $34,000 Dr. PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: T accounts MSC: ACBSP-APC-05-Accounting Cycle 28. If Accounts Payable has debit postings of $34,000, credit postings of $28,000, and a normal ending balance of $12,000, what was its beginning balance? a. $18,000 Cr. b. $6,000 Cr. c. $18,000 Dr. d. $6,000 Dr. ANS: A $12,000 = X + $28,000 - $34,000 X = $18,000 Cr. PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: T accounts MSC: ACBSP-APC-05-Accounting Cycle 29. To determine the balance of a particular account, one should refer to the a. source documents. b. chart of accounts. c. book of original entry. d. ledger. ANS: D PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Account balances MSC: ACBSP-APC-05-Accounting Cycle 30. All of the following are examples of source documents except a. checks. b. contracts. c. ledgers. d. receipts. ANS: C PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle

31. When collection is made on Accounts Receivable, a. stockholders' equity increases. b. total assets decrease. c. total assets remain the same. d. total assets increase. ANS: C PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions | Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle 32. If office equipment is sold at cost in exchange for a promissory note, a. total liabilities decrease. b. stockholders' equity decrease. c. total assets decrease. d. total assets remain the same. ANS: D PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions | Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle 33. The declaration and payment of a dividend will a. decrease net income. b. increase liabilities. c. not affect total assets. d. decrease stockholders' equity. ANS: D PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions | Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle 34. Payment on a portion of Accounts Payable will a. decrease total liabilities b. decrease net income. c. increase total liabilities. d. increase total assets ANS: A PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions | Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle

35. A $4,000 machine is purchased by paying $1,000 cash and issuing a promissory note for the remainder. The journal entry should include a a. credit to Machinery. b. credit to Notes Payable. c. credit to Notes Receivable. d. debit to Cash. ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Analyze transactions | Recording entries MSC: ACBSP-APC-06-Recording Transactions

OBJ: 3 LOC: Comprehension

36. Which of the following transactions increases both assets and stockholders' equity? a. Payment received from a credit customer b. Received a bank loan c. Rendered a service, payment not yet received d. Declared and paid a dividend ANS: C PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions | Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle 37. Which of the following accounts will not affect stockholders' equity? a. Rent Expense b. Dividends c. Equipment d. Sales Revenue ANS: C PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions | Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle 38. A dividend will reduce which of the following accounts? a. Dividends b. Retained Earnings c. Common Stock d. Accounts Payable ANS: B PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions | Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle

39. Which of the following transactions affects retained earnings? a. Declaration and payment of dividends b. Prepayment of rent c. Investments by stockholders d. Obtaining a new loan ANS: A PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions | Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle 40. The Office Supplies account is classified as a(n) a. expense. b. stockholders' equity account. c. asset. d. liability, if the supplies have not yet been paid for. ANS: C PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Assets MSC: ACBSP-APC-05-Accounting Cycle 41. The Unearned Fees account is classified as a(n) a. liability. b. revenue. c. asset. d. dividend. ANS: A PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Liabilities MSC: ACBSP-APC-05-Accounting Cycle 42. Which of the following accounts is an asset? a. Retained Earnings b. Notes Payable c. Prepaid Rent d. Supplies Expense ANS: C PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Assets MSC: ACBSP-APC-05-Accounting Cycle 43. Which of the following accounts is not a stockholders' equity account? a. Common Stock b. Retained Earnings c. Unearned Fees d. Dividends ANS: C PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Owner's equity MSC: ACBSP-APC-05-Accounting Cycle

44. Which of the following accounts is a liability? a. Unexpired Insurance b. Insurance Expense c. Prepaid Insurance d. Unearned Insurance Fees ANS: D PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Liabilities MSC: ACBSP-APC-05-Accounting Cycle 45. Cash is received for services not yet performed. This transaction affects an asset account and a(n) a. asset account. b. liability account. c. revenue account. d. expense account. ANS: B PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Assets | Liabilities MSC: ACBSP-APC-05-Accounting Cycle 46. Unearned revenues are recorded by companies that a. receive money in advance of the performance of a service. b. pay money at the time the performance of a service is complete. c. receive money at the time the performance of a service is complete. d. pay money in advance of the performance of a service. ANS: A PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions | Liabilities MSC: ACBSP-APC-05-Accounting Cycle 47. Office supplies become expenses a. when they are consumed (used up). b. when cash is paid for them. c. at no time, since they are an asset. d. when they are initially acquired. ANS: A PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle 48. Which of the following accounts is classified differently from the others listed? a. Accounts Receivable b. Retained Earnings c. Prepaid Rent d. Cash ANS: B PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Assets MSC: ACBSP-APC-05-Accounting Cycle

49. Which of the following accounts is classified differently from the others listed? a. Utilities Payable b. Unearned Revenue c. Accounts Payable d. Rent Expense ANS: D PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Liabilities MSC: ACBSP-APC-05-Accounting Cycle 50. For which of the following accounts would a related Accumulated Depreciation account be recorded? a. Office Equipment b. Land c. Office Supplies d. Prepaid Rent ANS: A PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Assets MSC: ACBSP-APC-06-Recording Transactions 51. Which of the following accounts might be used when there is a time delay between a transaction and its related cash flow? a. Accounts Payable b. Unearned Revenue c. Equipment d. Prepaid Utilities ANS: A PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions | Liabilities MSC: ACBSP-APC-05-Accounting Cycle 52. A transaction in which six months' rent is paid in advance results in which of the following journal entries? a. Prepaid Rent – Debit; Cash – Credit b. Rent Receivable – Debit; Cash – Credit c. Rent Revenue – Debit; Cash – Credit d. Rent Expense– Debit; Cash – Credit ANS: A PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Analyze transactions MSC: ACBSP-APC-06-Recording Transactions 53. Which of the following events does not result in the recording of an expense? a. Payment of insurance six months in advance b. Purchase of gasoline for fill-up of a company car c. Receipt of a bill from the electricity company d. Payment of wages ANS: A PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Analyze transactions MSC: ACBSP-APC-06-Recording Transactions © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

54. A company receives money in advance of performing a service. What is the journal entry for the transaction? a. Unearned Revenue – Debit; Accounts Payable – Credit b. Cash – Debit; Unearned Revenue – Credit c. Cash – Debit; Prepaid Fees – Credit d. Cash – Debit; Accounts Receivable. – Credit ANS: B PTS: 1 DIF: Challenging NAT: AACSB Analytic | AICPA FN Measurement KEY: Analyze transactions | Recording entries MSC: ACBSP-APC-06-Recording Transactions

OBJ: 3 LOC: Analysis

55. When a company has performed a service but has not yet received payment, what is the required journal entry to be recorded? a. Accounts Receivable – Debit; Revenue from Services – Credit b. Revenue from Services – Debit; Cash – Credit c. Unearned Revenue from Services – Debit; Accounts Receivable – Credit d. Revenue from Services – Debit; Accounts Receivable – Credit ANS: A PTS: 1 DIF: Challenging NAT: AACSB Analytic | AICPA FN Measurement KEY: Analyze transactions | Recording entries MSC: ACBSP-APC-06-Recording Transactions

OBJ: 3 LOC: Analysis

56. When a company receives an electric bill but does not pay it right away, what is the required journal entry to be recorded? a. Utilities Expense – Debit; Accounts Receivable – Credit b. No entry is required until the bill is paid. c. Utilities Expense – Debit; Accounts Payable – Credit d. Accounts Payable – Debit; Utilities Expense – Credit ANS: C PTS: 1 DIF: Challenging NAT: AACSB Analytic | AICPA FN Measurement KEY: Analyze transactions | Recording entries MSC: ACBSP-APC-06-Recording Transactions

OBJ: 3 LOC: Analysis

57. When a magazine company receives advance payment for a subscription, what is the required journal entry to be recorded? a. Cash – Debit; Unearned Subscriptions Revenue – Credit b. Accounts Receivable – Debit; Unearned Subscriptions Revenue – Credit c. Cash – Debit; Subscriptions Revenue – Credit d. Subscriptions Revenue – Debit; Cash – Credit ANS: A PTS: 1 DIF: Challenging NAT: AACSB Analytic | AICPA FN Measurement KEY: Analyze transactions | Recording entries MSC: ACBSP-APC-06-Recording Transactions

OBJ: 3 LOC: Analysis

58. When a service has been performed, but no cash has been received, which of the following statements is true? a. The entry would include a debit to Accounts Receivable. b. No journal entry would be made. c. The entry would include a debit to Accounts Payable. d. The entry would include a credit to Unearned Revenue. ANS: A PTS: 1 DIF: Challenging NAT: AACSB Analytic | AICPA FN Measurement KEY: Analyze transactions | Recording entries MSC: ACBSP-APC-06-Recording Transactions

OBJ: 3 LOC: Analysis

59. Which of the following transactions increases liabilities and decreases stockholders' equity? a. Declaration and payment of a dividend b. Advance payment made for insurance c. Receipt of a phone bill to be paid at a later time d. Payment of a liability ANS: C PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Analyze transactions | Effects of transactions on accounting equation MSC: ACBSP-APC-06-Recording Transactions 60. The primary purpose of the trial balance is to test the a. recording of transactions. b. analysis of transactions. c. equality of debit and credit balances in the ledger. d. equality of debit and credit entries in the journal. ANS: C PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle 61. Which of the following gives the correct sequence of accounting procedures? a. Financial statements, trial balance, ledger, journal b. Financial statements, journal, ledger, trial balance c. Journal, ledger, trial balance, financial statements d. Ledger, trial balance, journal, financial statements ANS: C PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle

62. Which of the following errors will not cause the debit and credit columns of the trial balance to be unequal? a. A debit entry was recorded in the wrong account. b. A debit was entered in an account as a credit. c. The account balance was carried to the wrong column of the trial balance. d. The balance of an account was incorrectly computed. ANS: A PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle 63. Which of the following errors will not cause the debit and credit columns of a trial balance to be unequal? a. A debit was posted to an account as a credit. b. A journal entry was posted twice. c. The trial balance was incorrectly summed. d. Only part of a journal entry was posted. ANS: B PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle 64. Which of the following errors will cause a trial balance to be out of balance? a. The bookkeeper forgot to journalize a transaction. b. The bookkeeper forgot to post a journal entry to the ledger. c. A credit was posted to an account as a debit. d. A debit to Office Equipment was incorrectly debited to Office Supplies. ANS: C PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle 65. Which of the following errors will cause a trial balance to be out of balance? a. Posting a debit to Land as a debit to Machinery b. Placing a debit balance amount into the credit balance column of the ledger c. Omitting an entire transaction d. Incorrectly recording the purchase of land for cash as a debit to Cash and a credit to Land ANS: B PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle 66. Which of the following errors will cause the trial balance to be out of balance? a. An entire transaction was entered in the general journal as $27 instead of $72. b. An entire transaction was omitted from the general journal. c. The balance of an account was incorrectly computed. d. A debit entry was entered in the wrong debit account. ANS: C PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

67. A $150 debit item is accidentally posted as a credit. The trial balance column totals will therefore differ by a. $0. b. $75. c. $150. d. $300. ANS: D PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle 68. A $95 credit item is posted as a debit. The trial balance column totals therefore will differ by a. $190. b. $380. c. $95. d. $0. ANS: A PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle 69. Here is the trial balance for Sebastian Corporation: Sebastian Corporation Trial Balance January 31, 2013 Cash Accounts Receivable Art Supplies Office Supplies Prepaid Rent Prepaid Insurance Art Equipment Office Equipment Accounts Payable Common Stock Retained Earnings Dividends Advertising Fees Earned Wages Expense Utilities Expense Telephone Expense

$11,000 4,000 6,000 10,000 14,000 10,000 10,000 6,000 $20,000 10,000 10,000 ? ? ? 10,000 6,000 ________ $ A $ B

On the trial balance, total assets equal a. $91,000. b. $87,000. c. $71,000. d. $51,000. ANS: C Assets = $11,000 + $4,000 + $6,000 + $10,000 + $14,000 + $10,000 + $10,000 + $6,000 = $71,000 © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle 70. Here is the trial balance for Sebastian Corporation: Sebastian Corporation Trial Balance January 31, 2013 Cash Accounts Receivable Art Supplies Office Supplies Prepaid Rent Prepaid Insurance Art Equipment Office Equipment Accounts Payable Common Stock Retained Earnings Dividends Advertising Fees Earned Wages Expense Utilities Expense Telephone Expense

$6,000 4,000 6,000 10,000 14,000 10,000 10,000 6,000 $20,000 10,000 10,000 ? ?

? 10,000 6,000 A

________ $ B

If the balance of the Dividends account were $72,000 and the balance of the Wages Expense account were $10,000, what would be the amount of B? a. $96,000 b. $122,000 c. $164,000 d. $124,000 ANS: C A = $6,000 + $4,000 + $6,000 + $10,000 + $14,000 + $10,000 + $10,000 + $6,000 + $72,000 + $10,000 + $10,000 + $6,000 = $164,000 A = B = $164,000 PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle

71. Here is the trial balance for Sebastian Corporation: Sebastian Corporation Trial Balance January 31, 2013 Cash Accounts Receivable Art Supplies Office Supplies Prepaid Rent Prepaid Insurance Art Equipment Office Equipment Accounts Payable Common Stock Retained Earnings Dividends Advertising Fees Earned Wages Expense Utilities Expense Telephone Expense

$6,000 4,000 6,000 10,000 14,000 10,000 10,000 6,000 $20,000 10,000 10,000 ? ?

? 10,000 6,000 A

________ $ B

If the trial balance showed a balance of $14,000 in the Dividends account and a balance of $22,000 in the Wages Expense account, what would be the amount of Advertising Fees Earned for the period? a. $98,000 b. $78,000 c. $108,000 d. $48,000 ANS: B A = $6,000 + $4,000 + $6,000 + $10,000 + $14,000 + $10,000 + $10,000 + $6,000 + $14,000 + $22,000 + $10,000 + $6,000 = $118,000 A = B = $118,000 Advertising Fees Earned = $118,000 – $20,000 – $10,000 – $10,000 = $78,000 PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle

72. Here is the trial balance for Sebastian Corporation: Sebastian Corporation Trial Balance January 31, 2013 Cash Accounts Receivable Art Supplies Office Supplies Prepaid Rent Prepaid Insurance Art Equipment Office Equipment Accounts Payable Common Stock Retained Earnings Dividends Advertising Fees Earned Wages Expense Utilities Expense Telephone Expense

$6,000 4,000 6,000 10,000 14,000 10,000 10,000 6,000 $20,000 10,000 10,000 ? ?

? 10,000 6,000 A

________ $ B

If the trial balance showed a balance of $16,000 in the Wages Expense account and a balance of $68,000 in the Advertising Fees Earned account, what would be the amount of A? a. $108,000 b. $88,000 c. $118,000 d. $98,000 ANS: A B = $20,000 + $10,000 + $10,000 + $68,000 = $108,000 A = B = $108,000 PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle

73. Here is the trial balance for Sebastian Corporation: Sebastian Corporation Trial Balance January 31, 2013 Cash Accounts Receivable Art Supplies Office Supplies Prepaid Rent Prepaid Insurance Art Equipment Office Equipment Accounts Payable Common Stock Retained Earnings Dividends Advertising Fees Earned Wages Expense Utilities Expense Telephone Expense

$6,000 4,000 6,000 10,000 14,000 10,000 10,000 6,000 $20,000 10,000 10,000 ? ?

? 10,000 6,000 A

________ $ B

If the trial balance showed a balance of $8,000 in the Wages Expense account and a balance of $60,000 in the Advertising Fees Earned account, what would be the amount of Dividends? a. $50,000 b. $28,000 c. $10,000 d. $38,000 ANS: C B = $20,000 + $10,000 + $10,000 + $60,000 = $100,000 A = B = $100,000 Dividends = $100,000 – $6,000 – $4,000 – $6,000 – $10,000 – $14,000 – $10,000 – $10,000 – $6,000 – $8,000 – $10,000 – $6,000 = $10,000 PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle 74. The general journal does not have a column titled a. Debit b. Account Balance. c. Date. d. Post. Ref. ANS: B PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

75. Which of the following terms does not mean the same as the others? a. Footing b. Folio c. LP d. Post. Ref. ANS: A PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle 76. To find an explanation of a transaction, one should look at the a. posting entry. b. financial statements. c. journal. d. chart of accounts. ANS: C PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle 77. Which of the following statements is true about a journal entry? a. The Post. Ref. column is filled in prior to posting. b. All credits are listed before any debits. c. The name of the month should be repeated for each entry. d. An explanation must follow each journal entry. ANS: D PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recording entries MSC: ACBSP-APC-06-Recording Transactions 78. Which of the following statements is false about a journal entry? a. It may have more than one debit or credit entry. b. Credits are always indented. c. Accounts that are increased are always listed first. d. A space should be skipped between journal entries. ANS: C PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recording entries MSC: ACBSP-APC-06-Recording Transactions 79. Which of the following statements is true about a journal entry? a. Decreases in liabilities are indented. b. The Post. Ref. column is left blank until entries are posted. c. A line is skipped between each debit and each credit. d. Assets are entered before liabilities. ANS: B PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recording entries MSC: ACBSP-APC-06-Recording Transactions

80. Which of the following statements is not necessarily true about a journal entry? a. Assets are indented. b. The date of the journal entry is always recorded. c. The Post. Ref. column is left blank until the entry is posted. d. All debits must be recorded before any credits. ANS: A PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recording entries MSC: ACBSP-APC-06-Recording Transactions 81. The process of transferring journal entry information from the journal to the ledger is called a. journalizing. b. posting. c. footing. d. analyzing. ANS: B PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle 82. The Post. Ref. column in the general journal is used to show that an amount has been posted to the ledger when which of the following is placed in it? a. An X b. Journal number c. Journal page number d. Account number ANS: D PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle 83. The principal purpose of posting is to a. enter transactions directly into the ledger. b. help identify errors made in the journal. c. obtain updated account balances. d. help determine if the financial statements are ready to be prepared. ANS: C PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle 84. Posting is performed by transferring information from the a. journal to the trial balance. b. source documents to the ledger. c. journal to the ledger. d. chart of accounts to the journal. ANS: C PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle

85. Which of the following bookkeeping techniques generally is not acceptable? a. A ruled line before each subtotal or total b. Dollar signs used in journals and ledgers c. A double line after final totals d. A dash in the cents column to indicate zero cents ANS: B PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bookkeeping MSC: ACBSP-APC-05-Accounting Cycle 86. The chart of accounts is the starting point for a a. journal. b. trial balance. c. ledger. d. financial statement. ANS: C PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Chart of accounts MSC: ACBSP-APC-05-Accounting Cycle 87. Typically, the chart of accounts begins with a. stockholders’ equity accounts. b. asset accounts. c. liability accounts. d. expense accounts. ANS: B PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Chart of accounts MSC: ACBSP-APC-05-Accounting Cycle 88. The purpose of the ledger is to a. compile all source documentation materials that support each transaction. b. make sure that all accounts have credit balances at all times. c. record chronologically the day's transactions. d. update each account. ANS: D PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle 89. Which of the following accounts might be placed first in a journal entry? a. Bonds Payable, when it has been decreased b. Cash, when it has been decreased c. Unearned Revenue, when it has been increased d. Interest Income, when it has been increased ANS: A PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Recording entries MSC: ACBSP-APC-06-Recording Transactions

90. Which of the following accounts should be credited in a journal entry? a. Dividends, when it has been decreased b. Accounts Receivable, when it has been increased c. Wages Expense, when it has been increased d. Wages Payable, when it has been decreased ANS: A PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Recording entries MSC: ACBSP-APC-06-Recording Transactions 91. Which of the following accounts probably would be listed before the others in a chart of accounts? a. Rent Expense b. Dividends c. Notes Payable d. Buildings ANS: D PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Chart of accounts MSC: ACBSP-APC-05-Accounting Cycle 92. Which of the following accounts probably would be listed after the others in a chart of accounts? a. Unearned Art Fees b. Prepaid Rent c. Retained Earnings d. Art Fees Earned ANS: D PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Chart of accounts MSC: ACBSP-APC-05-Accounting Cycle 93. Which of the following accounts will eventually be followed with an inflow of cash? a. Prepaid Insurance b. Unearned Revenue c. Dividends d. Accounts Receivable ANS: D PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle 94. Which of the following accounts will eventually be followed with an outflow of cash? a. Design Revenue b. Notes Receivable c. Accounts Payable d. Prepaid Rent ANS: C PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle

95. All of the following actions can help a business manage its cash flows except a. convince its creditors to allow payment over a period of time. b. pay for all expenditures immediately. c. be efficient in making collections from its customers. d. arrange for a line of credit at the bank, should the funds be needed. ANS: B PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Cash flow MSC: ACBSP-APC-05-Accounting Cycle SHORT ANSWER 1. Use this journal entry to answer the following question. Nov. 16

Accounts Payable Cash Recorded payment of a liability

685 685

Explain how the above journal entry relates to the measurement issues of (a) recognition, (b) valuation, and (c) classification. ANS: a. The transaction occurred and was recognized on November 16. b. A valuation of $685 was placed on the transaction. c. The accounts involved were determined to be (classified as) Accounts Payable and Cash. PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 2. Discuss the difference between business events that are transactions and those that are not. Why is the distinction important? ANS: Business events become transactions and are recorded when title passes from the seller to the buyer or, in the case of services, when the service is performed. The distinction is important because the recording of a transaction will have an effect on the financial position of the business. PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Business transactions MSC: ACBSP-APC-06-Recording Transactions 3. List, in order, the series of six steps that makes up the accounting cycle. ANS: 1. Analyze business transactions from source documents. 2. Record the transactions by entering them in the general journal. 3. Post the journal entries to the ledger and prepare a trial balance. 4. Adjust the accounts and prepare an adjusted trial balance. 5. Prepare financial statements to communicate to decision makers. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

6. Close the accounts and prepare a post-closing trial balance. PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Accounting cycle MSC: ACBSP-APC-05-Accounting Cycle 4. Indicate whether each account below has a normal debit or a normal credit balance. a. Automobiles b. Accounts Payable c. Common Stock d. Insurance Expense e. Rent Expense f. Revenues Earned ANS: a. Debit b. Credit c. Credit d. Debit e. Debit f. Credit

g. Dividends h. Retained Earnings i. Land j. Interest Payable k. Notes Receivable l. Equipment

g. Debit h. Credit i. Debit j. Credit k. Debit l. Debit

PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Account balances MSC: ACBSP-APC-05-Accounting Cycle 5. Indicate whether each account below has a normal debit or a normal credit balance. a. Cash b. Wages Payable c. Wages Expense d. Income Taxes Payable e. Utilities Expense f. Notes Payable ANS: a. Debit b. Credit c. Debit d. Credit e. Debit f. Credit

g. Interest Receivable h. Inventory i. Legal Fees Earned j. Common Stock k. Depreciation Expense l. Accounts Receivable

g. Debit h. Debit i. Credit j. Credit k. Debit l. Debit

PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: T accounts | Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle

6. Harris Corporation provided monthly waste-removal services for Goble Corporation, which resulted in the following transactions in Harris's records:

Sept. 27

Cash 2,000

Accounts Receivable Aug. 31 Sept. 27 3,000

2,000

Waste Removal Service Revenue Aug. 31 3,000

Using T accounts, prepare the corresponding entries in Goble's records.

ANS: Cash Sept. 27

2,000

Sept. 27

Accounts Payable 2,000 Aug. 31 3,000

Waste Removal Service Expense Aug. 31 3,000

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: T accounts | Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle 7. Using the T accounts below, record the following transactions. Label each entry with the appropriate letter. a. The stockholders contributed cash of $40,000 and a truck worth $48,000 into the business in exchange for 8,800 shares of $10 par value stock. b. Paid two months' rent in advance, $2,400. c. Agreed to do a hauling job for a price of $6,400. d. Performed the hauling job. Will get paid later. e. Received payment of $2,000 on the hauling job. f. Purchased gasoline on credit, $40. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Cash

Accounts Payable

Accounts Receivable

Common Stock

Prepaid Rent

Hauling Revenue

Truck

Gasoline Expense

ANS: Cash a) 40,000 e) 2,000

Accounts Payable f)

2,400

Accounts Receivable 6,400 e) 2,000

Common Stock a) 88,000

Prepaid Rent 2,400

Hauling Revenue d)

Truck a) 48,000

6,400

Gasoline Expense 40

c) No entry PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: T accounts | Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle

8. Briefly explain the difference between Unearned Art Fees and Art Fees Earned. ANS: Unearned Art Fees appears on the balance sheet as a liability, and represents an obligation to earn the payment that was received in advance. Art Fees Earned appears on the income statement as revenue, based on services rendered or goods delivered. PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Accounts MSC: ACBSP-APC-05-Accounting Cycle 9. Briefly discuss the differences between Prepaid Insurance and Insurance Expense. ANS: Prepaid Insurance appears on the balance sheet as an asset and represents unexpired insurance coverage. Insurance Expense appears on the income statement and represents insurance that has expired. PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Accounts MSC: ACBSP-APC-05-Accounting Cycle 10. By what amount, if any, would each of the following errors cause a trial balance to be out of balance? a. A purchase of supplies of $840 was recorded as a debit to Equipment and a credit to Cash for $840. b. An $890 balance in Prepaid Insurance was copied to the trial balance as a debit of $980. c. A $600 balance in Accounts Payable was copied to the trial balance as a debit of $600. ANS: a. $0 b. $90 ($980 – $890) c. $1,200 ($600 + $600) PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle 11. If a debit to Supplies were posted as a credit, and a credit of the same amount to Cash were posted as a debit, what would be the effect, if any, on the two accounts and on the trial balance column totals? ANS: The Cash account would be overstated, Supplies would be understated, and the trial balance would balance. PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

12. Record the following transactions, using proper form, in the journal provided. Mar.

2 Provided services in the amount of $2,000, receiving $600 in partial payment. 12 Received $800 of the amount owed from March 2.

Date Description

General Journal Post. Ref.

Page 1 Credit

Debit

ANS: General Journal Date

Description

Mar.

2 Cash Accounts Receivable Service Revenue Received cash in partial payment of services rendered 12 Cash Accounts Receivable Received payment on account

Post. Ref.

Debit

Page 1 Credit

600 1,400 2,000

800 800

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Recording entries MSC: ACBSP-APC-06-Recording Transactions

13. Provide explanations for the following related journal entries: a. Cash Common Stock

6,000

b. Law Library Accounts Payable

3,400

c. Cash Accounts Receivable Legal Fees Earned

600 1,000

d. Cash Accounts Receivable

500

e. Accounts Payable Cash

6,000

3,400

1,600

500 3,400 3,400

ANS: a. Stockholders invested cash into the business. b. Purchased a law library, to be paid for at a later time. c. Rendered $1,600 in legal services; $600 was received in cash, the remainder to be received at a later time. d. Received $500 from amount owed for legal services. e. Paid cash for the law library. PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle 14. Provide explanations for the following related journal entries: a. Prepaid Rent Cash

4,000

b. Trucks and Automobile Notes Payable

36,000

c. Cash Accounts Receivable

600

4,000

36,000

600

d. Notes Payable Cash

18,000

e. Cash Unearned Fees

2,500

18,000

2,500

ANS: a. Made advance payment of rent. b. Issued promissory note for purchase of company vehicle. c. Received payment from credit customer. d. Paid half of promissory note for purchase of company vehicle. e. Received cash in advance of performing a service. PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle 15. Given the following ledger account and postings, complete the Balance column. Assume no previous postings in the account. Unearned Fees Revenue Date 2013 June

Item

3 10 12 16

Account No. 214 Post. Ref.

J1 J1 J2 J2

Debit

Credit

Balance Debit Credit

5,000 1,400 1,000 400

ANS: Unearned Fees Revenue Date 2013 June

Item

3 10 12 16

Account No. 214 Post. Ref.

J1 J1 J2 J2

Debit

Credit

5,000 1,400 1,000 400

Balance Debit Credit 5,000 3,600 4,600 4,200

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle

16. Given the following ledger account and postings, complete the Balance column. Assume no previous postings in the account. Accounts Payable Date 2013 Dec.

Item

1 7 8 12

Account No. 212 Post. Ref.

J1 J1 J2 J2

Debit

Credit

Balance Debit Credit

8,200 2,800 600 800

ANS: Accounts Payable Date 2013 Dec.

Item

1 7 8 12

Account No. 212 Post. Ref.

J1 J1 J2 J2

Debit

Credit

Balance Debit Credit

8,200 2,800 600 800

8,200 5,400 6,000 5,200

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle 17. Given the following ledger account and postings, complete the Balance column. Assume no previous postings in the account. Accounts Receivable Date 2013 Feb.

Item

1 3 9 14

Account No. 113 Post. Ref.

J2 J3 J3 J3

Debit

Credit

Balance Debit Credit

1,820 320 700 410

ANS: Accounts Receivable Date 2013 Feb.

Item

1 3 9 14

Account No. 113 Post. Ref.

J2 J3 J3 J3

Debit

Credit

1,820 320 700 410

Balance Debit Credit 1,820 1,500 800 1,210

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle 18. What two purposes are served by using the Post. Ref. columns of a journal and ledger? ANS: The Post. Ref. columns provide cross-referencing between the journal and the ledger. That is, one can determine from what journal page an item was posted and to which account it was posted in the ledger. One also can more easily determine (by use of the Post. Ref. column) the last account posted from the journal. PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle 19. Lindsay Company had the following transactions for the month of August. 5 10 12 14 19 24 29

Performed services on credit, $4,000 Performed services for cash, $3,500 Paid expenses in cash, $1,000 Collected on account, $2,000 Incurred expenses on credit, $2,500 Performed services on credit, $1,200 Paid on account, $2,000

Assuming all accounts were zero at the beginning of the month, determine the cash balance after these transactions. ANS: Cash balance = $3,500 – $1,000 + $2,000 – $2,000 = $2,500 PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement KEY: Cash flows | Timing of transactions MSC: ACBSP-APC-05-Accounting Cycle

LOC: Application

20. Discuss why a company must pay careful attention to its cash flows and liquidity. ANS: Some transactions for a company generate an immediate cash inflow or outflow and some do not. A company must be careful to manage the cash account in order to guarantee that there are not more cash outflows than cash inflows during a given time period in order to maintain its liquidity. PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement KEY: Cash flows | Timing of transactions MSC: ACBSP-APC-05-Accounting Cycle

LOC: Comprehension

MATCHING Match each definition with the correct term below. a. A journal entry that involves more than two accounts. b. A list of account numbers with corresponding account titles. c. The difficulty of deciding when a business transaction should be recorded. d. The difference in dollars between the total debit footing and the total credit footing. e. The chronological accounting record sometimes known as the book of original entry. f. The basic storage units for accounting data. g. The item that is prepared at the end of the accounting period to test if total debits equals total credits. h. The process of transferring information from the journal to the ledger. i. The exchange price of an actual or potential business transaction. j. The practice of recording transactions at the exchange price at the point of recognition. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Compound entry Accounts Posting Cost principle Chart of accounts Fair value Trial balance Balance Journal Recognition

1. ANS: A PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recording transactions MSC: ACBSP-APC-06-Recording Transactions 2. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Accounts MSC: ACBSP-APC-05-Accounting Cycle 3. ANS: H PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle

4. ANS: J PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recording transactions MSC: ACBSP-APC-06-Recording Transactions 5. ANS: B PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Chart of accounts MSC: ACBSP-APC-05-Accounting Cycle 6. ANS: I PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions 7. ANS: G PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle 8. ANS: D PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: T accounts MSC: ACBSP-APC-05-Accounting Cycle 9. ANS: E PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recording transactions MSC: ACBSP-APC-06-Recording Transactions 10. ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-06-Recording Transactions PROBLEM 1. Explain why the dollar amount of total stockholders' equity probably will not equal the dollar amount that would remain if all the assets were sold and all the liabilities were then settled. ANS: The valuation of assets on the balance sheet is based primarily on historical cost, not on liquidation value. The proceeds from the sale of assets most likely would differ from the amount originally paid. PTS: 1 DIF: Challenging OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement KEY: Effects of transactions on accounting equation MSC: ACBSP-APC-06-Recording Transactions

LOC: Critical Thinking

2. Amalgamated Campus Stores, Inc. (ACS) employed student representatives to market grooming aids, casual clothes, and other such products on college campuses. The representatives organized parties at which they displayed samples of all the products. Students who bought products paid the representative, who in turn ordered the products and paid ACS for them. When the products arrived, the student representatives delivered them to the buyers. The representatives paid ACS less than they charged the buyers. The difference represented the earnings of the representatives, who were not employees of ACS. Wall Street investors admired ACS because the company had enjoyed several years of rapid growth in sales and earnings.

Last year, the president of ACS predicted further increases in sales of 30 percent. By December, however, it was apparent that the forecasted sales goals would not be met. So during the last two weeks of December, ACS shipped $23 million of merchandise to the sales representatives to be held for future sales parties. The company billed the student representatives and recorded the shipments as sales. In this way, ACS was able to meet its sales goal for the year. Were these merchandise shipments properly recorded as sales? ANS: The shipments were improperly recorded as sales. The goods had not been ordered by or sold to actual customers, and the student representatives had the right to return all the products unconditionally. In this type of arrangement, to report shipments as legitimate sales is certainly unethical and can be, as in this case, illegal when the intent is to deceive. It may turn out that most of the $23 million of products will be returned during January and February. PTS: 1 DIF: Challenging OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Critical Thinking KEY: Analyze transactions MSC: ACBSP-APC-06-Recording Transactions 3. Why is the Dividends account increased by a debit? Explain in terms of its relationship to stockholders' equity. ANS: Dividends represent a decrease in stockholders' equity. According to the rules of debit and credit, a decrease in stockholders' equity is recorded as a debit. PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement KEY: Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle

LOC: Comprehension

4. For each item below, indicate whether a debit or a credit applies. a. Decrease in Accounts Payable b. Decrease in Land c. Increase in Retained Earnings d. Increase in Unearned Revenue e. Decrease in Interest Payable f. Increase in Prepaid Insurance g. Increase in Wages Expense h. Decrease in Art Supplies i. Increase in Advertising Fees Earned ANS: a. Debit b. Credit c. Credit d. Credit e. Debit f. Debit © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

g. Debit h. Credit i. Credit PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement KEY: Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle

LOC: Comprehension

5. For each item below, indicate whether a debit or a credit applies. a. Increase in Art Fees Earned b. Decrease in Prepaid Rent c. Decrease in Unearned Fees d. Increase in Common Stock e. Increase in Depreciation Expense f. Increase in Interest Receivable g. Decrease in Retained Earnings h. Increase in Dividends i. Increase in Notes Payable ANS: a. Credit b. Credit c. Debit d. Credit e. Debit f. Debit g. Debit h. Debit i. Credit PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement KEY: Effects of transactions on accounting equation MSC: ACBSP-APC-05-Accounting Cycle

LOC: Comprehension

6. Use the following descriptive phrases to determine the account name that would be used for each. In addition, classify the account as an asset (A), liability (L), stockholders' equity (SE), revenue (R), or expense (E). a. Amount due to creditor for merchandise purchased b. Coins and currency c. Property to be used in the business d. An amount paid to stockholders resulting from profits e. Income recorded for performance of legal services f. Amount due to bank for loan to purchase building g. Stationery, pencils, etc., purchased but not yet used h. Stationery, pencils, etc., that have been consumed (used) i. An insurance premium paid covering the next two years j. Representation of stockholders' investments in a business © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: a. Accounts Payable (L) b. Cash (A) c. Land (A) d. Dividends (SE) e. Legal Fees Earned (R) f. Mortgage Payable (L) g. Office Supplies (A) h. Office Supplies Expense (E) i. Prepaid Insurance (A) j. Common Stock (SE) PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Accounts MSC: ACBSP-APC-05-Accounting Cycle 7. The following transactions are for Cockrell Company. a. Opened business by issuing common stock for $40,000 cash. b. Billed customers for services rendered, $8,000. c. Paid for six months' subscription in advance, $2,000. d. Received advertising bill, to be paid next week, $400. e. Dividends of $3,200 were declared and paid. f. Received $6,000 from customers billed in b. g. Paid half of advertising bill. h. Received $800 in advance of performing a service. Record the above transactions in T Accounts and then calculate (1) the ending balance of Cash, (2) the ending balance of Accounts Receivable, (3) total liabilities, and (4) net income for the period. ANS: Cash a) 40,000 f) 6,000 h) 800

Common Stock a) 40,000

c) 2,000 e) 3,200 g) 200

Accounts Receivable 8,000 f) 6,000

Prepaid Subscriptions 2,000

Accounts Payable 200 d)

Service Revenue b)

Advertising Expense 400

3,200

8,000

Dividends 400

Unearned Service Revenue h) 800

1. $41,400 debit ($40,000 + $6,000 + $800 – $2,000 – $3,200 – $200) 2. $2,000 debit ($8,000 – $6,000) 3. $1,000 ($400 + $800 – $200) 4. $7,600 ($8,000 – $400) PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: T accounts | Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle 8. The following transactions are available for Carlson Company. a. Opened business by issuing common stock for $36,000. b. Paid one year's insurance in advance, $2,400. c. Billed customers for services rendered, $6,000. d. Received utility bill, to be paid next month, $400. e. Received $800 in advance of performing a service. f. Received $4,400 from customers billed in c. g. Paid $300 on the utility bill of d. h. Dividends of $2,000 were declared and paid. Record the above transactions in T Accounts and then calculate (1) net income for the period, as well as the ending balances of (2) total assets, (3) total liabilities, and (4) Cash. ANS: Cash a) 36,000 e) 800 f) 4,400

b) g) h)

Common Stock a) 36,000

2,400 300 2,000

Accounts Receivable 6,000 f) 4,400

Service Revenue c)

Prepaid Insurance 2,400

Utility Expense 400

Accounts Payable 300 d)

6,000

Dividends 400

2,000

Unearned Service Revenue e) 800 © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

1. $5,600 ($6,000 – $400) 2. $40,500 ($36,000 + $800 + $4,400 + $6,000 + $2,400 – $2,400 – $300 – $2,000 – $4,400) 3. $900 ($400 + $800 – $300) 4. $36,500 ($36,000 + $800 + $4,400 – $2,400 – $300 – $2,000) PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: T accounts | Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle 9. From the following alphabetical list of account balances, all of which are normal, for Union Corporation on July 31, 2013, prepare a trial balance in proper form (the amount of Dividends must be computed). Accounts Payable Accounts Receivable Cash Common Stock Dividends Equipment Prepaid Advertising Retained Earnings Revenue Earned Wages Expense Wages Payable

$1,000 400 160 180 ? 1,400 40 120 800 140 100

ANS: Union Corporation Trial Balance July 31, 2013 Cash Accounts Receivable Prepaid Advertising Equipment Accounts Payable Wages Payable Common Stock Retained Earnings Dividends Revenue Earned Wages Expense

160 400 40 1,400 $ 1,000 100 180 120 60

800 140 ______ $2,200 $2,200 (Dividends = $2,200 – $160 – $400 – $40 – $1,400 – $140) PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle

10. From the following alphabetical list of account balances, all of which are normal, for Aloha Corporation on September 30, 2013, prepare a trial balance in proper form (the amount of Dividends must be computed). Accounts Payable Accounts Receivable Cash Common Stock Dividends Equipment Prepaid Advertising Retained Earnings Revenue Earned Wages Expense Wages Payable

$ 780 460 400 800 ? 1,380 20 400 1,000 60 20

ANS:

Cash Accounts Receivable Prepaid Advertising Equipment Accounts Payable Wages Payable Common Stock Retained Earnings Dividends Revenue Earned Wages Expense

Aloha Corporation Trial Balance September 30, 2013 $

400 460 20 1,380 $ 780 20 800 400 680

60 $3,000 (Dividends = $3,000 – $400 – $460 – $20 – $1,380 – $60)

1,000 ______ $3,000

PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle 11. Using the alphabetical list of account balances presented below, all of which are normal, prepare a trial balance for Garland Corporation at June 30, 2013, in proper order. Compute the balance of the Cash account. Accounts Payable Accounts Receivable Cash Common Stock Equipment Office Expense Retained Earnings Service Revenue

$280 560 ? 400 800 360 480 600

ANS: Garland Corporation Trial Balance June 30, 2013 Cash Accounts Receivable Equipment Accounts Payable Common Stock Retained Earnings Service Revenue Office Expense

40 560 800

360 $1,760

$ 280 400 480 600 _____ $1,760

(Cash = $1,760 – $560 – 800 – 360) PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Prepare trial balance MSC: ACBSP-APC-05-Accounting Cycle 12. In the journal provided, prepare journal entries without explanations for the following transactions. Write “no entry” if none is needed. a. Received a $3,000 invoice for this month's rent. Payment will not be made right away. b. Paid $3,200 for insurance premiums to cover the next six months. c. A $700 dividend is declared and paid. d. The rent invoice (in a) is paid. e. Purchased land for $120,000. The company paid half in cash and issued a promissory note for the other half.

Date Description

General Journal Post. Ref.

Debit

Page 1 Credit

ANS: General Journal Date Description

Post. Ref.

Debit

a. Rent Expense Rent Payable (or Accounts Payable)

3,000

b. Prepaid Insurance Cash

3,200

c. Dividends Cash d. Rent Payable (or Accounts Payable) Cash e. Land Cash Notes Payable

Page 1 Credit

3,000

3,200 700 700 3,000 3,000 120,000 60,000 60,000

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Recording entries MSC: ACBSP-APC-06-Recording Transactions 13. In the journal provided, prepare journal entries (in good form) for the following transactions. If no entry is required, write “no entry.” Omit explanations. Apr. 1

3 6 9 17 17 20 21 23 24 26 30

Investors opened a dry cleaning service, called Same Day Cleaners, by depositing $60,000 into a business bank account and receiving 60,000 shares of $1 par value stock in exchange. Paid two years rent in advance, $14,400. Purchased dry cleaning equipment for $40,000. Paid $8,000 in cash, the remainder to be paid in two weeks. Hired a part-time worker, to be paid $300 per week, starting tomorrow. Paid the worker's weekly wage. Recorded cash received for services performed during the week, $3,000. Paid for the remainder of the equipment purchased on April 6. Received $200 in advance of cleaning and boxing a wedding gown. Performed $500 of dry cleaning services for Asa's Tuxedo Shop. It will remit payment in three days. Paid the weekly wages. Received payment from Asa's Tuxedo Shop. Received a telephone bill for $100, which will be paid in two weeks.

General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal Date Description Apr. 1 Cash Common Stock

Page 1 Post. Ref.

Debit 60,000

Credit 60,000

3 Prepaid Rent Cash

14,400

6 Dry Cleaning Equipment Cash Accounts Payable

40,000

14,400

8,000 32,000

9 No entry 17 Wages Expense Cash

300 300

17 Cash Dry Cleaning Revenue

3,000

20 Accounts Payable Cash

32,000

3,000

32,000

21 Cash Unearned Dry Cleaning Revenue

200

23 Accounts Receivable Dry Cleaning Revenue

500

24 Wages Expense Cash

300

26 Cash Accounts Receivable

500

30 Telephone Expense Accounts Payable

100

200

500

300

500

100

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Recording entries MSC: ACBSP-APC-06-Recording Transactions

14. In the journal provided, prepare journal entries (in good form) for the following transactions. If no entry is required, write “no entry.” Omit explanations. July 1

3 6 10 17 17 20 21 23 24 26 30

Investors opened a dry cleaning service, called Jolly Cleaners, by depositing $200,000 into a business bank account and receiving 100,000 shares of $2 par value stock in exchange. Paid one year of rent in advance, $22,400. Purchased dry cleaning equipment for $60,000. Paid $25,000 in cash, the remainder to be paid in two weeks. Hired a worker, to be paid $800 per week. Paid the worker's weekly wage. Recorded cash received for services rendered during the week, $10,000. Paid for the remainder of the equipment purchased on May 6. Received $300 in advance of cleaning and boxing a wedding gown. Performed $1,200 of dry cleaning services for Weddings Unlimited. It will remit payment in three days. Paid the weekly wages. Received payment from Weddings Unlimited. Received an electricity bill for $350, which will be paid in two weeks.

General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal Date Description July 1 Cash Common Stock

Page 1 Post. Ref.

Debit Credit 200,000 200,000

3 Prepaid Rent Cash

22,400

6 Dry Cleaning Equipment Cash Accounts Payable

60,000

22,400

25,000 35,000

10 No entry 17 Wages Expense Cash

800 800

17 Cash Dry Cleaning Revenue

10,000

20 Accounts Payable Cash

35,000

21 Cash Unearned Dry Cleaning Revenue 23 Accounts Receivable Dry Cleaning Revenue 24 Wages Expense Cash

10,000

35,000 300 300 1,200 1,200 800 800

26 Cash Accounts Receivable

1,200

30 Utility Expense Accounts Payable

350

1,200

350

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Recording entries MSC: ACBSP-APC-06-Recording Transactions

15. In the journal provided, prepare journal entries (in good form) for the following transactions. If no entry is required, write “no entry.” Omit explanations. Mar. 1

2 4 6 8 17 17 20 21 23

Investors opened a dance school, called Yolonda's Dance Studio, by depositing $15,000 into a business bank account in exchange for 15,000 shares of $1 par value stock. Paid three months' rent in advance, $1,800. Hired a part-time assistant, to be paid $250 per week, starting next week. Purchased sound equipment for $2,000. Paid $400 in cash, the remainder to be paid in installments of $800 every two weeks. Signed up five students, who will begin lessons on March 10, at $80 per week per student. Received the first week's tuition from four students; the fifth student will remit payment in three days. Paid the assistant his first week's wages. Received payment from the fifth student. Paid the first installment on the sound equipment purchased on March 6. Received an electric bill of $100, to be paid April 1.

General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal Date Description Mar. 1 Cash Common Stock 2 Prepaid Rent Cash

Page 1 Post. Ref.

Debit 15,000

Credit 15,000

1,800 1,800

4 No entry 6 Sound Equipment Cash Accounts Payable

2,000 400 1,600

8 No entry 17 Cash Accounts Receivable Tuition Revenue

320 80

17 Wages Expense Cash

250

20 Cash Accounts Receivable

21 Accounts Payable Cash

800

23 Utilities Expense Accounts Payable

100

400

250

800

100

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Recording entries MSC: ACBSP-APC-06-Recording Transactions 16. In the journal provided, prepare journal entries (in good form) for the following transactions. If no entry is required, write “no entry.” Omit explanations. Nov. 1

2 4 6

Investors opened a dance school called Olga's Dance Studio by depositing $24,000 into a business bank account in exchange for 24,000 shares of $1 par value stock. Paid three months' rent in advance, $2,400. Hired a part-time assistant, to be paid $275 per week. Purchased sound equipment for $4,200. Paid $600 in cash, the remainder to be paid in installments of $1,200 every two weeks.

8 17 17 20 20 23

Signed up ten students, who will begin lessons on November 10, at $100 per week per student. Received the first week's tuition from nine students; the tenth student will remit payment in three days. Paid the assistant his first week's wages. Received payment from the tenth student. Paid the next installment on the sound equipment purchased on November 6. Received an electric bill of $150, to be paid on December 1. General Journal

Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal Date Description Nov. 1 Cash Common Stock 2 Prepaid Rent Cash

Page 1 Post. Ref.

Debit 24,000

Credit 24,000

2,400 2,400

4 No entry 6 Sound Equipment Cash Accounts Payable

4,200 600 3,600

8 No entry 17 Cash Accounts Receivable Tuition Revenue

900 100

17 Wages Expense Cash

275

20 Cash Accounts Receivable

100

1,000

275

100

20 Accounts Payable Cash

1,200

23 Utilities Expense Accounts Payable

150

1,200

150

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Recording entries MSC: ACBSP-APC-06-Recording Transactions

17. Post the following transaction. General Journal

Page 14

Date Description 2013 July 20 Accounts Receivable Commissions Earned Commission earned on sale of painting

Post. Ref.

Debit 415

415

Accounts Receivable Date

Credit

Account No. 112 Item

Post. Ref.

Item

Post. Ref.

Debit

Credit

Balance Debit Credit

2013

Commissions Earned Date

Account No. 411 Debit

Credit

Balance Debit Credit

2013

ANS: General Journal

Page 14

Date Description 2013 July 20 Accounts Receivable Commissions Earned Commission earned on sale of painting Accounts Receivable Date 2013 July

Item

Post. Ref. Debit 112 411

Credit

415 415

Account No. 112 Post. Ref.

J14

Debit

415

Credit

Balance Debit Credit 415

Commissions Earned Date 2013 July

Account No. 411

Item

Post. Ref.

Debit

Credit

J14

Balance Debit Credit

415

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle 18. Post the following transaction. General Journal

Page 8

Date Description 2013 May 12 Land Notes Payable Issued note for purchase of land

Post. Ref.

Credit

5,000 5,000

Land Date

Debit

Account No. 141 Item

Post. Ref.

Debit

Credit

Balance Debit Credit

2013

Notes Payable Date

Account No. 211 Item

Post. Ref.

Debit

Credit

Balance Debit Credit

2013

ANS: General Journal

Page 8

Date Description 2013 May 12 Land Notes Payable Issued note for purchase of land

Post. Ref. 141 211

Land

Credit

5,000 5,000

Account No. 141

Date 2013 May

Item

Post. Ref.

Debit

5,000

Credit

Date

Account No. 211 Item

Balance Debit Credit 5,000

Notes Payable

2013 May

Debit

Post. Ref.

Debit

Credit

Balance Debit Credit

5,000

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Posting transactions MSC: ACBSP-APC-05-Accounting Cycle 19. Lindsay Company had the following transactions for the month of August. 5 10 12 14 19 24 29

Performed services on credit, $8,000 Performed services for cash, $7,000 Paid expenses in cash, $2,000 Collected on account, $4,000 Incurred expenses on credit, $5,000 Performed services on credit, $2,400 Paid on account, $4,000

Enter the on the pervious transactions in the following T accounts. Determine the cash balance after transactions, the amount still to be received, and the amount still to be paid. Cash

Accounts Payable

Accounts Receivable

Revenue

Expenses

ANS: Cash 7,000 4,000

2,000 4,000

Accounts Receivable 8,000 4,000 2,400

Accounts Payable 4,000 5,000

Revenue 8,000 7,000 2,400

Expenses 2,000 5,000 Cash balance after transactions: $7,000 + $4,000 – $2,000 – $4,000 = $5,000 Amount still to be received: $8,000 + $2,400 – $4,000 = $6,400 Amount still to be paid: $5,000 – $4,000 = $1,000 PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement KEY: Cash flows | Timing of transactions MSC: ACBSP-APC-05-Accounting Cycle

LOC: Application

Chapter 03 - Measuring Business Income TRUE/FALSE 1. Accounting periods of greater than a year are called interim periods. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Accounting period issue MSC: ACBSP-APC-05-Accounting Cycle 2. If a company is not expected to survive, it is considered a going concern. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-05-Accounting Cycle 3. Expenses are often called the cost of doing business or expired costs. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Owner's equity MSC: ACBSP-APC-05-Accounting Cycle 4. When revenues exceed expenses, a net income occurs. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Net income MSC: ACBSP-APC-05-Accounting Cycle 5. All increases to cash represent revenues. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Net income MSC: ACBSP-APC-05-Accounting Cycle 6. Revenue is equal to the cash received by a company during an accounting period. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Net income MSC: ACBSP-APC-05-Accounting Cycle 7. Not all decreases in stockholders' equity are a result of expenses. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Net income MSC: ACBSP-APC-05-Accounting Cycle

8. Instead of the word net income, accountants use net profit because the latter term can be defined more precisely. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Net income MSC: ACBSP-APC-05-Accounting Cycle 9. A company's fiscal year need not correspond to the calendar year. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-05-Accounting Cycle 10. Accounting periods should be of unequal length to facilitate comparisons between periods. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-05-Accounting Cycle 11. The continuity assumption acknowledges that estimates of net income are still useful. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-05-Accounting Cycle 12. When preparing financial statements, the accountant assumes that the business will not continue to operate indefinitely unless there is evidence to the contrary. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-05-Accounting Cycle 13. In applying the matching rule, expenses should be recognized in the same accounting period as the revenues to which they are related. . ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Matching issues MSC: ACBSP-APC-05-Accounting Cycle 14. When there is a direct connection between revenues and costs, the costs are systematically allocated among the periods benefited from the costs. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Matching issues MSC: ACBSP-APC-05-Accounting Cycle

15. The intentional preparation of misleading financial statements is referred to as fraudulent financial reporting. ANS: T PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 1 KEY: Ethical reporting

16. Direct cause-and-effect relationships between revenues and expenses are often difficult to identify. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Matching issues MSC: ACBSP-APC-05-Accounting Cycle 17. The manipulation of revenues and expenses to get a certain outcome is called earnings management. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Earnings Management MSC: ACBSP-APC-05-Accounting Cycle 18. All transactions can be easily assigned to specific accounting periods. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-05-Accounting Cycle 19. When a net loss has been suffered, Retained Earnings will contain a positive balance. ANS: F PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Net income | Owner's equity MSC: ACBSP-APC-05-Accounting Cycle 20. The matching rule is most closely related to the cash basis of accounting. ANS: F PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Matching issues MSC: ACBSP-APC-05-Accounting Cycle 21. Net income is misleading when revenue is overstated or expenses are understated by significant amounts. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ethical reporting | Net income MSC: ACBSP-APC-01-Purpose

22. When the estimates involved in earnings management begin moving outside a reasonable range, the financial statements can become misleading. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Ethical reporting | Financial statements MSC: ACBSP-APC-05-Accounting Cycle

OBJ: 1 LOC: Comprehension

23. One of the applications of accrual accounting is recognizing revenue at the appropriate time. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Matching issues MSC: ACBSP-APC-05-Accounting Cycle 24. Accrual accounting is an application of continuity. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Matching issues MSC: ACBSP-APC-04-Cash vs. Accrual 25. Revenue is produced when accounts receivable are collected. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recognizing revenue MSC: ACBSP-APC-05-Accounting Cycle 26. Adjusting entries affect only the cash flows of the current period. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance MSC: ACBSP-APC-07-Adjusting Entries

OBJ: 2 LOC: Recall

27. Revenue should be recognized, only when collectability is reasonably assured. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Revenue recognition MSC: ACBSP-APC-05-Accounting Cycle 28. Revenue cannot be recognized when delivery of goods has occurred or services have been rendered. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Revenue recognition

OBJ: 2 LOC: Recall

29. Accrual accounting recognizes revenues and expenses at the point that cash changes hands. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Accrual vs. cash accounting MSC: ACBSP-APC-04-Cash vs. Accrual © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

30. A cash payment that reduces a liability does not result in an expense. ANS: T PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Recognizing expenses MSC: ACBSP-APC-05-Accounting Cycle 31. The cash basis of accounting results in a more accurate measurement of net income for the period than does the accrual basis of accounting. ANS: F PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Accrual vs. cash accounting MSC: ACBSP-APC-04-Cash vs. Accrual 32. An accrual is the recognition of an expense that has arisen but has not yet been recorded. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 33. Adjusting entries are useful in apportioning costs among two or more accounting periods. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 34. An adjusting entry includes two balance sheet accounts or two income statement accounts. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 35. Recording incurred but unpaid expenses is an example of an accrual. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 36. A contra account is an account whose balance is added to an associated account in the financial statements. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Accounts | Financial statements MSC: ACBSP-APC-05-Accounting Cycle 37. Expenses that have been paid for and recorded are called accrued expenses. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

38. Revenue for which the service has been performed but no entry has been made in the accounting records is called prepaid revenue. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 39. A depreciable asset's original cost can typically be obtained by referring to the balance sheet. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-05-Accounting Cycle 40. Accumulated depreciation is another term for depreciation expense. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance MSC: ACBSP-APC-07-Adjusting Entries

OBJ: 3 LOC: Recall

41. Depreciation Expense–Equipment is an example of a contra account. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Accounts MSC: ACBSP-APC-05-Accounting Cycle 42. The carrying value of equipment is the difference between the original value of the equipment and its accumulated depreciation. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Assets | Financial statements MSC: ACBSP-APC-05-Accounting Cycle 43. When an asset's depreciation is recorded, it’s carrying value increases. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Adjust accounts and adjust trial balance | Adjustment process 44. The heading of an adjusted trial balance might contain the line “May 31, 2013” ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Adjusted trial balance MSC: ACBSP-APC-05-Accounting Cycle 45. The adjusted trial balance facilitates the preparation of the financial statements. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Adjusted trial balance MSC: ACBSP-APC-05-Accounting Cycle © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

46. An adjusted trial balance is prepared after the adjusting entries are recorded. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Adjusted trial balance MSC: ACBSP-APC-05-Accounting Cycle 47. An adjusted trial balance proves the balance of the ledger accounts after the adjusting entries have been posted. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Adjusted trial balance MSC: ACBSP-APC-05-Accounting Cycle 48. An adjusted trial balance will probably list fewer accounts than are listed in the trial balance. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Adjusted trial balance MSC: ACBSP-APC-05-Accounting Cycle 49. The dollar amount of Cash on the trial balance and on the adjusted trial balance should be identical. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Adjusted trial balance MSC: ACBSP-APC-05-Accounting Cycle 50. Financial statements cannot be prepared until the accounts have been adjusted. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Adjust accounts MSC: ACBSP-APC-07-Adjusting Entries 51. In the accounting cycle, adjusting entries are prepared before closing entries. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Adjust accounts | Closing entries MSC: ACBSP-APC-07-Adjusting Entries | ACBSP-APC-08-Closing Entries 52. Closing entries are journal entries made at the beginning of an accounting period. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries 53. Real account balances are reduced to zero by closing entries. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries

54. Closing entries deal primarily with the balances of real accounts. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries 55. The only accounts that are closed are temporary accounts. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries 56. Closing entries result in the transfer of net income or loss into the Retained Earnings account. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries 57. After all closing entries have been posted, the balance of the Income Summary account will equal net income for the period. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries 58. Accounts Receivable is a real account. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries 59. Rent Expense is a permanent account. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries 60. Cash is a nominal account. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries 61. Supplies Expense is a permanent account. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries

62. A revenue account is closed with a credit to the revenue account and a debit to Income Summary. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries 63. Net income provides a good measure of a business's debt-paying ability. ANS: F PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Net income | Cash flow MSC: ACBSP-APC-09-Financial Statements 64. The Supplies Expense account on the income statement is related to the Supplies Payable account on the balance sheet. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Accounts

OBJ: 6 LOC: Comprehension

MULTIPLE CHOICE 1. The manipulation of revenues and expenses to achieve a specific outcome is called a. earnings management. b. continuity. c. going concern. d. revenue recognition. ANS: A PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 1 KEY: Ethical reporting

2. A net loss results in a decrease in a. expenses. b. liabilities. c. stockholders' equity. d. assets. ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Net income | Owner's equity MSC: ACBSP-APC-05-Accounting Cycle 3. Net income results in a(n) a. increase in stockholders' equity. b. increase in expenses. c. decrease in revenues. d. decrease in assets. ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Net income | Owner's equity MSC: ACBSP-APC-05-Accounting Cycle © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

4. When expenses exceed revenues, a. a net income will result. b. a net loss occurs. c. stockholders' equity increases. d. a liability is created. ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Net income MSC: ACBSP-APC-05-Accounting Cycle 5. The cost of doing business is also known as a. a liability. b. an expense. c. revenue. d. an asset. ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Expenses MSC: ACBSP-APC-05-Accounting Cycle 6. The periodicity assumption recognizes that a. the company may continue indefinitely. b. all financial statements should cover a fiscal year. c. it is useful to estimate the business’s net income in terms of accounting periods. d. the value of an asset may vary from month to month. ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-05-Accounting Cycle 7. Retailers often end their fiscal year a. in correspondence with their yearly cycle of business activity. b. during the peak of the busy season. c. at different times each year. d. on July 31. ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-05-Accounting Cycle 8. In order to make comparison easier, financial statement time periods should a. end during the peak season. b. be of equal length. c. correspond to the calendar year. d. comply with income tax regulations. ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-05-Accounting Cycle

9. The going concern assumption helps solve the a. matching rule issue. b. periodicity issue. c. recognition issue. d. continuity issue. ANS: D PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-05-Accounting Cycle 10. When a direct cause-and-effect relationship cannot be established between revenues and costs, the costs are a. not expensed and remain as assets on the balance sheet. b. expensed among the accounting periods that benefit from the costs. c. expensed immediately in their entirety. d. expensed equally each year. ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-05-Accounting Cycle 11. Making an assumption about periodicity attempts to solve which income measurement issue? a. Accounting period issue. b. Continuity issue. c. Matching issue. d. Recognition issue. ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Measurement issues MSC: ACBSP-APC-05-Accounting Cycle 12. Revenues are increases in stockholders’ equity and result from a. selling goods. b. rendering services. c. both selling goods and rendering services. d. neither selling goods nor rendering services. ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Revenues MSC: ACBSP-APC-05-Accounting Cycle 13. Which of the following actions can distort company records and result in fraudulent financial reporting? a. Prepaying an expense and recording it as an asset b. Collecting revenue in advance of earning it c. Recording income that has not yet been earned d. Recording an expense that has been incurred but has not yet been paid ANS: C PTS: 1 NAT: AACSB Ethics | AICPA BB Legal KEY: Ethical reporting

DIF: Moderate OBJ: 1 LOC: Comprehension MSC: ACBSP-APC-01-Purpose

14. Which of the following transactions results in an increase in expenses? a. Cash payment on accounts payable b. Receive a bill for the usage of utilities c. Repayment of principal of bank loan d. Purchase of machinery on credit ANS: B PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle 15. Which of the following transactions results in an increase in revenues? a. Sale of a service on credit b. Receipt of cash from bank loan c. Sale of land at cost for cash d. Collection of cash on account ANS: A PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle 16. Which of the following transactions will not result in an increase in revenues? a. Sale of goods on credit b. Sale of services for cash c. Accumulation of interest in bank account d. Sale of stock to investors for cash ANS: D PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle 17. Expenses are incurred a. as a result of selling goods or rendering a service. b. in order to produce liabilities. c. only during the adjustment process. d. in order to produce assets. ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Analyze transactions | Owner's equity MSC: ACBSP-APC-05-Accounting Cycle

OBJ: 1 LOC: Comprehension

18. A customer's promise to pay for goods or services a. decreases the assets of the company.. b. decreases the Cash account of the company. c. creates a liability for the company. d. increases the assets of the company. ANS: D PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle

19. The matching rule relates the least to a. systematic and rational allocation. b. the cash basis of accounting. c. revenues and expenses. d. cause-and-effect relationships. ANS: B PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Matching issues MSC: ACBSP-APC-05-Accounting Cycle 20. The matching rule is applied a. because it is required by the Internal Revenue Code. b. by expensing certain items immediately and in their entirety. c. to help make the bookkeeper's job easier. d. to help produce an accurate measurement of a company's performance. ANS: D PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Matching issues MSC: ACBSP-APC-05-Accounting Cycle 21. Which of the following is the most difficult to assign to specific time periods? a. The incurrence of wages expense b. The accrual of interest c. The use of equipment d. The expiration of insurance ANS: C PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Measurement issues MSC: ACBSP-APC-05-Accounting Cycle 22. The going concern assumption is not applied to a. companies that have sustained losses for the previous two years. b. companies about to file for bankruptcy. c. the partnership form of business. d. companies that have been in existence for less than a year. ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Measurement issues

OBJ: 1 LOC: Comprehension

23. Which of the following is not an application of accrual accounting? a. Recognizing revenues when earned and expenses when incurred b. Applying the matching rule c. Adjusting the accounts d. Recording on the basis of actual receipt and payment of cash ANS: D PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Accrual accounting MSC: ACBSP-APC-04-Cash vs. Accrual

24. Which of the following conditions is not a requirement by the SEC for the recognition of revenue? a. Delivery has occurred or services have been rendered. b. Collectability is reasonably certain. c. A written agreement has been signed. d. The seller's price to the buyer is fixed or determinable. ANS: C PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Revenue recognition MSC: ACBSP-APC-04-Cash vs. Accrual 25. The four conditions that must exist, according to the SEC, before revenue should be recognized include all of the following except a. there is a reasonable assurance the amount is collectible. b. a selling price has been determined. c. delivery will occur or services will be rendered within 30 days. d. persuasive evidence of an arrangement exists. ANS: C PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Revenue recognition MSC: ACBSP-APC-04-Cash vs. Accrual 26. Which of the following is a condition required by the SEC for the recognition of revenue? a. Cash payment received b. Execution of a promissory note c. Price in excess of $500 d. A product or service has been delivered ANS: D PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Revenue recognition MSC: ACBSP-APC-04-Cash vs. Accrual 27. Which of the following transactions results in the recognition of an expense? a. Expiration of the usefulness of equipment during the accounting period b. Payment on an account payable c. Declaration and payment of a dividend d. Payment on the principal portion of a loan ANS: A PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions MSC: ACBSP-APC-05-Accounting Cycle 28. When a credit sale takes place, a. a revenue account will decrease. b. an asset account will increase. c. one asset account will increase and another will decrease. d. assets will be unaffected. ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Effects of transactions on accounting equation MSC: ACBSP-APC-06-Recording Transactions

OBJ: 2 LOC: Comprehension

29. Which of the following is not an application of accrual accounting? a. Recording advertising fees earned at the time the work is paid for b. Adjusting unearned advertising fees to the proper balance at the end of the month c. Recording advertising fees earned at the time service is performed d. Recording telephone expense in the accounting period covered by the monthly bill ANS: A PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Accrual accounting MSC: ACBSP-APC-04-Cash vs. Accrual 30. Which of the following transactions is most likely not to result in an adjusting entry at the end of the period? a. Performance of a service for which payment was received in advance b. Payment of this month's rent c. Purchase of office equipment d. Purchase of a two-year insurance policy ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance MSC: ACBSP-APC-07-Adjusting Entries

OBJ: 2 LOC: Comprehension

31. Which of the following is an application of accrual accounting? a. Depreciating a building as quickly as allowed by income tax regulations b. Recording utilities expense in the accounting period when the bill is paid c. Expensing a machine in its entirety when purchased d. Recording revenue at the time services are rendered ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance MSC: ACBSP-APC-07-Adjusting Entries

OBJ: 2 LOC: Comprehension

32. An adjusting entry would not include which of the following accounts? a. Accounts Payable b. Unearned Revenue c. Accounts Receivable d. Cash ANS: D PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 33. In accounting, depreciation refers to the a. allocation of asset cost. b. wearing away of an asset. c. decline in value of an asset. d. obsolescence of an asset. ANS: A PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

34. Which of the following assets is not subject to depreciation? a. Vehicles b. Art equipment c. Land d. Machinery ANS: C PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 35. Which of the following accounts is a contra account? a. Accumulated Depreciation–Machinery b. Accounts Payable c. Depreciation Expense–Machinery d. Unearned Fees ANS: A PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Accounts MSC: ACBSP-APC-07-Adjusting Entries 36. The carrying value of a depreciable asset equals a. original cost minus depreciation expense for the current period. b. original cost minus accumulated depreciation. c. the estimated cost to replace the asset. d. the estimated amount that the asset could be sold for. ANS: B PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 37. Accumulated depreciation is classified as a(n) a. contra-expense account. b. expense account. c. contra-asset account. d. liability account. ANS: C PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Accounts MSC: ACBSP-APC-07-Adjusting Entries 38. Which of the following accounts need not be adjusted at year end? a. Prepaid Advertising b. Land c. Office Supplies d. Unearned Revenue ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance MSC: ACBSP-APC-07-Adjusting Entries

OBJ: 3 LOC: Comprehension

39. The recording of an expense could result in a corresponding increase in a. stockholders' equity. b. revenue. c. a liability. d. an asset. ANS: C PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions MSC: ACBSP-APC-07-Adjusting Entries 40. As the usefulness of a plant asset expires, a. an amount is transferred from one asset account to another. b. a related expense account is reduced. c. a liability is created. d. the cost of the asset is allocated to an expense account. ANS: D PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Adjust accounts MSC: ACBSP-APC-07-Adjusting Entries 41. Machinery might be depreciated over 10 years because a. it will lose most of its market value in 10 years. b. it will be paid for in 10 years. c. it will help to generate revenue for the company over 10 years. d. income tax provisions require depreciation over 10 years. ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance MSC: ACBSP-APC-07-Adjusting Entries

OBJ: 3 LOC: Comprehension

42. Which of the following accounts is most likely to be adjusted at year end? a. Accounts Payable b. Land c. Supplies d. Common Stock ANS: C PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Adjust accounts and adjust trial balance | Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 43. Which of the following accounts could increase as a result of adjusting entries? a. Prepaid Rent b. Accounts Receivable c. Unearned Revenues d. Machinery ANS: B PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

44. Which of the following transactions will not result in the recognition of an expense? a. Interest accrued on a bank loan b. Declaration and payment of a dividend c. Use of machinery during the period d. Expiration of prepaid insurance ANS: B PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Analyze transactions MSC: ACBSP-APC-06-Recording Transactions 45. Which of the following accounts could decrease as a result of adjusting entries? a. Prepaid Insurance b. Accumulated Depreciation–Equipment c. Supplies Expense d. Revenue ANS: A PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 46. Which of the following is an example of a deferral? a. Interest expense incurred but not yet paid b. A commission collected in advance c. Estimated income taxes for the year d. Medical fees earned but not yet collected ANS: B PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 47. Which of the following is an example of an accrual? a. Bookkeeping fees collected but not yet earned b. Six months' rent paid in advance c. Interest earned but not yet received d. Equipment purchased for use in the business ANS: C PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 48. Which of the following is an example of an accrual? a. Debit Office Supplies Expense, credit Office Supplies b. Debit Wages Expense, credit Wages Payable c. Debit Rent Expense, credit Prepaid Rent d. Debit Unearned Revenue, credit Revenue from Services ANS: B PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries

49. Which of the following is an example of a deferral? a. Debit Interest Expense, credit Interest Payable b. Debit Accounts Receivable, credit Legal Fees Earned c. Debit Property Taxes Expense, credit Property Taxes Payable d. Debit Depreciation Expense–Truck, credit Accumulated Depreciation–Truck ANS: D PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 50. An adjusting entry cannot include a debit to a(n) a. expense and a credit to an asset. b. expense and a credit to a liability. c. asset and a credit to a revenue. d. asset and a credit to a liability. ANS: D PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 51. Which of the following is an example of a deferral? a. Income taxes recorded but not yet paid b. The purchase of a company vehicle c. Legal fees earned but not yet collected d. The accumulation of interest in a bank account ANS: B PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 52. Which of the following is an example of an accrual? a. The purchase of office supplies b. Wages expense incurred but not yet paid c. Tuition revenue collected in advance d. Payment of two years' insurance in advance ANS: B PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 53. Which of the following situations is an example of an accrual? a. Recording supplies consumed b. Recording unrecorded, earned revenues c. Recording depreciation d. Recording the portion of prepaid rent that has expired ANS: B PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries

54. Which of the following pairs of accounts could not possibly appear in the same adjusting entry? a. Interest Income and Interest Payable b. Revenue from Services and Accounts Receivable c. Revenue from Services and Unearned Revenue d. Rent Expense and Rent Payable ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and prepare trial balance MSC: ACBSP-APC-07-Adjusting Entries

OBJ: 3 LOC: Comprehension

55. The principal difference between depreciation expense and most other types of expenses is that depreciation a. can be avoided if the asset is in as good of condition as when it was purchased. b. does not require an immediate cash outlay. c. is not deductible if it will cause a net loss. d. is subject to more precise measurement. ANS: B PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 56. Which of the following accounts could not be credited in an adjusting entry? a. Equipment b. Prepaid Insurance c. Office Supplies d. Interest Receivable ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance MSC: ACBSP-APC-07-Adjusting Entries

OBJ: 3 LOC: Comprehension

57. Which of the following pairs of accounts could not be included in the same adjusting entry? a. Unearned Revenue and Revenue from Services b. Wages Expense and Wages Payable c. Interest Expense and Interest Receivable d. Rent Expense and Rent Payable ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance MSC: ACBSP-APC-07-Adjusting Entries

OBJ: 3 LOC: Comprehension

58. What is the adjustment entry for that portion of revenue received in advance which has now been earned? a. Unearned Revenue – Debit; Cash – Credit. b. Unearned Revenue – Debit; Revenue from Services – Credit. c. Revenue from Services – Debit; Unearned Revenue – Credit. d. Cash – Debit; Unearned Revenue – Credit. ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance MSC: ACBSP-APC-07-Adjusting Entries

OBJ: 3 LOC: Application

59. An adjusting entry made to record accrued interest on a note payable due next year consists of a. Cash – Debit; Interest Expense – Credit. b. Interest Receivable – Debit; Interest Income – Credit. c. Interest Payable – Debit; Interest Expense – Credit. d. Interest Expense – Debit; Interest Payable – Credit. ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance

OBJ: 3 LOC: Application

60. Use this information to answer the following question. The trial balance for Barnstable Corporation appears as follows: Barnstable Corporation Trial Balance December 31, 2013 Cash Accounts Receivable Prepaid Insurance Supplies Office Equipment Accumulated Depreciation–Office Equipment Accounts Payable Common Stock Service Revenue Earned Salaries Expense Rent Expense

400 1,000 100 300 800 $ 400 600 1,200 1,000

200 400 $3,200

______ $3,200

If on December 31, 2013, supplies on hand were $40, the adjusting entry would contain a a. credit to Supplies for $40. b. credit to Supplies Expense for $260. c. debit to Supplies Expense for $260. d. debit to Supplies for $40.

ANS: C $300 - $40 = $260 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and prepare trial balance MSC: ACBSP-APC-07-Adjusting Entries

LOC: Application

61. Use this information to answer the following question. The trial balance for Barnstable Corporation appears as follows: Barnstable Corporation Trial Balance December 31, 2013 Cash Accounts Receivable Prepaid Insurance Supplies Office Equipment Accumulated Depreciation–Office Equipment Accounts Payable Common Stock Service Revenue Earned Salaries Expense Rent Expense

400 1,000 100 300 800 $ 400 600 1,200 1,000

200 400 $3,200

______ $3,200

If on December 31, 2013, the insurance still unexpired amounted to $40, the adjusting entry would contain a a. debit to Prepaid Insurance for $60. b. credit to Prepaid Insurance for $60. c. debit to Insurance Expense for $40. d. credit to Prepaid Insurance for $40. ANS: B $100 - $40 = $60 expired during the year PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and prepare trial balance MSC: ACBSP-APC-07-Adjusting Entries

LOC: Application

62. Use this information to answer the following question. The trial balance for Barnstable Corporation appears as follows: Barnstable Corporation Trial Balance December 31, 2013 Cash Accounts Receivable Prepaid Insurance Supplies Office Equipment Accumulated Depreciation–Office Equipment Accounts Payable Common Stock Service Revenue Earned Salaries Expense Rent Expense

400 1,000 100 300 800 $ 400 600 1,200 1,000

200 400 $3,200

______ $3,200

If the estimated depreciation for office equipment were $400, the adjusting entry would contain a a. debit to Accumulated Depreciation, Office Equipment for $400. b. credit to Office Equipment for $400. c. credit to Accumulated Depreciation, Office Equipment for $400. d. credit to Depreciation Expense, Office Equipment for $400. ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and prepare trial balance MSC: ACBSP-APC-07-Adjusting Entries

OBJ: 3 LOC: Application

63. Use this information to answer the following question. The trial balance for Barnstable Corporation appears as follows: Barnstable Corporation Trial Balance December 31, 2013 Cash Accounts Receivable Prepaid Insurance Supplies Office Equipment Accumulated Depreciation–Office Equipment Accounts Payable Common Stock Service Revenue Earned Salaries Expense Rent Expense

400 1,000 100 300 800 $ 400 600 1,200 1,000

200 400 $3,200

______ $3,200

If as of December 31, 2013, the rent of $200 for December had not been recorded or paid, the adjusting entry would include a a. debit to Rent Expense for $200. b. debit to Rent Payable for $200. c. credit to Cash for $200. d. credit to Accumulated Rent for $200. ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance MSC: ACBSP-APC-07-Adjusting Entries

OBJ: 3 LOC: Application

64. Use this information to answer the following question. The trial balance for Barnstable Corporation appears as follows: Barnstable Corporation Trial Balance December 31, 2013 Cash Accounts Receivable Prepaid Insurance Supplies Office Equipment Accumulated Depreciation–Office Equipment Accounts Payable Common Stock Service Revenue Earned Salaries Expense Rent Expense

400 1,000 100 300 800 $ 400 600 1,200 1,000

200 400 $3,200

______ $3,200

If services totaling $250 had been performed but not billed, the adjusting entry to record this would include a a. credit to Unearned Service Revenue for $250. b. debit to Service Revenue Earned for $250. c. credit to Service Revenue Earned for $250. d. credit to Service Revenue Earned for $750. ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance MSC: ACBSP-APC-07-Adjusting Entries

OBJ: 3 LOC: Application

65. The Office Supplies account had a $720 debit balance at the end of the accounting period before adjustment for supplies used, and an inventory of $160 worth of unused supplies was on hand. Which of the following is the required adjusting entry? a. Debit Office Supplies Expense $160 and credit Office Supplies $160. b. Debit Office Supplies Expense $560 and credit Office Supplies $560. c. Debit Office Supplies $160 and credit Office Supplies Expense $160. d. Debit Office Supplies $560 and credit Office Supplies Expense $560. ANS: B $720 - $160 = $560 supplies used PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance

LOC: Application

66. Use this information pertaining to the Essex Corporation to answer the following question. 1. The corporation's Office Supplies account showed a beginning debit balance of $400 and supplies purchased of $1,600. There were $600 of supplies on hand at year end. 2. Depreciation on a building is estimated to be $10,000. 3. A one-year insurance policy was purchased for $4,000. Three months have passed since the purchase. 4. Accrued interest on a note receivable amounted to $200. 5. The company received a $7,200 advance payment during the year on services to be performed. By the end of the year, one-fourth of the services had been performed. The adjusting entry for Office Supplies would be a. Office Supplies Expense 1,400 Office Supplies

1,400

b. Office Supplies Expense Office Supplies

1,600 1,600

c. Office Supplies Office Supplies Expense

1,400

d. Office Supplies Expense Office Supplies

600

1,400

600

ANS: A $400 + $1,600 - $600 = $1,400 supplies used PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance MSC: ACBSP-APC-07-Adjusting Entries

LOC: Application

67. Use this information pertaining to the Essex Corporation to answer the following question. 1. The corporation's Office Supplies account showed a beginning debit balance of $400 and supplies purchased of $1,600. There were $600 of supplies on hand at year end. 2. Depreciation on a building is estimated to be $10,000. 3. A one-year insurance policy was purchased for $4,000. Three months have passed since the purchase. 4. Accrued interest on a note receivable amounted to $200. 5. The company received a $7,200 advance payment during the year on services to be performed. By the end of the year, one-fourth of the services had been performed. The adjusting entry for depreciation on the building is a. Depreciation Expense - Building 10,000 Accumulated Depreciation - Building

10,000

b. Accumulated Depreciation - Building Depreciation Expense - Building

10,000 10,000

c. Building Depreciation Expense - Building

10,000

d. Accumulated Depreciation - Building Building

10,000

ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance MSC: ACBSP-APC-07-Adjusting Entries

10,000 OBJ: 3 LOC: Application

68. Use this information pertaining to the Essex Corporation to answer the following question. 1. The corporation's Office Supplies account showed a beginning debit balance of $400 and supplies purchased of $1,600. There were $600 of supplies on hand at year end. 2. Depreciation on a building is estimated to be $10,000. 3. A one-year insurance policy was purchased for $4,000. Three months have passed since the purchase. 4. Accrued interest on a note receivable amounted to $200. 5. The company received a $7,200 advance payment during the year on services to be performed. By the end of the year, one-fourth of the services had been performed.

The adjusting entry for the insurance policy is a. Prepaid Insurance 1,000 Insurance Expense b. Insurance Expense Prepaid Insurance

3,000

c. Prepaid Insurance Insurance Expense

3,000

d. Insurance Expense Prepaid Insurance

1,000

3,000

1,000

ANS: D $4,000 x 3/12 = $1,000 expired insurance PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance MSC: ACBSP-APC-07-Adjusting Entries

LOC: Application

69. Use this information pertaining to the Essex Corporation to answer the following question. 1. The corporation's Office Supplies account showed a beginning debit balance of $400 and supplies purchased of $1,600. There were $600 of supplies on hand at year end. 2. Depreciation on a building is estimated to be $10,000. 3. A one-year insurance policy was purchased for $4,000. Three months have passed since the purchase. 4. Accrued interest on a note receivable amounted to $200. 5. The company received a $7,200 advance payment during the year on services to be performed. By the end of the year, one-fourth of the services had been performed. The adjusting entry to record the accrued interest on the note is a. Interest Expense 200 Interest Receivable 200 b. Interest Payable Interest Expense

200

c. Interest Receivable Interest Income

200

d. Interest Income Interest Receivable

200

ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance MSC: ACBSP-APC-07-Adjusting Entries

OBJ: 3 LOC: Application

70. Use this information pertaining to the Essex Corporation to answer the following question. 1. The corporation's Office Supplies account showed a beginning debit balance of $400 and supplies purchased of $1,600. There were $600 of supplies on hand at year end. 2. Depreciation on a building is estimated to be $10,000. 3. A one-year insurance policy was purchased for $4,000. Three months have passed since the purchase. 4. Accrued interest on a note receivable amounted to $200. 5. The company received a $7,200 advance payment during the year on services to be performed. By the end of the year, one-fourth of the services had been performed. The adjusting entry to record the amount of service revenue earned during the accounting period is a. Service Revenue 5,400 Unearned Revenue 5,400 b. Unearned Revenue Service Revenue

5,400

c. Service Revenue Unearned Revenue

1,800

d. Unearned Revenue Service Revenue

1,800

5,400

1,800

ANS: D $7,200 x 1/4 = $1,800 Service Revenue Earned PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance MSC: ACBSP-APC-07-Adjusting Entries

LOC: Application

71. A company's five-day weekly payroll of $2,940 is paid on Fridays. Assume that the last day of the month falls on Wednesday. Which of the following is the required adjusting entry for the month end? a. Debit Salaries Payable $1,764 and credit Salaries Expense $1,764. b. Debit Salaries Expense $1,764 and credit Salaries Payable $1,764. c. Debit Unpaid Salaries $1,764 and credit Salaries Payable $1,764. d. Debit Salaries Expense $1,176 and credit Salaries Payable $1,176. ANS: B $2,940 x 3/5 = $1,764 Salaries Payable PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance MSC: ACBSP-APC-07-Adjusting Entries

LOC: Application

72. The adjustment for estimated income taxes would include a a. credit to Income Taxes Payable. b. debit to Unearned Income Taxes. c. credit to Income Taxes Expense. d. credit to Cash. ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance MSC: ACBSP-APC-07-Adjusting Entries

OBJ: 3 LOC: Application

73. The adjustment entry for the expiration of prepaid advertising, originally recorded as an asset, is a. Advertising Expense – Debit; Prepaid Advertising – Credit b. Prepaid Advertising – Debit; Cash – Credit c. Advertising Expense – Debit; Cash – Credit d. Prepaid Advertising – Debit; Advertising Expense – Credit ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance MSC: ACBSP-APC-07-Adjusting Entries

OBJ: 3 LOC: Application

74. In November, cash is received in advance of rendering services. Assuming that the services have been performed by December 31, the adjusting entry would be a. Unearned Service Revenue – Debit; Cash – Credit b. Cash – Debit; Service Revenue – Credit c. Unearned Service Revenue – Debit; Service Revenue – Credit d. Service Revenue – Debit; Prepaid Services – Credit ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance MSC: ACBSP-APC-07-Adjusting Entries

OBJ: 3 LOC: Application

75. The entry to record depreciation on machinery is a. Accumulated Depreciation–Machinery – Debit; Cash – Credit b. Depreciation Expense–Machinery – Debit; Machinery – Credit c. Depreciation Expense–Machinery – Debit; Cash – Credit d. Depreciation Expense–Machinery – Debit; Accumulated Depreciation–Machinery – Credit ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance MSC: ACBSP-APC-07-Adjusting Entries

OBJ: 3 LOC: Application

76. In July, a company pays three years' insurance in advance. The December 31 adjusting entry is a. Insurance Expense – Debit; Prepaid Insurance – Credit b. Prepaid Insurance – Debit; Insurance Expense – Credit c. Insurance Expense – Debit; Cash – Credit d. Prepaid Insurance – Debit; Cash – Credit ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance MSC: ACBSP-APC-07-Adjusting Entries

OBJ: 3 LOC: Application

77. Failure to adjust for accrued wages at year end will result in an a. overstatement of expenses. b. understatement of assets. c. overstatement of common stock. d. overstatement of net income. ANS: D PTS: 1 DIF: Challenging NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance MSC: ACBSP-APC-07-Adjusting Entries

OBJ: 3 LOC: Analysis

78. Failure to record depreciation at year end will result in an a. understatement of total assets. b. overstatement of total assets. c. overstatement of expenses. d. overstatement of total liabilities. ANS: B PTS: 1 DIF: Challenging NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance MSC: ACBSP-APC-07-Adjusting Entries

OBJ: 3 LOC: Analysis

79. A company recorded office supplies in an asset account when the supplies were purchased. Failure to take inventory and make an adjusting entry will result in an a. overstatement of liabilities. b. understatement of revenues. c. understatement of assets. d. overstatement of stockholders' equity. ANS: D PTS: 1 DIF: Challenging NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance MSC: ACBSP-APC-07-Adjusting Entries

OBJ: 3 LOC: Analysis

80. An adjusted trial balance is prepared to a. test that the ledger is in balance after the accounts have been adjusted. b. facilitate preparation of the adjusting entries. c. both test that the ledger is in balance after the accounts have been adjusted and facilitate preparation of the financial statements. d. facilitate preparation of the financial statements. ANS: C PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Adjusted trial balance MSC: ACBSP-APC-05-Accounting Cycle 81. Which of the following accounts would appear on an adjusted trial balance but probably would not appear on a trial balance? a. Depreciation b. Accounts Receivable c. Service Revenue d. Prepaid Rent ANS: A PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Adjusted trial balance MSC: ACBSP-APC-05-Accounting Cycle 82. Which of the following accounts probably would be larger in amount on an adjusted trial balance than on a trial balance? a. Accumulated Depreciation b. Cash c. Prepaid Rent d. Store Supplies ANS: A PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Adjusted trial balance MSC: ACBSP-APC-05-Accounting Cycle 83. Which of the following accounts probably would contain a smaller dollar amount on the adjusted trial balance than on the trial balance? a. Office Supplies b. Accumulated Depreciation–Equipment c. Cash d. Wages Expense ANS: A PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Adjusted trial balance MSC: ACBSP-APC-05-Accounting Cycle

84. Which of the following accounts would be found on the credit side of the adjusted trial balance? a. Service Revenue b. Office Supplies c. Dividends d. Rent Expense ANS: A PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Adjusted trial balance MSC: ACBSP-APC-05-Accounting Cycle 85. Which of the following accounts would most likely be found on both a trial balance and an adjusted trial balance? a. Utilities Expense b. Insurance Expense c. Supplies Expense d. Depreciation Expense–Equipment ANS: A PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Adjusted trial balance MSC: ACBSP-APC-05-Accounting Cycle 86. Which of the following accounts probably would not appear in a trial balance but probably would appear in an adjusted trial balance? a. Accumulated Depreciation–Machinery b. Accounts Receivable c. Insurance Expense d. Unearned Revenue ANS: C PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Adjusted trial balance MSC: ACBSP-APC-05-Accounting Cycle 87. If no adjustments are needed for a particular company, its a. trial balance will be identical to its adjusted trial balance. b. post-closing trial balance will be identical to its trial balance. c. trial balance, adjusted trial balance, and post-closing trial balance will be identical. d. adjusted trial balance will be identical to its post-closing trial balance. ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and prepare trial balance MSC: ACBSP-APC-07-Adjusting Entries

OBJ: 4 LOC: Comprehension

88. On which financial statement does the Income Summary account appear? a. Statement of Retained Earnings b. Balance Sheet c. Income Statement d. It doesn’t appear on a financial statement ANS: D PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

89. Which of the following accounts is not closed during the closing procedure? a. Income Summary b. Revenues Earned c. Retained Earnings d. Rent Expense ANS: C PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries 90. Which of the following accounts is a real account? a. Wages Expense b. Machinery c. Service Revenue d. Depreciation Expense–Machinery ANS: B PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries 91. Which of the following is not a permanent account? a. Cash b. Common Stock c. Insurance Expense d. Accounts Payable ANS: C PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries 92. Which of the following is a nominal account? a. Retained Earnings b. Income Taxes Expense c. Accumulated Depreciation–Furniture d. Retained Earnings ANS: B PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries 93. Which of the following is not a temporary account? a. Interest Income b. Utilities Expense c. Sales Revenue d. Notes Payable ANS: D PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries

94. An important purpose of closing entries is to a. help in preparing financial statements. b. set real account balances to zero to begin the next period. c. set nominal account balances to zero to begin the next period. d. adjust the accounts in the ledger. ANS: C PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing entries | Closing of accounts MSC: ACBSP-APC-08-Closing Entries

OBJ: 5 LOC: Recall

95. An important purpose of closing entries is to a. update the nominal accounts at year end. b. set permanent account balances to zero to begin the next period. c. help achieve the goals of the matching principle. d. transfer net income or loss to Retained Earnings. ANS: D PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing entries | Closing of accounts MSC: ACBSP-APC-08-Closing Entries

OBJ: 5 LOC: Recall

96. Which of the following accounts is not closed? a. Dividends b. Common Stock c. Interest Income d. Income Summary ANS: B PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing entries | Closing of accounts MSC: ACBSP-APC-08-Closing Entries

OBJ: 5 LOC: Recall

97. The post-closing trial balance differs from the adjusted trial balance in that it does not a. include balance sheet accounts. b. include income statement accounts. c. take into account adjusting entries. d. take into account closing entries. ANS: B PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries 98. The post-closing trial balance contains a. nominal accounts only. b. both real accounts and nominal accounts. c. real accounts only. d. neither real accounts nor nominal accounts. ANS: C PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

99. Formal closing entries ultimately will affect a. the Common Stock account. b. total Liabilities. c. the Retained Earnings account. d. total Assets. ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing entries | Closing of accounts MSC: ACBSP-APC-08-Closing Entries

OBJ: 5 LOC: Comprehension

100. Failure to prepare formal closing entries will produce a misstated a. Income Summary account balance. b. Retained Earnings account balance. c. Accounts Receivable account balance. d. Accounts Payable account balance. ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing entries | Closing of accounts MSC: ACBSP-APC-08-Closing Entries

OBJ: 5 LOC: Comprehension

101. After all closing entries have been posted, which of the following accounts is most likely to have a nonzero balance? a. Income Summary b. Utilities Payable c. Rent Expense d. Service Revenue ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing entries | Closing of accounts MSC: ACBSP-APC-08-Closing Entries

OBJ: 5 LOC: Comprehension

102. Which of the following accounts is not found in closing entries? a. Dividends b. Income Summary c. Retained Earnings d. Accumulated Depreciation–Equipment ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing entries | Closing of accounts MSC: ACBSP-APC-08-Closing Entries

OBJ: 5 LOC: Comprehension

103. When there is a net loss, the entry to close the Income Summary account is debit a. Retained Earnings and credit Income Summary. b. Income Summary and credit Retained Earnings. c. Net Loss and credit Income Summary. d. Income Summary and credit Net Loss. ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing entries | Closing of accounts MSC: ACBSP-APC-08-Closing Entries

OBJ: 5 LOC: Comprehension

104. Which account bypasses the Income Summary account in the closing process? a. Revenue from Services b. Depreciation Expense–Building c. Dividends d. Wages Expense ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing entries | Closing of accounts MSC: ACBSP-APC-08-Closing Entries

OBJ: 5 LOC: Comprehension

105. Closing entries will a. decrease the Retained Earnings balance. b. most likely either increase or decrease the Retained Earnings balance. c. not affect the Retained Earnings balance. d. increase the Retained Earnings balance. ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing entries | Closing of accounts MSC: ACBSP-APC-08-Closing Entries

OBJ: 5 LOC: Comprehension

106. The post-closing trial balance would not include which of the following accounts? a. Unearned Legal Fees b. Dividends c. Accumulated Depreciation–Office Equipment d. Retained Earnings ANS: B PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries

107. Which of the following accounts might appear in the adjusted trial balance but not in the post-closing trial balance? a. Depreciation Expense–Building b. Retained Earnings c. Unearned Revenue d. Income Summary ANS: A PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries 108. Probably the last account to be listed on a post-closing trial balance would be a. Income Summary. b. Retained Earnings. c. Wages Expense. d. Wages Payable. ANS: B PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries 109. Which of the following could not possibly be a closing entry? a. Debit Income Summary and credit Dividends. b. Debit Income Summary and credit Retained Earnings. c. Debit Retained Earnings and credit Dividends. d. Debit Retained Earnings and credit Income Summary. ANS: A PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Closing entries MSC: ACBSP-APC-08-Closing Entries 110. The Income Summary account is credited in the entry that closes a. the expense accounts. b. the revenue accounts. c. the Dividends account. d. net income. ANS: B PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Closing entries MSC: ACBSP-APC-08-Closing Entries

111. Use this information to answer the following question. The Retained Earnings, Dividends, and Income Summary accounts for Dukes Corporation for the accounting period are presented below in T account form after the recording and posting of closing entries:

12/31 12/31

12/31

Retained Earnings 600 1/1 800

Income Summary 1,800 12/31 12/31

3,000

3/1 6/1 9/1 12/1

Dividends 200 12/31 200 200 200

800

1,200 600

Dukes’ beginning Retained Earnings balance is a. $600. b. $1,400. c. $3,000. d. $1,600. ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing of accounts | Retained earnings MSC: ACBSP-APC-08-Closing Entries

OBJ: 5 LOC: Application

112. Use this information to answer the following question. The Retained Earnings, Dividends, and Income Summary accounts for Dukes Corporation for the accounting period are presented below in T account form after the recording and posting of closing entries:

12/31 12/31

12/31

Retained Earnings 600 1/1 800

Income Summary 1,800 12/31 12/31

3,000

3/1 6/1 9/1 12/1

Dividends 200 12/31 200 200 200

800

1,200 600

The ending balance of Retained Earnings is a. $200. b. $400. c. $1,400. d. $1,600.

ANS: D $3,000 – $600 – $800 = $1,600 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing of accounts | Retained earnings MSC: ACBSP-APC-08-Closing Entries

LOC: Application

113. The entry to close the Dividends account is debit a. Income Summary and credit Dividends. b. Retained Earnings and credit Dividends. c. Dividends and credit Income Summary. d. Dividends and credit Retained Earnings. ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing entries | Closing of accounts MSC: ACBSP-APC-08-Closing Entries

OBJ: 5 LOC: Application

114. Use this information to answer the following question. The Retained Earnings, Dividends, and Income Summary accounts for Dukes Corporation for the accounting period are presented below in T account form after the recording and posting of closing entries:

12/31 12/31

12/31

Retained Earnings 600 1/1 800

Income Summary 1,800 12/31 12/31

3,000

3/1 6/1 9/1 12/1

Dividends 200 12/31 200 200 200

800

1,200 600

The amount of revenue earned for the period is a. $1,200. b. $1,800. c. $1,400. d. $600. ANS: A PTS: 1 DIF: Challenging NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing entries | Closing of accounts MSC: ACBSP-APC-08-Closing Entries

OBJ: 5 LOC: Analysis

115. Use this information to answer the following question. The Retained Earnings, Dividends, and Income Summary accounts for Dukes Corporation for the accounting period are presented below in T account form after the recording and posting of closing entries:

12/31 12/31

12/31

Retained Earnings 600 1/1 800

Income Summary 1,800 12/31 12/31

3,000

3/1 6/1 9/1 12/1

Dividends 200 12/31 200 200 200

800

1,200 600

The amount of net income (or net loss) for the period is a. $1,800 net income. b. $1,200 net income. c. $600 net loss. d. $600 net income. ANS: C PTS: 1 DIF: Challenging NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing entries | Closing of accounts MSC: ACBSP-APC-08-Closing Entries

OBJ: 5 LOC: Analysis

116. Use this information to answer the following question. The Retained Earnings, Dividends, and Income Summary accounts for Dukes Corporation for the accounting period are presented below in T account form after the recording and posting of closing entries:

12/31 12/31

12/31

Retained Earnings 600 1/1 800

Income Summary 1,800 12/31 12/31

3,000

3/1 6/1 9/1 12/1

Dividends 200 12/31 200 200 200

800

1,200 600

The amount of dividends for the period is a. $800. b. $200. c. $1,000. d. $1,200.

ANS: A PTS: 1 DIF: Challenging NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing entries | Closing of accounts MSC: ACBSP-APC-08-Closing Entries

OBJ: 5 LOC: Analysis

117. Under which circumstance would one less closing entry than usual be made? a. When the Retained Earnings account is zero prior to posting of closing entries b. When a net loss has been suffered c. When revenues have not yet been collected d. When net income is zero ANS: D PTS: 1 DIF: Challenging NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing entries | Closing of accounts MSC: ACBSP-APC-08-Closing Entries

OBJ: 5 LOC: Analysis

118. Use this adjusted trial balance to answer the following question. Nantucket's Marina Adjusted Trial Balance December 31, 2013 Cash Accounts Receivable Supplies Prepaid Insurance Dock Accumulated Depreciation–Dock Accounts Payable Common Stock Dividends Boat Rentals Depreciation Expense–Dock Wages Expense Insurance Expense Income Taxes Expense

$ 5,000 7,000 3,000 5,000 24,000 $ 6,000 12,000 20,000 8,000 34,000 2,000 13,000 4,000 1,000 $72,000

_______ $72,000

The entry to close the Dividends account includes a a. debit to Dividends for $8,000. b. debit to Retained Earnings for $8,000. c. credit to Retained Earnings for $8,000. d. credit to Income Summary for $8,000. ANS: B PTS: 1 DIF: Challenging NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing entries | Closing of accounts MSC: ACBSP-APC-08-Closing Entries

OBJ: 5 LOC: Analysis

119. Use this adjusted trial balance to answer the following question. Nantucket's Marina Adjusted Trial Balance December 31, 2013 Cash Accounts Receivable Supplies Prepaid Insurance Dock Accumulated Depreciation–Dock Accounts Payable Common Stock Dividends Boat Rentals Depreciation Expense–Dock Wages Expense Insurance Expense Income Taxes Expense

$ 5,000 7,000 3,000 5,000 24,000 $ 6,000 12,000 20,000 8,000 34,000 2,000 13,000 4,000 1,000 $72,000

_______ $72,000

The entry to close the Boat Rentals account includes a a. debit to Retained Earnings for $34,000. b. debit to Income Summary for $34,000. c. debit to Boat Rentals for $34,000. d. credit to Boat Rentals for $34,000. ANS: C PTS: 1 DIF: Challenging NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing entries | Closing of accounts MSC: ACBSP-APC-08-Closing Entries

OBJ: 5 LOC: Analysis

120. Use this adjusted trial balance to answer the following question. Nantucket's Marina Adjusted Trial Balance December 31, 2013 Cash Accounts Receivable Supplies Prepaid Insurance Dock Accumulated Depreciation–Dock Accounts Payable Common Stock Dividends Boat Rentals Depreciation Expense–Dock Wages Expense Insurance Expense Income Taxes Expense

$ 5,000 7,000 3,000 5,000 24,000 $ 6,000 12,000 20,000 8,000 34,000 2,000 13,000 4,000 1,000 $72,000

_______ $72,000

The entry to close the expense accounts includes a a. debit to Retained Earnings for $4,000. b. debit to Income Summary for $20,000. c. debit to Insurance Expense for $4,000. d. credit to Retained Earnings for $40,000. ANS: B Total expense accounts = $2,000 + $13,000 + $4,000 + $1,000 = $20,000 PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing entries | Closing of accounts MSC: ACBSP-APC-08-Closing Entries

LOC: Analysis

121. Use this adjusted trial balance to answer the following question. Nantucket's Marina Adjusted Trial Balance December 31, 2013 Cash Accounts Receivable Supplies Prepaid Insurance Dock Accumulated Depreciation–Dock Accounts Payable Common Stock Dividends Boat Rentals Depreciation Expense–Dock Wages Expense Insurance Expense Income Taxes Expense

$ 5,000 7,000 3,000 5,000 24,000 $ 6,000 12,000 20,000 8,000 34,000 2,000 13,000 4,000 1,000 $72,000

_______ $72,000

The amount of net income (or net loss) during the period is a. $32,000 net income. b. $9,000 net income. c. $10,000 net loss. d. $14,000 net income. ANS: D $34,000 – $2,000 – $13,000 – $4,000 – $1,000 = $14,000 PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing entries | Closing of accounts MSC: ACBSP-APC-08-Closing Entries

LOC: Analysis

122. Use this adjusted trial balance to answer the following question. Nantucket's Marina Adjusted Trial Balance December 31, 2013 Cash Accounts Receivable Supplies Prepaid Insurance Dock Accumulated Depreciation–Dock Accounts Payable Common Stock Dividends Boat Rentals Depreciation Expense–Dock Wages Expense Insurance Expense Income Taxes Expense

$ 5,000 7,000 3,000 5,000 24,000 $ 6,000 12,000 20,000 8,000 34,000 2,000 13,000 4,000 1,000 $72,000

_______ $72,000

The entry to close Income Summary includes a a. credit to Common Stock for $16,000. b. credit to Income Summary for $24,000. c. debit to Income Summary for $14,000. d. debit to Retained Earnings for $32,000. ANS: C Net income: $34,000 – $2,000 – $13,000 – $4,000 – $1,000 = $14,000 PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing entries | Closing of accounts MSC: ACBSP-APC-08-Closing Entries

LOC: Analysis

123. Wages Payable were $700 at the end of October and $560 at the end of November. Wages Expense for November was $3,600. How much cash was paid for wages during November? a. $3,460 b. $4,860 c. $3,740 d. $2,340 ANS: C $700 + $3,600 – $560 = $3,740 PTS: 1 DIF: Challenging OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Cash flow and current liabilities MSC: ACBSP-APC-09-Financial Statements

124. Unearned Revenue was $2,400 at the end of May and $3,000 at the end of June. Service Revenue was $10,600 for the month of June. How much cash was received for services provided during June? a. $10,000 b. $5,200 c. $11,200 d. $16,000 ANS: C $3,000 + $10,600 – $2,400 = $11,200 PTS: 1 DIF: Challenging OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Cash flow and current liabilities MSC: ACBSP-APC-09-Financial Statements 125. Prepaid Rent was $800 at the end of May and $1,300 at the end of June. Rent Expense for June was $520. How much cash was paid for rent during June? a. $620 b. $820 c. $1,020 d. $1,220 ANS: C $520 + $1,300 – $800 = $1,020 PTS: 1 DIF: Challenging OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Cash flow and current assets MSC: ACBSP-APC-09-Financial Statements 126. Accounts Receivable was $750 at the end of November and $525 at the end of December. Revenue totaled $4,775 for December. How much cash was received from revenues during December? a. $6,050 b. $5,000 c. $4,550 d. $3,550 ANS: B $750 + $4,775 – $525 = $5,000 PTS: 1 DIF: Challenging OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Cash flow and current assets MSC: ACBSP-APC-09-Financial Statements 127. Office Supplies were $1,800 at the end of January and $2,280 at the end of February. During February, Office Supplies Expense equaled $840. How much cash was paid for office supplies during February? a. 720 b. $3,120 c. $3,720 d. $1,320

ANS: D $2,280 + $840 – $1,800 = $1,320 PTS: 1 DIF: Challenging OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Cash flow and current assets MSC: ACBSP-APC-09-Financial Statements 128. Unearned Revenue was $600 at the end of February and $750 at the end of March. Service Revenue was $4,200 for the month of March. How much cash was received from revenue during March? a. $5,550 b. $4,050 c. $2,850 d. $4,350 ANS: D $750 + $4,200 – $600 = $4,350 PTS: 1 DIF: Challenging OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Cash flow and current liabilities MSC: ACBSP-APC-09-Financial Statements SHORT ANSWER 1. Which two broad account categories are used to determine net income? Define each category and list two examples of each type. ANS: Net income is determined by subtracting expenses from revenues. Revenues are defined as increases in stockholders' equity resulting from selling goods, rendering services, or performing other business activities. Examples are fees for designing a website or sales made by a hobby shop. Expenses are decreases in stockholders' equity resulting from the cost of goods and services used up in the course of earning revenues. Examples include rent, insurance, and advertising. PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Net income MSC: ACBSP-APC-05-Accounting Cycle 2. How and why is the matching rule applied to the cost of a building? ANS: The matching rule requires that the cost of a building be allocated over the period the building benefits the company (useful life of the building). This allocation of cost is in the form of depreciation expense that appears annually on the income statement. This conversion of asset cost into expense occurs over the same years that the building aids the company in earning revenue. As a result of this matching of expense with revenue, the financial statements more accurately measure the entity's performance over the years.

PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement KEY: Matching rule and long-term assets MSC: ACBSP-APC-05-Accounting Cycle

LOC: Comprehension

3. What are the three things that must be done in order to accomplish accrual accounting? ANS: 1. Recognize revenues when they are earned. 2. Recognize expenses when they are incurred. 3. Adjust the accounts. PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Accrual accounting MSC: ACBSP-APC-04-Cash vs. Accrual 4. What is the purpose of adjusting entries? ANS: Adjusting entries result in financial statements that include all transactions experienced during the accounting period. They are prepared to apply accrual accounting to transactions that span more than one accounting period. PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance MSC: ACBSP-APC-07-Adjusting Entries

LOC: Recall

5. Distinguish between a deferral and an accrual. ANS: A deferral is the postponement of the recognition of an expense already paid or of a revenue already received. An accrual is the recognition of an expense or revenue that has arisen but that has not yet been recorded. PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 6. In the space below, state whether each situation is a deferral or an accrual. ______ ______ ______ ______ ______

a. Unrecorded interest on savings bonds is $1,530. b. Property taxes that have been incurred but that have not yet been paid or recorded amount to $2,068. c. Legal fees of $5,780 were collected in advance. By year end, 60 percent were still unearned. d. Prepaid Insurance had an $1,800 balance prior to adjustment. By year end, 50 percent was still unexpired. e. Salaries earned by employees by year end but not yet paid or recorded amounted to $3,310.

______

ANS: a. Accrual b. Accrual c. Deferral

Services totaling $1,380 have been performed but not yet recorded or billed.

d. Deferral e. Accrual f. Accrual

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 7. In the space below, state whether each situation is a deferral or an accrual. ______ ______

a. b.

______

ANS: a. Deferral b. Accrual c. Deferral

Depreciation on machinery is $7,200 for the accounting period. Interest that has been incurred on a loan but that has not yet been paid or recorded is $675. Office supplies of $965 were on hand at the beginning of the period. Purchases of office supplies during the period totaled $640. At the end of the period, $120 in office supplies remained. Commissions amounting to $975 were earned but not yet collected by year end. Prepaid Rent had a $2,500 balance prior to adjustment. By year end, 50 percent had expired. Federal income taxes for the year were estimated to be $4,680.

d. Accrual e. Deferral f. Accrual

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 8. Worcester Company purchased equipment for $72,000. The equipment has an estimated useful life of eight years and will be worthless at the end of that time. In the partial balance sheet below, show exactly how the equipment should be disclosed after it has been used for five years. Also calculate total assets. Worcester Company Partial Balance Sheet December 31, 2013 Cash Prepaid rent Equipment Total assets

$36,000 12,000 ____ __ $___ __

ANS: © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Worcester Company Partial Balance Sheet December 31, 2013 Cash Prepaid rent Equipment Less accumulated depreciation

$36,000 12,000 $72,000 45,000*

Total assets

27,000 $75,000

*$72,000 ÷ 8 = $9,000  5 = $45,000 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Adjust accounts MSC: ACBSP-APC-07-Adjusting Entries 9. Antonio's Pizza has a delivery truck it purchased for $30,000. The truck has an estimated useful life of six years and will be worthless at the end of that time. In the partial balance sheet below, show exactly how the truck would be disclosed after it has been used for two years. Also calculate total assets. Antonio's Pizza Partial Balance Sheet December 31, 2013 Cash Prepaid rent Truck

$10,000 3,000 ______ $___ __

Total assets

ANS: Antonio's Pizza Partial Balance Sheet December 31, 2013 Cash Prepaid rent Truck Less accumulated depreciation Total assets

$10,000 3,000 $30,000 10,000*

20,000 $33,000

*$30,000 ÷ 6 = $5,000  2 = $10,000 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Adjust accounts MSC: ACBSP-APC-07-Adjusting Entries © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

10. An examination of the Prepaid Insurance account shows a debit balance of $3,670 at the end of the accounting period before adjustment. Prepare journal entries to record the insurance expense for the period under each of the following independent assumptions: a. An examination of insurance policies shows that insurance costing $1,200 has expired during the period. General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

b. An examination of insurance policies shows unexpired insurance of $2,640 at the end of the period. General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: a. General Journal Date

Page 1 Post. Ref.

Description Insurance Expense Prepaid Insurance Recorded expired insurance

Debit $1,200

Credit $1,200

b. General Journal Date

Page 1 Post. Ref.

Description Insurance Expense Prepaid Insurance Recorded expired insurance

Debit $1,030

Credit $1,030

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Adjust accounts MSC: ACBSP-APC-07-Adjusting Entries 11. Dukes Press pays wages of $12,000 every Friday for a five-day workweek. September 30, the last day of the fiscal year, falls on a Tuesday. In the journal provided, prepare the September 30 adjusting entry as well as the October 3 follow-up entry when the wages are paid. Omit explanations. General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal Date Description Sept. 30 Wages Expense Wages Payable Oct.

Page 1 Post. Ref.

Debit 4,800

Credit 4,800

3 Wages Payable Wages Expense Cash

4,800 7,200 12,000

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 12. On December 12, Roger Kent, a painter, received $1,800 in advance for performing a service that would extend into the following calendar year. By December 31, he still had three-fourths of the service remaining to perform. In the journal provided, prepare the December 12 entry, the December 31 end-of-period adjustment, as well as the entry on January 29 when the job was completed. Omit explanations. General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal Date Description Dec. 12 Cash Unearned Painting Revenue

Jan.

Page 1 Post. Ref.

Debit 1,800

Credit 1,800

31 Unearned Painting Revenue Painting Revenue

450

29 Unearned Painting Revenue Painting Revenue

1,350

450

1,350

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 13. Bristol Enterprises had supplies on hand costing $480 on December 31. During the same year, supplies costing $1,000 were purchased, and $640 in supplies were consumed during the year. What was the cost of supplies on hand on January 1 of that year? ANS: $480 + $640 – $1,000 = $120 PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Adjust accounts MSC: ACBSP-APC-07-Adjusting Entries 14. Dowling Company had supplies on hand costing $1,000 at the beginning of the year and $2,400 at the end of the year. During the year, supplies totaling $3,800 were consumed. How much was the total cost of supplies purchased during the year? ANS: $3,800 + $2,400 – $1,000 = $5,200 PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Adjust accounts MSC: ACBSP-APC-07-Adjusting Entries 15. Distinguish between adjusting and closing entries. ANS: Adjusting entries update the accounts at the end of the accounting period. Closing entries, on the other hand, zero out all revenue, expense, and dividends accounts. PTS: 1 DIF: Easy OBJ: 4 | 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Accounting cycle MSC: ACBSP-APC-05-Accounting Cycle © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

16. The following steps in the accounting cycle are presented out of order below. Arrange the steps in the proper order by placing a number from 1 through 5 in the blanks provided. Also identify each step as either a recurring activity (RA)—one that would be repeated during the fiscal period—or an end-of-period activity (EOP)—one performed at the end of the accounting period. ______ a. Record entries in a journal. ______ b. Adjust the accounts and prepare an adjusted trial balance. ______ c. Close the accounts and prepare a post-closing trial balance. ______ d. Analyze business transactions from source documents. ______ e. Post entries to the ledger and prepare a trial balance. ANS: a. 2 RA b. 4 EOP c. 5 EOP

d. 1 RA e. 3 RA

PTS: 1 DIF: Moderate OBJ: 4 | 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Accounting cycle MSC: ACBSP-APC-05-Accounting Cycle 17. During the performance of the steps in the accounting cycle, trial balances are prepared at three key points. Using specific names where applicable, discuss the time of preparation and the purpose served by each of these trial balances. ANS: The first time a trial balance would be prepared could be anytime during the accounting period prior to any adjusting entries are made. Its purpose would be to assure the equality of debits and credits posted to the accounts up to that point. If this trial balance were to be prepared only once, it should be done immediately prior to any adjusting entries. This trial balance could be referred to as an Unadjusted Trial Balance. The next trial balance to be prepared would be the Adjusted Trial Balance. It would be prepared after all of the adjusting entries for the period have been posted. Its purpose is to verify the equality of all debits and credits posted up to that point. The final trial balance prepared is the Post-Closing Trial Balance. It is prepared after the closing entries have been posted to the accounts. It not only verifies the equality of debits and credits after closing procedures but also verifies that only permanent accounts remain with balances. PTS: 1 DIF: Moderate OBJ: 4 | 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Accounting cycle MSC: ACBSP-APC-05-Accounting Cycle 18. What broad purposes are accomplished by closing entries? ANS: Closing entries zero out all nominal accounts so that they may begin accumulating amounts at the beginning of the next period. Closing entries also transfer net income or loss to Retained Earnings.

PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Closing entries MSC: ACBSP-APC-08-Closing Entries 19. Indicate with an X in the appropriate column the type of entry to be made to close the following accounts: Debit

Credit

Not Closed

a. Fees Earned b. Telephone Expense c. Dividends paid d. Cash e. Depreciation Expense–Equipment f. Income Summary (assuming a net income) g. Retained Earnings ANS: a. b. c. d. e. f. g.

Debit X

Credit

Not Closed

X X X X X

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing entries | Closing of accounts MSC: ACBSP-APC-08-Closing Entries

LOC: Comprehension

20. Why will the Income Summary account never appear on any financial statement? ANS: The Income Summary account begins the closing process at a zero balance and ends the process at a zero balance. Therefore, there is no balance to transfer onto a financial statement. PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing entries | Closing of accounts MSC: ACBSP-APC-08-Closing Entries

LOC: Comprehension

21. The following amounts are taken from the balance sheets of Baltic Corporation:

December 31, 2013 Accrued liabilities Prepaid expenses

December 31, 2012

$44,000 14,000

$37,500 18,500

During 2013, expenses related to accrued liabilities were $30,500, and expenses related to prepaid expenses were $21,000. a. Compute cash payments related to accrued liabilities. b. Compute cash payments related to prepaid expenses. ANS: a. $24,000 ($37,500 + $30,500 – $44,000) b. $16,500 ($14,000 + $21,000 – $18,500) PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement KEY: Cash flow and current assets/liabilities MSC: ACBSP-APC-09-Financial Statements

LOC: Application

22. The end of year income statement for Plymouth Company showed rent expense of $21,600 and salaries expense of $14,400. The related balance sheet account balances at year end for last year and this year were as follows: This Year Prepaid rent Salaries payable

$2,400 800

Last Year $

0 1,600

a. Compute cash paid for rent during the year. b. Compute cash paid for salaries during the year. ANS: a. $24,000 ($2,400 + 21,600 – $0) b. $15,200 ($1,600 + $14,400 – $800) PTS: 1 DIF: Challenging OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement KEY: Cash flow and current assets/liabilities MSC: ACBSP-APC-09-Financial Statements

LOC: Analysis

MATCHING Match each definition with the correct term below. a. Used to determine that all temporary accounts have zero balances. b. The postponement of the recognition of an expense already paid. c. Accounts that begin each accounting period with a zero balance. d. Increases in stockholders’ equity resulting from selling goods. e. Revenue that is received in advance of goods delivery or service performance. f. Accounts that carry their end-of-period balances into the next accounting period. g. The recognition of a revenue or an expense that has arisen but not been recorded during the accounting period. h. Decreases in stockholders’ equity resulting from the cost of selling goods. i. Used after making adjusting journal entries to ensure that debits equal credits. j. Revenues that a company has earned by performing a service or delivering goods but for which no entry has been made in the accounting records. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Unearned revenues Adjusted trial balance Post-closing trial balance Revenues Temporary accounts Accrual Expenses Deferred expense Accrued revenues Permanent accounts

1. ANS: E PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 2. ANS: I PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Adjust accounts MSC: ACBSP-APC-07-Adjusting Entries 3. ANS: A PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries 4. ANS: D PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Accounts MSC: ACBSP-APC-09-Financial Statements 5. ANS: C PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries 6. ANS: G PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 7. ANS: H PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Accounts MSC: ACBSP-APC-09-Financial Statements © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

8. ANS: B PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 9. ANS: J PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 10. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries PROBLEM 1. Susan Kane won the mayoral election in the City of Ashley partly on the basis of her charge that Allen Ross, the former mayor, was responsible for the budget deficit. After taking office, she hired a major international accounting firm to straighten things out. This excerpt appeared in an article from a leading business publication, West End Business Review: [A riddle] Q: When is a budget deficit not a deficit? A: When it is a surplus, of course. Ashley Mayor Susan Kane was once again caught with egg on her face last week as she and her financial advisers tried to defend that riddle. On one hand, Comptroller Jim Guan [a Kane appointee], explaining $75 million in assets the mayor [Kane] hopes to hold in reserve in the 2013 Ashley city budget, testified in hearings that the city had actually ended 2011 with a $6 million surplus, not the much-reported deficit. He said further that the modest surplus grew to $54 million as a result of tax-enrichment supplements to the 2011 balance sheet. On the other hand, the mayor stuck by the same guns she used last year on her predecessor. The city had ended 2011, under the Allen Ross administration, not merely without a surplus, but with a deficit. The apparent discrepancy can be explained. Like most U.S. cities, Ashley operates under a modified accrual accounting basis. This is a combination of the cash basis and the accrual basis. The modified accrual basis differs from the accrual basis in that revenue is recorded when it is collected. The collection of Ashley's parking tax, which is assessed on all city parking lots and garages, is an example. The tax is assessed and collected on a quarterly basis but the city doesn't collect the amount due for the last quarter of 2012 until the first quarter of 2013. Under ideal accrual methods, the parking revenues should be recorded in the 2012 financial statements. Under a cash approach, the revenues would be recorded in the 2013 budget. What the city did before was to record the money whenever it was advantageous politically. That, combined with the infamous revolving funds, allowed the city to hide the fact that it was running large deficits under [former] Mayor Ross. That also means that no one really knew where the city stood. The auditors are now reallocating the parking revenues to the 2013 budget but are accruing other revenues by shifting the period of collection from a year in the past. Overall, more revenues were moved into earlier fiscal years than into later years, inflating those budgets. Thus, the 2013 deficit is a surplus. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

The article concluded: The upshot is that both Mayor Kane and Mr. Guan [the comptroller] were correct. There was a deficit in the 2011 corporate or checkbook fund, but because of corrections taking place now, a surplus exists. a. Do you agree with the way the auditors handled parking revenues? Support your answer by explaining which method of accounting you think a city should use. b. Comment on the statement, “Systematically applied accounting principles will allow all to know exactly where the city stands.” ANS: a. The question to be resolved is whether parking revenues should be recorded in the period in which they are earned (accrual accounting) or in the period in which they are collected (modified accrual accounting). The city was inconsistent in how it handled the parking revenues. In other words, it did whatever was politically expedient. The auditors are using the modified accrual basis. This is a generally accepted method used by governmental units and so is an acceptable method for the city of Ashley to use. The reasoning behind this method is that governmental units are not-for-profit organizations and therefore do not benefit greatly by using accrual accounting, a primary objective of which is to measure earnings. There are, however, strong advocates of accrual accounting for governmental units. They feel that governmental units should be subject to the same accounting principles that business organizations are. b. Regardless of the relative merits of the two methods, the worst situation from a financial reporting standpoint is for the city to use different methods in different years. Having chosen the modified accrual method, the auditors should (and did) apply the method consistently to all the years involved (2011, 2012, and 2013). Using the same method consistently for all years simplifies comparison of the financial reports and removes political bias. PTS: 1 DIF: Challenging OBJ: 1 | 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Critical Thinking KEY: Matching issues | Measurement issues | Accrual accounting MSC: ACBSP-APC-04-Cash vs. Accrual | ACBSP-APC-05-Accounting Cycle 2. Joan Miller owns an advertising agency. One of the adjustments her accountant made at the end of July was $360 for unpaid wages of the secretary. Joan Miller might ask, “Why go to the trouble of making this adjustment? Why worry about it? Doesn't everything come out in the end, when the secretary is paid in August? Because wages expense in total is the same for the two months, isn't the net income in total unchanged?” Give three reasons why adjusting entries can help Joan Miller assess the performance of her business. (Net income was $1,600.)

ANS: Adjusting entries are important because they help accountants compile information that is useful to management and stockholders. First, adjusting entries are necessary to measure income and financial position in a relevant and useful way. Joan Miller should know how much the agency has earned each month and what its liabilities and assets are on the last day of the month. For instance, if the accrued wages for the secretary are not recorded, the agency's income will be overstated by $360, or 22.5 percent ($360 / $1,600). Second, adjusting entries allow financial statements to be compared from one accounting period to the next. Joan Miller can see whether the company is making progress toward earning a profit or if the company has improved its financial position. If the adjustment for accrued wages is not recorded, not only will the net income for July be overstated by $360, but the net income for August (the month when payment will be made) will be understated by $360. This error will make August's earnings, whatever they may be, appear lower than they actually are. Third, even though one adjusting entry may seem insignificant, the cumulative effect of all adjusting entries can be great. PTS: 1 DIF: Challenging OBJ: 2 | 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Adjust accounts and adjust trial balance MSC: ACBSP-APC-07-Adjusting Entries

LOC: Critical Thinking

3. Answer the following questions. (Show your work.) a. Equipment is purchased for $48,000, to be used for eight years. Assuming zero value at the end of eight years, what is the equipment's carrying value after two years and three months? b. Prepaid Insurance has an $800 balance prior to adjustment. By year end, one-fourth has expired. What will be the balance in Prepaid Insurance after the adjusting entry has been made? c. A company purchased $210 in supplies during the year, recorded $120 in Supplies Expense, and ended with $350 of supplies. What was the beginning balance of Supplies? ANS: a. $34,500 [$48,000 – ($48,000 ÷ 8 = $6,000 ÷ 12 = $500 per month  27 months = $13,500)] b. $600 [$800 – ($800 ÷ 4)] c. $260 ($350 + $120 = $470 – $210) PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 4. In the journal provided, prepare adjusting entries for the following items. Omit explanations. a. Depreciation on machinery is $1,880 for the accounting period. b. Interest incurred on a loan but not paid or recorded is $1,270. c. Office supplies of $1,200 were on hand at the beginning of the period. Purchases of office supplies during the period totaled $400. At the end of the period, $280 in office supplies remained. d. Commissions revenue amounting to $1,080 were earned but not recorded or collected by year end. e. Prepaid Rent had a $16,000 normal balance prior to adjustment. By year end, 50 percent had expired. f. Federal income taxes for the year are estimated to be $6,500. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal Date a.

Description Depreciation Expense-Machinery Accumulated Depreciation-Machinery

Page 1 Post. Ref.

Debit 1,880

1,880

Interest Expense Interest Payable

1,270

Office Supplies Expense*

1,320

1,270

Office Supplies d.

Accounts Receivable

1,320 1,080

Commissions Earned e.

1,080

Rent Expense** Prepaid Rent

8,000

Income Taxes Expense Income Taxes Payable *$1,200 + $400 - $280 = 1,320 **$16,000 x .5 = $8,000

6,500

Credit

8,000

6,500

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 5. In the journal provided, prepare adjusting entries for the following items. Omit explanations. a. Unrecorded interest on savings bonds is $680. b. Property taxes incurred but not paid or recorded amount to $540. c. Legal fees of $5,000 were collected in advance. By year end, 80 percent were still unearned. d. Prepaid Insurance had a $1,600 debit balance prior to adjustment. By year end, 25 percent was still unexpired. e. Salaries incurred by year end but not yet paid or recorded amounted to $1,375. f. Services totaling $900 have been performed but not yet recorded or billed. General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal Date Description a. Interest Receivable Interest Income b.

Property Taxes Expense Property Taxes Payable

Page 1 Post. Ref.

Debit 680

680 540 540

Unearned Legal Fees* Legal Fees Earned

1,000

Insurance Expense** Prepaid Insurance

1,200

Salaries Expense Salaries Payable

1,375

Accounts Receivable Service Revenue Earned *$5,000 x .2 = $1,000 **$1,600 x .75 = $1,200

900

Credit

1,000

1,200

1,375

900

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 6. In the journal provided, prepare year-end adjustments for the following situations. Omit explanations. a. Accrued interest on notes receivable is $210. b. Of the $24,000 received in advance of performing a service, one-third was still unearned by year end. c. Three years' rent, totaling $72,000, was paid in advance at the beginning of the year. d. Services totaling $10,600 had been performed, but not yet billed. e. Depreciation on trucks totaled $6,800 for the year. f. Supplies available for use totaled $1,380. However, by year end, only $200 in supplies remained. g. Payroll for the five-day work week, to be paid on Friday, is $60,000. Year end falls on a Monday. h. Estimated federal income taxes were $8,320.

General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal Date a.

Description Interest Receivable Interest Income

Page 1 Post. Ref.

Debit 210

Credit 210

Unearned Revenue* Service Revenue

16,000

Rent Expense** Prepaid Rent

24,000

Accounts Receivable Service Revenue

10,600

Depreciation Expense-Trucks Accumulated Depreciation-Trucks

6,800

Supplies Expense† Supplies

1,180

Wages Expense‡ Wages Payable

12,000

Income Taxes Expense Income Taxes Payable

8,320

16,000

24,000

10,600

6,800

1,180

12,000

8,320

*$24,000 x 2/3 = $16,000 **$72,000 ÷ 3 = $24,000 †$1,380 – $200 = 1,180 ‡$60,000 x 1/5 = $12,000 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 7. In the journal provided, prepare year-end adjustments for the following situations. Omit explanations. a. Accrued interest on notes receivable is $560. b. Of the $7,200 received in advance of earning a service, one-third was still unearned by year end. c. Two years of rent, totaling $24,000, was paid in advance. By year end, four months' worth had expired. d. Services totaling $685 had been performed, but not yet billed. e. Depreciation on trucks totaled $1,700 for the year. f. Supplies available for use during the year amounted to $3,400. However, by year end, only $700 in supplies remained. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

g. Payroll for the five-day work week, to be paid on Friday, is $6,000. Year end falls on a Tuesday. h. Estimated federal income taxes were $2,100.

Date

General Journal Post. Description Ref.

Page 1 Debit

Credit

ANS: General Journal Date Description a. Interest Receivable Interest Income b.

Page 1 Post. Ref.

Debit

Credit 560 560

Unearned Revenue* Service Revenue

4,800

Rent Expense** Prepaid Rent

4,000

Accounts Receivable Service Revenue

4,800

4,000 685 685

Depreciation Expense–Trucks Accumulated Depreciation–Trucks

1,700

Supplies Expense† Supplies

2,700

Wages Expense‡ Wages Payable

2,400

Income Taxes Expense Income Taxes Payable *$7,200 x 2/3 = $4,800 **$24,000 x 4/24 = $4,000 †$3,400 – $700 = $2,700 ‡$6,000 x 2/5 = $2,400

2,100

1,700

2,700

2,400

2,100

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 8. Prepare year-end adjusting entries for each of the following situations. a. The Office Supplies account showed a beginning debit balance of $600 and purchases of $1,000. The ending debit balance was $400. b. Depreciation on buildings is estimated to be $7,600. c. A one-year insurance policy was purchased for $6,000. Four months have passed since the purchase. d. Accrued interest on notes payable amounted to $1,500. e. The company received a $14,400 advance payment during the year on services to be performed. By the end of the year, two-thirds of the services had been performed. f. Payroll for the five-day workweek, to be paid on Friday, is $14,000. The last day of the period is a Wednesday. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

g. Services totaling $780 had been performed but not yet billed or recorded.

Date

General Journal Post. Description Ref.

Page 1 Debit

Credit

ANS: General Journal Date Description a. Office Supplies Expense Office Supplies Recorded supplies used ($600 + $1,000 – $400 = $1,200) b.

Page 1 Post. Ref.

Debit 1,200

1,200

Depreciation Expense–Buildings Accumulated Depreciation–Buildings Recorded annual depreciation

7,600

Insurance Expense Prepaid Insurance Recorded expired insurance ($6,000  4/12 = $2,000)

2,000

Interest Expense Interest Payable Recorded accrued interest on notes payable

1,500

Unearned Service Revenue Service Revenue Recorded revenue earned ($14,400  2/3 = $9,600)

9,600

Wages Expense Wages Payable Recorded accrued wages ($14,000  3/5 = $8,400)

8,400

Accounts Receivable Services Revenue Recorded revenue earned but not received

Credit

7,600

2,000

1,500

9,600

8,400

780 780

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries

9. Prepare year-end adjusting entries for each of the following situations: a. The Store Supplies account showed a beginning debit balance of $400 and purchases of $2,800. The ending debit balance was $800. b. Depreciation on buildings is estimated to be $7,300. c. A one-year insurance policy was purchased for $2,400. Nine months have passed since the purchase. d. Accrued interest on notes payable amounted to $200. e. The company received a $9,600 advance payment during the year on services to be performed. By the end of the year, one-third of the services had been performed. f. Payroll for the five-day workweek, to be paid on Friday, is $10,000. The last day of the period is a Tuesday. g. Services totaling $920 had been performed but not yet billed or recorded. General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal Date Description a. Store Supplies Expense Store Supplies Recorded supplies used ($400 + $2,800 – $800 = $2,400) b.

Page 1 Post. Ref.

Debit 2,400

2,400

Depreciation Expense–Buildings Accumulated Depreciation–Buildings Recorded annual depreciation

7,300

Insurance Expense Prepaid Insurance Recorded expired insurance ($2,400  9/12 = $1,800)

1,800

Interest Expense Interest Payable Recorded accrued interest on notes payable

200

7,300

1,800

200

Unearned Service Revenue Service Revenue Recorded revenue earned ($9,600  1/3 = $3,200)

3,200

Wages Expense Wages Payable Recorded accrued wages ($10,000  2/5 = $4,000)

4,000

Accounts Receivable Services Revenue Recorded revenue earned but not received

Credit

3,200

4,000

920 920

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries

10. Use the following unadjusted trial balance to prepare adjusting entries, given the additional information below it. Assume financial statements are prepared quarterly. Omit explanations. Crivelli Financial Services Unadjusted Trial Balance September 30, 2013 Cash $ 20,000 Accounts Receivable 6,400 Office Supplies 1,000 Prepaid Rent 3,600 Office Furniture 9,600 Accumulated Depreciation–Office Furniture Accounts Payable Unearned Revenue Common Stock Consulting Revenue Salaries Expense 7,400 Insurance Expense 1,600 $49,600

400 14,800 2,000 20,400 12,000 _______ $49,600

a. Of the revenue received in advance, 60 percent remained unearned on September 30. b. The office furniture has an estimated five-year useful life and zero value at the end of that time. Record depreciation for the quarter. c. Salaries earned, but unpaid, totaled $1,520. d. The Prepaid Rent applies to the six months beginning July 1, 2013. e. Office supplies on hand totaled $300 at the end of the quarter. f. Services performed but not yet billed or recorded amount to $1,800.

General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal Date Description a. Unearned Revenue* Consulting Revenue b.

Depreciation Expense–Office Furniture** Accumulated Depreciation– Office Furniture

Page 1 Post. Ref.

Debit 800

800 480 480

Salaries Expense Salaries Payable

1,520

Rent Expense† Prepaid Rent

1,800

1,520

1,800

Office Supplies Expense‡ Office Supplies

700

Accounts Receivable Consulting Revenue *$2,000 x .4 = $800 **$9,600 x 3/60 = $480 †$3,600 x 3/6 = $1,800 ‡$1,000 – $300 = $700

1,800

Credit

700

1,800

PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries

11. Use the following unadjusted trial balance to prepare adjusting entries, given the additional information below it. Assume that financial statements are prepared quarterly. Omit explanations. Shayna's Financial Services Unadjusted Trial Balance September 30, 2013 Cash Accounts Receivable Office Supplies Prepaid Rent Office Furniture Accumulated Depreciation–Office Furniture Accounts Payable Unearned Revenue Common Stock Consulting Revenue Salaries Expense Insurance Expense

$ 30,000 9,600 1,600 5,400 14,400 $

11,000 2,400 $74,400

600 22,200 3,000 30,600 18,000 _______ $74,400

a. Of the revenue received in advance, 60 percent remained unearned on September 30. b. The office furniture has an estimated 12-year useful life and zero value at the end of that time. Record depreciation for the quarter. c. Salaries earned, but unpaid, totaled $2,600. d. The Prepaid Rent applies to the six months beginning July 1, 2013. e. Office supplies on hand totaled $600 at the end of the quarter. f. Services performed but not yet billed or recorded amount to $3,000.

General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal Date Description a. Unearned Revenue* Consulting Revenue b.

Depreciation Expense–Office Furniture** Accumulated Depreciation– Office Furniture

Page 1 Post. Ref.

Debit 1,200

1,200 300 300

Salaries Expense Salaries Payable

2,600

Rent Expense† Prepaid Rent

2,700

Office Supplies Expense‡ Office Supplies

1,000

Accounts Receivable Consulting Revenue *$3,000 x .4 = $1,200 **$14,400 x 3/144 = $300 †$5,400 x 3/6 = $2,700 ‡$1,600 – $600 = $1,000

3,000

Credit

2,600

2,700

1,000

3,000

PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 12. Answer the following questions. (Show your work.) a. A machine was purchased on July 1, 2012. It had a cost of $72,000 and an estimated useful life of nine years with zero value at that time. What is the machine's carrying value after four years? b. On April 1, 2012, a company paid in advance $108,000 for three years' insurance. How much Prepaid Insurance remains on the balance sheet on December 31, 2012? c. A company began the year with $1,600 in supplies, purchased $4,000 in supplies, and ended the period with $1,200 in supplies. How much is Supplies Expense for the period? d. A company was paid $3,600 in advance for services to be performed. At year end, one-third had not yet been earned. How much in Service Revenue should be recorded?

ANS: a. $40,000 [$72,000 – ($72,000 ÷ 9 = $8,000  4 = $32,000)] b. $81,000 [$108,000 – ($108,000 ÷ 36 = $3,000 per month  9 = $27,000)] c. $4,400 ($1,600 + $4,000 – $1,200) d. $2,400 [$3,600 x 2/3] PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 13. Answer the following questions. (Show your work.) a. Revenue of $60,000 was earned, but only $45,000 was collected. Expenses of $36,000 were incurred, but only $30,000 was paid. What is reported net income? b. Wages of $4,000 are paid every Friday for a five-day workweek. If year end falls on a Tuesday, the adjusting entry for wages would be recorded at what amount? c. A company vehicle is purchased for $24,000. Assuming an eight-year useful life and zero value at that time, what is the balance of accumulated depreciation after five years? d. Supplies Expense of $3,600 was recorded for a given year. Assuming that $2,400 in supplies were purchased during the year and that $640 in supplies remained at year end, what was the cost of supplies at the beginning of the year? ANS: a. $24,000 ($60,000 – $36,000) b. $1,600 ($4,000  2/5) c. $15,000 ($24,000 ÷ 8 = $3,000  5) d. $1,840 ($3,600 + $640 – $2,400) PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 14. For each of the following oversights, state whether total assets will be understated, overstated, or not affected. ______ a. Failure to record revenue earned but not yet received ______ b. Failure to record expired rent ______ c. Failure to record accrued interest in the bank ______ d. Failure to record depreciation ______ e. Failure to record accrued wages ______ f. Failure to convert unearned revenue to earned revenue ANS: a. Understated b. Overstated c. Understated

d. Overstated e. Not affected f. Not affected

PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 15. For each of the following oversights, state whether stockholders' equity will be understated, overstated, or not affected. ______ a. Failure to record depreciation ______ b. Failure to record accrued wages ______ c. Failure to convert unearned revenue to earned revenue ______ d. Failure to record accrued interest in the bank ______ e. Failure to record expired insurance ______ f. Failure to record revenue earned but not yet received ANS: a. Overstated b. Overstated c. Understated

d. Understated e. Overstated f. Understated

PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries 16. Norfolk Company has the following liabilities at year end: Notes Payable Accounts Payable Unearned Contract Revenue Wages Payable Interest Payable Income Taxes Payable

$40,000 30,000 18,000 5,800 1,400 3,000

a. Which of these accounts probably was created at the end of the fiscal year as a result of an accrual? Which probably was adjusted at year end? Explain your answer. b. Which adjustments probably reduced net income? Which probably increased net income? Explain your answers. ANS: a. Wages, interest, and income taxes are expenses that commonly have accrued but have not been paid at year's end. The offsetting liability accounts for these expenses are Wages Payable, Interest Payable, and Income Taxes Payable. Unearned Contract Revenue probably required an adjusting entry because some of the contract services undoubtedly have been provided and thus earned. It is less likely that adjusting entries affected Notes Payable or Accounts Payable. b. The three accruals for wages, interest, and income taxes decreased net income because each increased expenses. On the other hand, the adjustment for Contract Revenue Earned increased net income because the revenue was recognized as having been earned. PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Critical Thinking KEY: Adjustment process MSC: ACBSP-APC-07-Adjusting Entries © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

17. Given the adjusted trial balance below, prepare (in good form) an income statement, statement of retained earnings, and balance sheet. The name of the business is Hampden Cleaning Service and the accounting period coincides with the calendar year. Hampden Cleaning Service Adjusted Trial Balance December 31, 2013 Cash Accounts Receivable Supplies Prepaid Insurance Office Equipment Accumulated Depreciation–Office Equipment Accounts Payable Salaries Payable Common Stock Retained Earnings, Dec. 31, 2012 Service Revenue Earned Salaries Expense Supplies Expense Insurance Expense Depreciation Expense–Office Equipment

530 1,200 20 20 2,000 $ 300 1,200 70 1,000 400 2,200

1,120 80 100 100 $5,170

______ $5,170

ANS: Hampden Cleaning Service Income Statement For the Year Ended December 31, 2013 Service revenue earned Expenses Salaries expense $1,120 Supplies expense 80 Insurance expense 100 Depreciation expense–office equipment 100 Total expenses Net income Hampden Cleaning Service Statement of Retained Earnings For the Year Ended December 31, 2013 Retained earnings, December 31, 2012 Net income Subtotal Less dividends Retained earnings, December 31, 2013

$2,200

1,400 $ 800

$400 800 $1,200 0 $1,200

Hampden Cleaning Service Balance Sheet December 31, 2013 Assets Cash Accounts receivable Supplies Prepaid insurance Office equipment Less accumulated depreciation Total assets

$2,000 300

530 1,200 20 20

1,700 $3,470

Liabilities Accounts payable Salaries payable Total liabilities

1,200 70 $

1,270

Stockholders' Equity Common Stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity

1,000 1,200 2,200 $3,470

PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Prepare financial statements MSC: ACBSP-APC-09-Financial Statements 18. The Retained Earnings, Dividends, and Income Summary accounts for Suffolk’s Repair Shop for the accounting period are presented below in T account form after the recording and posting of closing entries.

12/31 12/31

12/31

Retained Earnings 200 1/1 600

Income Summary 2,000 12/31 12/31

1,000

3/1 6/1 9/1

Dividends 200 12/31 200 200

600

1,800 200

From the T accounts, determine the following: a. Revenue for the period b. Net income (or net loss) c. Dividends for the period d. Ending balance of Retained Earnings

ANS: a. $1,800 b. ($200) [$1,800 – $2,000] c. $600 d. $200 Cr. [$1,000 – $200 – $600] PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing entries | Closing of accounts MSC: ACBSP-APC-08-Closing Entries

LOC: Analysis

19. Presented below are the Retained Earnings, Dividends, and Income Summary accounts for Happy Puppy Pet Grooming Boutique for the year ended December 31, 2013. Retained Earnings 12/31 1/1 2,450 2,300 12/31 3,175

Income Summary 12/31 12/31 1,125 12/31 3,175

Dividends 5/1 950 8/19 1,500

12/31 2,450

4,300

In the journal provided, prepare the closing entries that resulted in the T accounts above. Assume that the only revenue is Revenue from Services and the only expense is Advertising Expense (omit explanations).

Date

Description

General Journal Post. Ref.

Debit

Page 1 Credit

ANS: General Journal

Page 1 Post. Ref.

Date Description Dec. 31 Revenue from Services Income Summary

Debit 4,300

Credit 4,300

31 Income Summary Advertising Expense

1,125

31 Income Summary Retained Earnings

3,175

31 Retained Earnings Dividends

2,450

1,125

3,175

2,450

PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing entries | Closing of accounts MSC: ACBSP-APC-08-Closing Entries

LOC: Analysis

20. Below are the adjusted accounts of Midlesex Realtors, Inc., for the month ended July 31, 2013, listed in alphabetical order: Accounts Payable Accounts Receivable Accumulated Depreciation– Office Equipment Cash Commissions Revenue Common Stock Depreciation Expense– Office Equipment

$2,400 21,600 24,000 6,900 45,000 48,000

Dividends Income Taxes Expense Income Taxes Payable Land Office Equipment Salaries Expense Utilities Expense

$ 6,000 600 600 9,000 60,000 13,800 900

1,200

Prepare a post-closing trial balance.

ANS: Middlesex Realtors, Inc. Post-Closing Trial Balance July 31, 2013 Cash Accounts Receivable Land Office Equipment Accumulated Depreciation–Office Equipment Accounts Payable Income Taxes Payable Common Stock Retained Earnings

$ 6,900 21,600 9.000 60,000

______ $97,500

$24,000 2,400 600 48,000 22,500* $97,500

*Retained Earnings = $97,500 – $24,000 – $2,400 – $600 – $48,000 = $22,500 PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing entries | Closing of accounts MSC: ACBSP-APC-08-Closing Entries

LOC: Analysis

21. Below are the adjusted accounts of Millennium Realtors, Inc., for the month ended May 31, 2013, listed in alphabetical order: Accounts Payable Accounts Receivable Accumulated Depreciation– Office Equipment Cash Commissions Revenue Common Stock Depreciation Expense– Office Equipment

400 3,600 4,000 1,150 7,500 8,000

Dividends Income Taxes Expense Income Taxes Payable Land Office Equipment Salaries Expense Utilities Expense

1,000 100 100 1,500 10,000 2,300 150

200

In the journal provided, prepare Millennium's closing entries (omit explanations). General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal Date Description May 31 Commissions Revenue Income Summary

Page 1 Post. Ref.

Debit 7,500

7,500

31 Income Summary Depreciation Expense–Office Equipment Income Taxes Expense Salaries Expense Utilities Expense

2,750

31 Income Summary Retained Earnings

4,750

31 Retained Earnings Dividends

1,000

PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing entries | Closing of accounts MSC: ACBSP-APC-08-Closing Entries

Credit

200 100 2,300 150

4,750

1,000

LOC: Analysis

22. Below are the adjusted accounts of Slate Realtors, Inc., for the month ended Oct. 31, 2013, listed in alphabetical order: Accounts Payable Accounts Receivable Accumulated Depreciation– Office Equipment Cash Commissions Revenue Common Stock Depreciation Expense– Office Equipment

$ 1,100 4,800 6,000 2,400 10,800 4,000

Dividends Income Taxes Expense Income Taxes Payable Office Equipment Prepaid Rent Retained Earnings Salaries Expense Utilities Expense

$ 1,500 100 100 15,000 2,200 8,000 3,500 200

300

In the journal provided, prepare Slate's closing entries (omit explanations). General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal

Page 1 Post. Ref.

Date Description Oct 31 Commissions Revenue Income Summary

Debit 10,800

Credit 10,800

31 Income Summary Depreciation Expense–Office Equipment Income Taxes Expense Salaries Expense Utilities Expense

4,100

31 Income Summary Retained Earnings

6,700

31 Retained Earnings Dividends

1,500

300 100 3,500 200

6,700

1,500

PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing entries | Closing of accounts MSC: ACBSP-APC-08-Closing Entries

LOC: Analysis

23. Below are the adjusted accounts of Century Realtors, Inc., for the month ended October 31, 2013, listed in alphabetical order: Accounts Payable Accounts Receivable Accumulated Depreciation– Office Equipment Cash Commissions Revenue Common Stock Depreciation Expense– Office Equipment

520 2,400 3,000 1,200 5,400 2,000

Dividends Income Taxes Expense Income Taxes Payable Office Equipment Prepaid Rent Retained Earnings Salaries Expense Utilities Expense

750 80 80 7,500 1,100 4,000 1,720 100

150

Prepare a post-closing trial balance.

ANS: Century Realtors, Inc. Post-Closing Trial Balance October 31, 2013 Cash Accounts Receivable Prepaid Rent Office Equipment Accumulated Depreciation–Office Equipment Accounts Payable Income Taxes Payable Common Stock Retained Earnings

$ 1,200 2,400 1,100 7,500

_______ $12,200

$ 3,000 520 80 2,000 6,600* $12,200

*Net income: $5,400 – $150 – $80 – $1,720 – $100 = $3,350 Ending Retained Earnings: $4,000 + $3,350 net income – $750 dividends = $6,600 PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement KEY: Closing entries | Closing of accounts MSC: ACBSP-APC-08-Closing Entries

LOC: Analysis

24. The income statement for Hampshire Corporation included the following revenues and expenses for the year: Fees earned Wages expense Insurance expense Interest expense

$206,000 89,400 17,000 10,400

Listed below are the related balance sheet account balances at year end for this year and last year: This Year Unearned Fees Wages Payable Prepaid Insurance Interest Payable

$15,600 5,400 2,400 --

Last Year $13,200 6,600 -1,600

a. Compute cash received for fees during the year. b. Compute cash paid for wages during the year. c. Compute cash paid for insurance during the year. d. Compute cash paid for interest during the year.

ANS: a. $208,400 ($15,600 + $206,000 – $13,200) b. $90,600 ($6,600 + $89,400 – $5,400) c. $19,400 ($2,400 + $17,000) d. $12,000 ($1,600 + $10,400) PTS: 1 DIF: Challenging OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement KEY: Cash flow and current assets/liabilities MSC: ACBSP-APC-09-Financial Statements

LOC: Analysis

25. The following amounts are taken from the balance sheets of Milman Corporation:

December 31 2013 2012 Prepaid expenses Accrued liabilities

$ 45,000 103,000

$56,000 88,000

During 2013, expenses related to prepaid expenses were $103,000, and expenses related to accrued liabilities were $197,000. Determine the amount of cash payments related to prepaid expenses and to accrued liabilities for 2013. ANS: Prepaid expenses 2013 ending balance Expense during 2013 Potential cash payments for expenses Less 2012 ending balance Cash payments related to prepaid expenses in 2013

$ 45,000 103,000 $148,000 56,000 $ 92,000

Accrued liabilities 2012 ending balance Expense during 2013 Potential cash payments for expenses Less 2013 ending balance Cash payments related to accrued liabilities in 2013

$ 88,000 197,000 $285,000 103,000 $182,000

PTS: 1 DIF: Challenging OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement KEY: Cash flow and current assets/liabilities MSC: ACBSP-APC-09-Financial Statements

LOC: Analysis

Chapter 03 - Supplement - Closing Entries and the Work Sheet TRUE/FALSE 1. The first step to preparing closing journal entries is to close the credit balance on the income statement to the Retained Earnings account. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries 2. The final step when preparing closing entries is to close the Dividends account to the Retained Earnings account. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries 3. All credit balance accounts on the income statement are revenue accounts. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries 4. When preparing the closing entry for all expense accounts, the Income Summary account should be debited for the amount of all expenses. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries 5. The process of crossfooting requires horizontal addition and subtraction. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 6. Despite the many uses of microcomputers, they cannot be used to prepare work sheets. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 7. A work sheet is more useful for a large company than for a small one. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle

8. Working papers provide a written record of the work performed by the accountant. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 9. The work sheet is a type of source document. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 10. The amount for Dividends will appear in the Income Statement columns of a work sheet. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 11. The Adjustments columns of the work sheet are prepared by combining the Trial Balance and Adjusted Trial Balance columns of the work sheet. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 12. When the Income Statement columns of the work sheet are initially footed, they should be out of balance by the amount of net income or net loss. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 13. When the Balance Sheet columns of the work sheet are initially footed, they should be out of balance by the amount of net income or net loss. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 14. An important use of the work sheet is as an aid in the preparation of the closing journal entries. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 15. The heading of a work sheet might include the line “For the Year Ended December 31, 2013.” ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

16. On a work sheet, the balance of Retained Earnings is its ending amount for the period. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 17. The amount of net income for the period can be found on the work sheet. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 18. When adjusting entries are entered onto a work sheet, it is not necessary to record them in the general journal. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 19. The work sheet should be prepared after the formal financial statements have been prepared. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 20. The balances of the Accumulated Depreciation accounts will appear on the credit side of the work sheet's Balance Sheet columns. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 21. The amount extended to the Retained Earnings line in the Balance Sheet column of the work sheet is not the amount to be reflected for Retained Earnings on the balance sheet. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 22. The work sheet is prepared after the formal adjusting and closing entries. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle

23. The balance sheet cannot be prepared by referring solely to the Balance Sheet columns of the work sheet. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 24. The total assets and the total liabilities and stockholders' equity on the balance sheet are the same as the totals of the Balance Sheet columns on the work sheet. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 25. Closing entries may be prepared by referring to the Income Statement columns and the Dividends column of the work sheet. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle MULTIPLE CHOICE 1. When a company has earned a net income, the net income amount is entered on the work sheet on the a. credit side of the Income Statement columns and the debit side of the Balance Sheet columns. b. debit side of both the Income Statement and the Balance Sheet columns. c. debit side of the Income Statement columns and the credit side of the Balance Sheet columns. d. credit side of both the Income Statement and the Balance Sheet columns. ANS: C PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 2. On the work sheet, account balances are “extended” from the a. Income Statement and Balance Sheet columns to the financial statements. b. Adjusted Trial Balance columns to the Income Statement or Balance Sheet columns. c. Trial Balance columns to the Adjusted Trial Balance columns. d. Trial Balance and Adjustments columns to the Adjusted Trial Balance columns. ANS: B PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle

3. The process of crossfooting on the work sheet results in the a. Adjusted Trial Balance columns. b. Financial Statements. c. Income Statement columns. d. Balance Sheet columns. ANS: A PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 4. When a company has suffered a net loss, the net loss amount is entered on the work sheet on the a. credit side of the Income Statement columns and the debit side of the Balance Sheet columns. b. debit side of both the Income Statement and the Balance Sheet columns. c. credit side of both the Income Statement and the Balance Sheet columns. d. debit side of the Income Statement columns and the credit side of the Balance Sheet columns. ANS: A PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 5. Which work sheet columns should contain “key letters”? a. Adjustments b. Income Statement c. Trial Balance d. Balance Sheet ANS: A PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 6. Which of the following accounts most likely would have an amount contained in the Income Statement columns of a work sheet? a. Common Stock b. Accounts Receivable c. Dividends d. Interest Expense ANS: D PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 7. Which of the following is the most useful aid to the accountant in preparing closing entries? a. Trial Balance b. Work sheet c. Journal d. Financial statements ANS: B PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

8. A work sheet is useful for all except which of the following? a. Recording transactions from source documents b. Recording closing entries c. Recording adjusting entries d. Preparing financial statements ANS: A PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 9. The amount of Retained Earnings for the balance sheet is obtained from the a. Statement of retained earnings. b. Adjustments columns of the work sheet. c. Balance Sheet columns of the work sheet. d. Income Statement columns of the work sheet. ANS: A PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 10. Typically, formal adjusting entries a. are prepared prior to completion of the work sheet. b. are prepared at the same time as closing entries. c. need not be prepared if a work sheet has been completed. d. are entered directly into the ledger. ANS: B PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 11. In a manual system which uses a work sheet, the preparation of adjusting entries a. typically precedes the preparation of the financial statements. b. typically precedes preparation of the work sheet. c. is easy because they are simply copied from the work sheet. d. is difficult, and therefore they must first be entered into the general journal in pencil. ANS: C PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 12. In preparing closing entries, which of the following columns of the work sheet are the most helpful? a. Adjustments columns b. Income Statement columns c. Adjusted Trial Balance columns d. Balance Sheet columns ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle

13. In the completed work sheet, which set of columns usually should be out of balance after the initial footing? a. Both Income Statement and Balance Sheet columns b. Both Trial Balance and Income Statement columns c. Adjusted Trial Balance columns only d. Adjustments columns only ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 14. Which of the following accounts will have an amount in the Adjustments columns of the work sheet but probably not in the Trial Balance columns? a. Accounts Receivable b. Accumulated Depreciation–Equipment c. Depreciation Expense–Equipment d. Revenue from Services ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 15. On the work sheet, under what circumstances will the last two columns be in balance after the initial footing? a. When no adjustments have been entered on the work sheet b. Under all circumstances, assuming no arithmetical errors have been made c. Under no circumstances d. When net income is zero ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 16. An amount would not appear along the Dividends account line in which of the following work sheet columns? a. Income Statement b. Balance Sheet c. Trial Balance d. Adjusted Trial Balance ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle

17. An important reason to use a work sheet is to a. aid the accountant in the daily preparation of journal entries. b. replace the journal when making adjusting and closing entries. c. check the accuracy of adjusting entries before they are entered formally into the accounting records. d. accompany the financial statements in the company's annual report. ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 18. Which of the following accounts probably would have a smaller balance in the Adjusted Trial Balance columns of a work sheet than in the Trial Balance columns? a. Office Supplies b. Utilities Payable c. Accumulated Depreciation–Equipment d. Rent Expense ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 19. In preparing adjustments on the work sheet, which of the following accounts most likely would not be added to the Account Name column? a. Cash b. Interest Receivable c. Interest Income d. Rent Expense ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 20. In preparing adjustments on the work sheet, which of the following accounts most likely would be added to the Account Name column? a. Telephone Expense b. Retained Earnings c. Income Taxes Payable d. Accumulated Depreciation–Equipment ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle

21. The work sheet is prepared a. after the formal closing entries have been entered into the journal. b. before the preparation of a formal trial balance. c. after the formal adjusting entries have been entered into the journal. d. before the preparation of formal financial statements. ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 22. Which of the following accounts most likely would have an amount contained in every set of columns but the Balance Sheet columns of a work sheet? a. Dividends b. Depreciation Expense c. Unearned Revenue d. Wages Expense ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 23. An amount for Retained Earnings would not appear in which of the following work sheet columns? a. Trial Balance b. Income Statement c. Balance Sheet d. Adjusted Trial Balance ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 24. Which account that does not appear on the balance sheet has an amount in the Balance Sheet columns of a work sheet? a. Dividends b. Rent Expense c. Retained Earnings d. Accounts Receivable ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 25. Omitting key letters in the work sheet would make which of the following difficult? a. The preparation of the trial balance columns b. The preparation of the closing entries c. The preparation of the adjusting entries d. Crossfooting to the adjusted trial balance columns ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

26. Use this information from the Income Statement columns of the work sheet of Oneida Landscape Service to answer the following question. Income Statement Debit Credit 5,000 1,500 1,000 600 400 100 3,600 5,000 1,400 5,000 5,000

Landscape Revenue Wages Expense Rent Expense Supplies Expense Insurance Expense Income Taxes Expense Net Income

The entry to close the Laundry Revenue account would be a. Landscape Revenue 5,000 Income Summary 5,000 b. Income Summary Landscape Revenue

5,000

c. Retained Earnings Income Summary

5,000

d. Retained Earnings Landscape Revenue

5,000

ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Closing entries MSC: ACBSP-APC-08-Closing Entries 27. Use this information from the Income Statement columns of the work sheet of Oneida Landscape Service to answer the following question.

Landscape Revenue Wages Expense Rent Expense Supplies Expense Insurance Expense Income Taxes Expense Net Income

Income Statement Debit Credit 5,000 1,500 1,000 600 400 100 3,600 5,000 1,400 5,000 5,000

The entry to close the expense accounts would be a. All Expenses 3,600 Retained Earnings

3,600

b. All Expenses Income Summary

3,600 3,600

c. Income Summary All Expenses

3,600

d. Retained Earnings All Expenses

3,600

ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Closing entries MSC: ACBSP-APC-08-Closing Entries 28. Use this information from the Income Statement columns of the work sheet of Oneida Landscape Service to answer the following question. Income Statement Debit Credit 5,000 1,500 1,000 600 400 100 3,600 5,000 1,400 5,000 5,000

Landscape Revenue Wages Expense Rent Expense Supplies Expense Insurance Expense Income Taxes Expense Net Income

The entry to close Income Summary would be a. Income Summary 5,000 Retained Earnings

5,000

b. Common Stock Income Summary

1,400

c. Income Summary Retained Earnings

1,400

d. Income Summary Common Stock

1,400

ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Closing entries MSC: ACBSP-APC-08-Closing Entries

SHORT ANSWER 1. Why would a large company probably benefit more from a work sheet than would a very small company? ANS: A large company probably would need to prepare far more end-of-period adjustments than a very small company. The work sheet is extremely valuable to use prior to the preparation of adjusting and closing entries and the financial statements. PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 2. Monty Milko is the only accountant employed at Gamma Enterprises, Inc. When asked by the company president if the financial statements had been prepared yet, Milko answered that he had completed all of his work except the preparation of the statements. He added that the net income that would appear on the current income statement would be $369,075. Identify the two instances where Milko would have learned the net income before he actually prepared the income statement. ANS: Going through the steps of the accounting cycle, Monty Milko would have first learned of the period's net income when he prepared a work sheet. Later, while preparing the closing entries, the same net income figure would appear as the amount transferred from Income Summary to Retained Earnings in what is typically the third closing entry. Both of these procedures would precede the actual preparation of the financial statements. PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Closing of accounts | Using a work sheet MSC: ACBSP-APC-08-Closing Entries | ACBSP-APC-05-Accounting Cycle 3. Using the following information and the trial balance accounts and balances on the work sheet provided, complete the work sheet. a. Expired insurance totals $150. b. Of the unearned revenue, all has been earned by the balance sheet date. c. Estimated depreciation of equipment is $120. d. Accrued wages equal $300. e. Unused supplies on hand are $90. f. Estimated income taxes are $100.

Account Name

Trial Balance

Adjustments

Debit

Cash Accounts Receivable Prepaid Insurance Supplies Equipment

Debit Credit 900 60 400 240 1,000

Credit

Adjusted Trial Balance Debit Credit

Income Statement Debit

Credit

Balance Sheet

Debit

Credit

Accumulated Depreciation–Equipment Accounts Payable Unearned Revenue Common Stock Dividends Service Revenue Wages Expense

240 50 160 550 800 4,000 1,600 5,000

5,000

ANS: Account Name

Cash Accounts Receivable Prepaid Insurance Supplies Equipment Accumulated Depreciation–Equipment Accounts Payable Unearned Revenue Common Stock Dividends Service Revenue Wages Expense Insurance Expense Depreciation Expense– Equipment Wages Payable Income Taxes Expense Income Taxes Payable Supplies Expense Net Income

Trial Balance

Adjustments

Debit Credit Debit 900 60 400 240 1,000 240

Adjusted

Trial Balance Debit Credit Debit 900 60 (a) 150 250 (e) 150 90 1,000 (c) 120 360

Credit

50 160 (b) 160 550

Credit

Debit Credit 900 60 250 90 1,000 360 50 — 550

800 4,000

Balance Sheet

50 — 550

800 1,600 5,000

Income Statement

(b) 160

800 4,160

4,160

(d) 300

1,900

(a) 150 (c) 120

150 120

5,000

(d) 300 (f) 100

300 100

(f) 100 (e) 150 980

980

300 100

100 150 5,520

5,520

100 150 2,420 1,740 4,160

4,160 4,160

3,100 1,360 1,740 3,100 3,100

PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 4. Using the following information and the trial balance accounts and balances on the work sheet provided, complete the work sheet. a. Expired insurance totals $32. b. Of the unearned revenue, all has been earned by the balance sheet date. c. Estimated depreciation of equipment is $24. d. Accrued wages equal $16. e. Unused supplies on hand are $16. f. Estimated income taxes are $8. Account Name

Cash Accounts Receivable Prepaid Insurance Supplies Equipment Accumulated Depreciation–Equipment Accounts Payable Unearned Revenue Common Stock Dividends Service Revenue Wages Expense

Trial Balance

Adjustments

Debit Credit Debit 120 80 48 40 160 24

Credit

Adjusted Trial Balance Debit Credit

Income Statement Debit

Credit

Balance Sheet

Debit

Credit

48 32 256 8 192 96 552

552

ANS: Account Name

Cash Accounts Receivable Prepaid Insurance Supplies Equipment Accumulated Depreciation – Equipment Accounts Payable Unearned Revenue Common Stock Dividends Service Revenue Wages Expense Insurance Expense Depreciation Expense– Equipment Wages Payable Income Taxes Expense

Trial Balance

Adjustments

Debit Credit 120 80

Debit

48 40 160

(a) 32 (e) 24 24

Net Income

Credit

(b) 32

Balance Sheet

Debit Credit 120 80 16 16 160

48 — 256

8 192

96 552

Debit

16 16 160

48 32 (b) 32 256 8

Income Statement

Trial Balance Debit Credit 120 80

8 224

224

(d) 16

112

(a) 32 (c) 24

32 24

552

(d) 16 (f) 8

Income Taxes Payable Supplies Expense

Credit

Adjusted

16 8

(f) 8 (e) 24 136

136

16 8

8 24 600

600

8 24 200 24 224

224

400

224

400

376 24 400

PTS: 1 DIF: Challenging NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle

PROBLEM 1. Prepare closing entries for December from the following Income Statement columns of the work sheet of Custom Cleaning Service, Inc., assuming that a $500 dividend was paid during the period (omit explanations). Income Statement Debit Credit 2,600 1,200 400 300 40 1,940 2,600 660 2,600 2,600

Cleaning Revenue Wages Expense Rent Expense Supplies Expense Income Taxes Expense Net Income

General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal Date Description Dec. 31 Cleaning Revenue Income Summary

Page 1 Post. Ref.

Debit 2,600

Credit 2,600

31 Income Summary Wages Expense Rent Expense Supplies Expense Income Taxes Expense

1,940 1,200 400 300 40

31 Income Summary Retained Earnings

660

31 Retained Earnings Dividends

500

660

500

PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries 2. From the following items in the Income Statement columns of the work sheet of ElKay Corporation, prepare the closing entries at December 31, assuming that a $75 dividend was paid during the period (omit explanations).

Service Revenue Wages Expense Rent Expense Supplies Expense Income Taxes Expense Depreciation Expense–Building Net Loss

Income Statement Debit Credit 1,800 1,200 400 200 100 150 2,050 1,800 250 2,050 2,050

General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal Date Description Dec. 31 Service Revenue Income Summary 31 Income Summary Wages Expense Rent Expense Supplies Expense Income Taxes Expense Depreciation Expense–Building

Page 1 Post. Ref.

Debit 1,800

Credit 1,800

2,050 1,200 400 200 100 150

31 Retained Earnings Income Summary

250

31 Retained Earnings Dividends

250

PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

3. From the following items in the Income Statement columns of the work sheet of Dane Corporation, prepare the closing entries at December 31, assuming that a $100 dividend was paid during the period (omit explanations).

Service Revenue Wages Expense Rent Expense Supplies Expense Income Taxes Expense Depreciation Expense–Building Net Loss

Income Statement Debit Credit 6,000 3,600 1,200 600 300 500 6,200 6,000 200 6,200 6,200

General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal Date Description Dec. 31 Service Revenue Income Summary 31 Income Summary Wages Expense Rent Expense Supplies Expense Income Taxes Expense Depreciation Expense–Building

Page 1 Post. Ref.

Debit 6,000

Credit 6,000

6,200 3,600 1,200 600 300 500

31 Retained Earnings Income Summary

200

31 Retained Earnings Dividends

100

200

100

PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries

4. The Trial Balance and Adjusted Trial Balance columns of Owen Cleaning Corporation's work sheet are shown below. (The Adjustments columns have been omitted.) Using this information, prepare the post-closing trial balance for Owen Cleaning Corporation as of June 30, 2013. Account Name

Trial Balance

Debit 2,600 380 570 2,600 10,800

Credit

2,160 720 10,600 850 7,800 2,400 1,080 21,280

Adjusted Trial Balance Debit Credit 2,600 400 540 1,740 10,800 3,920 780 10,600 850 7,820 2,600 1,140

21,280

Rent Expense Office Supplies Expense Depreciation Expense–Office Equipment Wages Payable Income Taxes Expense Income Taxes Payable

30 860 1,760 200 400 23,720

400 23,720

ANS: Owen Cleaning Corporation Post-Closing Trial Balance June 30, 2013 Cash Accounts Receivable Prepaid Rent Office Supplies Office Equipment Accumulated Depreciation–Office Equipment Accounts Payable Wages Payable Income Taxes Payable Common Stock Retained Earnings

$ 2,600 400 540 1,740 10,800

_______ $16,080

$ 3,920 780 200 400 10,600 ___180* $16,080

*Net Income: $7,820 – $2,600 – $1,140 – $30 – $860 – $1,760 – $400 = $1,030 © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Ending Retained Earnings: $1,030 net income – $850 dividends = $180. PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle 5. Presented below are the Retained Earnings, Dividends, and Income Summary accounts for Shawano Company for the year ended December 31, 2013. Closing entries have been entered and posted. Prepare a statement of retained earnings. Dividends 5/1 3,800 8/19

12/31

12/31 9,800 6,000

Income Summary 12/31 12/31 4,500 19,000 12/31 14,500

Retained Earnings 9,800 1/1 8,000 12/31 14,500

ANS: Shawano Company Statement of Retained Earnings For the Year Ended December 31, 2013 Retained earnings, December 31, 2012 Net income Subtotal Less dividends Retained earnings, December 31, 2013

$ 8,000 14,500 $22,500 9,800 $ 12,700

PTS: 1 DIF: Challenging NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Closing of accounts MSC: ACBSP-APC-08-Closing Entries

6. Using the information below from the Income Statement and Balance Sheet columns of Tople Corporation's work sheet for the month ended April 30, 2013, prepare the income statement, statement of retained earnings, and balance sheet.

Account Name Cash Accounts Receivable Prepaid Insurance Supplies Equipment Accumulated Depreciation–Equipment Accounts Payable Unearned Revenue Common Stock Dividends Service Revenue Wages Expense Insurance Expense Depreciation Expense–Equipment Income Taxes Expense Income Taxes Payable Wages Payable Supplies Expense

Income Statement Debit Credit

Net Income

Balance Sheet Debit Credit 12 24 4 8 40 6 10 4 50 6

60 20 8 6 2 2 2 4 40 20 60

74 20 94

ANS: Tople Corporation Income Statement For the Month Ended April 30, 2013 Service revenue Expenses Wages expense Insurance expense Depreciation expense–equipment Supplies expense Income taxes expense Net income

$60 $20 8 6 4 2

40 $20

Tople Corporation Statement of Retained Earnings For the Month Ended April 30, 2013 Retained earnings, April 1, 2012 Net income Subtotal Less dividends Retained earnings, April 30, 2013

$0 20 $20 6 $14

Tople Corporation Balance Sheet April 30, 2013 Assets Cash Accounts receivable Prepaid insurance Supplies Equipment Less accumulated depreciation Total assets

$12 24 4 8 $40 6

34 $82

Liabilities Accounts payable Unearned revenue Wages payable Income taxes payable Total liabilities Stockholders' Equity Common Stock Retained earnings Total liabilities and stockholders' equity

$10 4 2 2 $18

$50 14

64 $82

PTS: 1 DIF: Challenging NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle

7. The Trial Balance and Adjusted Trial Balance columns of Roland Cleaning Corporation's work sheet are shown below. (The Adjustments columns have been omitted.) In the journal provided, prepare the seven adjusting entries and the four closing entries for the month ended June 30, 2013. Omit explanations. Account Name

Cash Accounts Receivable Prepaid Rent Office Supplies Office Equipment Accumulated Depreciation–Office Equipment Accounts Payable Common Stock Dividends Cleaning Revenue Wages Expense Utilities Expense Rent Expense Office Supplies Expense Depreciation Expense–Office Equipment Wages Payable Income Taxes Expense Income Taxes Payable

Trial Balance Debit 2,600 380 570 2,600 10,800

Credit

2,160 720 10,600 850 7,800 2,400 1,080 21,280

Adjusted Trial Balance Debit Credit 2,600 400 540 1,740 10,800 4,320 780 10,600 850 7,820 2,550 1,140

21,280 30 860 2,160 150 50 23,720

50 23,720

General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal Date

Description

Post. Ref.

Debit

Credit

Adjusting Entries June

30 Accounts Receivable Cleaning Revenue

30 Rent Expense Prepaid Rent

30 Office Supplies Expense Office Supplies

860

30 Depreciation Expense–Office Equipment Accumulated Depreciation–Office Equipment

860 2,160 2,160

30 Utilities Expense Accounts Payable

30 Wages Expense Wages Payable

150

30 Income Taxes Expense Income Taxes Payable

150

Closing Entries 30 Cleaning Revenue Income Summary

7,820

30 Income Summary Wages Expense Utilities Expense Rent Expense Office Supplies Expense Depreciation Expense–Office Equipment Income Taxes Expense

6,790

30 Income Summary Retained Earnings

1,030

30 Retained Earnings Dividends

850

7,820

2,550 1,140 30 860 2,160 50

1,030

850

PTS: 1 DIF: Challenging NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Using a work sheet MSC: ACBSP-APC-05-Accounting Cycle

Chapter 04 - Financial Reporting and Analysis TRUE/FALSE 1. Only investors have an interest in a company's ability to generate favorable cash flows. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Financial information users MSC: ACBSP-APC-01-Purpose 2. Investors and creditors use financial statements to evaluate a company's ability to pay dividends and interest. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Objectives of financial reporting MSC: ACBSP-APC-01-Purpose 3. Financial statements are not important to the efficient allocation of resources in our economy. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Objectives of financial reporting MSC: ACBSP-APC-01-Purpose 4. Financial statements are generally prepared for a limited number of users. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Objectives of financial reporting MSC: ACBSP-APC-01-Purpose 5. The same set of financial statements usually is prepared for each user. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Objectives of financial reporting MSC: ACBSP-APC-01-Purpose 6. An advantage of accounting information is that it provides exact and completely reliable measures. ANS: F PTS: 1 DIF: Easy NAT: AACSB Communication | AICPA FN Reporting KEY: Qualitative characteristics of accounting information

OBJ: 1 LOC: Recall MSC: ACBSP-APC-01-Purpose

7. Accounting information does not contain estimates, classifications, summarizations, judgments, and allocations. ANS: F PTS: 1 DIF: Easy NAT: AACSB Communication | AICPA FN Reporting KEY: Qualitative characteristics of accounting information

OBJ: 1 LOC: Recall MSC: ACBSP-APC-01-Purpose

8. For accounting information to be useful, it must be both relevant and reliable. ANS: T PTS: 1 DIF: Easy NAT: AACSB Communication | AICPA FN Reporting KEY: Qualitative characteristics of accounting information

OBJ: 1 LOC: Recall MSC: ACBSP-APC-01-Purpose

9. The Sarbanes-Oxley Act requires the management of a company to guarantee, to its knowledge, that the financial statements that are filed with the SEC are accurate and complete. ANS: T PTS: 1 DIF: Easy NAT: AACSB Communication | AICPA FN Reporting KEY: Qualitative characteristics of accounting information

OBJ: 1 LOC: Recall MSC: ACBSP-APC-01-Purpose

10. Only the chief financial officer and the company's CPAs are responsible for the accuracy of financial statements. The chief executive officer is not expected to understand financial information. ANS: F PTS: 1 DIF: Easy NAT: AACSB Communication | AICPA FN Reporting KEY: Qualitative characteristics of accounting information

OBJ: 1 LOC: Recall MSC: ACBSP-APC-01-Purpose

11. Providing financial information that is useful to present and potential equity investors, lenders, and other creditors in decision making is the objective of financial reporting. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Objectives of financial reporting MSC: ACBSP-APC-01-Purpose 12. When no errors have been made, accounting is always 100 percent accurate. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Communication | AICPA FN Reporting KEY: Qualitative characteristics of accounting information

OBJ: 1 LOC: Comprehension MSC: ACBSP-APC-01-Purpose

13. The relevance of accounting information is also an indication of its faithful representation. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Communication | AICPA FN Reporting KEY: Qualitative characteristics of accounting information

OBJ: 1 LOC: Comprehension MSC: ACBSP-APC-01-Purpose

14. To understand accounting information, users must be familiar with the accounting conventions, or rules of thumb, used in preparing financial statements. ANS: T PTS: 1 DIF: Easy NAT: AACSB Communication | AICPA FN Reporting KEY: Conventions for interpretation of financial information

OBJ: 2 LOC: Recall MSC: ACBSP-APC-01-Purpose

15. Consistency in accounting means that a company uses the same generally accepted accounting principles from one accounting period to the next accounting period. ANS: T PTS: 1 DIF: Easy NAT: AACSB Communication | AICPA FN Reporting KEY: Conventions for interpretation of financial information

OBJ: 2 LOC: Recall MSC: ACBSP-APC-01-Purpose

16. The convention of consistency pertains to the use of the same accounting principles by all firms. ANS: F PTS: 1 DIF: Easy NAT: AACSB Communication | AICPA FN Reporting KEY: Conventions for interpretation of financial information

OBJ: 2 LOC: Recall MSC: ACBSP-APC-01-Purpose

17. A material item is one that is likely to affect a user's decision. ANS: T PTS: 1 DIF: Easy NAT: AACSB Communication | AICPA FN Reporting KEY: Conventions for interpretation of financial information

OBJ: 2 LOC: Recall MSC: ACBSP-APC-01-Purpose

18. In accounting, $500 is considered the dividing line between material and immaterial amounts. ANS: F PTS: 1 DIF: Easy NAT: AACSB Communication | AICPA FN Reporting KEY: Conventions for interpretation of financial information

OBJ: 2 LOC: Recall MSC: ACBSP-APC-01-Purpose

19. The convention of materiality requires that financial statements present all the information relevant to users' understanding of the statements. ANS: F PTS: 1 DIF: Easy NAT: AACSB Communication | AICPA FN Reporting KEY: Conventions for interpretation of financial information

OBJ: 2 LOC: Recall MSC: ACBSP-APC-01-Purpose

20. Illegal acts of a small dollar amount can be ignored because they are immaterial. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Communication | AICPA FN Reporting KEY: Conventions for interpretation of financial information

OBJ: 2 LOC: Comprehension MSC: ACBSP-APC-01-Purpose

21. Although a stapler that costs $15 is a long-term asset, it can be expensed because the amount is immaterial and will not affect anyone's decision making. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Communication | AICPA FN Reporting KEY: Conventions for interpretation of financial information

OBJ: 2 LOC: Comprehension MSC: ACBSP-APC-01-Purpose

22. General-purpose external financial statements that are divided into subcategories are called current financial statements. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Financial statements MSC: ACBSP-APC-09-Financial Statements 23. Classified balance sheets list accounts in alphabetical order. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 24. Natural resources, such as coal mines and oil wells, are classified as property, plant, and equipment. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet classifications MSC: ACBSP-APC-09-Financial Statements 25. It is possible for an asset to be a current asset even though the expected conversion of that asset into cash is to be longer than one year. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet classifications MSC: ACBSP-APC-09-Financial Statements 26. The investments category on the balance sheet normally includes investments that are intended to be held for a long period of time. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet classifications MSC: ACBSP-APC-09-Financial Statements 27. The main difference between intangible assets and property, plant, and equipment is the length of the asset's life. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet classifications MSC: ACBSP-APC-09-Financial Statements 28. The main difference among the balance sheets of the sole proprietorship, the partnership, and the corporation is found in the liabilities section. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet classifications MSC: ACBSP-APC-09-Financial Statements

29. The two parts of a corporation's stockholders' equity section are contributed capital and retained earnings. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet classifications MSC: ACBSP-APC-09-Financial Statements 30. The Retained Earnings portion of a corporation’s balance sheet represents the earnings of the corporation less any losses, dividends, or transfers to contributed capital. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet classifications MSC: ACBSP-APC-09-Financial Statements 31. Contributed capital is shown on a corporate balance sheet as two amounts: the par value of the issued stock and additional paid-in capital. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet classifications MSC: ACBSP-APC-09-Financial Statements 32. The term owner’s equity is a more accurate term than net worth because many assets are recorded at original cost rather than at current value. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet classifications MSC: ACBSP-APC-09-Financial Statements 33. Operating expenses include cost of goods sold. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 34. For a merchandising company, the difference between net sales and cost of goods sold is called gross margin. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 35. On the income statement of a merchandising company, net income is the amount by which net sales exceed operating expenses. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements

36. Accounting expense is a selling expense on the income statement. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 37. General and administrative expenses are a category of operating expense. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 38. Advertising expense appears as a general and administrative expense on the income statement. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 39. An advantage of the single-step income statement is that it is less complex than the multistep form. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 40. Freight paid on goods shipped to customers is classified as a general and administrative expense. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 41. Interest paid on bank loans is classified as cost of goods sold. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 42. The single-step and multistep income statements result in the same net income figures. ANS: T PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 43. Advertising expense should be included in the general and administrative expenses section of a multistep income statement. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements

44. Earnings per share, often called net income per share, is the final figure or “bottom line” of an income statement. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 45. Sales returns and allowances are not deducted from gross sales on the balance sheet. ANS: T PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 46. The income statement of a company that provides a service only will contain gross margin. ANS: F PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 47. Both return on assets and debt to equity ratio are profitability measures. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 48. Return on assets is a measure of profitability. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 49. Return on assets is a better measure of profitability than profit margin because it takes into account the assets invested in the business. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 50. Return on assets measures how efficiently assets are used to produce sales. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 51. A debt to equity ratio of 1.0 means that half of the company's assets are financed by creditors. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

52. Profit margin and gross margin are not the same thing. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 53. Cash return on assets is measured in percent. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 54. A company with a profit margin of 6 percent earns six cents profit for every dollar of net sales. ANS: T PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 55. A company with a high debt to equity ratio is in a more vulnerable position during poor economic times than a company with a low debt to equity ratio. ANS: T PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 56. A cash flow yield of 2.5 times is considered better than one of 2.0 times. ANS: T PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis MULTIPLE CHOICE 1. All the following are qualitative characteristics of accounting information except a. flexibility. b. comparability. c. verifiability. d. relevance. ANS: A PTS: 1 DIF: Easy NAT: AACSB Communication | AICPA FN Reporting KEY: Qualitative characteristics of accounting information

OBJ: 1 LOC: Recall MSC: ACBSP-APC-01-Purpose

2. According to the FASB, the usefulness of accounting is judged by which of the following two prime qualitative characteristics of accounting information? a. Timeliness and understandability b. Understandability and relevance c. Verifiability and faithful representation d. Relevance and faithful representation ANS: D PTS: 1 DIF: Easy NAT: AACSB Communication | AICPA FN Reporting KEY: Qualitative characteristics of accounting information

OBJ: 1 LOC: Recall MSC: ACBSP-APC-01-Purpose

3. The qualitative characteristic of faithful representation contains all the following features except a. complete. b. verifiability. c. neutral. d. free from material error. ANS: B PTS: 1 DIF: Easy NAT: AACSB Communication | AICPA FN Reporting KEY: Qualitative characteristics of accounting information

OBJ: 1 LOC: Recall MSC: ACBSP-APC-01-Purpose

4. Accounting information should make a difference to the outcome of a decision, according to the qualitative characteristic of a. faithful representation. b. relevance. c. comparability. d. understandability. ANS: B PTS: 1 DIF: Easy NAT: AACSB Communication | AICPA FN Reporting KEY: Qualitative characteristics of accounting information

OBJ: 1 LOC: Recall MSC: ACBSP-APC-01-Purpose

5. The user can depend on the accuracy of financial information when which of the following qualitative characteristics has been followed? a. Relevance b. Faithful representation c. Understandability d. Timeliness ANS: B PTS: 1 DIF: Easy NAT: AACSB Communication | AICPA FN Reporting KEY: Qualitative characteristics of accounting information

OBJ: 1 LOC: Recall MSC: ACBSP-APC-01-Purpose

6. The Securities and Exchange Commission instituted rules requiring the chief executive officers and chief financial officers of all publicly traded companies to certify that, to their knowledge, the quarterly and annual statements that their companies file with the SEC are a. 100 percent accurate and contain no misstatements, errors, or mistakes. b. accurate and complete. c. subject to interpretation due to the many accounting rules and regulations. d. not to be used except by individuals working for the company. ANS: B PTS: 1 NAT: AACSB Ethics | AICPA BB Legal MSC: ACBSP-APC-01-Purpose

DIF: Easy LOC: Recall

OBJ: 1 KEY: Ethical reporting

7. Who is responsible for preparing financial statements? a. The CPA firm that audits the financial statements b. Management of the company c. A company's accounting department d. The FASB ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Objectives of financial reporting MSC: ACBSP-APC-01-Purpose 8. The lower-of-cost-or-market method of accounting for inventories follows the convention of a. full disclosure. b. materiality. c. conservatism. d. cost-benefit. ANS: C PTS: 1 DIF: Easy NAT: AACSB Communication | AICPA FN Reporting KEY: Conventions for interpretation of financial information

OBJ: 2 LOC: Recall MSC: ACBSP-APC-01-Purpose

9. The convention of consistency refers to the consistent use of accounting principles a. among all firms in a particular industry. b. throughout one accounting period. c. among all firms. d. among accounting periods. ANS: D PTS: 1 DIF: Easy NAT: AACSB Communication | AICPA FN Reporting KEY: Conventions for interpretation of financial information

OBJ: 2 LOC: Recall MSC: ACBSP-APC-01-Purpose

10. The convention of consistency relates most closely to a. verifiability. b. comparability. c. timeliness. d. faithful representation. ANS: B PTS: 1 DIF: Moderate NAT: AACSB Communication | AICPA FN Reporting KEY: Conventions for interpretation of financial information

OBJ: 2 LOC: Recall MSC: ACBSP-APC-01-Purpose

11. Which accounting convention describes a note to the financial statements explaining the company's method of revenue recognition? a. Comparability and consistency b. Materiality c. Conservatism d. Full disclosure ANS: D PTS: 1 DIF: Moderate NAT: AACSB Communication | AICPA FN Reporting KEY: Conventions for interpretation of financial information

OBJ: 2 LOC: Recall MSC: ACBSP-APC-01-Purpose

12. A practical decision to expense small capital expenditures rather than record them as property, plant, and equipment and depreciate them is probably made on the basis of the convention of a. comparability. b. consistency. c. materiality. d. faithful representation. ANS: C PTS: 1 DIF: Moderate NAT: AACSB Communication | AICPA FN Reporting KEY: Conventions for interpretation of financial information

OBJ: 2 LOC: Comprehension MSC: ACBSP-APC-01-Purpose

13. The accounting convention that is most responsible for the increase in the number of notes to financial statements is a. materiality. b. full disclosure. c. consistency. d. conservatism. ANS: B PTS: 1 DIF: Moderate NAT: AACSB Communication | AICPA FN Reporting KEY: Conventions for interpretation of financial information

OBJ: 2 LOC: Comprehension MSC: ACBSP-APC-01-Purpose

14. To obtain a slightly more accurate measure of net income, Gabrielli, Inc., has determined that it must hire two full-time accountants. If it decides against the hiring, it has followed the convention of a. full disclosure. b. verifiability. c. consistency. d. cost-benefit. ANS: D PTS: 1 DIF: Moderate NAT: AACSB Communication | AICPA FN Reporting KEY: Conventions for interpretation of financial information

OBJ: 2 LOC: Comprehension MSC: ACBSP-APC-01-Purpose

15. Which of the following accounting conventions would an accountant most likely apply when facing major uncertainties? a. Full disclosure b. Conservatism c. Materiality d. Consistency ANS: B PTS: 1 DIF: Moderate NAT: AACSB Communication | AICPA FN Reporting KEY: Conventions for interpretation of financial information

OBJ: 2 LOC: Comprehension MSC: ACBSP-APC-01-Purpose

16. Expensing a building in the year of purchase represents an abuse of which of the following accounting conventions? a. Relevance b. Cost-benefit c. Conservatism d. Timeliness ANS: C PTS: 1 DIF: Moderate NAT: AACSB Communication | AICPA FN Reporting KEY: Conventions for interpretation of financial information

OBJ: 2 LOC: Comprehension MSC: ACBSP-APC-01-Purpose

17. Which accounting convention could cause an overload of information for the financial statement user? a. Consistency b. Conservatism c. Full disclosure d. Materiality ANS: C PTS: 1 DIF: Moderate NAT: AACSB Communication | AICPA FN Reporting KEY: Conventions for interpretation of financial information

OBJ: 2 LOC: Comprehension MSC: ACBSP-APC-01-Purpose

18. A company should classify land held for a planned manufacturing facility as a. an intangible asset. b. an investment. c. a current asset. d. property, plant, and equipment. ANS: B PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet classifications MSC: ACBSP-APC-09-Financial Statements 19. Which of the following should be classified as an intangible asset? a. Land held for future use b. Natural resources c. Equipment d. Goodwill ANS: D PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet classifications MSC: ACBSP-APC-09-Financial Statements © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

20. A corporation's stockholders' equity section of the balance sheet may contain all except a. T. McDonald, capital b. Retained earnings c. Additional paid-in capital d. Common stock ANS: A PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Components of stockholders' equity MSC: ACBSP-APC-09-Financial Statements

OBJ: 3 LOC: Recall

21. An investment is classified as short term or long term based on a. whether the investment can be sold immediately. b. the length of time the investor expects to hold it. c. the purpose for which it is held. d. the dollar amount of the investment. ANS: B PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet classifications MSC: ACBSP-APC-09-Financial Statements 22. Which of the following appears on the balance sheet? a. Rent income b. Depreciation expense c. Net sales d. Merchandise inventory ANS: D PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 23. Which accounting term does not mean the same as the others? a. Retained earnings b. Net worth c. Capital d. Owner's equity ANS: A PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Components of stockholders' equity MSC: ACBSP-APC-09-Financial Statements

OBJ: 3 LOC: Recall

24. Patents would appear in which section of the balance sheet? a. Contributed capital b. Property, plant, and equipment c. Current liabilities d. Intangible assets ANS: D PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet classifications MSC: ACBSP-APC-09-Financial Statements

25. Oil wells and coal mines used in the normal course of business would appear in which section of the balance sheet? a. Property, plant, and equipment b. Investments c. Current assets d. Intangible assets ANS: A PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet classifications MSC: ACBSP-APC-09-Financial Statements 26. The normal operating cycle helps define which of the following balance sheet sections? a. Intangible assets b. Current assets c. Property, plant, and equipment d. Stockholders' equity ANS: B PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet classifications MSC: ACBSP-APC-09-Financial Statements 27. Liabilities have which of the following two major categories? a. Investments and long term b. Contributed capital and retained earnings c. Current and long term d. Current and intangible ANS: C PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet classifications MSC: ACBSP-APC-09-Financial Statements 28. The owner's capital for a sole proprietorship is similar in nature to which of the following for corporations? a. Stockholders' equity b. Retained earnings c. Common stock d. Dividends ANS: A PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Owner's equity MSC: ACBSP-APC-09-Financial Statements 29. Which of the following accounts is most likely to appear on the balance sheet as a current liability? a. Accumulated Depreciation b. Bonds Payable c. Mortgage Payable d. Wages Payable ANS: D PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Balance sheet classifications MSC: ACBSP-APC-09-Financial Statements

30. Which of the following should not be classified as a current asset? a. A one-year installment receivable from the sale of a truck b. An investment expected to be needed for operations in the next year c. A one-year prepaid insurance policy d. A fund to be used to purchase land ANS: D PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Balance sheet classifications MSC: ACBSP-APC-09-Financial Statements 31. Use this information to answer the following question. Becker, Inc. Balance Sheet December 31, 2013 Assets Cash Short-term investments Notes receivable (due in ten months) Accounts receivable Merchandise inventory Land held for future use Land Building Less accumulated depreciation Trademark Total assets

$ 20,000 80,000 60,000 40,000 140,000 160,000 180,000 $200,000 40,000

160,000 140,000 $980,000

Liabilities Notes payable (due in six months) Accounts payable Salaries payable Mortgage payable (due in seven years) Total liabilities Stockholders' Equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity

$ 100,000 40,000 20,000 180,000 $340,000

$520,000 120,000 640,000 $980,000

The total dollar amount of assets to be classified as current assets is a. $280,000. b. $440,000. c. $240,000. d. $340,000. ANS: D $20,000 + $80,000 + $60,000 + $40,000 + $140,000 = $340,000 © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Balance sheet classifications MSC: ACBSP-APC-09-Financial Statements 32. Use this information to answer the following question. Becker, Inc. Balance Sheet December 31, 2013 Assets Cash Short-term investments Notes receivable (due in ten months) Accounts receivable Merchandise inventory Land held for future use Land Building Less accumulated depreciation Trademark Total assets

$ 20,000 80,000 60,000 40,000 140,000 160,000 180,000 $200,000 40,000

160,000 140,000 $980,000

$ 100,000 40,000 20,000 180,000 $340,000

$520,000 120,000 640,000 $980,000

The total dollar amount of assets to be classified as investments is a. $200,000. b. $360,000. c. $0. d. $160,000. ANS: D PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Balance sheet classifications MSC: ACBSP-APC-09-Financial Statements

33. Use this information to answer the following question. Becker, Inc. Balance Sheet December 31, 2013 Assets Cash Short-term investments Notes receivable (due in ten months) Accounts receivable Merchandise inventory Land held for future use Land Building Less accumulated depreciation Trademark Total assets

$ 20,000 80,000 60,000 40,000 140,000 160,000 180,000 $200,000 40,000

160,000 140,000 $980,000

$ 100,000 40,000 20,000 180,000 $340,000

$520,000 120,000 640,000 $980,000

The total dollar amount of assets to be classified as property, plant, and equipment is a. $640,000. b. $480,000. c. $380,000. d. $340,000. ANS: D $180,000 + $160,000 = $340,000 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Balance sheet classifications MSC: ACBSP-APC-09-Financial Statements

34. Use this information to answer the following question. Cass Corporation Balance Sheet December 31, 2013 Assets Cash Short-term investments Accounts receivable Notes receivable (due in one year) Merchandise inventory Land held for future use Land Building Less accumulated depreciation Trademark Total assets

$ 140,000 112,000 56,000 84,000 196,000 224,000 280,000 $300,000 56,000

244,000 184,000 $1,520,000

Liabilities Notes payable (due in one year) Accounts payable Salaries payable Mortgage payable (due in seven years) Total liabilities Stockholders' Equity Common stock Retained earnings Total liabilities and stockholders' equity

$ 140,000 60,000 28,000 292,000 $520,000

$600,000 400,000

1,000,000 $1,520,000

The total dollar amount of assets to be classified as current assets is a. $504,000. b. $476,000. c. $588,000. d. $488,000. ANS: C $140,000 + $112,000 + $56,000 + $84,000 + $196,000 = $588,000 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Balance sheet classifications MSC: ACBSP-APC-09-Financial Statements

35. Use this information to answer the following question. Cass Corporation Balance Sheet December 31, 2013 Assets Cash Short-term investments Accounts receivable Notes receivable (due in one year) Merchandise inventory Land held for future use Land Building Less accumulated depreciation Trademark Total assets

$ 140,000 112,000 56,000 84,000 196,000 224,000 280,000 $300,000 56,000

244,000 184,000 $1,520,000

$ 140,000 60,000 28,000 292,000 $520,000

$600,000 400,000

1,000,000 $1,520,000

The total dollar amount of assets to be classified as investments is a. $336,000. b. $0. c. $224,000. d. $112,000. ANS: C PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Balance sheet classifications MSC: ACBSP-APC-09-Financial Statements 36. Gross margin equals the difference between net sales and a. income taxes. b. income before income taxes. c. operating expenses. d. cost of goods sold. ANS: D PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

37. Which of the following is not considered an operating expense? a. Rent expense b. Interest expense c. Freight-out expense d. Advertising expense ANS: B PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 38. Which of the following accounts is not classified as a selling expense on the income statement? a. Freight-out expense b. Advertising expense c. Sales salaries expense d. Interest expense ANS: D PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 39. Interest expense on a mortgage would be classified on a multistep income statement under the heading a. cost of goods sold b. selling expenses. c. operating expenses d. other revenues and expenses. ANS: D PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Reporting LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 40. Which of the following appears in different sections of the income statement when prepared on a single-step basis and when prepared on a multistep basis? a. Sales commissions b. Rent expense c. Interest expense d. Sales ANS: C PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 41. Earnings per share are found on which financial statement? a. Balance sheet b. Income statement c. Statement of cash flows d. Statement of retained earnings ANS: B PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements

42. In which category would office salaries expense be included? a. Net sales b. Cost of goods sold c. Selling expenses d. General and administrative expenses ANS: D PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 43. Which of the following is not considered a selling expense? a. Cost of goods sold b. Cost of storing goods c. Freight-out expense d. Advertising expense ANS: A PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 44. Interest paid on debt would be entered on the multistep income statement in the category called a. selling expenses. b. other revenues and expenses. c. general and administrative expenses. d. operating expenses. ANS: B PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 45. An advantage of the single-step income statement over the multistep form is a. the amount of information it provides. b. its simplicity. c. its comprehensiveness. d. its use in computing ratios. ANS: B PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 46. Which of the following items is not shown on a single-step income statement? a. Cost of goods sold b. Interest expense c. Selling expenses d. Gross margin ANS: D PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements

47. A merchandiser will earn an operating income of exactly $0 when a. gross margin equals operating expenses. b. net sales equals cost of goods sold. c. cost of goods sold equals gross margin. d. operating expenses equal net sales. ANS: A PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 48. Positive operating income will result if gross margin exceeds a. operating expenses. b. purchases. c. cost of goods sold. d. cost of goods sold minus operating expenses. ANS: A PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 49. Income from operations is arrived after considering all except a. administrative salaries. b. interest income. c. the cost of sales. d. sales returns and allowances. ANS: B PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 50. Which type of account is cost of goods sold? a. An asset account b. A liability account c. An expense account d. An income account ANS: C PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 51. To which account is the cost of inventory transferred when a product is sold? a. Sales b. Freight expense c. Gross margin d. Cost of goods sold ANS: D PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Income statement MSC: ACBSP-APC-09-Financial Statements

52. Which type of account is gross margin? a. An income account b. An expense account c. An asset account d. None of these are correct ANS: D PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 53. Which of the following is not a subtotal? a. Cost of goods sold b. Gross margin c. Net income d. Income from operations ANS: A PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 54. The other revenues and expenses section of a multistep income statement could include all the following except a. interest expense. b. investment income. c. dividend income. d. rent expense. ANS: D PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 55. Use this information to answer the following question. Ramsey Company Income Statement For the Year Ended December 31, 2013 Revenues Net sales Dividend income Total revenues Costs and expenses Costs of goods sold Selling expenses General and administrative expenses Interest expense Total costs and expenses Income before income taxes Income taxes Net income

$200,000 17,500 $217,500 $ 58,000 20,000 27,500 12,500 118,0000 $ 99,500 39,000 $ 60,500

If the income statement were prepared in a multistep form, gross margin from sales would be a. $159,500. b. $152,000. c. $142,000. d. $172,000. ANS: C $200,000 – $58,000 = $142,000 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 56. Use this information to answer the following question. Ramsey Company Income Statement For the Year Ended December 31, 2013 Revenues Net sales Dividend income Total revenues Costs and expenses Costs of goods sold Selling expenses General and administrative expenses Interest expense Total costs and expenses Income before income taxes Income taxes Net income

$206,500 17,500 $224,000 $ 60,000 20,000 27,500 12,500 120,000 $104,000 39,000 $ 65,000

If the income statement were prepared in a multistep form, income from operations would be a. $99,000. b. $84,000. c. $104,000. d. $86,500. ANS: A $206,500 – $60,000 – $20,000 – $27,500 = $99,000 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Income statement MSC: ACBSP-APC-09-Financial Statements

57. Use this information to answer the following question. Ramsey Company Income Statement For the Year Ended December 31, 2013 Revenues Net sales Dividend income Total revenues Costs and expenses Costs of goods sold Selling expenses General and administrative expenses Interest expense Total costs and expenses Income before income taxes Income taxes Net income

$200,000 14,000 $214,000 $ 60,000 20,000 27,500 12,500 120,000 $ 94,000 39,000 $ 55,000

If the income statement were prepared in a multistep form, excess of other expenses over other revenues would be a. $14,000. b. $1,500. c. $16,500. d. $1,250. ANS: B $14,000 – $12,500 = $1,500 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Income statement MSC: ACBSP-APC-09-Financial Statements

58. Use this information to answer the following question. Ramsey Company Income Statement For the Year Ended December 31, 2013 Revenues Net sales Dividend income Total revenues Costs and expenses Costs of goods sold Selling expenses General and administrative expenses Interest expense Total costs and expenses Income before income taxes Income taxes Net income

$200,000 17,500 $217,500 $ 60,000 20,000 27,500 12,500 120,000 $ 97,500 39,000 $ 58,500

If the income statement were prepared in a multistep form, income before income taxes would be a. $67,500. b. $105,000. c. $80,000. d. $97,500. ANS: D PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 59. Use this information to answer the following question. Ramsey Company Income Statement For the Year Ended December 31, 2013 Revenues Net sales Dividend income Total revenues Costs and expenses Costs of goods sold Selling expenses General and administrative expenses Interest expense Total costs and expenses Income before income taxes Income taxes Net income

$200,000 17,500 $217,500 $ 75,500 20,000 12,000 12,500 120,000 $ 97,500 39,000 $ 58,500

If the income statement were prepared in a multistep form, operating expenses would be a. $92,000. b. $32,000. c. $44,500. d. $80,000. ANS: B $20,000 + $12,000 = $32,000 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 60. The debt to equity ratio equals a. stockholders' equity divided by total liabilities. b. stockholders' equity divided by long-term liabilities. c. total liabilities divided by stockholders' equity. d. current liabilities divided by average stockholders' equity. ANS: C PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 61. The profit margin equals a. net sales divided by net income. b. gross margin divided by net income. c. net income divided by gross margin. d. net income divided by net sales. ANS: D PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 62. Asset turnover equals a. net sales divided by average total assets. b. average total assets divided by net income. c. average total assets divided by total liabilities. d. net income divided by average total assets. ANS: A PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 63. Which of the following is not expressed in terms of a percentage? a. Return on assets b. Debt to equity ratio c. Asset turnover d. Profit margin ANS: C PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

64. Which of the following is expressed in terms of a percentage? a. Return on equity b. Cash flow yield c. Asset turnover d. None of these are expressed in terms of a percentage. ANS: A PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 65. Which of the following does not include net income in its computation? a. Debt to equity ratio b. Return on assets c. Return on equity d. Profit margin ANS: A PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 66. The asset turnover ratio measures a. how quickly the company uses assets to pay debt. b. how efficiently assets are used to produce sales. c. the income produced by selling inventory. d. how efficiently equity is used to produce revenue. ANS: B PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 67. Which of the following is not a measure of profitability? a. Profit margin b. Return on assets c. Return on equity d. Debt to equity ratio ANS: D PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

68. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios. Isanti Systems, Inc. Balance Sheet December 31, 2013 Assets Current assets Investments Property, plant, and equipment Intangible assets

Total assets

$ 12,000 2,000 16,000 10,000

$40,000

Liabilities Current liabilities Long-term liabilities Total liabilities Stockholders' Equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity

$ 8,000 2,000 $ 10,000

$20,000 10,000 $30,000 $40,000

Isanti Systems, Inc. Income Statement For the Year Ended December 31, 2013 Net sales Costs of goods sold Gross margin Operating expenses Income before income taxes Income taxes Net income

$ 48,000 16,000 $ 32,000 16,000 $ 16,000 6,400 $ 9,600

The profit margin of Isanti Systems is a. 60 percent. b. 25 percent. c. 20 percent. d. 12 percent. ANS: C $9,600 ÷ $48,000 = .2 or 20% PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

69. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios. Isanti Systems, Inc. Balance Sheet December 31, 2013 Assets Current assets Investments Property, plant, and equipment Intangible assets

Total assets

$ 12,000 2,000 16,000 10,000

$40,000

Liabilities Current liabilities Long-term liabilities Total liabilities Stockholders' Equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity

$ 8,000 2,000 $ 10,000

$20,000 10,000 $30,000 $40,000

Isanti Systems, Inc. Income Statement For the Year Ended December 31, 2013 Net sales Costs of goods sold Gross margin Operating expenses Income before income taxes Income taxes Net income

$ 48,000 16,000 $ 32,000 16,000 $ 16,000 6,400 $ 9,600

The return on assets for Isanti Systems is a. 30 percent. b. 150 percent. c. 33-1/3 percent. d. 24 percent. ANS: D $9,600 ÷ $40,000 = .24 or 24% PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

70. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios. Isanti Systems, Inc. Balance Sheet December 31, 2013 Assets Current assets Investments Property, plant, and equipment Intangible assets

Total assets

$ 12,000 2,000 16,000 10,000

$40,000

Liabilities Current liabilities Long-term liabilities Total liabilities Stockholders' Equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity

$ 8,000 2,000 $ 10,000

$20,000 10,000 $30,000 $40,000

Isanti Systems, Inc. Income Statement For the Year Ended December 31, 2013 Net sales Costs of goods sold Gross margin Operating expenses Income before income taxes Income taxes Net income

$ 48,000 16,000 $ 32,000 16,000 $ 16,000 6,400 $ 9,600

The return on equity for Isanti Systems is a. 40 percent. b. 67 percent. c. 47 percent. d. 32 percent. ANS: D $9,600 ÷ $30,000 = .32 or 32% PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

71. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios. Isanti Systems, Inc. Balance Sheet December 31, 2013 Assets Current assets Investments Property, plant, and equipment Intangible assets

Total assets

$ 12,000 2,000 16,000 10,000

$40,000

Liabilities Current liabilities Long-term liabilities Total liabilities Stockholders' Equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity

$ 8,000 2,000 $ 10,000

$20,000 10,000 $30,000 $40,000

Isanti Systems, Inc. Income Statement For the Year Ended December 31, 2013 Net sales Costs of goods sold Gross margin Operating expenses Income before income taxes Income taxes Net income

$ 48,000 16,000 $ 32,000 16,000 $ 16,000 6,400 $ 9,600

The debt to equity ratio for Isanti Systems is a. 67 percent. b. 75 percent. c. 25 percent. d. 33.3 percent. ANS: D $10,000 ÷ $30,000 = .333 or 33.3% PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

72. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios. Isanti Systems, Inc. Balance Sheet December 31, 2013 Assets Current assets Investments Property, plant, and equipment Intangible assets

Total assets

$ 12,000 2,000 16,000 10,000

$40,000

Liabilities Current liabilities Long-term liabilities Total liabilities Stockholders' Equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity

$ 8,000 2,000 $ 10,000

$20,000 10,000 $30,000 $40,000

Isanti Systems, Inc. Income Statement For the Year Ended December 31, 2013 Net sales Costs of goods sold Gross margin Operating expenses Income before income taxes Income taxes Net income

$ 48,000 16,000 $ 32,000 16,000 $ 16,000 6,400 $ 9,600

The asset turnover for Isanti Systems is a. 1.00 times. b. 1.33 times. c. .83 times. d. 1.20 times. ANS: D $48,000 ÷ $40,000 = 1.2 times PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

73. Use the following information for the first year of operations for Layton Novelties, Inc. to answer the following question. Use ending balances whenever average balances are required for computing ratios. Layton Novelties, Inc. Balance Sheet December 31, 2013 Assets Current assets Investments Property, plant, and equipment Intangible assets

Total assets

$ 28,000 12,000 48,000 32,000

$120,000

Liabilities Current liabilities Long-term liabilities Total liabilities Stockholders' Equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity

$ 16,000 4,000 $ 20,000

$ 80,000 20,000 $100,000 $120,000

Layton Novelties, Inc. Income Statement For the Year Ended December 31, 2010 Net sales Costs of goods sold Gross margin Operating expenses Income before income taxes Income taxes Net income

$ 80,000 32,000 $ 48,000 12,000 $ 36,000 14,400 $ 21,600

Cash flow from operating expenses for Layton Novelties is $32,400. The asset turnover of Layton Novelties is a. 2.5 times b. 1.5 times. c. .667 times. d. .18 times ANS: C $80,000 ÷ $120,000 = .667 times PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

74. Use the following information for the first year of operations for Layton Novelties, Inc. to answer the following question. Use ending balances whenever average balances are required for computing ratios. Layton Novelties, Inc. Balance Sheet December 31, 2013 Assets Current assets Investments Property, plant, and equipment Intangible assets

$ 28,000 12,000 48,000

Liabilities Current liabilities Long-term liabilities Total liabilities

$ 16,000 4,000 $ 20,000

32,000

Total assets

$120,000

Stockholders' Equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity

$ 80,000 20,000 $100,000 $120,000

Layton Novelties, Inc. Income Statement For the Year Ended December 31, 2013 Net sales Costs of goods sold Gross margin Operating expenses Income before income taxes Income taxes Net income

$ 80,000 32,000 $ 48,000 12,000 $ 36,000 14,400 $ 21,600

Cash flow from operating expenses for Layton Novelties is $32,400. The cash flow yield for Layton Novelties is a. 1.5 times. b. .67 times c. .405 times. d. 2.5 times. ANS: A $32,400 ÷ $21,600 = 1.5 times PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

75. Use the following information for the first year of operations for Layton Novelties, Inc. to answer the following question. Use ending balances whenever average balances are required for computing ratios. Layton Novelties, Inc. Balance Sheet December 31, 2013 Assets Current assets Investments Property, plant, and equipment Intangible assets

$ 28,000 12,000 48,000

Liabilities Current liabilities Long-term liabilities Total liabilities

$ 16,000 4,000 $ 20,000

32,000

Total assets

$120,000

Stockholders' Equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity

$ 80,000 20,000 $100,000 $120,000

Layton Novelties, Inc. Income Statement For the Year Ended December 31, 2013 Net sales Costs of goods sold Gross margin Operating expenses Income before income taxes Income taxes Net income

$ 80,000 32,000 $ 48,000 12,000 $ 36,000 14,400 $ 21,600

Cash flow from operating expenses for Layton Novelties is $32,400. The cash return on assets for Layton Novelties is a. 45 percent. b. 40 percent. c. 27 percent. d. 9 percent. ANS: C $32,400 ÷ $120,000 = .27 or 27% PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

76. Use this balance sheet and income statement for the first year of operations for Layton Novelties, Inc. to answer the following question. Use ending balances whenever average balances are required for computing ratios. Layton Novelties, Inc. Balance Sheet December 31, 2013 Assets Current assets Investments Property, plant, and equipment Intangible assets

Total assets

$ 28,000 12,000 48,000 32,000

$120,000

Liabilities Current liabilities Long-term liabilities Total liabilities

$ 16,000 4,000 $ 20,000

Stockholders' Equity Common stock $ 80,000 Retained earnings 20,000 Total stockholders' equity $100,000 Total liabilities and stockholders' equity $120,000

Layton Novelties, Inc. Income Statement For the Year Ended December 31, 2013 Net sales Costs of goods sold Gross margin Operating expenses Income before income taxes Income taxes Net income

$ 80,000 32,000 $ 48,000 12,000 $ 36,000 14,400 $ 21,600

The profit margin of Layton Novelties is a. 30 percent. b. 75 percent. c. 60 percent. d. 27 percent. ANS: D $21,600 ÷ $80,000 = .27 or 27% PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

77. Use this balance sheet and income statement for the first year of operations for Layton Novelties, Inc. to answer the following question. Use ending balances whenever average balances are required for computing ratios. Layton Novelties, Inc. Balance Sheet December 31, 2013 Assets Current assets Investments Property, plant, and equipment Intangible assets

Total assets

$ 28,000 12,000 48,000 32,000

$120,000

Liabilities Current liabilities Long-term liabilities Total liabilities

$ 16,000 4,000 $ 20,000

Stockholders' Equity Common stock $ 80,000 Retained earnings 20,000 Total stockholders' equity $100,000 Total liabilities and stockholders' equity $120,000

Layton Novelties, Inc. Income Statement For the Year Ended December 31, 2013 Net sales Costs of goods sold Gross margin Operating expenses Income before income taxes Income taxes Net income

$ 80,000 32,000 $ 48,000 12,000 $ 36,000 14,400 $ 21,600

The return on assets for Layton Novelties is a. 40 percent. b. 70 percent. c. 18 percent. d. 66-2/3 percent. ANS: C $21,600 ÷ $120,000 = .18 or 18% PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

78. Use this balance sheet and income statement for the first year of operations for Layton Novelties, Inc. to answer the following question. Use ending balances whenever average balances are required for computing ratios. Layton Novelties, Inc. Balance Sheet December 31, 2013 Assets Current assets Investments Property, plant, and equipment Intangible assets

Total assets

$ 28,000 12,000 48,000 32,000

$120,000

Liabilities Current liabilities Long-term liabilities Total liabilities

$ 16,000 4,000 $ 20,000

Stockholders' Equity Common stock $ 80,000 Retained earnings 20,000 Total stockholders' equity $100,000 Total liabilities and stockholders' equity $120,000

Layton Novelties, Inc. Income Statement For the Year Ended December 31, 2013 Net sales Costs of goods sold Gross margin Operating expenses Income before income taxes Income taxes Net income

$ 80,000 32,000 $ 48,000 12,000 $ 36,000 14,400 $ 21,600

The return on equity for Layton Novelties is a. 48 percent. b. 21.6 percent. c. 42 percent. d. 30 percent. ANS: B $21,600 ÷ $100,000 = .216 or 21.6% PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

79. Use this balance sheet and income statement for the first year of operations for Layton Novelties, Inc. to answer the following question. Use ending balances whenever average balances are required for computing ratios. Layton Novelties, Inc. Balance Sheet December 31, 2013 Assets Current assets Investments Property, plant, and equipment Intangible assets

Total assets

$ 28,000 12,000 48,000 32,000

$120,000

Liabilities Current liabilities Long-term liabilities Total liabilities

$ 16,000 4,000 $ 20,000

Stockholders' Equity Common stock $ 80,000 Retained earnings 20,000 Total stockholders' equity $100,000 Total liabilities and stockholders' equity $120,000

Layton Novelties, Inc. Income Statement For the Year Ended December 31, 2013 Net sales Costs of goods sold Gross margin Operating expenses Income before income taxes Income taxes Net income

$ 80,000 32,000 $ 48,000 12,000 $ 36,000 14,400 $ 21,600

The debt to equity ratio for Layton Novelties is a. 16-2/3 percent. b. 20 percent. c. 80 percent. d. 83-1/3 percent. ANS: B $20,000 ÷ $100,000 = .20 or 20% PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

80. Use this information to answer the following question. J. & B. Auto Parts, Inc. Balance Sheet December 31, 2013 Assets Cash Short-term investments Notes receivable (due in ten months) Accounts receivable Merchandise inventory Land held for future use Land Building Less accumulated depreciation Trademark Total assets

$ 60,000 40,000 30,000 20,000 70,000 80,000 90,000 $100,000 20,000

80,000 70,000 $540,000

Liabilities Notes payable (due in six months) Accounts payable Salaries payable Mortgage payable (due in seven years) Total liabilities

$ 50,000 20,000 10,000 90,000 $170,000

Stockholders' Equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity

$310,000 60,000 370,000 $540,000

The debt to equity ratio is a. .46. b. .67. c. 2.20. d. .33. ANS: A $170,000 ÷ $370,000 = .46 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

81. Use this information to answer the following question. Coyne Corporation Balance Sheet December 31, 2013 Assets Cash Short-term investments Accounts receivable Notes receivable (due in one year) Merchandise inventory Land held for future use Land Building Less accumulated depreciation Trademark Total assets

$ 70,000 56,000 28,000 42,000 98,000 112,000 140,000 $150,000 28,000

122,000 92,000 $760,000

$ 70,000 30,000 14,000 146,000 $260,000

$300,000 200,000

500,000 $760,000

The debt to equity ratio is a. .48. b. .34. c. .52. d. .66. ANS: C $260,000 ÷ $500,000 = .52 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

82. If net cash flows from operating activities were $187,000, net income were $50,000, and net sales were $600,000, the cash flow yield would equal (Round amounts to one decimal place) a. 0.3 times. b. 3.2 times. c. 3.7 times. d. 12.0 times. ANS: C $187,000 ÷ $50,000 = 3.7 times PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 83. Heckart Corporation had sales of $250,000, net income of $25,000, average total assets of $350,000, dividend payments of $17,500, net cash flows from operating activities of $26,000, purchases of plant assets of $37,500, and sales of plant assets of $45,000. Cash return on assets equals (Round amounts to one decimal place) a. 13.0 percent b. 10.4 percent c. 8.7 percent d. 7.4 percent ANS: D $26,000 ÷ $350,000 = .074 or 7.4% PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis SHORT ANSWER 1. List at least five qualitative characteristics of financial accounting. ANS: Relevance Faithful representation Comparability Verifiability Timeliness Understandability PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Reporting KEY: Qualitative characteristics of accounting information

LOC: Recall MSC: ACBSP-APC-01-Purpose

2. The most fundamental qualitative characteristics of financial accounting are relevance and faithful representation. List the two items that information must have in order to be relevant and the three items that demonstrate that information is faithfully represented. ANS: For information to be relevant, it must have predictive value and confirmative value. Information that is faithfully represented is complete, neutral, and free from material error. PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Reporting KEY: Qualitative characteristics of accounting information

LOC: Recall MSC: ACBSP-APC-01-Purpose

3. Following is a list of descriptions of concepts or conventions of accounting. Write the name of the concept or convention that is described. a. The relative importance of an item or event. b. Once a company has adopted an accounting procedure, it must use it from one period to the next unless a note to the financial statements informs users of a change in procedure. c. The benefits to be gained from providing accounting information should be greater than the costs of providing it. d. When faced with choosing between two equally acceptable procedures or estimates, accountants should choose the one that is least likely to overstate assets and income. e. Financial statements should present all the information relevant to users’ understanding of the statements. ANS: a. Materiality b. Consistency c. Cost-benefit d. Conservatism e. Full disclosure PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting KEY: Conventions for interpretation of financial information

LOC: Recall MSC: ACBSP-APC-01-Purpose

4. Why is it important for a company to maintain the same accounting methods and practices from period to period? ANS: An important aspect of financial analysis is comparing financial information about a company from one period to another. The only way to make a valid comparison is if the same set of rules (standards) have been used each period. PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting KEY: Conventions for interpretation of financial information

LOC: Comprehension MSC: ACBSP-APC-01-Purpose

5. State the definition of a current asset. ANS: A current asset is cash or another asset that is expected to be converted into cash or consumed within one year or the normal operating cycle, whichever is longer. PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet classifications MSC: ACBSP-APC-09-Financial Statements 6. Following is a classification scheme for a balance sheet. Current assets Investments Property, plant, and equipment Intangible assets

Current liabilities Long-term liabilities Stockholders' equity Not on balance sheet

For each account name below, write the name of the category above to which it belongs. a. b. c. d. e. f. g. h. i. j. k.

Accumulated Depreciation Revenues Received in Advance Interest Expense Wages Payable Retained Earnings Inventory Trademark Notes Payable (due in five years) Depreciation Expense Prepaid Interest Land Held for Future Use

ANS: a. Property, plant, and equipment b. Current liabilities c. Not on balance sheet d. Current liabilities e. Stockholders’ equity f. Current assets g. Intangible assets h. Long-term liabilities i. Not on balance sheet j. Current asset k. Investments PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Balance sheet classifications MSC: ACBSP-APC-09-Financial Statements

7. Following is a classification scheme for a balance sheet. Current assets Investments Property, plant, and equipment Intangible assets Current liabilities

Long-term liabilities Contributed capital Retained earnings Not on balance sheet

For each account name below, write the name of the category above to which it belongs. a. b. c. d. e. f. g. h. i. j.

Additional paid-in-capital Cost of Goods Sold Retained Earnings Land Temporary Investments Mortgage Payable (due in ten years) Common Stock Goodwill Notes Payable (due in ten months) Special Fund for Purchase of a Building

ANS: a. Contributed capital b. Not on balance sheet c. Retained earnings d. Property, plant, and equipment e. Current assets f. Long-term liabilities g. Contributed capital h. Intangible assets i. Current liabilities j. Investments PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Balance sheet classifications MSC: ACBSP-APC-09-Financial Statements 8. Distinguish between cost of goods sold and operating expenses, describing the nature of these two items and their placement on the income statement. ANS: Cost of goods sold includes the cost of obtaining the goods held for resale; it is deducted directly from net sales on the income statement. Operating expenses, on the other hand, include selling and general and administrative expenses; they appear directly beneath gross margin on the income statement. PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements

9. Following is a classification scheme for a multistep income statement Revenues Cost of goods sold Selling expenses

General and administrative expenses Other revenues and expenses Not on income statement

For each account name below, write the name of the category above to which it belongs. a. b. c. d. e. f. g. h. i. j.

Interest Income Accumulated Depreciation Sales Returns and Allowances Inventories Company President’s Salary Utilities Expense for Store Interest Expense Freight-Out Expense Office Salaries Expense for Headquarters Interest Receivable

ANS: a. Other revenues and expenses b. Not on income statement c. Revenues d. Not on income statement e. General and administrative expenses f. Selling expenses g. Other revenues and expenses h. Selling expenses i. General and administrative expenses j. Not on income statement PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 10. Following is a classification scheme for a multistep income statement Revenues Cost of goods sold Selling expenses

General and administrative expenses Other revenues and expenses Not on income statement

For each account name below, write the name of the category above to which it belongs. a. b. c. d. e. f. g.

Depreciation Expense (for delivery truck) Dividend Income Cash Interest Income Prepaid Rent Rent Expense (for main office) Advertising Expense

h. i. j.

Personnel Expense Unearned Revenue Sales Discounts

ANS: a. Selling expenses b. Other revenues and expenses c. Not on income statement d. Other revenues and expenses e. Not on income statement f. General and administrative expenses g. Selling expenses h. General and administrative expenses i. Not on income statement j. Revenues PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 11. Sean and Dylan Matthews are brothers who each own and operate sports memorabilia shops in neighboring towns. They decide to have a contest to see whose shop can be more profitable for the year. At year-end, Sean's records show sales of $105,000, cost of goods sold of $55,000, and operating expenses of $21,000. The records of Dylan's shop reveal sales of $108,000, cost of goods sold of $62,000, and operating expenses of $19,000. Dylan's shop also had other revenue of $3,000 received for allowing the shop to be used in taping a television show. Each brother claims to have won the contest. Provide explanations as to why each would think so, and then name the winner. ANS: Sean believes he won the contest because the operating income of his shop was $29,000 ($105,000 – $55,000 – $21,000), compared to the $27,000 ($108,000 – $62,000 – $19,000) operating income of Dylan's shop. Dylan argues that his shop posted higher sales than his brother's shop and his $30,000 ($27,000 + $3,000) “bottom line” net income is higher than Sean's $29,000. Even though Dylan's net income is $1,000 higher than Sean's, the $3,000 of other revenue did not come as the result of the buying or selling of merchandise and would not be expected to occur again. Therefore, because $3,000 of Dylan's earnings were not from operations, the more successful store and the bragging rights as the contest winner belong to Sean. PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 12. For each of the definitions below, write the name of the ratio that is described. a. A measure that shows the proportion of a company's assets that is financed by creditors and the proportion financed by stockholders b. A measure that shows the productivity of a company’s assets by comparing cash flows from operating activities to average total assets. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

c. A measure that relates the amount earned by a business to the stockholders' investment in the business d. A measure that shows the percentage of each sales dollar that results in net income e. A measure that shows how much cash a company’s operations generate in relation to its net income. f. A measure that shows how efficiently a company uses its assets to produce income g. A measure of how efficiently assets are used to produce sales ANS: a. Debt to equity ratio b. Cash return on assets c. Return on equity d. Profit margin e. Cash flow yield f. Return on assets g. Asset turnover PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 13. Using the following amounts taken from the balance sheet, income statement, and cash flows statement of a business, compute the measures listed below. Round to one decimal place. Current assets Average total assets Current liabilities Long-term liabilities

$ 6,000 30,000 4,500 10,500

Average stockholders' equity $15,000 Net sales 19,500 Net income 2,400 Cash flows from operating activities 3,450

a. Return on assets b. Profit margin c. Return on equity d. Cash return on assets ANS: a. 8.0% ($2,400 ÷ $30,000) b. 12.3%0 ($2,400 ÷ $19,500) c. 16.0% ($2,400 ÷ $15,000) d. 11.5% ($3,450 ÷ $30,000) PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 14. Using the following amounts taken from the balance sheet and income statement of a business, compute the measures listed below. Round to one decimal place. Beginning total assets Ending total assets

$ 90,000 150,000

Beginning stockholders' equity Ending stockholders’ equity

$50,000 $70,000

Current liabilities Long-term liabilities

20,000 40,000

Net sales Net income

164,000 3,000

a. Debt to equity ratio b. Return on equity c. Return on assets d. Asset turnover ANS: a. 85.7% [($20,000 + $40,000) ÷ $70,000] b. 5.0% [$3,000 ÷ (($50,000 + $70,000) ÷ 2)] c. 2.5% [$3,000 ÷ (($90,000 + $150,000) ÷ 2)] d. 1.4 times [$164,000 ÷ (($90,000 + $150,000) ÷ 2)] PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis MATCHING Match each definition with the correct term below. a. Information should have direct bearing on a decision. b. The quality or accounting information that enables users to comprehend the meaning of the information they receive. c. The quality of accounting information that assures users that information as presented can be substantiated. d. The accounting convention that requires that once a company has adopted an accounting procedure, it must use it from one period to the next. e. The accounting convention that refers to the relative importance of an item or event. f. The accounting convention that states that when faced with choosing between two equally acceptable procedures or estimates, accountants should choose the one that is least likely to overstate assets and income. g. Cash and other assets that a company can reasonably expect to convert to cash, sell, or consume within one year or the company’s normal operating cycle. h. Debts that fall due more than one year in the future or beyond the normal operating cycle. i. The amount that stockholders invest in the business. j. Gross sales less sales returns and allowances k. The amount a merchandiser paid for the merchandise it sold during an accounting period. l. The income from a company’s main business. 1. 2. 3. 4. 5. 6. 7.

Consistency Materiality Contributed capital Cost of goods sold Understandability Long-term liabilities Relevance © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

8. 9. 10. 11. 12.

Net sales Verifiability Current assets Income from operations Conservatism

1. ANS: D PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Conventions for interpretation of financial information MSC: ACBSP-APC-01-Purpose 2. ANS: E PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Conventions for interpretation of financial information MSC: ACBSP-APC-01-Purpose 3. ANS: I PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 4. ANS: K PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 5. ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Qualitative characteristics of accounting information MSC: ACBSP-APC-01-Purpose 6. ANS: H PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 7. ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Qualitative characteristics of accounting information MSC: ACBSP-APC-01-Purpose 8. ANS: J PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 9. ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Qualitative characteristics of accounting information MSC: ACBSP-APC-01-Purpose 10. ANS: G PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements 11. ANS: L PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 12. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting LOC: Recall KEY: Conventions for interpretation of financial information MSC: ACBSP-APC-01-Purpose

PROBLEM 1. Define the following qualitative characteristics of accounting: a. Relevance b. Faithful Representation c. Comparability d. Verifiability e. Timeliness f. Understandability ANS: a. Information should have a direct bearing on a decision. b. Financial information is complete, neutral, and free from material error. c. The quality that enables users to identify similarities and differences between two sets of financial data. d. The quality that assures users that information as presented can be substantiated e. The quality that enables users to receive information in time to influence their decisions. f. The quality that enables users to comprehend the meaning of the information they receive. PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Communication | AICPA FN Reporting KEY: Qualitative characteristics of accounting information

LOC: Comprehension MSC: ACBSP-APC-01-Purpose

2. Each of the following statements is justified by a concept or convention of accounting. Write the name of the concept or convention that applies to each statement. a. This convention best enhances comparability of financial statements between years. b. A merger agreed on just after the balance sheet date nevertheless is reported in the notes to the financial statements. c. A company forgoes hiring another full-time accountant, which would add only slightly to the financial statements' accuracy. d. A company uses lower-of-cost-or-market to value inventory. e. A large company rounds its financial statement figures to the nearest $10,000. ANS: a. Consistency b. Full disclosure c. Cost-benefit d. Conservatism e. Materiality PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting KEY: Conventions for interpretation of financial information

LOC: Application MSC: ACBSP-APC-01-Purpose

3. Each of the following statements violates a concept or convention of accounting. Write the name of the concept or convention that is violated. a. A note to the financial statements indicating a change in inventory methods is omitted. b. When management is unsure of which estimates to use in a given situation, the estimate resulting in the largest net income is always used. c. In 2012, a company uses straight-line depreciation and in 2013 the company uses declining-balance depreciation. d. A small company expenses all expenditures under $10,000. e. A small company purchases a $50,000 computer to save $3,000 per year in bookkeeping wages. ANS: a. Full disclosure b. Conservatism c. Consistency d. Materiality e. Cost-benefit PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting KEY: Conventions for interpretation of financial information

LOC: Application MSC: ACBSP-APC-01-Purpose

4. Bill Pierce owns several ice cream shops all within 50 miles of his home. He has plans to expand greatly the number of shops he owns. This planned expansion will require a large bank loan. Bill has always done his own accounting work and has prepared a set of financial statements for each of the past five years of operations to present to the bank. Because some periods were more profitable than others, Bill attempted to streamline his earnings by switching depreciation and inventory valuation methods frequently. This created the appearance that his company earnings were very consistent over the years. Discuss the merits of Bill's financial statements with regard to his streamlining decisions. ANS: Bill's attempt to streamline his earnings by frequently changing depreciation and inventory methods is a violation of the accounting conventions of comparability and consistency. Once the selection of accounting methods for such areas as depreciation and inventory are made, the company should continue to apply these methods from one period to the next. To vacillate between different methods greatly diminishes the usefulness of the statements in providing meaningful information. The true picture of somewhat erratic earnings is hidden by his efforts to present his operations in a more favorable light in order to receive a loan from the bank. PTS: 1 DIF: Challenging OBJ: 2 NAT: AACSB Communication | AICPA FN Reporting KEY: Conventions for interpretation of financial information

LOC: Critical Thinking MSC: ACBSP-APC-01-Purpose

5. Following is the year end Balance Sheet for Dakota Company. Dakota, Inc. Balance Sheet December 31, 2013 Assets Cash Short-term investments Notes receivable (due in five months) Accounts receivable Inventory Securities Land Building Less accumulated depreciation Patent Total assets

$600,000 120,000

60,000 240,000 180,000 120,000 420,000 480,000 540,000 480,000 420,000 $2,940,000

Liabilities Notes payable (due in ten months) Accounts payable Salaries payable Mortgage payable (due in nine years) Total liabilities Stockholders' Equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity

$ 300,000 120,000 60,000 540,000 $1,020,000

$1,560,000 360,000 1,920,000 $2,940,000

Using the information above, calculate the total dollar amounts that should be included in each of the following classifications. a. Current assets b. Investments c. Property, plant, and equipment d. Intangibles e. Current liabilities f. Long-term liabilities g. Contributed capital h. Retained earnings

ANS: a. $60,000 + $240,000 + $180,000 + $120,000 + $420,000 = $1,020,000 b. $480,000 c. $540,000 + $480,000 = $1,020,000 d. $420,000 e. $300,000 + $120,000 + $60,000 = $480,000 f. $540,000 g. $1,560,000 h. $360,000 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Communication | AICPA FN Reporting LOC: Application KEY: Balance sheet classifications MSC: ACBSP-APC-09-Financial Statements 6. Using the following data, prepare a classified balance sheet for Kanabec Corporation as of December 31, 2013. Cash Investments in Short-Term Government Securities Accounts Receivable Inventory Prepaid Rent Investment in Land Held for future use Land Building

400 800

Accumulated Depreciation– Building Franchise

$ 2,000 3,600

1,600 6,000 200 5,400

Accounts Payable Revenues Received in Advance Notes Payable (in two years) Common Stock—$10 par value,

3,200 800 8,000 20,000

4,000 16,000

Retained Earnings

4,000

ANS: Kanabec Corporation Balance Sheet December 31, 2013 Assets Current assets Cash Investments in short-term government securities Accounts receivable Inventory Prepaid rent Total current assets Investments Land held for future use Property, plant, and equipment Land Building Less accumulated depreciation Total property, plant, and equipment Intangible assets Franchise Total assets

400 800 1,600 6,000 200 $ 9,000 5,400 $ 4,000

$16,000 2,000

14,000 18,000 3,600 $36,000

Liabilities Current liabilities Accounts payable Revenues received in advance Total current liabilities Long-term liabilities Notes payable (in two years) Total liabilities

$3,200 800

Stockholders' Equity Contributed capital Common stock-$10 par value, 1,000 shares issued and outstanding Retained earnings Total stockholders' equity Total liabilities and stockholders' equity

$ 4,000 8,000 $12,000

$20,000 4,000 24,000 $36,000

PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Communication | AICPA FN Reporting LOC: Analysis KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements

7. Using the following data, prepare a classified balance sheet as of December 31, 2013, for the Lyon Company. There are 4,000 shares of $10 par value common stock issued and outstanding. Accounts Payable Building Not Currently Used Accumulated Depreciation, Equipment

$3,200 38,000 16,000

Common Stock Retained Earnings Copyright Bonds Payable (due in 20 years)

40,000 45,200 10,000 26,000

Accounts Receivable Cash Unearned Revenue

6,000 10,400 1,600

Short-Term Investments Land Equipment Long-Term Investments

4,000 32,000 30,000 1,600

ANS: Lyon Company Balance Sheet December 31, 2013 Assets Current assets Cash Short-term investments Accounts receivable Total current assets Investments Building not currently used Long-term investments Total investments Property, plant, and equipment Land Equipment Less accumulated depreciation Total property, plant, and equipment Intangible assets Copyright Total assets

$ 10,400 4,000 6,000 $ 20,400 $38,000 1,600 39,600 $32,000 $30,000 16,000

14,000 46,000 10,000 $116,000

Liabilities Current liabilities Accounts payable Unearned revenue Total current liabilities Long-term liabilities Bonds payable (due in 20 years) Total liabilities

$3,200 1,600 $ 4,800 26,000 $30,800

Stockholders' Equity Contributed capital Common stock-$10 par value, 4,000 shares issued and outstanding Retained earnings Total stockholders' equity Total liabilities and stockholders' equity

$40,000 45,200 85,200 $116,000

PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Communication | AICPA FN Reporting LOC: Analysis KEY: Balance sheet MSC: ACBSP-APC-09-Financial Statements

8. Using the following data, prepare a multistep income statement for Morrison Company for the month ended February 28, 2013. Cost of Goods Sold General and Administrative Expenses Net Sales Selling Expenses Income Taxes

$30,000 8,000 50,000 7,000 950

ANS: Morrison Company Income Statement For the Month Ended February 28, 2013 Net sales Costs of goods sold Gross margin Operating expenses Selling expenses General and administrative expenses Total operating expenses Income before income taxes Income taxes Net income

$ 50,000 30,000 $ 20,000 $7,000 8,000 15,000 $ 5,000 950 $ 4,050

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 9. Use the information from the following single-step income statement to prepare a condensed multistep income statement in proper form. Anoka Industries Income Statement For the Year Ended December 31, 2013 Revenues Net sales Interest income Total revenues

$20,000 600

Costs and expenses Costs of goods sold Selling expenses General and administrative expenses Interest expense Total costs and expense

$ 10,000 6,000 3,600 1,600

Net (loss)

$20,600

21,200 600)

ANS: Anoka Industries Income Statement For the Year Ended December 31, 2013 Net sales Costs of goods sold Gross margin Operating expenses Selling expenses General and administrative expenses Total operating expenses Income from operations Other revenues and expenses Interest income Less interest expense Excess of other expenses over other revenues Net (loss)

$20,000 10,000 $ 10,000 $6,000 3,600 9,600 $ 400 $ 600 1,600 ($

1,000 600)

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 10. Use the information from the following multistep income statement to prepare a single-step income statement in proper form. Olga & Daughters, Inc. Income Statement For the Month Ended July 31, 2013 Net sales Cost of goods sold Gross margin Operating expenses Selling expenses General and administrative expenses Total operating expenses Income from operations Other revenues and expenses Dividend income Interest income Less interest expense Excess of other revenues over other expenses Income before income taxes Income taxes Net income

$15,000 9,000 $ 6,000 $1,200 800 2,000 $ 4,000 $ 250 350 150 450 $ 4,450 1,780 $ 2,670

ANS: Olga & Daughters, Inc. Income Statement For the Month Ended July 31, 2013 Revenues Net sales Dividend income Interest income Total revenues Costs and expenses Cost of goods sold Selling expenses General and administrative expenses Interest expense Total costs and expenses Income before income taxes Income taxes Net income

$15,000 250 350 $15,600 $ 9,000 1,200 800 150 11,150 4,450 1,780 $ 2,670 $

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 11. Use the following information to calculate the ratios listed below. Round to two decimal places. Average stockholders' equity Average total assets Current assets Current liabilities

$ 9,250 18,000 11,250 7,500

Net income $ 1,500 Net sales 15,625 Total liabilities 8,750 Cash flow from operating activities $2,900

a. Cash flow yield b. Cash return on assets c. Return on equity d. Profit margin e. Debt to equity f. Return on assets g. Asset turnover ANS: a. 1.93 times ($2,900 ÷ $1,500) b. 16.11% ($2,900 ÷ $18,000) c. 16.22% ($1,500 ÷ $9,250) © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

d. 9.60% ($1,500 ÷ $15,625) e. 94.59% ($8,750 ÷ $9,250) f. 8.33% ($1,500 ÷ $18,000) g. .87 times ($15,625 ÷ $18,000) PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 12. Use the following information to calculate the ratios listed below. Round to two decimal places. Average stockholders' equity Average total assets Current assets Current liabilities

$14,000 21,000 15,000 10,000

Net income Net sales Total liabilities Cash flow from operating activities

$ 2,100 17,500 10,500 5,200

a. Cash flow yield b. Cash return on assets c. Return on equity d. Profit margin e. Debt to equity f. Return on assets g. Asset turnover ANS: a. 2.48 times ($5,200 ÷ $2,100) b. 24.76% ($5,200 ÷ $21,000) c. 15.0% ($2,100 ÷ $14,000) d. 12.0% ($2,100 ÷ $17,500) e. 75.0% ($10,500 ÷ $14,000) f. 10.0% ($2,100 ÷ $21,000) g. .83 times ($17,500 ÷ $21,000) PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

13. From the simplified balance sheet and income statement of the business below, compute the following ratios. Assume that the June 30 amounts for total assets and stockholders' equity also represent their average amounts for the period. Round percentages to the nearest whole percent. a. Profit margin b. Return on assets c. Debt to equity d. Return on equity e. Asset turnover

Assets Current assets Investments Property, plant, and equipment Intangible assets

Total assets

Sci-Tech Enterprises, Inc. Balance Sheet June 30, 2013 Liabilities $ 4,000 Current liabilities 2,000 Long-term liabilities Total liabilities 12,000 2,000 Stockholders' Equity Common stock Retained earnings Total stockholders' equity $20,000 Total liabilities and stockholders' equity

$ 4,000 6,000 $10,000

$ 8,000 2,000 $10,000 $20,000

Sci-Tech Enterprises, Inc. Income Statement For the Year Ended June 30, 2013 Net sales Cost of goods sold Gross margin Operating expenses Income before income taxes Income taxes Net income

$24,000 12,000 $12,000 8,000 $ 4,000 1,600 $ 2,400

ANS: a. 10% ($2,400 ÷ $24,000) b. 12% ($2,400 ÷ $20,000) c. 100% ($10,000 ÷ $10,000) d. 24% ($2,400 ÷ $10,000) e. 1.2 times ($24,000 ÷ $20,000) PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

14. From the simplified balance sheet and income statement of the business below, compute the following ratios. Assume that the April 30 amounts for total assets and stockholders' equity also represent their average amounts for the period. Round percentages to the nearest whole percent. a. Profit margin b. Return on assets c. Debt to equity d. Return on equity e. Asset turnover Gruen Enterprises, Inc. Balance Sheet April 30, 2013 Assets Current assets Investments Property, plant, and equipment Intangible assets

Total assets

Liabilities $ 4,000 Current liabilities 6,000 Long-term liabilities Total liabilities 16,000 4,000 Stockholders' Equity Common stock Retained earnings Total stockholders' equity $30,000 Total liabilities and stockholders' equity

$ 2,000 8,000 $10,000

$14,000 6,000 $20,000 $30,000

Gruen Enterprises, Inc. Income Statement For the Year Ended April 30, 2013 Net sales Cost of goods sold Gross margin Operating expenses Income before income taxes Income taxes Net income

$40,000 22,000 $18,000 12,000 $ 6,000 2,400 $ 3,600

ANS: a. 9% ($3,600 ÷ $40,000) b. 12% ($3,600 ÷ $30,000) c. 50% ($10,000 ÷ $20,000) d. 18% ($3,600 ÷ $20,000) e. 1.3 times ($40,000 ÷ $30,000) PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

Chapter 05 - The Operating Cycle and Merchandising Operations TRUE/FALSE 1. Businesses can be classified as service companies, wholesalers, or retailers. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Communication | AICPA BB Industry LOC: Recall KEY: Business types MSC: ACBSP-APC-03-Business Forms 2. Profitability means having enough cash on hand to pay bills when they become due. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Liquidity MSC: ACBSP-APC-23-Financial Statement Analysis 3. The operating cycle involves the purchase and sale of merchandise inventory as well as the subsequent collection of cash from credit sales. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Operating cycle MSC: ACBSP-APC-05-Accounting Cycle 4. When a U.S. company does business with a British company and payment is in U.S. dollars, an exchange gain or loss occurs if the exchange rate between dollars and pounds changes between the date of sale and the date of payment. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Management issues MSC: ACBSP-APC-15-Current Assets Reporting 5. An advantage of using the periodic inventory system is that it requires less recordkeeping than the perpetual inventory system. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory systems MSC: ACBSP-APC-17-Inventories Reporting 6. The perpetual inventory system relies on a physical count of merchandise for its balance sheet amount. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory systems MSC: ACBSP-APC-17-Inventories Reporting 7. The periodic inventory system provides an up-to-date amount of inventory on hand. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory systems MSC: ACBSP-APC-17-Inventories Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

8. A retail operation would still have to take a physical inventory even if it uses a perpetual inventory system. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory systems MSC: ACBSP-APC-17-Inventories Reporting 9. Under the periodic inventory system, Cost of goods sold must be computed on the income statement because it is not updated for purchases, sales, and other transactions during the accounting period. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory systems MSC: ACBSP-APC-17-Inventories Reporting 10. Computerization has led to a large increase in the use of the periodic inventory system. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory systems MSC: ACBSP-APC-17-Inventories Reporting 11. Taking a physical inventory refers to making a count of all merchandise on hand at a particular time. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory systems MSC: ACBSP-APC-17-Inventories Reporting 12. When the periodic inventory system is used, a physical inventory does not need to be taken at the end of the fiscal year. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory systems MSC: ACBSP-APC-17-Inventories Reporting 13. Computerization has helped to make taking physical inventory a much easier process in both the periodic and perpetual inventory systems. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory systems MSC: ACBSP-APC-17-Inventories Reporting 14. A company with a current ratio of 1.0 is considered more liquid than one with a current ratio of 2.0. ANS: F PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

15. A company would be more likely to know the amount of inventory on hand if it used the perpetual inventory system rather than the periodic inventory system. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory systems MSC: ACBSP-APC-17-Inventories Reporting 16. Under the periodic inventory system, cost of goods sold is treated as an account. ANS: F PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory systems MSC: ACBSP-APC-17-Inventories Reporting 17. A large discount chain, like Wal-Mart or Target, most likely would use the perpetual inventory system to maintain control of its inventory. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory systems MSC: ACBSP-APC-17-Inventories Reporting 18. Liquidity management involves planning a business's cash receipts and cash payments. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Liquidity MSC: ACBSP-APC-05-Accounting Cycle 19. Cash flow cannot be managed, but it is a natural component of business operations. ANS: F PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Management issues MSC: ACBSP-APC-15-Current Assets Reporting 20. When the terms of sale include a sales discount, it usually is advisable for the buyer to pay within the discount period. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Discounts | Terms of sale MSC: ACBSP-APC-17-Inventories Reporting 21. The terms “2/10, n/30” mean that a 2 percent discount is allowed on payments made before 10 days after the invoice date. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Discounts | Terms of sale MSC: ACBSP-APC-17-Inventories Reporting

22. Terms of “2/10, n/30” are an example of a trade discount. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Discounts | Terms of sale MSC: ACBSP-APC-17-Inventories Reporting 23. Sale and purchase of goods should be recorded at their list price, before any trade discount is recorded. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Discounts | Terms of sale MSC: ACBSP-APC-17-Inventories Reporting 24. FOB shipping point means that the seller incurs the shipping costs. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Terms of sale MSC: ACBSP-APC-17-Inventories Reporting 25. Freight-in is not considered a cost of merchandise purchased. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Merchandise purchases transactions MSC: ACBSP-APC-17-Inventories Reporting

OBJ: 2 LOC: Recall

26. The use of major credit cards requires sellers to establish the customer's credit. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Terms of sale MSC: ACBSP-APC-09-Financial Statements 27. The fee paid by a retailer to a credit card company is considered an expense account by the retailer. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Accounts | Terms of sale MSC: ACBSP-APC-09-Financial Statements 28. When the buyer bears the transportation charge, it is called freight-out. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory measurement MSC: ACBSP-APC-17-Inventories Reporting 29. Upon making a credit card sale, a business should record the sale as an accounts receivable until the customer pays his or her credit card bill. ANS: F PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Recording entries | Terms of sale MSC: ACBSP-APC-06-Recording Transactions © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

30. When a business is able to deposit its credit card sales invoices directly into a special bank account, it debits Accounts Receivable. ANS: F PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Recording entries | Terms of sale MSC: ACBSP-APC-06-Recording Transactions 31. If insured goods are shipped FOB destination, the seller should file a claim for goods damaged in transit. ANS: T PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Terms of sale MSC: ACBSP-APC-17-Inventories Reporting 32. Cost of goods sold is not considered an expense of a merchandising business. ANS: F PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Merchandise sales transactions MSC: ACBSP-APC-17-Inventories Reporting 33. A sale takes place when title to the goods transfers to the buyer. ANS: T PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Measurement issues MSC: ACBSP-APC-17-Inventories Reporting 34. Sales Discounts and Sales Returns and Allowances are revenue accounts. ANS: F PTS: 1 DIF: Easy OBJ: 2 | 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Accounts | Income statement MSC: ACBSP-APC-09-Financial Statements 35. The difference between gross sales and net sales is equal to the sum of sales discounts and sales returns and allowances. ANS: T PTS: 1 DIF: Easy OBJ: 2 | 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 36. When a customer returns goods, the company increases the Sales Returns and Allowances account. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Merchandise sales transactions MSC: ACBSP-APC-06-Recording Transactions 37. Inventory losses are easier to identify under the perpetual inventory system than under the periodic inventory system. ANS: T PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory systems MSC: ACBSP-APC-17-Inventories Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

38. The net cost of purchases is found by adding freight-in to net purchases. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 39. With the periodic inventory system, goods available for sale must be calculated before cost of goods sold. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Income statement | Inventory systems MSC: ACBSP-APC-09-Financial Statements

OBJ: 4 LOC: Recall

40. Adding together the beginning merchandise inventory and cost of goods sold gives the amount of goods available for sale. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 41. Ending merchandise inventory is included in the calculation of goods available for sale. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 42. Freight-In is treated as an addition in the cost of goods sold section of the income statement. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 43. Under the periodic inventory system, the Purchases account is used to accumulate all purchases of merchandise for resale. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Merchandise purchases transactions MSC: ACBSP-APC-06-Recording Transactions

OBJ: 4 LOC: Recall

44. The change in merchandise inventory level from the beginning to the end of the year does not affect cost of goods sold. ANS: F PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory measurement MSC: ACBSP-APC-17-Inventories Reporting

45. The calculation of goods available for sale during the year is affected by the previous year's ending merchandise inventory. ANS: T PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 46. Good internal control dictates that key employees be rotated among different jobs. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Recall KEY: Control activities MSC: ACBSP-APC-10-Internal Control 47. At the end of each day, the cashier should not be the one responsible for comparing the amount on the cash register tape with the day's cash additions to the cash register. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Recall KEY: Control activities MSC: ACBSP-APC-10-Internal Control 48. Management's authorization of transactions relates to a control activity in the accounting system. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Recall KEY: Control activities MSC: ACBSP-APC-10-Internal Control 49. Merchandising businesses and servicing companies both need a good system of internal control. ANS: T PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Control activities | Control environment MSC: ACBSP-APC-10-Internal Control

OBJ: 5 LOC: Recall

50. An effective system of internal control centralizes functions in a single, capable individual. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Recall KEY: Control environment MSC: ACBSP-APC-10-Internal Control 51. An effective system of internal control requires that individuals never take vacations. ANS: F PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Control activities | Control environment MSC: ACBSP-APC-10-Internal Control

OBJ: 5 LOC: Recall

52. Bonding means insuring a company against employee theft. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Recall KEY: Control activities MSC: ACBSP-APC-10-Internal Control 53. Management's regular assessment of its internal controls is called monitoring. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Recall KEY: Risk assessment MSC: ACBSP-APC-10-Internal Control 54. Management is responsible for establishing a satisfactory system of internal control. ANS: T PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Control activities | Control environment MSC: ACBSP-APC-10-Internal Control

OBJ: 5 LOC: Recall

55. The separation-of-duties feature of internal control can be negated when the owner of a small company has an active involvement in the company. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Recall KEY: Control activities MSC: ACBSP-APC-10-Internal Control 56. One example of a periodic independent verification is the bank reconciliation. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Recall KEY: Control activities MSC: ACBSP-APC-10-Internal Control 57. A system of internal control cannot be considered good until the possibility of human error has been completely eliminated. ANS: F PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Comprehension KEY: Risk assessment MSC: ACBSP-APC-10-Internal Control 58. Proper control procedures do not guarantee the prevention of theft. ANS: T PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Comprehension KEY: Control activities MSC: ACBSP-APC-10-Internal Control 59. All systems of internal control are identical and, once established, do not need to be changed. ANS: F PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Comprehension KEY: Control activities MSC: ACBSP-APC-10-Internal Control © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

60. Under an effective system of internal control, errors occur only as a result of fraud or dishonesty. ANS: F PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Comprehension KEY: Risk assessment MSC: ACBSP-APC-10-Internal Control 61. It is likely that a company would want to bond its employees who handle cash or inventory. ANS: T PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Comprehension KEY: Control activities MSC: ACBSP-APC-10-Internal Control 62. A formal request for a purchase from the requesting department of a business is known as a purchase order. ANS: F PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Internal control over merchandising transactions MSC: ACBSP-APC-10-Internal Control

OBJ: 6 LOC: Recall

63. The purchasing department prepares a purchase requisition addressed to the vendor (seller) containing instructions related to the items ordered. ANS: F PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Internal control over merchandising transactions MSC: ACBSP-APC-10-Internal Control

OBJ: 6 LOC: Recall

64. Another term for an invoice is a check. ANS: F PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Internal control over merchandising transactions MSC: ACBSP-APC-10-Internal Control

OBJ: 6 LOC: Recall

65. In addition to keeping the records of a purchase transaction, the accounting department should prepare and mail checks for payment of invoices. ANS: F PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Internal control over merchandising transactions MSC: ACBSP-APC-10-Internal Control

OBJ: 6 LOC: Recall

66. Effective internal control requires a department to purchase supplies through a formal purchasing process. ANS: T PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Internal control over merchandising transactions MSC: ACBSP-APC-10-Internal Control

OBJ: 6 LOC: Recall

67. The treasurer should prepare and sign a check only after a proper check authorization has been provided. ANS: T PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Internal control over merchandising transactions MSC: ACBSP-APC-10-Internal Control

OBJ: 6 LOC: Recall

MULTIPLE CHOICE 1. Which of the following is a measure of liquidity? a. Return on equity b. Return on assets c. Working capital d. Profit margin ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 2. Current assets divided by current liabilities is known as the a. profit margin. b. current ratio. c. working capital. d. capital structure. ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 3. Working capital measures a. the excess of current assets over current liabilities—what is on hand to continue business operations. b. the ability to earn a satisfactory income. c. the amount of debt in the company. d. the profitability of the business. ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 4. The perpetual inventory system has traditionally been used most commonly by companies that sell a. low-priced, high-volume merchandise. b. low-priced, low-volume merchandise. c. high-priced, low-volume merchandise. d. high-priced, high-volume merchandise. ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory systems MSC: ACBSP-APC-17-Inventories Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

5. A physical inventory is usually taken a. at the beginning of the fiscal year. b. at the end of the busy season. c. at the end of the fiscal year. d. when the perpetual inventory system, but not the periodic inventory system, is being used. ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory systems MSC: ACBSP-APC-17-Inventories Reporting 6. Under the perpetual inventory system, a. continuous records of the quantity and cost of inventory items are kept as they are bought and sold. b. up-to-date information about product availability is more accessible to managers. c. the cost of inventory items purchased for resale is recorded in the Merchandise Inventory account. d. all of these are correct. ANS: D PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory systems MSC: ACBSP-APC-17-Inventories Reporting 7. Which of the following activities is not a component of the operating cycle? a. Payment of rent b. Payment for purchases made on credit c. Purchase of merchandise d. Collection of cash from credit sales ANS: A PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Operating cycle MSC: ACBSP-APC-15-Current Assets Reporting 8. Each of the following companies is a merchandising business except a a. candy store. b. car wash. c. wholesale parts company. d. furniture store. ANS: B PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Business types MSC: ACBSP-APC-03-Business Forms 9. Which of the following companies would be most likely to use a computerized perpetual inventory system? a. Antique dealer b. Car dealership c. Auto parts store d. Large appliance retailer ANS: C PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory systems MSC: ACBSP-APC-17-Inventories Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

10. A merchandising business will earn an income before income taxes of exactly $0 when a. net sales equals cost of goods sold. b. operating expenses equal net sales. c. gross margin equals operating expenses. d. cost of goods sold equals gross margin. ANS: C PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Income statement | Net income MSC: ACBSP-APC-09-Financial Statements 11. On average, it takes Straford Corporation 30 days to sell its inventory and 45 days to collect payment from customers. Straford normally pays for inventory purchases within 15 days. Its financing period is a. 15. b. 30. c. 60. d. 90. ANS: C 30 + 45 – 15 = 60 PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Operating cycle MSC: ACBSP-APC-15-Current Assets Reporting 12. Use this balance sheet and income statement for the first year of operations for Layton Novelties, Inc. to answer the following question. Layton Novelties, Inc. Balance Sheet December 31, 2013 Assets Liabilities Current assets $ 28,000 Current liabilities $ 16,000 Investments 12,000 Long-term liabilities 4,000 Property, plant, and equipment 48,000 Total liabilities $ 20,000 Intangible assets 32,000 Stockholders' Equity Common stock $ 80,000 Retained earnings 20,000 Total stockholders' equity $100,000 Total liabilities and Total assets $120,000 stockholders' equity $120,000

Layton Novelties, Inc. Income Statement For the Year Ended December 31, 2013 Net sales Costs of goods sold Gross margin Operating expenses Income before income taxes Income taxes Net income

$ 80,000 32,000 $ 48,000 12,000 $ 36,000 14,400 $ 21,600

The total amount of working capital of Layton Novelties is a. $8,000 b. $28,000 c. $12,000 d. $4,000 ANS: C $28,000 – $16,000 = $12,000 PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 13. Use this balance sheet and income statement for the first year of operations for Layton Novelties, Inc. to answer the following question. Layton Novelties, Inc. Balance Sheet December 31, 2013 Assets Liabilities Current assets $ 28,000 Current liabilities $ 16,000 Investments 12,000 Long-term liabilities 4,000 Property, plant, and equipment 48,000 Total liabilities $ 20,000 Intangible assets 32,000 Stockholders' Equity Common stock $ 80,000 Retained earnings 20,000 Total stockholders' equity $100,000 Total liabilities and Total assets $120,000 stockholders' equity $120,000

Layton Novelties, Inc. Income Statement For the Year Ended December 31, 2013 Net sales Costs of goods sold Gross margin Operating expenses Income before income taxes Income taxes Net income

$ 80,000 32,000 $ 48,000 12,000 $ 36,000 14,400 $ 21,600

The current ratio for Layton Novelties is a. 1.75. b. .57. c. 1.4. d. 2.0. ANS: A $28,000 ÷ $16,000 = 1.75 PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 14. Use this balance sheet and income statement to answer the following question. Abner Systems, Inc. Balance Sheet December 31, 2013 Assets Current assets Investments Property, plant, and equipment Intangible assets

Total assets

$ 6,000 1,000 8,000 5,000

$20,000

Liabilities Current liabilities Long-term liabilities Total liabilities Stockholders' Equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity

$ 4,000 1,000 $ 5,000

$10,000 5,000 $15,000 $20,000

Abner Systems, Inc. Income Statement For the Year Ended December 31, 2013 Net sales Costs of goods sold Gross margin Operating expenses Income before income taxes Income taxes Net income

$ 24,000 8,000 $ 16,000 8,000 $ 8,000 3,200 $ 4,800

The total amount of working capital of Abner Systems is a. $0. b. $6,000. c. $2,000. d. $10,000. ANS: C $6,000 – $4,000 = $2,000 PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 15. Use this balance sheet and income statement to answer the following question. Abner Systems, Inc. Balance Sheet December 31, 2013 Assets Current assets Investments Property, plant, and equipment Intangible assets

Total assets

$ 6,000 1,000 8,000 5,000

$20,000

Liabilities Current liabilities Long-term liabilities Total liabilities Stockholders' Equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity

$ 4,000 1,000 $ 5,000

$10,000 5,000 $15,000 $20,000

Abner Systems, Inc. Income Statement For the Year Ended December 31, 2013 Net sales Costs of goods sold Gross margin Operating expenses Income before income taxes Income taxes Net income

$ 24,000 8,000 $ 16,000 8,000 $ 8,000 3,200 $ 4,800

The current ratio for Abner Systems is (after rounding to two decimal places a. .67. b. 1.25. c. 1.13. d. 1.50. ANS: D $6,000 ÷ $4,000 = 1.5 PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

16. Use this information to answer the following question. J. & B. Auto Parts, Inc. Balance Sheet December 31, 2013 Assets Cash Short-term investments Notes receivable (due in ten months) Accounts receivable Merchandise inventory Land held for future use Land Building Less accumulated depreciation Trademark Total assets

$ 60,000 40,000 30,000 20,000 70,000 80,000 90,000 $100,000 20,000

80,000 70,000 $540,000

$ 50,000 20,000 10,000 90,000 $170,000

$310,000 60,000 370,000 $540,000

The total amount of working capital is a. $370,000. b. $40,000. c. $140,000. d. $60,000. ANS: C ($60,000 + $40,000 + $30,000 + $20,000 + $70,000) – ($50,000 + $20,000 + $10,000) = $140,000 PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

17. Use this information to answer the following question. J. & B. Auto Parts, Inc. Balance Sheet December 31, 2013 Assets Cash Short-term investments Notes receivable (due in ten months) Accounts receivable Merchandise inventory Land held for future use Land Building Less accumulated depreciation Trademark Total assets

$ 60,000 40,000 30,000 20,000 70,000 80,000 90,000 $100,000 20,000

80,000 70,000 $540,000

$ 50,000 20,000 10,000 90,000 $170,000

$310,000 60,000 370,000 $540,000

The current ratio is a. 3.18. b. 2.75. c. 1.45. d. .36 ANS: B ($60,000 + $40,000 + $30,000 + $20,000 + $70,000) ÷ ($50,000 + $20,000 + $10,000) = 2.75 PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

18. Use this information to answer the following question. Coyne Corporation Balance Sheet December 31, 2010 Assets Cash Short-term investments Accounts receivable Notes receivable (due in one year) Merchandise inventory Land held for future use Land Building Less accumulated depreciation Trademark Total assets

$ 70,000 56,000 28,000 42,000 98,000 112,000 140,000 $150,000 28,000

122,000 92,000 $760,000

$ 70,000 30,000 14,000 146,000 $260,000

$300,000 200,000

500,000 $760,000

The total amount of working capital is a. $70,000. b. $180,000. c. $124,000. d. $500,000. ANS: B ($70,000 + $56,000 + $28,000 + $42,000 + $98,000) – ($70,000 + $30,000 + $14,000) = $180,000 PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

19. A discount that buyers take for early payment of merchandise is called a a. customer discount. b. purchases discount. c. sales discount. d. trade discount. ANS: B PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Discounts | Terms of sale MSC: ACBSP-APC-17-Inventories Reporting 20. Which of the following does not represent a sale? a. Merchandise placed aside for a customer who plans to come in next week and pay with cash b. Purchase of merchandise by a customer who pays cash c. Sale of merchandise to a customer who uses a credit card d. Purchase of merchandise by a customer who uses a debit card ANS: A PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Merchandise sales transactions MSC: ACBSP-APC-06-Recording Transactions 21. Which of the following goods would not be included in merchandise inventory for a purchasing company? a. Goods in transit shipped FOB shipping point b. Goods on hand in the showroom c. Goods in transit shipped FOB destination d. Goods ordered and received from the supplier ANS: C PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory cost | Terms of sale MSC: ACBSP-APC-17-Inventories Reporting 22. A sale on June 21 with terms of n/10 eom is due to be collected by a. June 30. b. July 31. c. July 10. d. July 21. ANS: C PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Terms of sale MSC: ACBSP-APC-05-Accounting Cycle

23. Goods totaling $56,000 purchased August 2 on terms of 2/10, n/30 and on which returns of $2,000 were made on August 10 would be subject to which of the following discounts if paid for on August 12? a. $1,080 b. $1,120 c. $1,160 d. $40 ANS: A ($56,000 – $2,000) x .02 = $1,080 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Discounts | Recording entries MSC: ACBSP-APC-17-Inventories Reporting 24. Use this information to answer the following question. Alfalfa Company experienced the following events during the period: 1.

A tabulation of invoices at the end of the day showed $1,600 in VISA invoices, which were deposited in a bank account at full value less a 5 percent discount.

Made a sale on an American Express card for $800 and mailed invoice to American Express for payment. The discount charged by American Express is 4 percent.

The entry to record transaction 1 would include an increase in a. Credit Card Expense for $80. b. Sales for $1,520. c. Cash for $1,600. d. Accounts Receivable for $1,520. ANS: A $1,600 x .05 = $80 Credit Card Expense PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Discounts | Recording entries MSC: ACBSP-APC-06-Recording Transactions 25. Use this information to answer the following question. Alfalfa Company experienced the following events during the period: 1.

A tabulation of invoices at the end of the day showed $1,600 in VISA invoices, which were deposited in a bank account at full value less a 5 percent discount.

Made a sale on an American Express card for $800 and mailed invoice to American Express for payment. The discount charged by American Express is 4 percent.

The entry to record transaction 2 would include a(n) a. increase in Accounts Receivable for $800. b. increase in Sales for $800. c. decrease in Credit Card Expense for $32. d. decrease in Cash for $768. ANS: B PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Discounts | Recording entries MSC: ACBSP-APC-06-Recording Transactions 26. A retailer accepted Visa charge sales totaling $1,500 and deposited the charge slips in the bank. Assuming a credit card discount expense of 4 percent, what would be the increase to Cash and the increase to Sales, respectively? a. $1,500 and $1,440 b. $1,440 and $1,500 c. $1,440 and $1,440 d. $1,500 and $1,500 ANS: B Increase to Sales: $1,500 Credit Card Expense: $1,500 x .04 = $60 Increase to Cash: $1,500 – $60 = $1,440 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Discounts | Recording entries MSC: ACBSP-APC-06-Recording Transactions 27. The entry to record payment of a $1,500 purchase within the 2 percent discount period would include a(n) a. decrease to Accounts Payable for $1,470. b. increase to Purchases Discounts for $30. c. increase to Accounts Payable for $1,500. d. increase to Cash for $1,500. ANS: B Purchase discount: $1,500 x .02 = $30 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Discounts | Recording entries MSC: ACBSP-APC-06-Recording Transactions 28. A purchase on account with an invoice price of $1,500 has been made. The entry to record the payment after the 2 percent discount period would include a(n) a. decrease to Accounts Payable for $1,500. b. decrease to Purchases Discounts for $30. c. increase to Accounts Payable for $1,470. d. decrease to Cash for $1,470. ANS: A PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Discounts | Recording entries MSC: ACBSP-APC-06-Recording Transactions © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

29. The entry to record a $750 sale with terms of 2/10, n/30 would include a(n) a. decrease to Accounts Receivable for $750. b. increase to Sales for $750. c. increase to Sales Discounts for $15. d. decrease to Sales for $735. ANS: B PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Discounts | Recording sales MSC: ACBSP-APC-06-Recording Transactions 30. The collection of a $400 account within the 2 percent discount period would result in a(n) a. increase to Accounts Receivable for $392. b. decrease to Cash for $392. c. increase to Sales Discounts for $8. d. decrease to Accounts Receivable for $392. ANS: C $400 x .02 = $8 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Discounts | Recording entries MSC: ACBSP-APC-06-Recording Transactions 31. The collection of a $2,000 account beyond the 2 percent discount period would result in a(n) a. increase to Cash for $1,960. b. decrease to Accounts Receivable for $2,000. c. decrease to Cash for $2,000. d. increase to Sales Discounts for $40. ANS: B PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Discounts | Recording entries MSC: ACBSP-APC-06-Recording Transactions 32. Under the perpetual inventory system, which of the following accounts would not be used? a. Cost of Gods Sold b. Sales Returns and Allowances c. Accounts Receivable d. Purchases ANS: D PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory systems MSC: ACBSP-APC-17-Inventories Reporting

33. Under the perpetual inventory system, in addition to making the entry to record a sale, a company would a. record an increase in inventory corresponding to the amount of the sale. b. record a decrease in inventory and an increase in cost of goods sold for the cost of the merchandise sold. c. record an increase in inventory corresponding to the cost of the inventory. d. make no additional entry until the end of the period. ANS: B PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory systems MSC: ACBSP-APC-17-Inventories Reporting 34. Merchandise inventory becomes part of cost of goods sold when a company a. receives payment from the customer. b. pays for the inventory. c. purchases the inventory. d. sells the inventory. ANS: D PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Merchandise sales transactions MSC: ACBSP-APC-06-Recording Transactions 35. The entry to record a sales return from a customer in the perpetual inventory system would require a(n) a. decrease to Sales. b. increase to Sales. c. decrease to Sales Returns and Allowances. d. increase to Sales Returns and Allowances. ANS: D PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory systems MSC: ACBSP-APC-17-Inventories Reporting 36. Under the perpetual inventory system, the entry to record a purchase return would include a credit to which account? a. Merchandise Inventory b. Purchases Returns and Allowances c. Accounts Receivable d. Cash ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Merchandise purchases transactions MSC: ACBSP-APC-06-Recording Transactions

OBJ: 3 LOC: Comprehension

37. Under the perpetual inventory system, in addition to making the entry to record a sales return, a company would a. increase Merchandise Inventory and decrease Cost of Goods Sold. b. increase Cost of Goods Sold and decrease Purchases. c. increase Cost of Goods Sold and decrease Merchandise Inventory. d. make no additional entry until the end of the period. ANS: A PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Merchandise sales transactions MSC: ACBSP-APC-06-Recording Transactions 38. Bryan Company purchased merchandise worth $1,800 on credit, terms n/30. What is the required journal entry to record the transaction under the perpetual inventory system? a. Accounts Receivable 1,800 Purchases 1,800 b. Purchases Merchandise Inventory

1,800

c. Merchandise Inventory Accounts Payable

1,800

d. Accounts Payable Merchandise Inventory

1,800

ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Merchandise purchases transactions MSC: ACBSP-APC-06-Recording Transactions

OBJ: 3 LOC: Application

39. Bryan Company purchased merchandize worth $1,800 on credit, terms n/30 and returned merchandise worth $200 the next day. What is the required journal entry to record the merchandise returns under the perpetual inventory system? a. Accounts Payable 200 Purchases Returns and Allowances 200 b. Accounts Payable Merchandise Inventory

200

c. Merchandise Inventory Purchases Returns and Allowances

200

d. Purchases Returns and Allowances Merchandise Inventory

200

ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Merchandise purchases transactions MSC: ACBSP-APC-06-Recording Transactions

200 OBJ: 3 LOC: Application

40. Feathertouch Company sold merchandise worth $800 on credit, terms n/15. The cost of the merchandise sold was $550. What is the required journal entry to record the transaction under the perpetual inventory system? a. Accounts Receivable 800 Sales 800 Cost of Goods Sold Merchandise Inventory

550 550

b. Sales Accounts Receivable

800

Merchandise Inventory Cost of Goods Sold

550

c. Accounts Receivable Merchandise Inventory

800

Cost of Goods Sold Merchandise Inventory

550

d. Merchandise Inventory Sales Cost of Goods Sold Merchandise Inventory

800

550

800

550 800 800 550 550

ANS: A PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Merchandise sales transactions MSC: ACBSP-APC-06-Recording Transactions

41. Feathertouch Company sold merchandise worth $800 on credit, terms n/15 and the next day the customer returned merchandise worth $50, which cost $30 for Feathertouch company. What is the required journal entry to record the merchandise returns under the perpetual inventory system? a. Accounts Receivable 50 Sales Returns and Allowances 50 Cost of Goods Sold Merchandise Inventory

b. Sales Returns and Allowances Accounts Receivable

Merchandise Inventory Cost of Goods Sold

c. Accounts Receivable Merchandise Inventory

Cost of Goods Sold Sales

d. Merchandise Inventory Sales

Sales Cost of Goods Sold

ANS: B PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Merchandise sales transactions MSC: ACBSP-APC-06-Recording Transactions 42. The amount of goods available for sale during the year depends on the amounts of a. beginning merchandise inventory, net cost of purchases, and ending merchandise inventory. b. beginning merchandise inventory and cost of goods sold. c. beginning merchandise inventory, cost of goods sold, and ending merchandise inventory. d. beginning merchandise inventory and net cost of purchases. ANS: D PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 43. Which of the following is not considered in computing net cost of purchases? a. Freight-out expenses b. Purchases c. Freight paid on purchased goods d. Purchases returns and allowances ANS: A PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

44. Which of the following is necessary for computing cost of goods sold but not necessary for computing goods available for sale? a. Freight-in b. Purchases c. Ending merchandise inventory d. Beginning merchandise inventory ANS: C PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 45. The entry to record a purchase of $12,000 in merchandise assuming terms of 2/10, n/30 and a periodic inventory system would include a(n) a. increase to Accounts Payable for $12,000. b. increase to Purchases Discounts for $240. c. decrease to Purchases for $12,000. d. decrease to Accounts Payable for $11,760. ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Merchandise purchase transactions | Recording entries MSC: ACBSP-APC-06-Recording Transactions

OBJ: 4 LOC: Application

46. Assuming that net cost of purchases was $116,000 during the year and that ending merchandise inventory was $2,000 less than the beginning merchandise inventory of $25,000, how much was cost of goods sold? a. $139,000 b. $143,000 c. $118,000 d. $93,000 ANS: C $25,000 + $116,000 – $23,000 = $118,000 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 47. Use this information to answer the following question. Account Name Sales Sales Returns and Allowances Purchases Purchases Returns and Allowances Freight-In Selling Expenses General and Administrative Expenses

Debit

Credit 303,000

10,000 68,000 8,000 12,000 30,000 110,000

In addition, beginning merchandise inventory was $22,000 and ending merchandise inventory was $14,000. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Net sales for the period were a. $303,000. b. $273,000. c. $293,000. d. $213,000. ANS: C $303,000 – $10,000 = $293,000 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 48. Use this information to answer the following question. Account Name Sales Sales Returns and Allowances Purchases Purchases Returns and Allowances Freight-In Selling Expenses General and Administrative Expenses

Debit

Credit 600,000

20,000 106,000 16,000 24,000 60,000 220,000

In addition, beginning merchandise inventory was $44,000 and ending merchandise inventory was $28,000. Net cost of purchases for the period were a. $154,000. b. $90,000. c. $114,000. d. $138,000. ANS: C $106,000 – 16,000 + $24,000 = $114,000 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 49. Use this information to answer the following question. Account Name Sales Sales Returns and Allowances Purchases Purchases Returns and Allowances Freight-In Selling Expenses General and Administrative Expenses

Debit

Credit 300,000

10,000 62,000 8,000 12,000 30,000 110,000

In addition, beginning merchandise inventory was $22,000 and ending merchandise inventory was $14,000. Cost of goods sold for the period was a. $74,000. b. $62,000. c. $88,000. d. $58,000. ANS: A $22,000 + $62,000 – $8,000 + $12,000 – $14,000 = $74,000 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 50. Use this information to answer the following question. The selected accounts and balances for Pawnee Market appear as follows: Advertising Expense Common Stock Dividends Freight-In Freight-Out Expense Interest Income Merchandise Inventory (Jan. 1) Merchandise Inventory (Dec. 31) Purchases Purchases Returns and Allowances Rent Expense Retained Earnings Sales Sales Returns and Allowances Wages Expense

$ 28,000 200,000 42,000 14,000 20,000 48,000 140,000 112,000 120,000 8,000 18,000 80,000 300,000 38,000 64,000

The amount of net sales on the income statement would be a. $338,000. b. $288,000. c. $262,000. d. $274,000. ANS: C $300,000 – $38,000 = $262,000 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Income statement MSC: ACBSP-APC-09-Financial Statements

51. Use this information to answer the following question. The selected accounts and balances for Pawnee Market appear as follows: Advertising Expense Common Stock Dividends Freight-In Freight-Out Expense Interest Income Merchandise Inventory (Jan. 1) Merchandise Inventory (Dec. 31) Purchases Purchases Returns and Allowances Rent Expense Retained Earnings Sales Sales Returns and Allowances Wages Expense

$ 28,000 200,000 42,000 14,000 20,000 48,000 116,000 112,000 120,000 8,000 18,000 80,000 300,000 38,000 64,000

Goods available for sale would appear on the income statement as a. $228,000. b. $122,000. c. $242,000. d. $102,000. ANS: C $116,000 + $120,000 – $8,000 + $14,000 = $242,000 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Income statement MSC: ACBSP-APC-09-Financial Statements

52. Use this information to answer the following question. The selected accounts and balances for Pawnee Market appear as follows: Advertising Expense Common Stock Dividends Freight-In Freight-Out Expense Interest Income Merchandise Inventory (Jan. 1) Merchandise Inventory (Dec. 31) Purchases Purchases Returns and Allowances Rent Expense Retained Earnings Sales Sales Returns and Allowances Wages Expense

$ 28,000 200,000 42,000 14,000 20,000 48,000 140,000 112,000 120,000 8,000 18,000 80,000 302,000 38,000 64,000

Gross margin from sales would be a. $124,000. b. $110,000. c. $148,000. d. $136,000. ANS: B ($302,000 – $38,000) – ($140,000 + $120,000 – $8,000 + $14,000 – $112,000) = $110,000 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 53. Chancellor Company purchased merchandise worth $900 on credit, terms n/30. What is the required journal entry to record the transaction under the periodic inventory system? a. Accounts Receivable 900 Purchases 900 b. Purchases Accounts Payable

900

c. Merchandise Inventory Accounts Payable

900

d. Accounts Payable Merchandise Inventory

900

ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Merchandise purchases transactions MSC: ACBSP-APC-06-Recording Transactions

OBJ: 4 LOC: Application

54. Chancellor Company purchased merchandise worth $900 on credit, terms n/30 and returned merchandise worth $100 on next day. What is the required journal entry to record the merchandise returns under the periodic inventory system? a. Accounts Payable 100 Purchases Returns and Allowances 100 b. Accounts Payable Merchandise Inventory

100

c. Merchandise Inventory Purchases Returns and Allowances

100

d. Purchases Returns and Allowances Merchandise Inventory

100

ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Merchandise purchases transactions MSC: ACBSP-APC-06-Recording Transactions

OBJ: 4 LOC: Application

55. Rogers Company sold merchandise worth $1,600 on credit, terms n/15. The merchandise sold had cost $1,100. What is the required journal entry to record the transaction and to transfer the cost of merchandise inventory to cost of goods sold under the periodic inventory system? a. Accounts Receivables 1,600 Sales 1,600 No entry for transfer to cost of goods sold. b. Sales Accounts Receivables

1,600

Merchandise Inventory Cost of Goods Sold

1,100

c. Accounts Receivables Merchandise Inventory

1,600

Cost of Goods Sold Merchandize Inventory

1,100

d. Merchandise Inventory Sales

1,600

1,100

1,600

1,100 1,600 1,600

No entry for transfer to cost of goods sold. ANS: A PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Merchandise sales transactions MSC: ACBSP-APC-06-Recording Transactions

56. On June 3, Win-Tel Company sold merchandise worth $800 on credit, terms 2/10, n/30. The merchandise sold had cost $550. The customer paid the amount on June 10. What is the required journal entry to record the payment received under the periodic inventory system? a. Accounts Receivable 784 Sales Discounts 16 Cash 800 b. Accounts Receivable Sales Discounts Cash

800

c. Cash Sales Discounts Accounts Receivable

784 16

d. Cash Sales Discounts Accounts Receivable

800 16

16 784

800

816

ANS: C Sales discount = $800 x .02 = $16 Cash paid = $800 – $16 = $784 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Merchandise sales transactions MSC: ACBSP-APC-06-Recording Transactions 57. On June 3, Win-Tel Company sold merchandise worth $800 on credit, terms 2/10, n/30. The merchandise sold had cost $550. The customer paid the amount on June 15. What is the required journal entry to record the payment received under the periodic inventory system? a. Accounts Receivable 784 Sales Discounts 16 Cash 800 b. Accounts Receivable Cash

800

c. Cash Sales Discounts Accounts Receivable

784 16

d. Cash

800 Accounts Receivable

800

ANS: D PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Merchandise sales transactions MSC: ACBSP-APC-06-Recording Transactions

58. On May 13, Wagoner Company purchased merchandize worth $2,400 on credit, terms 2/10, n/30. The amount was paid on May 20. What is the required journal entry to record the payment under the periodic inventory system? a. Accounts Payable 2,352 Purchases Discounts 48 Cash 2,400 b. Accounts Payable Purchases Discounts Cash

2,400

c. Cash Purchases Discounts Accounts Payable

2,352 48

d. Cash Purchases Discounts Accounts Payable

2,400 48

48 2,352

2,400

2,448

ANS: B Sales discount = $2,400 x .02 = $48 Cash paid = $2,400 – $48 = $2,352 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Merchandise purchase transactions MSC: ACBSP-APC-06-Recording Transactions

LOC: Application

59. On May 13, Maryland Company purchased merchandise worth $2,400 on credit, terms 2/10, n/30. The amount was paid on May 25. What is the required journal entry to record the payment under the periodic inventory system? a. Accounts Payable 2,352 Purchases Discounts 48 Cash 2,400 b. Accounts Payable Purchases Discounts Cash

2,400

c. Cash

2,400

48 2,352

Accounts Payable d. Accounts Payable Cash

2,400 2,400 2,400

ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Merchandise purchases transactions MSC: ACBSP-APC-06-Recording Transactions

OBJ: 4 LOC: Application

60. Assume a company uses the periodic inventory system and has a beginning merchandise inventory balance of $5,000, purchases of $75,000, and sales of $125,000. The company closes its records once a year on December 31. In the accounting records, the merchandise inventory account would be expected to have a balance on December 31 prior to adjusting and closing entries that was a. indeterminate. b. less than $5,000. c. more than $5,000. d. equal to $5,000. ANS: A PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 61. Use this information to answer the following question. Account Name Sales Sales Returns and Allowances Purchases Purchases Returns and Allowances Freight-In Selling Expenses General and Administrative Expenses

Debit

Credit 638,000

20,000 136,000 16,000 24,000 60,000 220,000

In addition, beginning merchandise inventory was $44,000 and ending merchandise inventory was $28,000. Income before income taxes for the period was a. $398,000. b. $238,000. c. $178,000. d. $458,000. ANS: C ($638,000 – $20,000) – ($44,000 + $136,000 – $16,000 + $24,000 – $28,000) – $60,000 – $220,000 = $178,000 PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Income statement MSC: ACBSP-APC-09-Financial Statements

62. Use this information to answer the following question.

Account Name Sales Sales Returns and Allowances Purchases Purchases Returns and Allowances Freight-In Selling Expenses General and Administrative Expenses

Debit

Credit 600,000

20,000 136,000 16,000 24,000 60,000 220,000

In addition, beginning merchandise inventory was $44,000 and ending merchandise inventory was $28,000. If beginning and ending merchandise inventories were ignored in computing net income, then net income would be a. understated by $44,000. b. overstated by $16,000. c. understated by $28,000. d. understated by $16,000. ANS: B Omitting beginning inventory would understate cost of goods sold by $44,000 and omitting ending inventory would overstate cost of goods sold by $28,000. Hence, costs of goods sold would be understated by $16,000, thus causing net income to be overstated by $16,000. PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Net income MSC: ACBSP-APC-09-Financial Statements 63. Which of the following is not a primary concern of internal control? a. Efficiency of company operations b. Fairness of financial statements c. Accuracy of accounting records d. Safeguarding assets ANS: B PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Recall KEY: Control activities MSC: ACBSP-APC-10-Internal Control 64. All of the following are examples of internal control activities except a. rotation of key personnel. b. company picnics for all employees. c. authorization of certain transactions d. well-designed documents ANS: B PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Recall KEY: Control activities MSC: ACBSP-APC-10-Internal Control © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

65. A traditional definition of internal control specifically includes all of the following features except a. adherence to prescribed managerial policies. b. promotion of operational efficiency. c. reliability of accounting data. d. maintenance of a clean and safe workplace. ANS: D PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Recall KEY: Control environment MSC: ACBSP-APC-10-Internal Control 66. Each of the following is a feature of internal control except a. physical controls that limit access to assets. b. recording of all transactions. c. periodic independent verification. d. television commercials to enhance marketability. ANS: D PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Recall KEY: Control activities MSC: ACBSP-APC-10-Internal Control 67. Each of the following is a feature of internal control except a. limited access to assets. b. periodic independent verification. c. management compensation packages. d. authorization of transactions. ANS: C PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Recall KEY: Control activities MSC: ACBSP-APC-10-Internal Control 68. The bonding of employees is an example of which feature of a good system of internal control? a. Authorization of transactions b. Well-designed documents c. Sound personnel policies d. Periodic independent verification ANS: C PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Recall KEY: Control activities MSC: ACBSP-APC-10-Internal Control 69. A very small company would have the most difficulty in implementing which of the following internal control activities? a. Separation of duties b. Well-designed documents c. Limited access to assets d. Recording of all transactions ANS: A PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Recall KEY: Control activities MSC: ACBSP-APC-10-Internal Control

70. Internal control is weakened by all of the following except a. collusion. b. separation of duties. c. effects of changing conditions. d. human error. ANS: B PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Recall KEY: Control activities MSC: ACBSP-APC-10-Internal Control 71. In a small business, because it is often cost-prohibitive to hire extra employees, the lack of certain separations of duties can best be overcome by a. hiring only honest employees. b. bonding the employees. c. holding one person responsible for a given set of transactions. d. getting the owner actively involved. ANS: D PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Recall KEY: Control activities MSC: ACBSP-APC-10-Internal Control 72. Which of the following attributes of internal control would be violated if the accounting clerk wrote checks to pay accounts payable? a. Adequate design of documents b. Sound personnel procedures c. Periodic independent verification d. Separation of duties ANS: D PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Comprehension KEY: Control activities MSC: ACBSP-APC-10-Internal Control 73. Which of the following would not be found in a good system of internal control? a. Establishing a system of checks and balances b. Having one person handle all the responsibilities of a department c. Establishing an internal audit staff d. Requiring all employees to take earned vacations ANS: B PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Comprehension KEY: Control activities MSC: ACBSP-APC-10-Internal Control 74. A consequence of a separation of duties is that a. operations become extremely inefficient because of constant training of employees. b. theft by employees becomes impossible. c. more employees will need to be bonded. d. theft is possible only when several employees are involved. ANS: D PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Comprehension KEY: Control activities MSC: ACBSP-APC-10-Internal Control © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

75. Which of the following is not an internal control activity for cash? a. Surprise audits of cash on hand should be made occasionally. b. All cash receipts should be recorded promptly. c. The number of persons who have access to cash should be limited. d. Most transactions should be in cash to reduce recordkeeping. ANS: D PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Internal control over merchandising transactions MSC: ACBSP-APC-10-Internal Control

OBJ: 6 LOC: Recall

76. Which of the following documents is sent to the vendor (seller) of goods? a. Check authorization b. Purchase order c. Bank statement d. Invoice ANS: B PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Internal control over merchandising transactions MSC: ACBSP-APC-10-Internal Control

OBJ: 6 LOC: Recall

77. In a purchase system, the most appropriate department to control goods upon arrival into the company is the a. receiving department. b. treasury department. c. accounting department. d. requesting department. ANS: A PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Internal control over merchandising transactions MSC: ACBSP-APC-10-Internal Control

OBJ: 6 LOC: Recall

78. The document prepared by a department requesting the company to buy something is called a(n) a. check. b. purchase requisition. c. check authorization. d. purchase order. ANS: B PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Internal control over merchandising transactions MSC: ACBSP-APC-10-Internal Control

OBJ: 6 LOC: Recall

79. A remittance advice is attached to a(n) a. check. b. invoice. c. purchase requisition. d. check authorization. ANS: A PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Internal control over merchandising transactions MSC: ACBSP-APC-10-Internal Control

OBJ: 6 LOC: Recall

80. Which of the following sets of documents are in the correct sequence? a. Purchase order, check, receiving report b. Receiving report, Purchase requisition, purchase order c. Purchase order, purchase requisition, receiving report d. Purchase requisition, purchase order, invoice ANS: D PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Internal control over merchandising transactions MSC: ACBSP-APC-10-Internal Control

OBJ: 6 LOC: Recall

81. All of the following are the goals of internal controls over merchandising transactions except a. To keep credit losses at a minimum b. To retain enough cash to take advantage of cash discounts c. To keep the appropriate amount of inventory on hand d. To decide on the quality of materials to be purchased ANS: D PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Internal control over merchandising transactions MSC: ACBSP-APC-10-Internal Control

OBJ: 6 LOC: Recall

82. Which of the following is not an internal control activity for cash? a. Limit the number of employees who have access to cash. b. Recordkeeping and physical custody of cash should be performed by the same person. c. Record and deposit all cash receipts promptly. d. Banking facilities should be used as much as possible. ANS: B PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Internal control over merchandising transactions MSC: ACBSP-APC-10-Internal Control

OBJ: 6 LOC: Recall

83. When payment is received by mail, a detailed list of such receipts would not be retained by the a. person who opens the mail. b. accounting department. c. receiving department. d. cashier. ANS: C PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Internal control over merchandising transactions MSC: ACBSP-APC-10-Internal Control

OBJ: 6 LOC: Recall

84. A purchase order is sent from a company's a. accounting department to the supplier. b. treasurer to the supplier. c. supplier to its accounting department. d. purchasing department to the supplier. ANS: D PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Internal control over merchandising transactions MSC: ACBSP-APC-10-Internal Control

OBJ: 6 LOC: Recall

85. Before a check authorization is issued, the following documents must be in agreement, except for the a. invoice. b. remittance advice. c. purchase order. d. receiving report. ANS: B PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Internal control over merchandising transactions MSC: ACBSP-APC-10-Internal Control

OBJ: 6 LOC: Recall

86. Which of the following documents is prepared by a company's accounting department? a. Receiving report b. Check authorization c. Purchase order d. Purchase requisition ANS: B PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Internal control over merchandising transactions MSC: ACBSP-APC-10-Internal Control

OBJ: 6 LOC: Recall

87. When a company makes payment for goods or services, the check is prepared by the company's a. requesting department. b. treasurer. c. accounting department. d. receiving department. ANS: B PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Internal control over merchandising transactions MSC: ACBSP-APC-10-Internal Control

OBJ: 6 LOC: Recall

88. Which of the following documents would not originate with the purchasing company? a. Purchase order b. Check authorization c. Purchase requisition d. Invoice ANS: D PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Internal control over merchandising transactions MSC: ACBSP-APC-10-Internal Control

OBJ: 6 LOC: Recall

89. Which of the following documents would be sent to the treasurer? a. Invoice b. Purchase order c. Check authorization d. Bank statement ANS: C PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Internal control over merchandising transactions MSC: ACBSP-APC-10-Internal Control

OBJ: 6 LOC: Recall

90. Which of the following is an appropriate internal control activity for cash? a. The amount of cash on hand should be kept to a maximum. b. All payments should be made with currency, not checks. c. Banking facilities should be used as little as possible. d. Recordkeeping and custodianship over cash should be performed by separate individuals. ANS: D PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Internal control over merchandising transactions MSC: ACBSP-APC-10-Internal Control

OBJ: 6 LOC: Recall

91. Which of the following is not a goal of a system of internal control over merchandising transactions? a. Prevent the theft of cash and inventory. b. Keep enough cash on hand to take advantage of purchase discounts. c. Keep the maximum amount of inventory on hand at all times. d. Keep credit losses as low as possible. ANS: C PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Internal control over merchandising transactions MSC: ACBSP-APC-10-Internal Control

OBJ: 6 LOC: Recall

92. Which of the following documents would be prepared (by a buyer of goods) after the others? a. Check authorization b. Check c. Purchase requisition d. Invoice ANS: B PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Internal control over merchandising transactions MSC: ACBSP-APC-10-Internal Control

OBJ: 6 LOC: Recall

93. Which of the following documents remains within the originating company in a purchase transaction? a. Purchase order b. Receiving report c. Check d. Invoice ANS: B PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Internal control over merchandising transactions MSC: ACBSP-APC-10-Internal Control

OBJ: 6 LOC: Recall

SHORT ANSWER 1. For a company that takes an average of 40 days to sell inventory, takes an average of 90 days to collect for its sales, and has payment terms of 60 days on its purchases, what is the financing period? Show calculations. ANS: Inventory on hand Add: Time for collection Less: Time until payment

+ 40 days + 90 days – 60 days 70 days

PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Operating cycle MSC: ACBSP-APC-15-Current Assets Reporting 2. Under a perpetual inventory system, is it necessary to take a physical inventory at the end of the period? Why or why not? © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: A physical inventory must be taken to determine whether or not the actual quantity of goods matches the quantity contained in the perpetual inventory record. Discrepancies could arise as a result of error or theft. PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory systems MSC: ACBSP-APC-17-Inventories Reporting 3. Beaver Company bought merchandise from Caddo Company. Following are the terms of sale for the merchandise. · · · ·

The list price of the merchandise is $34,000. Caddo Company offered Beaver Company a trade discount of 20%. The merchandise was sold at FOB shipping point and the cost of shipping was $1,200. Caddo Company also offered Beaver Company a sales discount of 2/10, n/30. The sales discount does not apply to the shipping costs.

What is the net cost of the merchandise to Beaver Company, assuming it was paid for within 10 days of purchase? ANS: List Price less: Trade Discount ($34,000 x .2) plus: cost of shipping less: sales discount [($34,000 – $6,800) x .02] Net Cost of Merchandise

$34,000 (6,800) 1,200 (544) $27,856

PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Discounts | Recording entries MSC: ACBSP-APC-06-Recording Transactions 4. Garvin Company bought equipment from Haskell Company. Following are the terms of sale for the equipment. · · · ·

The list price of the equipment is $75,000. Haskell Company offered Garvin Company a trade discount of 30%. The merchandise was sold at FOB destination and the cost of shipping was $500. Haskell Company also offered Garvin Company a sales discount of 1/10, n/30. The sales discount does not apply to the shipping costs.

What is the net cost of the equipment to Haskell Company, assuming it was paid for within 10 days of purchase? ANS: List Price less: Trade Discount ($75,000 x .3) less: sales discount [($75,000 – $22,500) x .01] Net Cost of Merchandise

$75,000 (22,500) (525) $51,975

PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Discounts | Recording entries MSC: ACBSP-APC-06-Recording Transactions 5. Assume that on July 24, Bond Company had a sale totaling $11,019 with a related cost of goods sold of $7,604. Record this transaction in journal form assuming the perpetual inventory system was in use. General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

Debit

Credit

ANS: General Journal Date

Description

July 24 Accounts Receivable Sales Cost of Goods Sold Merchandise Inventory PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement

Post. Ref.

11,019 11,019 7,604 7,604

LOC: Application

KEY: Merchandise sales transactions

MSC: ACBSP-APC-06-Recording Transactions

6. Assume that on March 13, Cimarron Company made a purchase totaling $13,000. Record this transaction in journal form assuming the perpetual inventory system was in use (omit explanations). General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

Debit

Credit

ANS: General Journal Date

Post. Ref.

Description

Mar 13 Merchandise Inventory Accounts Payable

13,000 13,000

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Merchandise purchase transactions MSC: ACBSP-APC-06-Recording Transactions

LOC: Application

7. Given the following information, prepare in good form the cost of goods sold section of an income statement for 2013. Freight-In Merchandise Inventory, December 31, 2012 Merchandise Inventory, December 31, 2013 Purchases Purchases Returns and Allowances

$ 16,000 60,000 64,000 152,000 7,200

ANS: Merchandise inventory, December 31, 2012 Purchases Less purchases returns and allowances Net purchases Freight-in Net cost of purchases Goods available for sale Less merchandise inventory, December 31, 2013

$ 60,000 $152,000 7,200 $144,800 16,000 160,800 $220,800 64,000

Cost of goods sold

$156,800

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 8. Given the following information, prepare in good form the cost of goods sold section of an income statement for 2013. Freight-In Merchandise Inventory, December 31, 2012 Merchandise Inventory, December 31, 2013 Purchases Purchases Returns and Allowances

$ 24,000 90,000 102,000 228,000 8,400

$ 90,000 $228,000 8,400 $219,600 24,000 243,600 $333,600 102,000

Cost of goods sold

$231,600

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Income statement MSC: ACBSP-APC-09-Financial Statements

9. Assuming the use of the periodic inventory system, use the data below to calculate the net cost of purchases and the goods available for sale for the year ended December 31, 2013. Merchandise Inventory, December 31, 2012 Merchandise Inventory, December 31, 2013 Cost of Goods Sold

$2,307 2,041 7,604

ANS: $2,307 7,338 $9,645 2,041 $7,604

Beginning Merchandise Inventory Net Cost of Purchases Goods Available for Sale Ending Merchandise Inventory Cost of Goods Sold

Goods Available for Sale must be found first by adding the Ending Merchandise Inventory and Cost of Goods Sold. Once this figure has been determined, the Net Cost of Purchases is found by subtracting the Beginning Merchandise Inventory from Goods Available for Sale. PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 10. Assuming the use of the periodic inventory system, use the data below to calculate the net cost of purchases and the goods available for sale for the year ended December 31, 2013. Merchandise Inventory, December 31, 2012 Merchandise Inventory, December 31, 2013 Cost of Goods Sold

$ 5,660 6,964 36,096

ANS: $39,096 6,964 $43,060 5,660 $37,400

Cost of Goods Sold Ending Merchandise Inventory Goods Available for Sale Beginning Merchandise Inventory Net cost of Purchases

11. On August 1, Phillips Industries purchased $12,000 of merchandise on credit. Terms of 1/10, n/30 are extended, and Phillips makes payment on August 9. a. In the journal provided, make Phillips's entries, assuming use of the periodic inventory system. b. Make the entry that would have been made had payment been made on August 17. General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal

Date Aug.

Page 1 Post. Ref.

Description 1 Purchases Accounts Payable Purchased merchandise on account

Debit 12,000

Credit 12,000

9 Accounts Payable Purchases Discounts Cash Made payment on account ($12,000 - $120 = $11,880)

12,000

17 Accounts Payable Cash Made payment on account

12,000

120 11,880

12,000

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Recording entries MSC: ACBSP-APC-06-Recording Transactions 12. Compute the dollar amount of the items indicated by letters a through f in the table below. Case 1 Sales Beginning Merchandise Inventory Net Cost of Purchases Ending Merchandise Inventory Cost of Goods Sold Gross Margin Operating Expenses Income Before Income Taxes

$5,500 75 4,975 a b c 450 150

Case 2 $13,000 d 4,600 600 e 4,800 f 1,200

ANS: a. $75 + $4,975 – $4,900 = $150 b. $5,500 – $600 = $4,900 c. $150 + $450 = $600 d. $8,200 – $4,600 + $600 = $4,200 e. $13,000 – $4,800 = $8,200 f. $4,800 – $1,200 = $3,600 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Income statement MSC: ACBSP-APC-09-Financial Statements © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

13. From the following data, calculate the amount of gross margin and gross purchases. Ending Merchandise Inventory Purchases Returns and Allowances Beginning Merchandise Inventory Sales Freight-In Cost of Goods Sold Purchases Discounts

256 64 320 2,560 192 1,556 32

ANS: Gross margin: $2560 – $1,556 = $1,004 Gross purchases: $1,556 + $256 – $192 + $64 + $32 – $320 = $1,396 PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 14. Why is the separation of duties an important control activity in a good system of internal control? ANS: When only one employee is responsible for processing a transaction from beginning to end, it is likely that an error or theft by that employee would go unnoticed. However, when two or more employees are involved in the process, an error by an employee, whether honest or not, probably would be detected by one of the other employees. PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Application KEY: Control activities MSC: ACBSP-APC-10-Internal Control 15. Indicate whether each business practice listed below strengthens (S) or weakens (W) a company's system of internal control. _____ a. Bonding of employees _____ b. Limiting the number of people who have access to cash _____ c. Combining the recordkeeping and custodianship functions _____ d. Making all payments with cash _____ e. Keeping rotation of key employees to a minimum _____ f. Using prenumbered sales tickets ANS: a. S b. S c. W

d. W e. W f. S

PTS: 1 DIF: Moderate OBJ: 5 | 6 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Comprehension KEY: Control activities MSC: ACBSP-APC-10-Internal Control

16. Indicate whether each business practice listed below strengthens (S) or weakens (W) a company's system of internal control. _____ a. Discouraging employees from taking paid vacations _____ b. Using banking facilities as much as possible _____ c. Having employees bonded _____ d. Conducting surprise audits of cash on hand _____ e. Having one person open the mail _____ f. Having the receiving department compare goods received with goods ordered ANS: a. W b. S c. S

d. S e. W f. W

PTS: 1 DIF: Moderate OBJ: 5 | 6 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Comprehension KEY: Control activities MSC: ACBSP-APC-10-Internal Control 17. For each description below, state which document is being described. a. Document issued to permit the treasurer to make a payment b. Bill sent by the vendor to the purchaser c. Written request prepared by a department asking the purchasing department to make a purchase d. Document that gives authorization for the bank to pay the vendor a specified amount. e. Document describing items in a shipment of goods delivered f. Document sent to a vendor requesting shipment of goods ANS: a. Check authorization b. Invoice c. Purchase requisition

d. Check e. Receiving report f. Purchase order

PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Internal control over merchandising transactions MSC: ACBSP-APC-10-Internal Control

LOC: Recall

18. In the following table, indicate the letter of where each of the following documents would be prepared and the letter of where it would be sent. a. Requesting department b. Purchasing department c. Receiving department Document Purchase requisition Receiving report Invoice Check authorization Check

d. Accounting department e. Treasurer f. Vendor Where Prepared

Where Sent

ANS: Document Purchase requisition Receiving report Invoice Check authorization Check

Where Prepared a c f d e

PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Ethics | AICPA FN Risk Analysis KEY: Internal control over merchandising transactions MSC: ACBSP-APC-10-Internal Control

Where Sent b d d e f

LOC: Recall

MATCHING Match each definition with the correct term below. a. An inventory system in which the inventory not yet sold or on hand is counted periodically. b. Management’s regular assessment of the quality of internal control. c. An account that accumulates the total cost of merchandise purchased for resale during an accounting period. d. The policies and procedures that management puts into place to see that its directives are carried out. e. The seller bears the transportation costs to the place where merchandise is delivered and title passes at the time it is delivered. f. An inventory system in which continuous records are kept of the quantity and cost of individual items as they are bought and sold. g. The total cost of merchandise that could be sold in an accounting period. h. The buyer bears the shipping costs of merchandise and title passes at the time it is shipped. i. An account that gives management a readily available measure of unsatisfactory products and dissatisfied customers. j. Controls that limit access to assets. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Perpetual inventory system Periodic inventory system FOB shipping point FOB destination Sales returns and allowances account Cost of goods available for sale Purchases account Control activities Monitoring Physical controls

1. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory systems MSC: ACBSP-APC-17-Inventories Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

2. ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory systems MSC: ACBSP-APC-17-Inventories Reporting 3. ANS: H PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory systems MSC: ACBSP-APC-17-Inventories Reporting 4. ANS: E PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory systems MSC: ACBSP-APC-17-Inventories Reporting 5. ANS: I PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Accounts MSC: ACBSP-APC-06-Recording Transactions 6. ANS: G PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 7. ANS: C PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory systems MSC: ACBSP-APC-06-Recording Transactions 8. ANS: D PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Recall KEY: Control environment MSC: ACBSP-APC-10-Internal Control 9. ANS: B PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Recall KEY: Control environment MSC: ACBSP-APC-10-Internal Control 10. ANS: J PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Recall KEY: Control activities MSC: ACBSP-APC-10-Internal Control PROBLEM 1. Use the following information to calculate the ratios listed below. Average stockholders' equity Average total assets Current assets Current liabilities

$ 9,250 18,000 11,250 7,500

Net income $ 1,500 Net sales 15,625 Total liabilities 8,750 Cash flow from operating activities $2,900

a. Working capital b. Current ratio ANS: a. $11,250 – $7,500 = $3,750 b. $11,250 ÷ $7,500 = 1.5 PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

2. From the simplified balance sheet and income statement of the business below, compute the following financial measures. a. Working capital b. Current ratio

Assets Current assets Investments Property, plant, and equipment Intangible assets

Total assets

$ 4,000 6,000 $10,000

$ 8,000 2,000 $10,000 $20,000

Sci-Tech Enterprises, Inc. Income Statement For the Year Ended June 30, 2013 Net sales Cost of goods sold Gross margin Operating expenses Income before income taxes Income taxes Net income

$24,000 12,000 $12,000 8,000 $ 4,000 1,600 $ 2,400

ANS: a. $4,000 – $4,000 = $0 b. $4,000 ÷ $4,000 = 1 PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

3. Assume that Beckham Corporation had credit card sales of $7,500 for the month ended December 31. Prepare one journal entry to record these sales assuming that all of the credit card companies charge Beckham a 2 percent discount fee. (Omit date.) Round to the nearest whole dollar. General Journal Date

Description

Post. Ref.

Debit

Credit

ANS: General Journal Date

Description Cash Credit Card Expense Sales

Post. Ref.

Debit 7,350 150

Credit

7,500

PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Terms of sale | Recording entries MSC: ACBSP-APC-06-Recording Transactions

4. Assume that the sales made by Wessling Corporation for the month ended February 28, were made to customers using credit cards and totaled $5,666. Prepare one journal entry to record these sales assuming that all of the credit card companies charge Wessling Corporation a 2.5 percent discount fee. (Omit date.) Round to the nearest whole dollar. General Journal Date

Post. Ref.

Description

Debit

Credit

ANS: General Journal Date

Description Cash Credit Card Expense Sales

Post. Ref.

Debit 5,524 142

Credit

5,666

PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Terms of sale | Recording entries MSC: ACBSP-APC-06-Recording Transactions 5. Sandy's Supply Store, Inc., entered into the transactions listed below. In the journal provided, prepare Sandy's entries, assuming use of the perpetual inventory system. Omit explanations. Mar.

2 Purchased $900 of merchandise on credit, terms n/30. 6 Returned $150 of the items purchased on March 2. 8 Paid freight charges of $50 on the items purchased March 2. 16 Sold merchandise on credit for $1,200, terms n/15. The merchandise had a cost in inventory of $750. 17 Of the merchandise sold on March 16, $100 of it was returned. The items had cost Sandy's $30. 25 Received payment in full from the customer of March 16. 31 Paid for the merchandise purchased on March 2.

General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal Date Description Mar. 2 Merchandise Inventory Accounts Payable

Page 1 Post. Ref.

Debit 900

900

6 Accounts Payable Merchandise Inventory

150

8 Freight-In Cash

16 Accounts Receivable Sales

150

50 1,200 1,200

16 Cost of Goods Sold Merchandise Inventory

750

17 Sales Returns and Allowances Accounts Receivable

100

17 Merchandise Inventory Cost of Goods Sold

25 Cash Accounts Receivable

1,100

31 Accounts Payable Cash

Credit

750

100

1,100 750 750

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Merchandise purchases transactions | Merchandise sales transactions | Recording entries MSC: ACBSP-APC-06-Recording Transactions 6. Scuilli Corporation purchased $5,000 worth of merchandise, terms n/30, from the Zupcic Corporation on June 4. The cost of the merchandise to Zupcic was $3,600. On June 10, Scuilli returned $700 worth of goods to Zupcic for full credit. The goods had a cost of $450 to Zupcic. On June 12, the account was paid in full. Prepare journal entries without explanations to record these transactions in (a) Scuilli's records and (b) Zupcic's records. Assume use of the perpetual inventory system by both companies.

a. Scuilli's records: General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

b. Zupcic's records: General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: a. Scuilli's records: General Journal Date Description June 4 Merchandise Inventory Accounts Payable

Page 1 Post. Ref.

Debit 5,000

Credit 5,000

10 Accounts Payable Merchandise Inventory

700 700

12 Accounts Payable Cash

4,300 4,300

b. Zupcic's records: General Journal Date Description June 4 Accounts Receivable Sales

Page 1 Post. Ref.

Debit 5,000

Credit 5,000

4 Cost of Goods Sold Merchandise Inventory

3,600

10 Sales Returns and Allowances Accounts Receivable

700

10 Merchandise Inventory Cost of Goods Sold

450

12 Cash Accounts Receivable

4,300

3,600

700

450

4,300

7. Compute the dollar amount of each item indicated by a letter in the following table. Treat each horizontal row of numbers as a separate problem. Beginning Net Cost Ending Cost of Net Gross Operating Merchandise of Merchandise Goods Income Margin Expenses Inventory Purchases Inventory Sold (Loss) $ a $ c $125,000 $ 35,000 $10,000 $ b $40,000 $12,000 . . d 12,000 e 18,000 108,000 60,000 40,000 20,000 230,000 22,000 167,000 f g 50,000 h (1,000) 390,000 40,000 i 60,000 j k 120,000 40,000 Sales

ANS: a. $85,000 + $10,000 – $35,000 = $60,000 b. $125,000 – $40,000 = $85,000 c. $40,000 – $12000 = $28,000 d. $108,000 + $60,000 = $168,000 e. $108,000 + $18,000 – $12,000 = $114,000 f. $167,000 + $22,000 – $180,000 = $9,000 g. $230,000 – $50,000 = $180,000 h. $50,000 + $1,000 = $51,000 i. $230,000 – $40,000 + $60,000 = $250,000 j. $390,000 – $160,000 = $230,000 k. $120,000 + $40,000 = $160,000 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 8. Using the following information, calculate for 2013 (a) net sales, (b) cost of goods sold, (c) gross margin, and (d) net income. Freight-In Merchandise Inventory, December 31, 2012 Sales Purchases Returns and Allowances Advertising Expense Purchases Merchandise Inventory, December 31, 2013 Sales Returns and Allowances General and Administrative Expenses

$ 11,400 130,000 320,000 1,600 18,000 140,000 110,000 11,000 114,000

ANS: a. $320,000 – $11,000 = $309,000 b. $130,000 + $140,000 – $1,600 + $11,400 – $110,000 = $169,800 c. $309,000 – $169,800 = $139,200 d. $139,200 – $18,000 – $114,000 = $7,200 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 9. Using the following information, calculate for 2013 (a) net sales, (b) cost of goods sold, (c) gross margin, and (d) net income before taxes. Freight-In Merchandise Inventory, December 31, 2012 Sales Purchases Returns and Allowances Advertising Expense Purchases Merchandise Inventory, December 31, 2013 Sales Returns and Allowances General and Administrative Expenses

400 30,000 120,000 600 8,000 40,000 10,000 1,000 14,000

ANS: a. $120,000 – $1,000 = $119,000 b. $30,000 + $40,000 – $600 + $400 – $10,000 = $59,800 c. $119,000 – $59,800 = $59,200 d. $59,200 – $8,000 – $14,000 = $37,200 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 10. Using the following information, calculate (a) net sales, (b) beginning merchandise inventory, (c) gross margin, and (d) net income. Sales staff Salaries Expense Sales Ending Merchandise Inventory Purchases Returns and Allowances General and Administrative Expenses Sales Returns and Allowances Freight-In Purchases Cost of Goods Sold

$ 7,000 90,000 16,000 500 11,000 1,200 1,500 30,000 47,000

ANS: a. $90,000 – $1,200 = $88,800 b. $47,000 + $16,000 – $30,000 + $500 – $1,500 = $32,000 c. $88,800 – $47,000 = $41,800 d. $41,800 – $7,000 – $11,000 = $23,800 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 11. Demmler Corporation entered into the transactions listed below. In the journal provided, prepare Demmler's journal entries, assuming use of the periodic inventory system. Omit explanations. Oct.

3 6 7 12 13 14 23 25

Purchased $1,500 of merchandise on credit, terms n/15. Returned $300 of the goods purchased on October 3. Paid freight charges of $150 on goods purchased on October 3. Paid for the goods purchased on October 3. Sold goods on credit for $1,000, terms n/30. The customer of October 13 returned $200 of the goods. Received payment from the customer of October 13. Purchased office supplies for $450.

General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal Date Description Oct. 3 Purchases Accounts Payable

Page 1 Post. Ref.

Debit 1,500

Credit 1,500

6 Accounts Payable Purchases Returns and Allowances

300

7 Freight-In Cash

150

300

150

12 Accounts Payable Cash

1,200

13 Accounts Receivable Sales

1,000

1,200

1,000

14 Sales Returns and Allowances Accounts Receivable

200

23 Cash Accounts Receivable

800

25 Office Supplies Cash

450

200

800

450

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Merchandise purchase transactions | Merchandise sales transactions MSC: ACBSP-APC-06-Recording Transactions 12. Tillman, Inc., entered into the transactions listed below. In the journal provided, prepare Tillman’s journal entries, assuming use of the periodic inventory system. Omit explanations. April

3 6 7 12 13 14 23 25

Purchased $3,200 of merchandise on credit, terms 2/10, n/60. Returned $400 of the goods purchased on April 3. Paid freight charges of $280 on goods purchased on April 3. Paid for the goods purchased on April 3. Sold goods on credit for $4,000, terms 1/10, n/30. The customer of April 13 returned $400 of the goods. Received payment from the customer of April 13. Purchased office supplies for $1,000.

General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal Date

Description

April

3 Purchases Accounts Payable

Post. Ref.

Debit 3,200

3,200

6 Accounts Payable Purchases Returns and Allowances

400

7 Freight-In Cash

280

400

280

12 Accounts Payable ($3,200 – $400) Purchases Discounts ($2,800 x .02) Cash ($2,800 – $56)

2,800

13 Accounts Receivable Sales

4,000

14 Sales Returns and Allowances Accounts Receivable

Page 1 Credit

56 2,744

4,000 400 400

23 Cash ($3,600 – $36) Sales Discounts ($3,600 x .01) Accounts Receivable ($4,000 – $400)

3,564 36

25 Office Supplies Cash

1,000

3,600

1,000

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Merchandise purchase transactions | Merchandise sales transactions MSC: ACBSP-APC-06-Recording Transactions 13. Prepare journal entries without explanations for the merchandising transactions listed below for Naveh Corporation. Assume use of the periodic inventory system. July

1 2 3 5 10 11 13 14

Sold merchandise to Hobart Company for $1,000, terms n/15. Purchased merchandise from Stowe Corporation for $4,000, terms n/15. Gave credit to Hobart Company for merchandise returned, $100. Purchased merchandise from Rajah Company for $5,000, terms n/30. Received payment from Hobart Company for purchase of July 1. Returned $500 in merchandise to Rajah Company for credit. Paid Stowe Corporation in full for purchase of July 2. Paid Rajah Company in full for purchase of July 5.

General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal Date Description July 1 Accounts Receivable Sales

Page 1 Post. Ref.

Debit 1,000

Credit 1,000

2 Purchases Accounts Payable

4,000 4,000

3 Sales Returns and Allowances Accounts Receivable

100 100

5 Purchases Accounts Payable

5,000

10 Cash Accounts Receivable

900

11 Accounts Payable Purchases Returns and Allowances

500

5,000

900

500

13 Accounts Payable Cash

4,000

14 Accounts Payable Cash

4,500

4,000

4,500

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Merchandise purchase transactions | Merchandise sales transactions MSC: ACBSP-APC-06-Recording Transactions 14. The income statement account balances on December 31, 2013, for Janice Corporation appear below. In addition, beginning merchandise inventory was $3,000 and ending merchandise inventory was $4,000. Prepare a 2013 income statement for the company. Account Name Sales Sales Returns and Allowances Purchases Purchases Returns and Allowances Freight-In Selling Expense General and Administrative Expenses Income Taxes Expense

Balance $100,000 1,500 50,000 3,000 5,000 25,000 10,000 1,800

ANS: Janice Corporation Income Statement For the Year Ended December 31, 2013 Net sales Sales Less sales returns and allowances Net sales Cost of goods sold Merchandise inventory, December 31, 2012 Purchases Less purchases returns and allowances Net purchases Freight-in Net cost of purchases Goods available for sale Merchandise inventory, December 31, 2013 Cost of goods sold Gross margin Operating expenses Selling expenses General and administrative expenses Total operating expenses Income before income taxes Income taxes Net income

$100,000 1,500 $ 98,500 $ 3,000 $50,000 3,000 $47,000 5,000 52,000 $55,000 4,000 51,000 $ 47,500 $25,000 10,000 35,000 $ 12,500 1,800 $ 10,700

PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Income statement MSC: ACBSP-APC-09-Financial Statements 15. An accountant is responsible for the following activities: (1) receiving all cash; (2) maintaining the general ledger; (3) maintaining the accounts receivable subsidiary ledger that includes the individual records of each customer; (4) maintaining the journals for recording sales, purchases, and cash receipts; and (5) preparing monthly statements to be sent to customers. As a service to customers and employees, the company allows the accountant to cash checks of up to $50 with money from the cash receipts. When deposits are made, the checks are included in place of the cash receipts. What weaknesses in internal control exist in this system?

ANS: In this case, the principle of separation of duties is being violated. Because the accountant collects the cash and keeps the records for accounts receivable, he or she could divert incoming checks from customers and cash the checks out of cash collections. At the end of the month, when statements are mailed to customers, the accountant could destroy the statements to the customers whose checks he or she had embezzled. The customers then would believe that the company had received the payments because they would not receive a subsequent statement. In addition, there is no indication of any outside verification. Furthermore, allowing checks to replace cash receipts does not provide for consistent documentation of the firm's transactions. Cash and checks received should be deposited intact. PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Critical Thinking KEY: Control activities MSC: ACBSP-APC-10-Internal Control 16. Colton, Inc., a specialty retailer of customized audio systems for automobiles, installed a perpetual inventory system in the second quarter of 2012. The new system allowed the firm to adjust its merchandise inventories to sales patterns more effectively and to prepare monthly financial statements. Although the system led to an improvement in sales and income, the gross margin on the monthly income statements was falling below both management's expectations and the industry average. At the end of 2013, a physical inventory revealed that actual merchandise inventory was considerably lower than the perpetual inventory records indicated. The merchandise inventories of some stores were off more than others, but all had deficiencies. What probably caused these losses and what steps could be taken to prevent them in the future? ANS: The merchandise inventory losses probably were due to shoplifting and embezzlement. Management must carefully review its controls at the individual stores and install a system that will protect its merchandise inventory from these forms of theft. This goal can be accomplished through an internal control structure that creates an environment that encourages compliance with a company's policies, a good accounting system, and specific activities designed to safeguard the merchandise inventory. PTS: 1 DIF: Challenging OBJ: 5 | 6 NAT: AACSB Ethics | AICPA FN Risk Analysis LOC: Critical Thinking KEY: Control activities | Internal control over merchandising transactions MSC: ACBSP-APC-10-Internal Control

Chapter 06 - Inventories TRUE/FALSE 1. Supply-chain management works well in a just-in-time operating environment. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Accounting information and the Internet MSC: ACBSP-APC-17-Inventories Reporting

OBJ: 1 LOC: Recall

2. The higher the value assigned to ending inventory, the lower the gross margin. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory cost and valuation MSC: ACBSP-APC-17-Inventories Reporting 3. Days' inventory on hand equals the inventory turnover divided by 365. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 4. The costs included in work in process and finished goods inventories would not contain manufacturing overhead costs. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory cost concepts MSC: ACBSP-APC-17-Inventories Reporting 5. Indirect materials and indirect labor are components of manufacturing overhead. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Cost allocation MSC: ACBSP-APC-17-Inventories Reporting 6. Periodic and perpetual are examples of inventory costing systems. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory systems MSC: ACBSP-APC-17-Inventories Reporting 7. Supply-chain management helps companies maintain higher levels of inventory. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory management MSC: ACBSP-APC-17-Inventories Reporting

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

8. A manufacturer’s inventory usually consists of raw materials, work in process, and finished goods. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory management MSC: ACBSP-APC-17-Inventories Reporting 9. Inventory is an example of a long-term asset. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory cost and valuation MSC: ACBSP-APC-17-Inventories Reporting 10. The just-in-time operating environment produces decreased carrying costs for inventory. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory cost concepts MSC: ACBSP-APC-17-Inventories Reporting 11. The portion of cost of goods available for sale that is not assigned to ending inventory is assigned to cost of goods sold. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Income statement MSC: ACBSP-APC-17-Inventories Reporting 12. Inventory turnover is a measure not expressed in terms of a percentage. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory management MSC: ACBSP-APC-17-Inventories Reporting 13. An understatement of ending inventory in a period will result in an understatement of gross margin in the next period. ANS: F PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Income statement MSC: ACBSP-APC-17-Inventories Reporting 14. The higher the inventory turnover, the lower the days' inventory on hand. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory management MSC: ACBSP-APC-17-Inventories Reporting

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

15. The determination of the balance sheet cost of merchandise inventory is important to the determination of net income. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Income statement MSC: ACBSP-APC-17-Inventories Reporting 16. An overstatement of ending inventory in a period will result in an understatement of gross margin in that period. ANS: F PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Income statement MSC: ACBSP-APC-17-Inventories Reporting 17. An overstatement of beginning inventory in a period will result in an overstatement of gross margin in the next period. ANS: F PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Income statement MSC: ACBSP-APC-17-Inventories Reporting 18. The term goods flow refers to the association of costs with their assumed flow in the operation of a business. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory cost concepts MSC: ACBSP-APC-17-Inventories Reporting 19. Goods in transit shipped FOB shipping point should be included in the seller's ending inventory. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory cost and goods flow MSC: ACBSP-APC-17-Inventories Reporting 20. Goods in transit shipped FOB destination should be included in the seller’s ending inventory. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory cost and goods flow MSC: ACBSP-APC-17-Inventories Reporting 21. Goods held on consignment should be included in the consignee's ending inventory. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory cost and goods flow MSC: ACBSP-APC-17-Inventories Reporting

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

22. In accounting for inventory, the assumed cost flow must match the physical goods flow. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory cost and goods flow MSC: ACBSP-APC-17-Inventories Reporting 23. Costs incurred in storing inventory usually are included in inventory costs. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory cost and goods flow MSC: ACBSP-APC-17-Inventories Reporting 24. Freight charges associated with the purchase of inventory normally are included in inventory cost. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory cost and valuation MSC: ACBSP-APC-17-Inventories Reporting 25. When the cost of inventory is written down due to a market decline, a loss must be recorded. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Valuing inventory at the lower of cost or market MSC: ACBSP-APC-17-Inventories Reporting

OBJ: 2 LOC: Recall

26. Merchandise inventory is always valued on the balance sheet at its historical cost. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Pricing methods MSC: ACBSP-APC-17-Inventories Reporting 27. The lower-of-cost-or-market rule implies that it is misleading to carry inventory at a cost that is in excess of its market value. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Valuing inventory at the lower of cost or market MSC: ACBSP-APC-17-Inventories Reporting

OBJ: 2 LOC: Recall

28. Inventory methods such as LIFO and FIFO deal more with goods flow than with cost flow. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

29. The specific identification method identifies the cost of each item in ending inventory. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 30. The average-cost method relies on a calculation of average unit cost. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 31. The LIFO method agrees with the actual physical goods flow in most businesses. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 32. A major criticism of the LIFO method is that it magnifies the effects of the business cycle on business income. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 33. Under the periodic inventory system, cost of goods sold is recorded throughout the accounting period as inventory is sold. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory systems MSC: ACBSP-APC-17-Inventories Reporting 34. Specific identification is a very popular inventory method because it is very easy to apply. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 35. The matching of revenue with inventory costs is best achieved with the FIFO method. ANS: F PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 36. The LIFO method tends to smooth out the peaks and valleys of a business cycle. ANS: T PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting . different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

37. If prices were to never change, there would still be a need for alternative inventory methods. ANS: F PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 38. The LIFO method is rarely used because most companies do not sell the last goods they purchase first. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 39. The LIFO inventory method produces the most up-to-date figure for ending inventory. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 40. If a company uses LIFO for tax purposes, it must also use LIFO for financial reporting purposes. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 41. In periods of declining prices, the FIFO method will result in a larger gross margin than the LIFO method. ANS: F PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 42. In periods of rising inventory prices, the LIFO method will result in a higher inventory valuation than will the average-cost method. ANS: F PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 43. In periods of falling prices, FIFO will result in a higher ending inventory valuation than LIFO. ANS: F PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

44. In general, when prices are rising, use of the FIFO method will result in a lower tax liability than the other methods. ANS: F PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 45. In general, in times of declining prices, using FIFO has a favorable effect on cash flows. ANS: F PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 46. During periods of consistently falling prices, the FIFO inventory method will produce the highest possible amount of net income. ANS: F PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 47. The average-cost method produces an ending inventory figure that is higher than the figures produced by FIFO and LIFO. ANS: F PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 48. The specific identification method and the LIFO method produce the same results under both the perpetual and periodic inventory systems. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 49. The computer has made the perpetual inventory system more popular and easier to apply. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 50. Under the perpetual inventory system, cost of goods sold is accumulated as sales are made throughout the accounting period. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

51. Ending merchandise inventory for LIFO will be the same dollar amount under a periodic inventory system as under a perpetual inventory system. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 52. When the average-cost method is applied to a perpetual inventory system, the sale and purchase of goods will not change the unit cost of the goods that remain in inventory. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 53. When the average-cost method is applied to a perpetual inventory system, a moving average cost per unit is computed with each purchase. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 54. The retail method is the only method that is useful in estimating the inventory cost. ANS: F PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Valuing inventory by estimation MSC: ACBSP-APC-17-Inventories Reporting 55. When taking a physical inventory under the retail method, it is necessary to know only the quantity of items on hand. ANS: F PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Valuing inventory by estimation MSC: ACBSP-APC-17-Inventories Reporting 56. In verifying a claim for a loss of inventory, an insurance company will most likely use the retail method. ANS: F PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Valuing inventory by estimation MSC: ACBSP-APC-17-Inventories Reporting 57. The gross profit method requires that records be kept at both cost and retail. ANS: F PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Valuing inventory by estimation MSC: ACBSP-APC-17-Inventories Reporting

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

58. A cost-to-retail percentage must be calculated when applying the gross profit method. ANS: F PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Valuing inventory by estimation MSC: ACBSP-APC-17-Inventories Reporting MULTIPLE CHOICE 1. All of the following are inventory costing methods except a. last-in, last-out. b. average-cost. c. perpetual. d. specific identification. ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory cost concepts MSC: ACBSP-APC-17-Inventories Reporting 2. Which of the following is an inventory processing system? a. Periodic b. First-in, first,out c. Lower-of-cost-or-market d. Average-cost ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory cost concepts MSC: ACBSP-APC-17-Inventories Reporting 3. Manufacturing overhead would not include which of the following costs? a. Packing materials b. Depreciation of plant assets c. Factory rent d. Direct labor ANS: D PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory cost concepts MSC: ACBSP-APC-17-Inventories Reporting 4. Which of the following is an inventory valuation method? a. Specific identification b. Average-cost c. Lower-of-cost-or-market d. Periodic ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory cost concepts MSC: ACBSP-APC-17-Inventories Reporting

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

5. Which of the following is an inventory costing method? a. Cost b. Lower-of-cost-or-market c. First-in, First-out d. Periodic ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory cost concepts MSC: ACBSP-APC-17-Inventories Reporting 6. Inventory turnover is expressed in terms of a. days. b. a percentage. c. dollars. d. times. ANS: D PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 7. Days' inventory on hand equals 365 divided by a. inventory turnover. b. cost of goods sold. c. goods available for sale. d. average inventory. ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 8. Which of the following accounts would not appear as an asset on a manufacturer's balance sheet? a. Finished Goods b. Work in Process c. Factory Overhead d. Raw Materials ANS: C PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory cost concepts MSC: ACBSP-APC-17-Inventories Reporting 9. An overstatement of beginning inventory results in a. no effect on the period's gross margin. b. an overstatement of gross margin. c. an understatement of gross margin. d. a need to adjust purchases. ANS: C PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory measurement MSC: ACBSP-APC-17-Inventories Reporting

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

10. An overstatement of ending inventory in one period results in a. an overstatement of the ending inventory of the next period. b. an understatement of gross margin of the next period. c. an overstatement of gross margin of the next period. d. no effect on gross margin of the next period. ANS: B PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory measurement MSC: ACBSP-APC-17-Inventories Reporting 11. An understatement of year 1's ending inventory will a. cause year 2's cost of goods sold to be overstated. b. result in an understatement of year 2's beginning inventory. c. not affect year 2's ending owner's equity. d. have no effect on year 2's gross margin. ANS: B PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory measurement MSC: ACBSP-APC-17-Inventories Reporting 12. An understatement of year 1's beginning inventory will a. cause year 2's gross margin to be overstated. b. cause year 1's cost of goods sold to be understated. c. cause year 2's gross margin to be understated. d. have no effect on year 1's gross margin. ANS: B PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory measurement MSC: ACBSP-APC-17-Inventories Reporting 13. The most important accounting problem in dealing with merchandise inventory is the application of which of the following conventions or rules? a. Materiality b. Cost-benefit c. Matching d. Consistency ANS: C PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory management MSC: ACBSP-APC-17-Inventories Reporting 14. Average inventory equals $200,000, and cost of goods sold equals $432,000. Days' inventory on hand equals a. 168.98 days. b. 170.0 days. c. 157.9 days. d. 193.1 days.

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: A Inventory turnover: $432,000 ÷ $200,000 = 2.16 Days’ inventory on hand: 365 ÷ 2.16 = 168.98 days PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 15. Average inventory equals $200,000, and cost of goods sold equals $432,000. Inventory turnover equals a. 0.46 times. b. 1.23 times. c. 2.16 times. d. 168.98 times. ANS: C Inventory turnover: $432,000 ÷ $200,000 = 2.16 times PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 16. Cost of goods sold equals $1,000,000, and average inventory equals $400,000. Days' inventory on hand equals a. 91.3 days. b. 146.0 days. c. 821.9 days. d. 912.5 days. ANS: B Inventory turnover: $1,000,000 ÷ $400,000 = 2.5 times Days’ inventory on hand: 365 ÷ 2.5 = 146.0 days PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 17. Cost of goods sold equals $1,000,000, and average inventory equals $400,000. Inventory turnover equals a. 0.4 times. b. 2.5 times. c. 5 times. d. 146.0 times. ANS: B Inventory turnover: $1,000,000 ÷ $400,000 = 2.5 times PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis . different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

18. During the year, Toyz for Boyz had beginning inventory of $350,000, ending inventory of $320,000, and cost of goods sold of $1,507,500. The days’ inventory on hand was a. 4.5 days. b. 4.7 days. c. 81.1 days. d. 77.7 days. ANS: C Inventory turnover: $1,507,500 ÷ [($350,000 + $320,000) ÷ 2] = 4.5 times Days’ inventory on hand: 365 ÷ 4.5 = 81.1 days PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 19. When applying the lower-of-cost-or-market rule to inventory valuation, market generally means a. original cost, less physical deterioration. b. replacement cost. c. original cost. d. resale value. ANS: B PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Valuing inventory at the lower of cost or market MSC: ACBSP-APC-17-Inventories Reporting

OBJ: 2 LOC: Recall

20. Applying the lower-of-cost-or-market rule follows which of the following accounting conventions? a. Full disclosure b. Consistency c. Cost-benefit d. Conservatism ANS: D PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Valuing inventory at the lower of cost or market MSC: ACBSP-APC-17-Inventories Reporting

OBJ: 2 LOC: Recall

21. Goods held on consignment are a. kept for sale on the premises of the consignor. b. included as part of no one's ending inventory. c. never owned by the consignee. d. included in the consignee's ending inventory. ANS: C PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory cost and goods flow MSC: ACBSP-APC-17-Inventories Reporting

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

22. Inventory costing methods place primary reliance on assumptions about the flow of a. costs. b. goods. c. resale prices. d. values. ANS: A PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Pricing methods MSC: ACBSP-APC-17-Inventories Reporting 23. Which of the following costs would not be included in the inventory cost? a. Invoice price b. Cost of goods held on consignment c. Cost of outgoing goods shipped FOB destination d. Sales tax ANS: B PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory cost and goods flow MSC: ACBSP-APC-17-Inventories Reporting 24. Which of the following costs usually would not be included in the inventory cost? a. Ordering costs b. Related tariffs c. Invoice price less purchases discounts d. Freight-in ANS: A PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory cost and goods flow MSC: ACBSP-APC-17-Inventories Reporting 25. Which of the following costs normally would be included in the inventory cost? a. Ordering costs b. Receiving costs c. Freight-in d. Storage costs ANS: C PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory cost and goods flow MSC: ACBSP-APC-17-Inventories Reporting 26. An assumption about cost flow is necessary a. because it is required by income tax regulations. b. only when the flow of goods cannot be determined. c. because prices usually change, and tracking which units have been sold is difficult. d. even when there is no change in the purchase price of inventory. ANS: C PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory cost and valuation MSC: ACBSP-APC-17-Inventories Reporting

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

27. Which of the following terms best describes the assumption made in applying the four inventory methods? a. Cost flow b. Goods flow c. Asset flow d. Physical flow ANS: A PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 28. A fur dealer probably would use which of the following inventory methods? a. Specific identification b. FIFO c. Average-cost d. LIFO ANS: A PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 29. Use this inventory information for the month of November to answer the following question. November

1 7 16 23 28

Beginning inventory Purchase Sale Purchase Sale

10 units @ $240 60 units @ $224 40 units 30 units @ $232 28 units

Assuming that a periodic inventory system is used, what is cost of goods sold on a LIFO basis? a. $15,392 b. $15,472 c. $7,328 d. $7,408 ANS: B Total inventory sold = 28 + 40 = 68 units 30 units @ $232 38 units @ $224 Cost of goods sold

$ 6,960 8,512 $15,472

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

30. Use this inventory information for the month of November to answer the following question. November

1 7 16 23 28

Beginning inventory Purchase Sale Purchase Sale

10 units @ $240 60 units @ $224 40 units 30 units @ $232 28 units

Assuming that a periodic inventory system is used, what is cost of goods sold under the average-cost method? a. $7,296 b. $15,504 c. $7,424 d. $15,776 ANS: B 11/1 11/7 11/23 Goods available for sale

10 units @ $240 60 units @ $224 units @ $232 30 100

$ 2,400 13,440 6,960 $22,800

Average unit cost: $22,800 ÷ 100 units = $228 Total inventory sold: 28 + 40 = 68 units Cost of goods sold: 68 units x $228 = $15,504 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 31. Use this inventory information for the month of November to answer the following question. November

1 7 16 23 28

Beginning inventory Purchase Sale Purchase Sale

10 units @ $240 60 units @ $224 40 units 30 units @ $232 28 units

What is cost of goods sold under the specific identification method? a. More information is needed. b. $7,408 c. $15,392 d. $15,472 ANS: A PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting . different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

32. Use this inventory information for the month of May to answer the following question. May

1 7 18 22 29

Beginning inventory Purchase Sale Purchase Sale

20 units @ $76 70 units @ $80 25 units 10 units @ $88 40 units

Assuming that a periodic inventory system is used, what is ending inventory (rounded) under the average-cost method? a. $5,200 b. $5,288 c. $2,848 d. $2,800 ANS: D 5/1 5/7 5/22 Goods available for sale

20 units @ $76 70 units @ $80 10 units @ $88 100

$ 1,520 5,600 880 $8,000

Average unit cost: $8,000 ÷ 100 units = $80 Ending Inventory: 20 + 70 – 25 + 10 – 40 = 35 units Cost of goods sold: 35 units x $80 = $2,800 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 33. Use this inventory information for the month of May to answer the following question. May

1 7 18 22 29

Beginning inventory Purchase Sale Purchase Sale

20 units @ $76 70 units @ $80 25 units 10 units @ $88 40 units

Assuming that a periodic inventory system is used, what is cost of goods sold on a FIFO basis? a. $2,880 b. $5,120 c. $5,200 d. $2,800

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: B Total inventory sold = 25 + 40 = 65 units 20 units @ $76 45 units @$80 Cost of goods sold

$1,520 3,600 $5,120

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 34. Use this inventory information for the month of May to answer the following question. May

1 7 18 22 29

Beginning inventory Purchase Sale Purchase Sale

20 units @ $76 70 units @ $80 25 units 10 units @ $88 40 units

What is ending inventory under the specific identification method? a. $2,720 b. $2,800 c. More information is needed. d. $2,880 ANS: C PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 35. Use this information to answer the following question. Beginning inventory Purchase—Oct. Purchase—Dec.

100 units @ $16.00 200 units @ $12.00 100 units @ $24.00

A periodic inventory system is used; ending inventory is 150 units. What is ending inventory under the average-cost method? a. $1,800 b. $2,100 c. $2,700 d. $2,400 ANS: D Beg. Inv. Oct. Dec. Goods available for sale

100 units @ $16 200 units @ $12 100 units @ $24 400

$1,600 2,400 2,400 $6,400

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Average unit cost: $6,400 ÷ 400 units = $16 Ending Inventory: 150 units x $16 = $2,400 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 36. Use this information to answer the following question. Beginning inventory Purchase—Oct. Purchase—Dec.

100 units @ $16.00 200 units @ $12.00 100 units @ $24.00

A periodic inventory system is used; ending inventory is 147 units. What is cost of goods sold under LIFO? a. $2,236 b. $6,236 c. $4,236 d. $8,236 ANS: C Total inventory sold = 100 + 200 + 100 – 147 = 253 units 100 units @ $24 153 units @ $12

$2,400 1,836 $4,236

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 37. Use this information to answer the following question. Beginning inventory Purchase—Oct. Purchase—Dec.

100 units @ $16.00 200 units @ $12.00 100 units @ $24.00

A periodic inventory system is used; ending inventory is 151 units. What is the value of ending inventory under FIFO? a. $2,812 b. $3,212 c. $2,612 d. $3,012

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: D 100 units @ $24 51 units @ $12

$2,400 612 $3,012

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 38. Use this information to answer the following question. Feb.

1 6 13 20 25

Inventory Purchase Purchase Purchase Purchase Total sales

200 units @ $6.00 300 units @ $6.60 100 units @ $7.20 200 units @ $7.80 40 units @ $8.40 620 units

A periodic inventory system is used. Using the average-cost method, the cost assigned to ending inventory is a. $4,278. b. $1,518. c. $1,692. d. $1,584. ANS: B 2/1 2/6 2/13 2/20 2/25 Goods available for sale

200 300 100 200 40 840

units @ $6 units @ $6.60 units @ $7.20 units @ $7.80 units @ $8.40

$1,200 1,980 720 1,560 336 $5,796

Average unit cost: $5,796 ÷ 840 units = $6.90 Ending Inventory: 840 units – 620 units = 220 units Ending Inventory Cost: 220 units x $6.90 = $1,518 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

39. Use this information to answer the following question. Feb.

1 6 13 20 25

Inventory Purchase Purchase Purchase Purchase Total sales

200 units @ $6.00 300 units @ $6.60 100 units @ $7.20 200 units @ $7.80 40 units @ $8.40 620 units

A periodic inventory system is used. Using the specific identification method and assuming that 50 of the items left are from the February 13 purchase and the rest are from the February 20 purchase, the cost assigned to ending inventory is a. $1,920. b. $1,656. c. $1,686. d. $1,588. ANS: C Ending Inventory: 840 units – 620 units = 220 units 50 units @ $7.20 170 units @ $7.80

$ 360 1,326 $1,686

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 40. Use this information to answer the following question. Feb.

1 6 13 20 25

Inventory Purchase Purchase Purchase Purchase Total sales

200 units @ $6.00 300 units @ $6.60 100 units @ $7.20 200 units @ $7.80 40 units @ $8.40 620 units

A periodic inventory system is used. Using LIFO, the cost assigned to ending inventory is a. $1,740. b. $4,056. c. $1,332. d. $4,464.

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: C Ending Inventory: 200 + 300 + 100 + 200 + 40 – 620 = 220 units 200 units @ $6.00 20 units @ $6.60

$1,200 132 $1,332

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 41. Use this information to answer the following question. Feb.

1 6 13 20 25

Inventory Purchase Purchase Purchase Purchase Total sales

200 units @ $6.00 300 units @ $6.60 100 units @ $7.20 200 units @ $7.80 40 units @ $8.40 620 units

A periodic inventory system is used. Using FIFO, the cost assigned to ending inventory is a. $4,056. b. $1,332. c. $1,740. d. $4,464. ANS: C Ending Inventory: 200 + 300 + 100 + 200 + 40 – 620 = 220 units 40 units @ $8.40 180 units @ $7.80

$ 336 1,404 $1,740

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

42. Use this information to answer the following question. Feb.

1 6 13 20 25

Inventory Purchase Purchase Purchase Purchase Total sales

200 units @ $6.00 300 units @ $6.60 100 units @ $7.20 200 units @ $7.80 40 units @ $8.40 620 units

A periodic inventory system is used. Using LIFO, cost of goods sold is a. $1,740. b. $4,464. c. $1,332. d. $4,056. ANS: B 40 units @ $8.40 200 units @ $7.80 100 units @ $7.20 280 units @ $6.60

$ 336 1,560 720 1,848 $4,464

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 43. Use this information to answer the following question. July

1 8 17 25

Inventory Purchase Purchase Purchase Total sales

15 units @ $8.00 60 units @ $8.80 30 units @ $8.40 45 units @ $9.60 100 units

A periodic inventory system is used. Cost of goods sold under the average-cost method is a. $888. b. $666. c. $870. d. $444.

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: A 1/1 1/8 1/17 1/25 Goods available for sale

15 units @ $8.00 60 units @ $8.80 30 units @ $8.40 units @ $9.60 45 150

$ 120 528 252 432 $1,332

Average unit cost: $1,332 ÷ 150 units = $8.88 Cost of goods sold: 100 units x $8.88 = $888 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 44. Use this information to answer the following question. July

1 8 17 25

Inventory Purchase Purchase Purchase Total sales

15 units @ $8.00 60 units @ $8.80 30 units @ $8.40 45 units @ $9.60 100 units

A periodic inventory system is used. Cost of goods sold under FIFO is a. $858. b. $852. c. $904. d. $474. ANS: A 15 units @ $8.00 60 units @ $8.80 25 units @ $8.40

$120 528 210 $858

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

45. Use this information to answer the following question. July

1 8 17 25

Inventory Purchase Purchase Purchase Total sales

15 units @ $8.00 60 units @ $8.80 30 units @ $8.40 45 units @ $9.60 100 units

A periodic inventory system is used. Ending inventory under LIFO is a. $904. b. $858. c. $428. d. $474. ANS: C Ending inventory: 15 + 60 + 30 + 45 – 100 = 50 units 15 units @ $8.00 35 units @ $8.80

$120 308 $428

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 46. Use this information to answer the following question. July

1 8 17 25

Inventory Purchase Purchase Purchase Total sales

15 units @ $8.00 60 units @ $8.80 30 units @ $8.40 45 units @ $9.60 100 units

Assuming that the specific identification method is used and that ending inventory consists of 15 units from each of the three purchases and five units from the January 1 inventory, cost of goods sold is a. $442. b. $836. c. $676. d. $890. ANS: D 10 units @ $8.00 45 units @ $8.80 15 units @ $8.40 30 units @ $9.60

$ 80 396 126 288 $890

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 47. In a period of declining prices, which of the following inventory methods generally results in the highest balance sheet figure for inventory? a. LIFO b. Cannot tell without more information c. FIFO d. Average-cost ANS: A PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 48. In a period of rising prices, which of the following inventory methods generally results in the highest gross margin figure? a. Cannot tell without more information b. LIFO c. FIFO d. Average-cost ANS: C PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 49. Which inventory method generally best follows the matching principle? a. Average-cost b. LIFO c. Whichever method is used for tax purposes d. FIFO ANS: B PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 50. Which inventory method generally results in the most realistic ending inventory figure? a. FIFO b. Whichever method produces the highest ending inventory figure c. LIFO d. Average-cost ANS: A PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

51. In a period of declining prices, which inventory method is best to use for tax purposes? a. FIFO b. Average-cost c. Specific identification d. LIFO ANS: A PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 52. Given equal circumstances, which inventory method probably would be the most time consuming? a. Specific identification b. FIFO c. Average-cost d. LIFO ANS: A PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 53. In a period of rising prices, the liquidation of base-layer inventory will result in an unusually high income tax liability under which of the following methods? a. Specific identification b. Average-cost c. LIFO d. FIFO ANS: C PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 54. Which of the following inventory methods when used for income tax purposes must also be used for reporting purposes? a. Specific identification b. LIFO c. FIFO d. Average-cost ANS: B PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 55. Use this inventory information for the month of September to answer the following question. Sept.

1 5 14 21 30

Beginning inventory Purchase Sale Purchase Sale

10 units @ $120 60 units @ $112 40 units 30 units @ $116 28 units

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Assuming that a perpetual inventory system is used, what is ending inventory on a FIFO basis? a. $3,704 b. $7,696 c. More information is needed. d. $3,664 ANS: A Ending inventory: 10 + 60 – 40 + 30 – 28 = 32 2 units @ $112 $ 224 30 units @ $116 3,480 $3,704 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 56. Use this inventory information for the month of September to answer the following question. Sept.

1 5 14 21 30

Beginning inventory Purchase Sale Purchase Sale

10 units @ $120 60 units @ $112 40 units 30 units @ $116 28 units

Assuming that a perpetual inventory system is used, what is ending inventory (rounded) under the average-cost method? a. $3,666 b. $3,712 c. $3,208 d. $7,734 ANS: A Beg. inventory Purchase Balance

9/1 9/5 9/5

10 units @ $120 60 units @ $112 70 units @ $113.14

$1,200 6,720 7,920

Sale Purchase Balance

9/14 9/21 9/21

40 units @ $113.14 30 units @ $116 60 units @ $114.57

4,526 3,480 6,874

Sale End. Inventory

9/30 9/30

28 units @ $114.57 32 units @ $114.57

3,208 $3,666

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

57. Use this inventory information for the month of June to answer the following questions. June

1 7 18 22 29

Beginning inventory Purchase Sale Purchase Sale

20 units @ $152 70 units @ $160 25 units 10 units @ $176 40 units

Assuming that a perpetual inventory system is used, what is ending inventory on a LIFO basis? a. More information is needed. b. $10,240 c. $5,440 d. $5,760 ANS: C 20 units @ $152 15 units @ $160

$3,040 2,400 $5,440

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 58. Use this inventory information for the month of June to answer the following questions. June

1 7 18 22 29

Beginning inventory Purchase Sale Purchase Sale

20 units @ $152 70 units @ $160 25 units 10 units @ $176 40 units

Assuming that a perpetual inventory system is used, what is cost of goods sold (rounded) under the average-cost method? a. $12,040 b. $6,420 c. $10,380 d. $5,620

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: C Beg. inventory Purchase Balance

6/1 6/7 6/7

20 units @ $152 70 units @ $160 90 units @ $158.22

$3,040 11,200 14,240

Sale Purchase Balance

6/18 6/22 6/22

25 units @ $158.22 10 units @ $176 75 units @ $160.59

3,956 1,760 12,044

Sale 6/29 40 units @ $160.59 End. Inventory 6/29 35 units @ $160.59 Cost of goods sold: $3,956 + $6,424 = $10,380

6,424 $5,620

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 59. Which of the following companies would be most likely to use the retail method? a. A dealer in heavy machinery b. A TV repair company c. A women's dress shop d. A farm supply company ANS: C PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Valuing inventory by estimation MSC: ACBSP-APC-17-Inventories Reporting 60. In which of the following cases would the gross profit method most likely be used? a. In a company with good accounting records b. In applying the average-cost method c. In estimating the market value of inventory for application of the lower-of-cost-or-market rule d. In estimating an inventory loss from fire ANS: D PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Valuing inventory by estimation MSC: ACBSP-APC-17-Inventories Reporting 61. When applying the retail method, which of the following would not be a component of the cost-to-retail percentage? a. Purchases b. Beginning inventory c. Sales d. Freight-in ANS: C PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Valuing inventory by estimation MSC: ACBSP-APC-17-Inventories Reporting

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

62. Which of the following methods generally is used to determine the loss when inventory is destroyed or stolen? a. Retail method b. FIFO c. LIFO d. Gross profit method ANS: D PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Valuing inventory by estimation MSC: ACBSP-APC-17-Inventories Reporting 63. A retail company has goods available for sale of $1,000,000 at retail and $400,000 at cost and ending inventory of $98,000 at retail. What is the estimated cost of goods sold? a. $302,000 b. $380,400 c. $360,800 d. $341,200 ANS: C Ratio of cost to retail price: $400,000 ÷ $1,000,000 = 40% Net sales during the period: $1,000,000 – $98,000 = $902,000 Estimated cost of goods sold: $902,000 x 40% = $360,800 PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Valuing inventory by estimation MSC: ACBSP-APC-17-Inventories Reporting 64. A company has cost of goods available for sale of $500,000, sales of $574,000, and a gross profit percentage of 30 percent. Using the gross profit method, what is the ending inventory? a. $226,000 b. $10,000 c. $98,200 d. $327,800 ANS: C Estimated gross margin: $574,000 – ($574,000 x .3) = $401,800 Estimated cost of ending inventory: $500,000 – $401,800 = $98,200 PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Valuing inventory by estimation MSC: ACBSP-APC-17-Inventories Reporting

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

65. A retail store has goods available for sale of $1 million at retail and $550,000 at cost, and ending inventory of $80,000 at retail. What is the estimated cost of ending inventory? a. $64,000 b. $80,000 c. $55,000 d. $44,000 ANS: D Ratio of cost to retail price: $550,000 ÷ $1,000,000 = 55% Estimated ending inventory: $80,000 x 55% = $44,000 PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Valuing inventory by estimation MSC: ACBSP-APC-17-Inventories Reporting 66. A retail store prices its goods to achieve a gross margin of 30 percent. Up to the date of a fire that destroyed the store's inventory, sales were $400,000 and cost of goods available for sale was $300,000. The estimated cost of the inventory destroyed is a. $20,000. b. $70,000. c. $120,000. d. $100,000. ANS: A Estimated gross margin: $400,000 – ($400,000 x .3) = $280,000 Estimated cost of ending inventory: $300,000 – $280,000 = $20,000 PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Valuing inventory by estimation MSC: ACBSP-APC-17-Inventories Reporting 67. A retail store has beginning inventory of $60,000, purchases of $440,000, sales of $400,000, and a normal gross margin of 25 percent. What is estimated inventory based on these facts and the gross profit method? a. $100,000 b. $300,000 c. $200,000 d. $400,000 ANS: C Estimated gross margin: $400,000 – ($400,000 x .25) = $300,000 Estimated cost of ending inventory: ($60,000 + $440,000) – $300,000 = $200,000 PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Valuing inventory by estimation MSC: ACBSP-APC-17-Inventories Reporting

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

68. A company has goods available for sale of $250,000 at retail and $175,000 at cost. It also had sales of $210,000 for the period. What is the estimated cost of ending inventory, using the retail method? a. $38,000 b. $28,000 c. $40,000 d. $63,000 ANS: B Ratio of cost to retail price: $175,000 ÷ $250,000 = 70% Estimated ending inventory at retail: $250,000 – $210,000 = $40,000 Estimated ending inventory at cost: $40,000 x 70% = $28,000 PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Valuing inventory by estimation MSC: ACBSP-APC-17-Inventories Reporting SHORT ANSWER 1. How is the matching rule applied when accounting for merchandise inventory? ANS: Merchandise inventory is classified as an asset when it is acquired or manufactured because it has future economic benefit. When the inventory is sold, sales revenue is generated, and the inventory cost is converted to an expense (cost of goods sold) in accordance with the matching rule. PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Matching rule and inventories MSC: ACBSP-APC-17-Inventories Reporting 2. Use the following figures (stated in millions of dollars) to compute the inventory turnover and the days' inventory on hand: (Round answers to one decimal place). Cost of goods sold: Beginning inventory: Ending inventory:

$13,168 $1,830 $2,354

a. Inventory turnover = ___________________ b. Days' inventory on hand = ___________________ ANS: a. $13,168 ÷ [($1,830 + $2,354) ÷ 2] = 6.3 times b. 365 ÷ 6.3 = 57.9 days PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

3. What is the chief objective of supply-chain management? How is it accomplished? ANS: The chief objective of supply-chain management is the reduction of levels of inventory. It is accomplished by business-to-business purchasing conducted over the Internet in a just-in-time operating environment. PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory management MSC: ACBSP-APC-17-Inventories Reporting 4. Assuming that ending inventory for 2012 was understated, indicate whether each of the following will be understated (U), overstated (O), or not affected (N). _____ 1. Beginning inventory for 2013 _____ 2. Cost of goods sold for 2012 _____ 3. Stockholders' equity at the end of 2013 _____ 4. Income before income taxes for 2013 _____ 5. Stockholders' equity at the end of 2012 _____ 6. Cost of goods sold for 2013 _____ 7. Income before income taxes for 2012 ANS: 1. U 2. O 3. N

4. 5. 6.

O U U

PTS: 1 DIF: Challenging OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Inventory measurement MSC: ACBSP-APC-17-Inventories Reporting

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

5. Assuming that ending inventory for 2012 was overstated, indicate whether each of the following will be understated (U), overstated (O), or not affected (N). _____ 1. Beginning inventory for 2013 _____ 2. Cost of goods sold for 2012 _____ 3. Stockholders' equity at the end of 2013 _____ 4. Income before income taxes for 2013 _____ 5. Stockholders' equity at the end of 2012 _____ 6. Cost of goods sold for 2013 _____ 7. Income before income taxes for 2012 ANS: 1. O 2. U 3. N

4. 5. 6.

U O O

PTS: 1 DIF: Challenging OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Inventory measurement MSC: ACBSP-APC-17-Inventories Reporting 6. Why are cost flow assumptions made when accounting for merchandise inventory? ANS: With changing prices, one would have to carefully track the flow of goods to obtain exact cost of goods sold and ending inventory amounts. Because tracking is usually impractical and sometimes impossible, cost flow assumptions are made to provide a good estimate of inventory cost with no need to track the flow of goods. PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory cost and goods flow MSC: ACBSP-APC-17-Inventories Reporting 7. Explain how the accounting convention of conservatism applies to the lower-of-cost-or market rule. ANS: The lower-of-cost-or-market rule requires that inventory be written down to a lower value if the market, or replacement, cost is below its historical cost. This rule shows the application of the accounting convention of conservatism because a loss would be recognized prior to the sale of the inventory. PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory cost and goods flow MSC: ACBSP-APC-17-Inventories Reporting . different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

8. Given the following information about purchases and sales during the year, compute the cost to be assigned to ending inventory under each of three methods: (a) average-cost, (b) FIFO, and (c) LIFO. Assume the periodic inventory system is used. (Show your work.) Jan. April

1 1

Dec.

Beginning inventory Purchases Totals Total sales Ending inventory

150 items @ $6 = 450 items @ $12 = 600 items 300 items 300 items

$ 900 5,400 $6,300

ANS: a. Average-cost: $3,150 [($6,300 ÷ 600)  300] b. FIFO: $3,600 (300  $12) c. LIFO: $2,700 [(150  $6) + (150  $12)] PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 9. Given the following information about purchases and sales during the year, compute the cost to be assigned to ending inventory under each of three methods: (a) average-cost, (b) FIFO, and (c) LIFO. Assume the periodic inventory system is used. (Show your work.) Jan. July

1 1

Dec.

Beginning inventory Purchases Totals Total sales Ending inventory

100 items @ $4 = 300 items @ $8 = 400 items 240 items 160 items

$ 400 2,400 $2,800

ANS: a. Average-cost: $1,120 ($2,800 ÷ 400  160) b. FIFO: $1,280 (160  $8) c. LIFO: $880 [(100  $4) + (60  $8)] PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 10. Use the following information to calculate cost of goods sold under each of three methods: (a) FIFO, (b) LIFO, and (c) average-cost. Assume the periodic inventory system is used. (Show your work.) Apr.

1 8 17 24 30

Beginning inventory Sales Purchases Sales Purchases

90 units @ $40 70 units 150 units @ $42 110 units 60 units @ $44

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: Total Sales: 70 + 110 = 180 units a. FIFO: 90 units @ $40 90 units @ $42

b. LIFO: 60 units @ $44 120 units @ $42

c. Average-cost: 4/1 4/17 4/30

$3,600 3,780 $7,380

$2,640 5,040 $7,680

90 units @ $40 150 units @ $42 60 units @ $44

Goods available 300 for sale Average unit cost: $12,540 ÷ 300 units = $41.80 Cost of goods sold: 180 units x $41.80 = $7,524

$ 3,600 6,300 2,640 $12,540

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 11. Under rising prices, why will the FIFO method produce a higher ending inventory than LIFO? ANS: Under FIFO, it is assumed that the ending inventory consists of the most recently purchased items. If prices are rising, then the most recently purchased items are the most expensive ones. PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 12. What is a LIFO liquidation, and what is its effect on income before income taxes? ANS: Under LIFO, ending inventory is assumed to consist of the oldest items. When prices are rising and ending inventory falls below the beginning inventory quantity, the current selling price is matched with the old costs, producing an unusually high increase to income before income taxes. PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting . different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

13. Why are the amounts determined for ending inventory and cost of goods sold the same under both the periodic and perpetual inventory systems when FIFO is used but not when LIFO is used? ANS: FIFO will provide the same valuation results for ending inventory and cost of goods sold under both systems because the ending inventory will always consist of the last items purchased. The results will not be the same using LIFO because the cost of goods sold would be determined at the time of each sale when using the perpetual system. Only in rare circumstances would the only goods sold be the last purchased during the period. PTS: 1 DIF: Moderate OBJ: 3 | 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 14. How does the perpetual inventory system differ from the periodic inventory system in the determination of cost of goods sold? ANS: Under the perpetual system, cost of goods sold is accumulated as sales are made. Under the periodic system, cost of goods sold is determined at the end of the period, when ending inventory is deducted from the cost of goods available for sale. PTS: 1 DIF: Moderate OBJ: 3 | 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Inventory systems MSC: ACBSP-APC-17-Inventories Reporting 15. Up to the date of a fire that completely destroyed Clark’s inventory, Clark had sales of $4,000,000, purchases of $3,600,000, and freight-in of $160,000. The cost of beginning inventory was $280,000 and the company's typical gross profit was 40 percent. Using the gross profit method, estimate Clark’s inventory loss from the fire. (Show your work.) ANS: Beginning inventory at cost Purchases at cost Freight-in Cost of goods available for sale Less estimated cost of goods sold Sales at selling price Less estimated gross profit, 40% Estimated cost of ending inventory (estimated loss in fire)

$ $3,600,000 160,000

$4,000,000 1,600,000

280,000

3,760,000 $4,040,000

2,400,000 $ 1,640,000

PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Valuing inventory by estimation MSC: ACBSP-APC-17-Inventories Reporting

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

16. Prior to a fire that destroyed most of its inventory, Verona Company had inventory purchases during the period of $80,000 and sales of $250,000. Verona began the period with $190,000 in inventory. Verona's typical gross profit percentage is 20 percent. Inventory that cost $10,000 survived the fire. Using the gross profit method, estimate the inventory loss from the fire. (Show your work.) ANS: Beginning inventory at cost Purchases at cost Cost of goods available for sale Less estimated cost of goods sold Sales at selling price Less estimated gross profit, 20% Estimated cost of ending inventory Salvaged inventory Fire loss

$ 190,000 80,000 $270,000 $250,000 50,000

200,000 $ 70,000 10,000 $ 60,000

PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Valuing inventory by estimation MSC: ACBSP-APC-17-Inventories Reporting 17. Jayne's Department Store had net retail sales of $310,000 during the current year. The following additional information was obtained from the accounting records.

Beginning inventory Net purchases for the period Freight-in

At Cost $ 55,000 169,000 7,000

At Retail $ 95,000 290,000

Estimate the company's ending inventory at cost using the retail method. (Show your work.) ANS: Beginning inventory Net purchases for the period Freight-in Merchandise available for sale Ratio of cost to retail price: $231,000 ÷ $385,000 = 60% Net sales during the period Estimated ending inventory at retail Ratio of cost to retail Estimated cost of ending inventory

Cost $ 55,000 169,000 7,000 $231,000

Retail $ 95,000 290,000 $385,000

310,000 $ 75,000 60% $ 45,000

PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Valuing inventory by estimation MSC: ACBSP-APC-17-Inventories Reporting

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

18. Marathon Shoe Store had net retail sales of $400,000 during the current year. The following additional information was obtained from the accounting records.

Beginning inventory Net purchases for the period Freight-in

At Cost $ 60,000 178,000 18,000

At Retail $ 126,000 386,000

Estimate the company's ending inventory at cost using the retail method. (Show your work.) ANS: Beginning inventory Net purchases for the period Freight-in Merchandise available for sale Ratio of cost to retail price: $256,000 ÷ $512,000 = 50% Net sales during the period Estimated ending inventory at retail Ratio of cost to retail Estimated cost of ending inventory

Cost $ 60,000 178,000 18,000 $256,000

Retail $ 126,000 386,000 $512,000

400,000 $ 112,000 50% $ 56,000

PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Valuing inventory by estimation MSC: ACBSP-APC-17-Inventories Reporting MATCHING Match each definition with the correct term below. a. An inventory management system in which the Internet is used to order and track goods. b. A method of valuing inventory that assumes that costs of the first items acquired should be assigned to the first items sold. c. A method of estimating inventory that uses the ratio of cost to retail price. d. Merchandise that its owner places on the premises of another company with the understanding that payment will be made only when the merchandise is sold. e. An inventory management system in which goods arrive just at the time they are needed. f. When sales have reduced inventories below the levels set in prior years. g. A method of estimating inventory that assumes the gross margin for a business remains relatively stable from year to year. h. The association of costs with their assumed flow in the operations of a company. i. A method of valuing inventory that assumes that the costs of the last items purchased should be assigned to the first items sold. j. A method of valuing inventory that identifies the cost of each item in ending inventory. 1. 2. 3. 4.

Supply-chain management Just-in-time operating environment Consignment Cost flow

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

5. 6. 7. 8. 9. 10.

Specific identification method First-in, first-out Last-in, last-out LIFO Liquidation Retail method Gross profit method

1. ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory management MSC: ACBSP-APC-17-Inventories Reporting 2. ANS: E PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory management MSC: ACBSP-APC-17-Inventories Reporting 3. ANS: D PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory cost and valuation MSC: ACBSP-APC-17-Inventories Reporting 4. ANS: H PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory cost and goods flow MSC: ACBSP-APC-17-Inventories Reporting 5. ANS: J PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 6. ANS: B PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 7. ANS: I PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 8. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 9. ANS: C PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Valuing inventory by estimation MSC: ACBSP-APC-17-Inventories Reporting 10. ANS: G PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Valuing inventory by estimation MSC: ACBSP-APC-17-Inventories Reporting

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

PROBLEM 1. Assume that during the physical count of the inventory of a large corporation for this year, $900,000 of merchandise was counted twice. The error was not detected, and the financial statements were prepared. Identify the individual statements that would be affected and explain the effect the count error would have on each. (Omit income tax consideration.) ANS: The double-counting of merchandise would cause the merchandise inventory amount shown on the balance sheet to be overstated by the $900,000 error. Consequently, total assets would be overstated by the same amount. The error would also cause cost of goods sold and gross margin on the income statement to be understated and overstated, respectively. The error would carry all the way through to the bottom of the income statement where the earnings before income taxes would be overstated by $900,000. The statement of stockholders' equity would show an overstated income after taxes as an increase to retained earnings. Thus total stockholders' equity would also be overstated on the balance sheet. PTS: 1 DIF: Challenging OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Inventory measurement MSC: ACBSP-APC-17-Inventories Reporting 2. Assume that during the physical count of the inventory of a large corporation last year, $750,000 of merchandise was not counted. The error was not detected, and the financial statements for the current fiscal year were prepared. Identify the individual statements that would be affected and explain the effect the error would have on each of these statements. ANS: By understating last year's ending inventory, the company would have started the current year with an understated inventory balance. As a result, total assets would be understated by the same $750,000. The error would also cause cost of goods sold and gross margin on the income statement to be understated and overstated, respectively. Earnings before income taxes would be overstated by $750,000. This year's overstatement of earnings before income taxes, retained earnings, and inventory would exactly offset the understatement of each item on the prior year's statements. PTS: 1 DIF: Challenging OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Inventory measurement MSC: ACBSP-APC-17-Inventories Reporting 3. Why will an understated beginning inventory produce an overstated income before income taxes for the same period? Will the understatement have a favorable or unfavorable effect on current year income taxes?

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: An understated beginning inventory will produce an understated goods available for sale and cost of goods sold. An understated cost of goods sold (an expense) produces an overstated income before income taxes for the same period. An unfavorable effect on income taxes will result from this understatement. PTS: 1 DIF: Challenging OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Inventory measurement MSC: ACBSP-APC-17-Inventories Reporting 4. Pepin Company reports income before income taxes of $160,000 during 2013. If beginning inventory was overstated by $14,000 and ending inventory was understated by $16,000, calculate corrected income before income taxes for the year. (Show your work.) ANS: $190,000 ($160,000 + $14,000 + $16,000) PTS: 1 DIF: Challenging OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Inventory measurement MSC: ACBSP-APC-17-Inventories Reporting 5. Winer & Daughters reports income before income taxes of $10,000 during 2013. If beginning inventory was understated by $3,000 and ending inventory was overstated by $1,200, calculate corrected income before income taxes for the year. (Show your work.) ANS: $5,800 ($10,000 – $3,000 – $1,200) PTS: 1 DIF: Challenging OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Inventory measurement MSC: ACBSP-APC-17-Inventories Reporting 6. Condensed income statements for Sauk Company are shown below for two years.

Net sales Cost of goods sold Gross margin Operating expenses Income before income taxes

2013 $150,000 90,000 $60,000 30,000 $30,000

2012 $180,000 108,000 $72,000 30,000 $42,000

Compute the corrected income before income taxes for 2012 and 2013 assuming that the inventory as of the end of 2012 was mistakenly understated by $6,000.

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: 2012 = $48,000 (EI understated, COGS overstated, IBIT understated; $42,000 + $6,000) 2010 = $24,000 (BI understated, COGS understated, IBIT overstated; $30,000 – $6,000) PTS: 1 DIF: Challenging OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Inventory measurement MSC: ACBSP-APC-17-Inventories Reporting 7. The following information is available for Sawyer Company. Inventory held in warehouse Inventory on consignment (included in warehouse count) from Rusk Company Incoming goods shipped FOB destination Outgoing goods shipped FOB destination Inventory on consignment (not included in warehouse count) at Grant Company Incoming goods shipped FOB shipping point

$32,000 5,000 12,000 7,000 2,000 3,000

Using this information, compute the cost of inventory for Sawyer company at the end of the year. ANS: $32,000 – $5,000 + $7,000 + $2,000 + $3,000 = $39,000 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory measurement MSC: ACBSP-APC-17-Inventories Reporting 8. Emil Hinkel owns and operates a large antique shop. He uses the specific identification method to account for transactions that affect inventory. Hinkel recently completed a physical inventory of the merchandise in his shop as part of his year-end work. Today, his accountant called to inform him that it would be necessary to adjust the inventory figure shown on the balance sheet, which will increase Hinkel's tax liability. Hinkel argued that the inventory had to be correct, because he counted it twice and matched every item to an invoice. Cite reasons why the accountant would find it necessary to adjust the inventory even if Hinkel's count is accurate. ANS: The inventory could have been adjusted for any of the following reasons: 1. Some items purchased and owned were still in transit when Hinkel took his physical count. 2. Hinkel had some merchandise on consignment or stored at another location. 3. Some items Hinkel counted had already been sold but not yet picked up by the buyer. 4. Hinkel forgot to add freight costs to the total cost of his inventory. PTS: 1 DIF: Challenging OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Critical Thinking KEY: Inventory measurement MSC: ACBSP-APC-17-Inventories Reporting

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

9. During April, Leary Company sold 900 units of Product Q. Its beginning inventory and purchases during the month were as follows: Apr.

1 5 10 15 20 25

Beginning inventory Purchases Purchases Purchases Purchases Purchases

200 units @ $1 200 units @ $2 200 units @ $3 200 units @ $4 200 units @ $5 200 units @ $6

Compute the cost of the ending inventory under each of three methods: (a) average-cost, (b) LIFO, and (c) FIFO. Assume the periodic inventory system is used. (Show your work.) ANS: Ending Inventory: 200 + 200 + 200 + 200 + 200 + 200 – 900 = 300 units a. Average-cost: 4/1 200 units @ $1 4/5 200 units @ $2 4/10 200 units @ $3 4/15 200 units @ $4 4/20 200 units @ $5 4/25 200 units @ $6 Goods available 1,200 for sale Average unit cost: $4,200 ÷ 1,200 units = $3.5 Ending inventory: 300 units x $3.5 = $1,050 b. LIFO: 200 units @ $1 100 units @ $2

c. FIFO: 200 units @ $6 100 units @ $5

200 400 600 800 1,000 1,200 $4,200

$200 200 $400

$1,200 500 $1,700

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

10. During November, Marquette Company sold 240 units of Product Y. Its beginning inventory and purchases during the month were as follows: Nov.

1 5 10 15 20 25

Beginning inventory Purchases Purchases Purchases Purchases Purchases

100 units @ $40 100 units @ $48 100 units @ $44 100 units @ $48 100 units @ $56 100 units @ $52

Compute the cost of goods sold under each of three methods: (a) average-cost, (b) LIFO, and (c) FIFO. Assume the periodic inventory system is used. (Show your work.) ANS: a. Average-cost: 11/1 100 units @ $40 11/5 100 units @ $48 11/10 100 units @ $44 11/15 100 units @ $48 11/20 100 units @ $56 11/25 100 units @ $52 Goods available 600 for sale Average unit cost: $28,800 ÷ 600 units = $48 Cost of goods sold: 240 units x $48 = $11,520 b. LIFO: 100 units @ $52 100 units @ $56 40 units @ $48

c. FIFO: 100 units @ $40 100 units @ $48 40 units @ $44

$ 4,000 4,800 4,400 4,800 5,600 5,200 $28,800

$ 5,200 5,600 1,920 $12,720

$ 4,000 4,800 1,760 $10,560

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

11. During the first quarter of the year, Blake Company sold 12,000 cases of Product T for $120,000. Facts related to its beginning inventory and purchases are as follows: Jan. Feb. Mar.

1 10 13 5

Beginning inventory Purchases Purchases Purchases

5,000 cases @ $4.00 3,000 cases @ $5.00 8,000 cases @ $4.50 2,000 cases @ $5.00

For the quarter ended March 31, compute the ending inventory, cost of goods sold, and gross margin under three methods: (a) average-cost, (b) FIFO, and (c) LIFO. Assume the periodic inventory system is used. (Show your work.) ANS: a. Average-cost b. FIFO method c. LIFO method

Ending Inventory Cost of Goods Sold $27,0001 $54,0002 $28,0004 $53,0005 7 $25,000 $56,0008

Gross Margin $66,0003 $67,0006 $64,0009

Goods available for sale: 5,000 + 3,000 + 8,000 + 2,000 = 18,000 units Cost of goods available for sale: [(5,000  $4) + (3,000  $5) + (8,000  $4.50) + (2,000  $5)] = $81,000 Ending inventory: 18,000 – 12,000 = 6,000 units 1 $81,000 ÷ 18,000 = $4.50  6,000 2 $81,000 – $27,000 3 $120,000 – $54,000 4 [(2,000  $5) + (4,000  $4.50)] 5 $81,000 – $28,000 6 $120,000 – $53,000 7 [(5,000  $4) + (1,000  $5)] 8 $81,000 – $25,000 9 $120,000 – $56,000 PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 12. Why is the LIFO cost flow assumption an acceptable valuation method for merchandise inventory when it rarely matches the physical movement of the product? ANS: LIFO is an acceptable inventory valuation method because it provides an excellent matching of current selling prices (revenue) with current merchandise costs (expense) on the income statement. This matching of current revenue and costs provides more accurate information in regard to the gross margin. . different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Critical Thinking KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 13. For each of the following descriptive statements, indicate whether FIFO or LIFO is being described. _____ 1. Preferable method for conforming to matching principle _____ 2. Preferable method for tax purposes under rising prices _____ 3. Results in more up-to-date ending inventory figure _____ 4. Results in fictitious profits under rising prices _____ 5. Produces higher income when prices are declining _____ 6. Produces higher ending inventory when prices are rising ANS: 1. LIFO 2. LIFO

3. 4.

FIFO FIFO

5. 6.

LIFO FIFO

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 14. Use the following information to calculate ending inventory on (a) a LIFO basis, (b) a FIFO basis, and (c) an average-cost basis. Assume a perpetual inventory system. Round answers to nearest dollar. Dec. 1 Beginning inventory 70 units @ $28 9 Purchases 30 units @ $32 17 Sales 25 units 22 Purchases 15 units @ $36 27 Sales 40 units ANS: Ending inventory: 70 + 30 – 25 + 15 – 40 = 50 a. LIFO: 50 units @ $28

b. FIFO: 5 units @ $28 30 units @ $32 15 units @ $36

$1,400 $1,400

$ 140 960 540 $1,640

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

c. Average-cost: Beg. inventory Purchase Balance

12/1 12/9 12/9

70 units @ $28 30 units @ $32 100 units @ $29.20*

$1,960 960 2,920

Sale Purchase Balance

12/17 12/22 12/22

25 units @ $29.20* 15 units @ $36 90 units @ $30.33*

730 540 2,730

Sale End. Inventory *Rounded.

12/27 12/31

40 units @ $30.33* 50 units @ $30.33*

1,213 $1,517

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Inventory pricing methods MSC: ACBSP-APC-17-Inventories Reporting 15. Braxton Company uses the retail method to estimate the cost of ending inventory. Use the following information to estimate the cost of Braxton's ending inventory on December 31, 2013, using the retail method. Show your answer in good form. Cost January 1, 2013, inventory Purchases Purchases returns and allowances Freight-in Sales Sales returns and allowances

Retail $ 35,000 162,500 (6,000) 8,500

$ 65,000 265,000 (10,000) 247,500 (7,500)

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: Braxton Company Estimated Cost of Ending Inventory December 31, 2013 Cost Inventory, January 1, 2013 $ 35,000

Retail $ 65,000

Purchases Purchases returns and allowances Freight-in

162,500 (6,000) 8,500

265,000 (10,000)

Net purchases for the period

$165,000

$255,000

Merchandise available for sale

$200,000

$320,000

Ratio of cost to retail price: $200,000 ÷ $320,000 = 62.5% Net sales during the period ($247,500 – $7,500)

240,000

Estimated inventory, December 31, 2013, at retail

$ 80,000

Ratio of cost to retail Estimated cost of inventory, December 31, 2013

62.5%

$ 50,000

PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Valuing inventory by estimation MSC: ACBSP-APC-17-Inventories Reporting

. different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 07 - Cash and Receivables TRUE/FALSE 1. Under discounting, a company sells its receivables in batches at a discount. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Financing receivables MSC: ACBSP-APC-12-Receivables Reporting 2. Purchasing receivables with recourse is riskier than purchasing them without recourse. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Financing receivables MSC: ACBSP-APC-12-Receivables Reporting 3. A contingent liability is generally not disclosed in the notes to the financial statements. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Financing receivables

OBJ: 1 LOC: Recall

4. A company's acceptance of credits cards, like MasterCard, is an example of factoring with recourse. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Financing receivables MSC: ACBSP-APC-12-Receivables Reporting 5. Having a compensating balance decreases a company's liquidity. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Cash management MSC: ACBSP-APC-15-Current Assets Reporting 6. Companies that experience seasonal cycles of business activity need not manage their cash as carefully as companies whose business is not cyclical. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Cash management MSC: ACBSP-APC-15-Current Assets Reporting 7. The receivable turnover is expressed in terms of times. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

8. The higher the receivable turnover, the lower the days' sales uncollected. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 9. Securitization expedites the receipt of cash from sales made on credit for a fee. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Financing receivables MSC: ACBSP-APC-12-Receivables Reporting 10. Accounts receivable and inventory are considered short-term financial assets. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Current assets MSC: ACBSP-APC-12-Receivables Reporting 11. It is considered unethical to use the estimate for bad debts to purposely manipulate the amount of net income. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 12. Notes payable and cash are examples of short-term financial assets. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Current assets MSC: ACBSP-APC-15-Current Assets Reporting 13. The fee for factoring with recourse is normally higher than it would be without recourse. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Financing receivables MSC: ACBSP-APC-12-Receivables Reporting 14. A discounted note represents a contingent liability because a potential liability exists. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Financing receivables MSC: ACBSP-APC-12-Receivables Reporting 15. Receivable turnover cannot be calculated without first knowing the days’ sales uncollected. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

16. A compensating balance refers to a minimum amount that must remain in a bank account as part of a credit-granting arrangement. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Cash management MSC: ACBSP-APC-15-Current Assets Reporting 17. The SEC requires companies to disclose the amount of compensating balances in a note to the financial statements. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Cash management MSC: ACBSP-APC-15-Current Assets Reporting 18. Loans to company employees should be classified on the balance sheet as receivables from employees. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Current assets MSC: ACBSP-APC-12-Receivables Reporting 19. Trade credit arises from credit sales. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 20. Compensating balances are kept as part of the Cash account balance on the balance sheet. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Cash management MSC: ACBSP-APC-15-Current Assets Reporting 21. A compensating balance restricts cash; in effect, it increases the interest on the loan and reduces a company's liquidity. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Cash management MSC: ACBSP-APC-15-Current Assets Reporting 22. Credit balances in customer accounts appear on the balance sheet as a current asset. ANS: F PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 23. Bad debts are considered an expense of selling on credit. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Accounts receivable MSC: ACBSP-APC-12-Receivables Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

24. When Company A discounts, with recourse, a note to Company B, Company A has a contingent liability until the note is paid. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Financing receivables MSC: ACBSP-APC-12-Receivables Reporting 25. A company that factors its receivables will have a less favorable receivable turnover than a company that does not factor. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Ratio analysis | Accounts receivable MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Comprehension

26. Following a stringent credit-granting policy will probably result in fewer defaults by customers. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 27. Customers with credit balances in their accounts are entitled to a refund if they do not intend to make any future purchase. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 28. Most operating transactions do not use or generate cash. ANS: F PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Current assets MSC: ACBSP-APC-15-Current Assets Reporting 29. A successful credit policy balances an acceptable level of credit losses with the potential for profit from total credit sales. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Risk assessment MSC: ACBSP-APC-12-Receivables Reporting 30. A petty cash fund is an example of an imprest system. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Petty cash procedures MSC: ACBSP-APC-15-Current Assets Reporting

31. In a petty cash fund, the current cash amount plus the receipts submitted should equal the original fixed amount. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Petty cash procedures MSC: ACBSP-APC-15-Current Assets Reporting 32. When an individual uses a debit card to make a purchase, the amount of the purchase is deducted directly from that individual's bank account. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Cash and cash equivalents MSC: ACBSP-APC-15-Current Assets Reporting 33. Cash equivalents are categorized as cash on the balance sheet. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Cash and cash equivalents MSC: ACBSP-APC-15-Current Assets Reporting 34. Cash equivalents are defined as investments that carry a term of less than one year. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Cash and cash equivalents MSC: ACBSP-APC-15-Current Assets Reporting 35. Automated teller machines (ATMs) are used primarily by consumers rather than by businesses. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Cash and cash equivalents MSC: ACBSP-APC-15-Current Assets Reporting 36. On a bank reconciliation, outstanding checks are deducted from the balance per books. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bank reconciliation MSC: ACBSP-APC-11-Bank Reconciliation 37. On a bank reconciliation, interest income would be added to the balance per book. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bank reconciliation MSC: ACBSP-APC-11-Bank Reconciliation 38. A bank reconciliation begins with the balances as of the beginning of the month. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bank reconciliation MSC: ACBSP-APC-11-Bank Reconciliation © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

39. On a bank reconciliation, an NSF check would be deducted from the balance per book. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bank reconciliation MSC: ACBSP-APC-11-Bank Reconciliation 40. On a bank reconciliation, a deposit in transit would be added to the balance per bank. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bank reconciliation MSC: ACBSP-APC-11-Bank Reconciliation 41. On a bank reconciliation, a bank service charge would be added to the balance per books. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bank reconciliation MSC: ACBSP-APC-11-Bank Reconciliation 42. When a bank reconciliation balances, no errors could have been made by the bank or the company. ANS: F PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bank reconciliation MSC: ACBSP-APC-11-Bank Reconciliation 43. A debit memorandum means that an amount was added to the bank balance; a credit memorandum means that an amount was deducted. ANS: F PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bank reconciliation MSC: ACBSP-APC-11-Bank Reconciliation 44. A check that is outstanding for two consecutive months will appear only on the first month's bank reconciliation. ANS: F PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bank reconciliation MSC: ACBSP-APC-11-Bank Reconciliation 45. Excess cash should be kept in a petty cash fund. ANS: F PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Cash and cash equivalents MSC: ACBSP-APC-15-Current Assets Reporting 46. It is usually a good business practice to maintain as large a balance in the Cash account as possible. ANS: F PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Cash and cash equivalents MSC: ACBSP-APC-15-Current Assets Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

47. The use of electronic funds transfers makes check writing necessary. ANS: F PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Cash and cash equivalents MSC: ACBSP-APC-15-Current Assets Reporting 48. Under the direct charge-off method, uncollectible accounts must be estimated if the matching rule is to be followed. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 49. Because bad debt losses are incurred to generate sales, they should be charged against the sales that they helped generate. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 50. The direct charge-off method makes an attempt to match bad-debt losses with revenues. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 51. The allowance method of handling bad debts violates the matching principle. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 52. The account Allowance for Uncollectible Accounts is adjusted at the end of the accounting period. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 53. The allowance for uncollectible accounts is similar to accumulated depreciation in that it represents the total of all accounts written off over the years. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 54. Uncollectible accounts cannot be estimated because it is not possible to know which accounts will not be collected. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

55. The Allowance for Uncollectible Accounts is a contra-asset account. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 56. The accounts receivable aging method of estimating uncollectible accounts is in violation of the matching principle. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 57. Under the accounts receivable aging method, the balance in Allowance for Uncollectible Accounts must be considered prior to adjusting for estimated uncollectible accounts. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 58. When the direct method is used, the write-off of an account receivable results in an expense at the time of write-off. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 59. When an account receivable that was previously written off is collected, it is necessary to reverse the entry for the write-off before recording the collection. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 60. The allowance method of recognizing uncollectible accounts is not in accordance with good accounting practice. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 61. Both the allowance method and the direct charge-off method are acceptable for tax purposes. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting

62. When using the allowance method, year-end adjustments for uncollectible accounts expense must be made. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 63. Under the allowance method, Uncollectible Accounts Expense is recorded when an individual customer defaults. ANS: F PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 64. The existence of uncollectible accounts is not evidence of poor credit policies. ANS: T PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 65. A promissory note may be issued for an amount to be determined at a future date. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Notes receivable MSC: ACBSP-APC-15-Current Assets Reporting 66. The debtor named in a promissory note is called the maker. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Notes receivable MSC: ACBSP-APC-15-Current Assets Reporting 67. A 60-day note dated December 10 is due on February 10. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Notes receivable MSC: ACBSP-APC-15-Current Assets Reporting 68. The maker of a note records Notes Receivable. ANS: F PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Notes receivable MSC: ACBSP-APC-15-Current Assets Reporting 69. If a promissory note is dishonored, the payee should record interest income. ANS: T PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Notes receivable MSC: ACBSP-APC-15-Current Assets Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

70. Interest on a nine-month, 9 percent, $4,000 note is calculated by multiplying $4,000  9/100  9/12. ANS: T PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Notes receivable MSC: ACBSP-APC-15-Current Assets Reporting 71. The holder of a note adjusts for accrued interest by debiting Interest Receivable and crediting Interest Income. ANS: T PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Notes receivable MSC: ACBSP-APC-15-Current Assets Reporting MULTIPLE CHOICE 1. Cash consists of all of the following except a. deposits in checking accounts. b. checks from customers. c. compensating balances. d. receivables from customers. ANS: D PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Cash and cash equivalents MSC: ACBSP-APC-15-Current Assets Reporting 2. A company's acceptance of credit cards like Visa is an example of a. securitization. b. factoring with recourse. c. discounting. d. factoring without recourse. ANS: D PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Financing receivables MSC: ACBSP-APC-15-Current Assets Reporting 3. Which of the following accounts is classified as a short-term financial asset? a. Inventory b. Notes Receivable c. Machinery d. Prepaid Insurance ANS: B PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Short-term assets' management issues MSC: ACBSP-APC-15-Current Assets Reporting

OBJ: 1 LOC: Recall

4. Which of the following is not classified as a short-term financial asset? a. Accounts Receivable b. Notes Receivable c. Inventory d. Cash ANS: C PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Short-term assets' management issues MSC: ACBSP-APC-15-Current Assets Reporting

OBJ: 1 LOC: Recall

5. The sale or transfer of accounts receivable to raise funds is called a. discounting. b. collateralizing. c. pledging. d. factoring. ANS: D PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Financing receivables MSC: ACBSP-APC-15-Current Assets Reporting 6. Which of the following topics involves a contingent liability? a. Installment accounts receivable b. A factored accounts receivable with recourse c. Securitization d. A factored accounts receivable without recourse ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Financing receivables MSC: ACBSP-APC-12-Receivables Reporting 7. The receivable turnover is expressed in terms of a. times. b. days. c. a percentage. d. dollars. ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 8. Days' sales uncollected equals 365 days divided by a. cash. b. net accounts receivable. c. net sales. d. the receivable turnover. ANS: D PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

9. The most liquid of all assets is a. cash. b. notes receivable. c. machinery. d. accounts receivable. ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Current assets MSC: ACBSP-APC-15-Current Assets Reporting 10. Which of the following would not be considered cash? a. Postage stamps b. Currency on hand c. Money orders from customers d. Bank deposits ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Cash and cash equivalents MSC: ACBSP-APC-15-Current Assets Reporting 11. Customers' accounts with credit balances should be disclosed as a(n) a. expense on the income statement. b. current liability on the balance sheet. c. offset to Accounts Receivable on the asset side of the balance sheet. d. note to the financial statements. ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 12. Which of the following statements is false about factoring without recourse? a. The seller of the receivables is liable upon default of the debtor. b. The factor's risk is higher than if the factoring were with recourse. c. An example is the use of major credit cards. d. The fee will be higher than if the factoring were with recourse. ANS: A PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Financing receivables MSC: ACBSP-APC-12-Receivables Reporting 13. Which of the following situations results in a contingent liability? a. Making a credit card sale b. Dishonoring a note c. Estimating uncollectible accounts expense d. Discounting a note ANS: D PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Financing receivables MSC: ACBSP-APC-12-Receivables Reporting

14. Which of the following statements is not true when FLK Company discounts a note receivable to the bank? a. FLK may ultimately have to pay the bank when the note is due. b. If the maker of the note pays the bank on time, no liability will result to FLK. c. FLK will receive the maturity value from the bank. d. A contingent liability arises for FLK. ANS: C PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Financing receivables MSC: ACBSP-APC-12-Receivables Reporting 15. The goal of a successful credit policy is to maximize the potential profit on total credit sales while a. limiting credit losses to an acceptable level. b. minimizing the number of credit customers. c. keeping credit sales as low as possible. d. selling only to customers who will pay. ANS: A PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 16. Which of the following would not be included in Cash or Cash Equivalents? a. Sixty-day U.S. Treasury bills held b. Deposits in bank checking accounts c. Checks and money orders received from customers d. Twelve-month certificates of deposit held ANS: D PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Cash and cash equivalents MSC: ACBSP-APC-15-Current Assets Reporting 17. An example of a cash equivalent is a. a 120-day time deposit. b. notes receivable. c. accounts receivable. d. a 60-day certificate of deposit. ANS: D PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Cash and cash equivalents MSC: ACBSP-APC-15-Current Assets Reporting 18. Which of the following would not be a valid reason to keep some currency on hand at a place of business? a. To pay expenses that are impractical to pay by check b. To make up for any imbalance in the books c. To advance money to employees d. To provide money for cash registers ANS: B PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Petty cash procedures MSC: ACBSP-APC-15-Current Assets Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

19. Which of the following items on a bank reconciliation would require a journal entry on the company's books? a. A deposit in transit b. Outstanding checks c. A bank service charge d. A bank error on the bank statement ANS: C PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bank reconciliation MSC: ACBSP-APC-11-Bank Reconciliation 20. All of the following bank reconciliation items would result in a journal entry on the company's books except a. error in recording deposit. b. fee for collection of note by bank. c. NSF check of customer. d. outstanding checks. ANS: D PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bank reconciliation MSC: ACBSP-APC-11-Bank Reconciliation 21. Which of the following bank reconciliation items would result in a journal entry on the company's books? a. Bank error b. Interest income c. Deposit in transit d. Outstanding checks ANS: B PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bank reconciliation MSC: ACBSP-APC-11-Bank Reconciliation 22. Which of the following would be added to the balance per books on a bank reconciliation? a. Deposits in transit b. Outstanding checks c. Collection fee d. Interest income ANS: D PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bank reconciliation MSC: ACBSP-APC-11-Bank Reconciliation 23. An NSF check should appear in which section of the bank reconciliation? a. Deduction from the balance per books b. Deduction from the balance per bank c. Addition to the balance per books d. Addition to the balance per bank ANS: A PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bank reconciliation MSC: ACBSP-APC-11-Bank Reconciliation © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

24. Which of the following would be added to the balance per bank? a. Outstanding checks b. Interest income c. Collection of a note receivable by the bank d. Deposit in transit ANS: D PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bank reconciliation MSC: ACBSP-APC-11-Bank Reconciliation 25. Which of the following would be deducted from the balance per bank? a. An issued check that the company forgot to record on its books b. Bank service charge c. Outstanding checks d. NSF check ANS: C PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bank reconciliation MSC: ACBSP-APC-11-Bank Reconciliation 26. A check written for $354 is incorrectly recorded by a company as $534. On the bank reconciliation the $180 error should be a. deducted from the balance per books. b. added to the balance per bank. c. deducted from the balance per bank. d. added to the balance per books. ANS: D PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bank reconciliation MSC: ACBSP-APC-11-Bank Reconciliation 27. On a bank reconciliation, interest earned on a checking account should be a. deducted from the balance per books. b. added to the balance per books. c. added to the balance per bank. d. deducted from the balance per bank. ANS: B PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bank reconciliation MSC: ACBSP-APC-11-Bank Reconciliation 28. Which of the following bank reconciliation items would not result in a journal entry? a. Service charge b. NSF check of customer c. Interest income d. Deposits in transit ANS: D PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bank reconciliation MSC: ACBSP-APC-11-Bank Reconciliation

29. During the month, a company learns that a check it issued has been accidentally destroyed. On the bank reconciliation, the company would a. deduct the amount from the balance per bank. b. deduct the amount from the balance per books. c. add the amount to the balance per bank. d. add the amount back to the balance per books. ANS: D PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bank reconciliation MSC: ACBSP-APC-11-Bank Reconciliation 30. A company issues a check for $792 but records it as $729. On the bank reconciliation, the $63 error should be a. deducted from the balance per books. b. added to the balance per bank. c. deducted from the balance per bank. d. added to the balance per books. ANS: A PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bank reconciliation MSC: ACBSP-APC-11-Bank Reconciliation 31. Which of the following would be deducted from the balance per books on a bank reconciliation? a. Notes collected by the bank b. Deposits in transit c. Service charges d. Outstanding checks ANS: C PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bank reconciliation MSC: ACBSP-APC-15-Current Assets Reporting 32. For which of the following errors should the appropriate amount be added to the balance per bank on a bank reconciliation? a. A returned $600 check recorded by bank as $500 b. Check for $164 recorded as $146 c. Deposit of $800 recorded by bank as $600 d. Check for $69 recorded as $96 ANS: C PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bank reconciliation MSC: ACBSP-APC-11-Bank Reconciliation 33. The allowance for uncollectible accounts is necessary because a. a liability results when a credit sale is made. b. when recording uncollectible accounts expense, it is not possible to predict specifically which accounts will not be collected. c. management should know how many credit losses have been sustained over the years. d. uncollected accounts that are written off must be accumulated in a separate account.

ANS: B PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 34. The account Allowance for Uncollectible Accounts is classified as a(n) a. contra account to Bad Debt Expense. b. expense. c. asset. d. contra account to Accounts Receivable. ANS: D PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 35. Under the allowance method, Uncollectible Accounts Expense is recorded a. for an estimated amount. b. several times during the accounting period. c. when an individual account is written off. d. for a known amount. ANS: A PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 36. Which of the following methods of recording uncollectible accounts expense would be described best as an income statement method? a. Both percentage of net sales method and accounts receivable aging method b. Direct charge-off method c. Percentage of net sales method d. Accounts receivable aging method ANS: C PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 37. Which of the following methods of recording uncollectible accounts expense would be described best as a balance sheet method? a. Accounts receivable aging method b. Percentage of net sales method c. Direct charge-off method d. Both percentage of net sales method and direct charge-off method ANS: A PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 38. The balance in Allowance for Uncollectible Accounts must be considered prior to end-of-period adjustment when using which of the following methods? a. Both percentage of net sales method and accounts receivable aging method b. Both direct charge-off method and percentage of net sales method c. Percentage of net sales method d. Accounts receivable aging method © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: D PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 39. The matching rule a. results in the recording of a known amount for bad-debt losses. b. necessitates the recording of an estimated amount for bad debts. c. requires that all bad-debt losses be recorded when an individual customer defaults. d. is violated when the allowance method is employed. ANS: B PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 40. If the amount of uncollectible accounts expense is overstated at year end, a. Allowance for Uncollectible Accounts will be understated. b. net income will be overstated. c. net Accounts Receivable will be understated. d. total liabilities and stockholders' equity will be overstated. ANS: C PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 41. The matching rule relates to credit losses by stating that Uncollectible Accounts Expense should be recorded a. in the period of the loss. b. for an exact amount. c. in the same period as allowed for tax purposes. d. in the period of the sale. ANS: D PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 42. Under the allowance method, when a specific account is written off, a. total assets will be unchanged. b. expenses will increase. c. net income will decrease. d. total assets will decrease. ANS: A PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 43. A company that uses the allowance method writes off a specific account as uncollectible, but then the customer pays. The entries made upon receiving payment will a. decrease Cash. b. decrease Accounts Receivable. c. increase Allowance for Uncollectible Accounts. d. decrease Uncollectible Accounts Expense. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: C PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 44. Under the allowance method, when a year-end adjustment is made for estimated uncollectible accounts, a. total assets decrease. b. total assets increase. c. expenses are unchanged. d. net income is unchanged. ANS: A PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 45. One might infer from a debit balance in Allowance for Uncollectible Accounts that a. a posting error has been made. b. Uncollectible Accounts Expense has been overestimated. c. the accounts receivable aging method apparently is being used. d. more has been written off than had been estimated. ANS: D PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 46. Under the direct charge-off method of dealing with uncollectible accounts, a. revenues and expenses are properly matched. b. Accounts Receivable is shown on the balance sheet at net realizable value. c. Uncollectible Accounts Expense is recorded in the period of the sale. d. no Allowance for Uncollectible Accounts exists. ANS: D PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 47. If the amount of uncollectible accounts expense is understated at year end, a. net Accounts Receivable will be overstated. b. total liabilities will be overstated. c. net income will be understated. d. Allowance for Uncollectible Accounts will be overstated. ANS: A PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting

48. Use this information to answer the following question. The general ledger account for Accounts Receivable shows a debit balance of $100,000. Allowance for Uncollectible Accounts has a credit balance of $2,000. Net sales for the year were $1,000,000. In the past, 2 percent of sales have proved uncollectible, and an aging of accounts receivable accounts results in an estimate of $27,000 of uncollectible accounts. Using the accounts receivable aging method, the Allowance for Uncollectible Accounts balance (after adjustment) would be a. $29,000. b. $28,000. c. $27,000. d. $25,000. ANS: C PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 49. Use this information to answer the following question. The general ledger account for Accounts Receivable shows a debit balance of $100,000. Allowance for Uncollectible Accounts has a credit balance of $2,000. Net sales for the year were $1,044,000. In the past, 2 percent of sales have proved uncollectible, and an aging of accounts receivable accounts results in an estimate of $27,000 of uncollectible accounts. Using the percentage of net sales method, Uncollectible Accounts Expense would be debited for a. $18,880. b. $22,880. c. $2,000. d. $20,880. ANS: D $1,044,000 x .02 = $20,880 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 50. Use this information to answer the following question. The general ledger account for Accounts Receivable shows a debit balance of $100,000. Allowance for Uncollectible Accounts has a credit balance of $2,000. Net sales for the year were $930,000. In the past, 2 percent of sales have proved uncollectible, and an aging of accounts receivable accounts results in an estimate of $27,000 of uncollectible accounts.

Using the percentage of net sales method, the Allowance for Uncollectible Accounts balance (after adjustment) would be a. $16,600. b. $18,600. c. $20,600. d. $2,000. ANS: C $930,000 x .02 = $18,600 $18,600 + $2,000 = $20,600 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 51. Use this information to answer the following question. The general ledger account for Accounts Receivable shows a debit balance of $100,000. Allowance for Uncollectible Accounts has a credit balance of $2,000. Net sales for the year were $1,000,000. In the past, 2 percent of sales have proved uncollectible, and an aging of accounts receivable accounts results in an estimate of $35,800 of uncollectible accounts. Using the accounts receivable aging method, the Uncollectible Accounts Expense would be a. $33,800. b. $36,800. c. $35,800. d. $37,800. ANS: A $35,800 – $2,000 = $33,800 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 52. Using the percentage of net sales method, uncollectible accounts expense for the year is estimated to be $54,000. If the balance of the Allowance for Uncollectible Accounts is an $18,000 credit before adjustment, what is the balance after adjustment? a. $72,000 b. $38,000 c. $54,000 d. $18,000 ANS: A $54,000 + $18,000 = $72,000 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting

53. Using the accounts receivable aging method, estimated uncollectible accounts are $50,000. If the balance of the Allowance for Uncollectible Accounts is an $18,000 debit before adjustment, what is the balance after adjustment? a. $68,000 b. $50,000 c. $18,000 d. $32,000 ANS: B PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 54. The balance of Accounts Receivable, net of the allowance account, is $70,000 before the write-off of a $5,600 account. What is the Accounts Receivable balance, net of the allowance account, after the write-off? a. $70,000 b. $64,400 c. $5,600 d. $75,600 ANS: A PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 55. A company performs the aging of accounts receivable calculation and arrives at an estimate for uncollectible accounts of $800. If Allowance for Uncollectible Accounts has a debit balance of $300 prior to the year-end adjustment, for how much should the adjustment be journalized? a. $1,100 b. $800 c. $300 d. $5,500 ANS: A $800 + $300 = $1,100 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 56. A company has net sales of $100,000 during the year. At year end (before an adjustment is made), Allowance for Uncollectible Accounts has a credit balance of $5,000. If the company estimates that 3 percent of net sales are uncollectible and the company uses percentage of net sales method, what is the balance in the allowance account after the year-end adjustment has been made? a. $3,000 debit balance b. $3,000 credit balance c. $8,000 credit balance d. $2,000 debit balance ANS: C $100,000 x .03 = $3,000 $3,000 + $5,000 = $8,000

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 57. The general ledger account for Accounts Receivable shows a debit balance of $50,000. Allowance for Uncollectible Accounts has a credit balance of $3,000. Net sales for the year were $500,000. In the past, 3 percent of sales have proved uncollectible, and an aging of accounts receivable resulted in an estimate of $20,000 of uncollectible accounts receivable. Using the percentage of net sales method, the entry to record the Uncollectible Accounts Expense is: a. Uncollectible Accounts Expense 12,000 Allowance for Uncollectible Accounts 12,000 b. Uncollectible Accounts Expense Allowance for Uncollectible Accounts

15,000

c. Uncollectible Accounts Expense Allowance for Uncollectible Accounts

18,000

d. Uncollectible Accounts Expense Allowance for Uncollectible Accounts

15,000

18,000 20,000 20,000

ANS: B $500,000 x .03 = $15,000 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 58. The general ledger account for Accounts Receivable shows a debit balance of $50,000. Allowance for Uncollectible Accounts has a credit balance of $3,000. Net sales for the year were $500,000. In the past, 3 percent of sales have proved uncollectible, and an aging of accounts receivable resulted in an estimate of $20,000 of uncollectible accounts receivable. Using the percentage of net sales method, the Allowance for Uncollectible Accounts balance (after adjustment) would be a. $15,000. b. $20,000. c. $18,000. d. $12,000. ANS: C $500,000 x .03 = $15,000 $15,000 + $3,000 = $18,000 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting

59. The general ledger account for Accounts Receivable shows a debit balance of $50,000. Allowance for Uncollectible Accounts has a credit balance of $3,000. Net sales for the year were $500,000. In the past, 3 percent of sales have proved uncollectible, and an aging of accounts receivable resulted in an estimate of $20,000 of uncollectible accounts receivable. Using the accounts receivable aging method, the entry to record the Uncollectible Accounts Expense is: a. Uncollectible Accounts Expense 21,500 Allowance for Uncollectible Accounts 21,500 b. Uncollectible Accounts Expense Allowance for Uncollectible Accounts

17,000 17,000

c. Uncollectible Accounts Expense Allowance for Uncollectible Accounts

20,000

d. Uncollectible Accounts Expense Allowance for Uncollectible Accounts

23,000

20,000

23,000

ANS: B $20,000 – $3,000 = $17,000 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 60. The general ledger account for Accounts Receivable shows a debit balance of $50,000. Allowance for Uncollectible Accounts has a credit balance of $3,000. Net sales for the year were $500,000. In the past, 3 percent of sales have proved uncollectible, and an aging of accounts receivable resulted in an estimate of $20,000 of uncollectible accounts receivable. Using the accounts receivable aging method, the Allowance for Uncollectible Accounts balance (after adjustment) would be a. $23,000. b. $20,000. c. $17,000. d. $21,500. ANS: B PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 61. You have just received notice that Agnes Fisher, a customer of yours with an Accounts Receivable balance of $200, has gone bankrupt and will not be making any future payments. Assuming you use the allowance method, the journal entry you make is to a. debit Uncollectible Accounts Expense and credit Accounts Receivable. b. debit Allowance for Uncollectible Accounts and credit Uncollectible Accounts Expense. c. debit Uncollectible Accounts Expense and credit Allowance for Uncollectible Accounts. d. debit Allowance for Uncollectible Accounts and credit Accounts Receivable.

ANS: D PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 62. Cottage Sales Company made most of its sales on credit during its first year of operation, 2013. At the end of the year, accounts receivable amounted to $100,000. On December 31, 2013, management reviewed the collectible status of the accounts receivable. Approximately $6,000 of the $100,000 of accounts receivable were estimated to be uncollectible. As per the accounts receivable aging method the adjusting entry that would be made on December 31 of that year is: a. Uncollectible Accounts Expense 6,000 Accounts receivable 6,000 b. Allowance for Uncollectible Accounts 10,000 Uncollectible Accounts Expense c. Uncollectible Accounts Expense Allowance for Uncollectible Accounts

10,000 6,000 6,000

d. Allowance for Uncollectible Accounts 10,000 Accounts receivable

10,000

ANS: C PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 63. Assume that on March 15, a customer who owes Chisago sales company $3,000 is declared bankrupt by a federal court. The entry that would be made to write off this account is: a. Allowance for uncollectible 3,000 Accounts receivable, customer account 3,000 b. Accounts receivable, customer account Cash

3,000

c. Accounts receivable, customer account Notes receivable

3,000

d. Cash

3,000 Accounts Receivable, customer account

3,000

ANS: A PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Notes receivable MSC: ACBSP-APC-15-Current Assets Reporting 64. Each of the following is a characteristic of a promissory note except a(n) a. maturity date that can be determined on the date the note is signed. b. payee who has an unconditional right to receive a definite amount on a definite date. c. maker who agrees to pay a definite sum subject to certain conditions. d. amount to be paid that can be determined on the date the note is signed. ANS: C PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Notes receivable MSC: ACBSP-APC-15-Current Assets Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

65. Which of the following statements is false regarding promissory notes? a. They are sometimes used to extend past-due accounts. b. They can be resold to banks. c. They must be held by the maker until maturity. d. They are often received upon the sale of machinery and automobiles. ANS: C PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Notes receivable MSC: ACBSP-APC-15-Current Assets Reporting 66. A dishonored note means the payee's entry includes a a. credit to Accounts Receivable. b. debit to Interest Expense. c. debit to Notes Receivable. d. credit to Interest Income. ANS: D PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Notes receivable MSC: ACBSP-APC-15-Current Assets Reporting 67. Interest on a note receivable may be calculated without knowledge of the a. principal amount. b. rate of interest. c. note's maturity date. d. note's duration. ANS: C PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Notes receivable MSC: ACBSP-APC-15-Current Assets Reporting 68. A note receivable dated May 23 and due in 90 days would be due on a. August 20. b. August 21. c. August 23. d. August 22. ANS: B 90 Interest period – 8 Days remaining in May (31 – 23) 82 8 – 30 days in June 52 – 31 days in July 21 due date in August PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Notes receivable MSC: ACBSP-APC-15-Current Assets Reporting

69. The interest on a three-month, 12 percent, $16,600 note receivable is a. $498. b. $166. c. $332. d. $1,992. ANS: A $16,600 x .12 x 3/12 = $498 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Notes receivable MSC: ACBSP-APC-15-Current Assets Reporting 70. The maturity value of a 60-day, 9 percent, $2,000 note receivable is a. $1,970.33. b. $1,820.89. c. $2,029.59. d. $2,180.12. ANS: C Interest receivable: $2,000 x .09 x 60/365 = $29.59 Maturity value: $2,000 + $29.59 = $2,029.59 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Notes receivable MSC: ACBSP-APC-15-Current Assets Reporting 71. Interest on a 90-day, 10 percent, $30,000 note receivable is a. $7,502.31. b. $865.14. c. $739.73. d. $3,001.89. ANS: C $30,000 x .10 x 90/365 = $739.73 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Notes receivable MSC: ACBSP-APC-15-Current Assets Reporting 72. A promissory note is executed in June. When the note is paid the following January, the payee's entry includes (assuming a calendar-year accounting period and no reversing entries) a a. debit to Interest Income. b. credit to Cash. c. credit to Interest Receivable. d. debit to Notes Receivable. ANS: C PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Notes receivable MSC: ACBSP-APC-15-Current Assets Reporting

73. Assume that the $2,000, 90-day, 8 percent note was received on August 31 and that the fiscal year ended on September 30. The adjusting entry that would be made to record the interest receivable is (amounts rounded to nearest dollar): a. Interest receivable 13 Interest Income 13 b. Notes receivable Interest Income

13 13

c. Accounts receivable Cash

d. Interest income Accounts receivable

ANS: A $2,000 x .08 x 30/365 = $13 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Accrued interest MSC: ACBSP-APC-15-Current Assets Reporting 74. Assume that on August 1, a $6,000, 90-day, 12 percent note receivable was received from a customer as an extension of his of past – due account. The entry that would be made to record the note is: a. Notes receivable 6,000 Cash 6,000 b. Notes receivable Interest Income account

6,000

c. Notes receivable Accounts receivable

6,000

d. Cash

6,000 Accounts receivable

6,000

ANS: C PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Notes receivable MSC: ACBSP-APC-15-Current Assets Reporting

75. Assume that on December 1, a note which has a face value of $18,000, bears interest at 10 percent for 90 days, received from a customer as an extension of his past-due account is dishonored. The entry that would be made to record the dishonor (ignoring interest) is: a. Notes receivable 18,000 Cash 18,000 b. Accounts receivable Cash

18,000

c. Accounts receivable Notes receivable

18,000

d. Cash

18,000

Accounts Receivable

18,000

ANS: C PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Notes receivable MSC: ACBSP-APC-15-Current Assets Reporting 76. Assume that on December 1, a note which has a face value of $1,000, bears interest at 6 percent for 90 days, received from a customer as an extension of his of past-due account is honored on due date. The entry that would be made to record the receipt on due date (ignoring interest) is: a. Notes receivable 1,000 Cash 1,000 b. Accounts receivable Cash

1,000

c. Accounts receivable Notes receivable

1,000

d. Cash

1,000 Notes receivable

1,000

ANS: D PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Notes receivable MSC: ACBSP-APC-15-Current Assets Reporting SHORT ANSWER 1. What is a contingent liability, and how does it relate to the discounting of a note receivable at the bank? ANS: A contingent liability is a potential liability that may or may not become an actual liability. When a company discounts a note receivable at the bank, the company is contingently liable to the bank upon default by the note's maker.

PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Notes receivable MSC: ACBSP-APC-12-Receivables Reporting 2. What purpose is served by a factoring arrangement? What does it mean to factor accounts receivable with recourse? ANS: Factoring involves the sale or transfer of accounts receivable to a buyer for the purpose of obtaining cash prior to customer payment. Factoring with recourse means that the seller of the accounts receivable is liable to the purchaser upon default of the customer. PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Financing receivables MSC: ACBSP-APC-12-Receivables Reporting 3. On a balance sheet, what items normally are included in Cash? ANS: The items normally included in Cash are coins and currency on hand, checks and money orders from customers, and deposits in bank accounts. PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Cash and cash equivalents MSC: ACBSP-APC-15-Current Assets Reporting 4. What is a compensating balance? By whom is it required? ANS: A compensating balance is a minimum amount that a bank requires a company to keep in its bank account as part of a credit-granting arrangement. PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement KEY: Short-term assets' management issues MSC: ACBSP-APC-15-Current Assets Reporting

LOC: Recall

5. Compute the correct amount for each letter in the following table:

Balance per bank statement Deposits in transit Outstanding checks Balance per books

Case 1 $ a 2,400 6,000 13,800

Case 2 $35,600 b 4,000 37,600

Case 3 $1,260 200 c 900

Case 4 $7,960 500 300 d

ANS: a. $17,400 ($13,800 + $6,000 – $2,400) b. $6,000 ($37,600 + $4,000 – $35,600) c. $560 ($1,260 + $200 – $900) d. $8,160 ($7,960 + $500 – $300) © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bank reconciliation MSC: ACBSP-APC-11-Bank Reconciliation 6. For each of the items below, use the following letters to identify the correct treatment in a bank reconciliation. A = Add to balance per bank B = Deduct from balance per bank

C = Add to balance per books D = Deduct from balance per books

____ 1. Interest income ____ 2. Outstanding checks ____ 3. Check written for $89, but $98 recorded in books ____ 4. Customer's NSF check ____ 5. Note receivable collected by bank ____ 6. Deposit made for $70, but $700 recorded in books ____ 7. Bank check-printing charge ____ 8. Check written for $52, but $25 recorded in books ____ 9. Deposits in transit ____ 10. Bank fee for collection on note receivable ANS: 1. C 2. B 3. C 4. D 5. C 6. D 7. D 8. D 9. A 10. D PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bank reconciliation MSC: ACBSP-APC-11-Bank Reconciliation 7. How is the account Allowance for Uncollectible Accounts presented in the financial statements, and what purpose does this presentation serve? ANS: Allowance for Uncollectible Accounts is presented in the asset section of the balance sheet as a contra account to Accounts Receivable. It serves to reduce the receivables to the net amount ultimately expected to be realized. PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting

8. Using the following transactions for the year, show how the T-account below would appear after all appropriate postings have been made. Assume an opening balance of $1,800. Mar. June Dec.

15 23 9 31

Wrote off an individual account for $2,000. Reinstated the account written off on February 13. Wrote off an individual account for $1,400. Made year-end adjustment of $1,600 for estimated uncollectible accounts.

Allowance for Uncollectible Accounts 1/1 1,800

ANS:

3/15 6/9

Allowance for Uncollectible Accounts 2,000 1/1 1,800 1,400 3/23 2,000 12/31 1,600

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 9. Sally's Dress Shop has $5,200 in Accounts Receivable at December 31. The company's accountant estimates that $300 of the $5,200 will never be collected. Complete the current asset section of the balance sheet below. Current assets Cash Short-term investments Accounts receivable

$14,000 4,000

Inventory Total current assets

50,000 $

ANS: Current assets Cash Short-term investments Accounts receivable Less allowance for uncollectible accounts Inventory Total current assets

$14,000 4,000 $5,200 300

4,900 50,000 $72,900

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 10. On December 31, Skinner Enterprises has a $400 debit balance in Allowance for Uncollectible Accounts. If an accounts receivable aging method analysis indicated that an estimated $3,200 of December 31 receivables are uncollectible, for what amount would the adjusting entry for uncollectible accounts be recorded? (Show your work.) ANS: $3,600 ($3,200 + $400) PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 11. On December 31, Becker Products has a $600 credit balance in Allowance for Uncollectible Accounts. It estimates that 4 percent of the $120,000 in sales are uncollectible. After the appropriate adjusting entry for uncollectible accounts has been made using percentage of net sales method, what will be the balance in Allowance for Uncollectible Accounts? Indicate if the balance is a debit or credit. (Show your work.) ANS: $5,400 credit ($120,000  .04 = $4,800 + $600) PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 12. At year end, Erwin Graphics has a $350 debit balance in Allowance for Uncollectible Accounts. It estimates that 5 percent of the $20,000 in sales are uncollectible. Give the amount that should be used in the adjusting entry using percentage of net sales method to record uncollectible accounts. (Show your calculations.) ANS: $1,000 credit to Allowance for Uncollectible Accounts ($20,000  .05) PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting

13. At year end, Blue Earth Company has a $3,600 credit balance in Allowance for Uncollectible Accounts. If an accounts receiving aging method analysis indicates that an estimated $22,800 of year-end receivables are uncollectible, what will be the balance in Allowance for Uncollectible Accounts after the appropriate adjusting entry for uncollectible accounts has been made? Indicate if the balance is a debit or credit. ANS: $22,800 credit PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 14. Use the following T account to answer the questions below (assume a calendar-year accounting period). Allowance for Uncollectible Accounts 1/10 300 1/15 300 5/12 440 12/31 3,600

What apparently occurred on the following dates? a. January 10 b. January 15 c. May 12 d. December 31 ANS: a. Wrote off individual account. b. Reinstated account written off on January 10. c. Wrote off individual account. d. Made year-end estimate for uncollectible account losses. PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 15. In the journal provided, prepare entries for the following (assume a calendar-year accounting period): Omit explanations. Dec. 1

Received a three-month, 15 percent note receivable for $800 from a customer as an extension of his past-due account. 31 Made the year-end adjustment for accrued interest. Mar. 1 Received full payment on the note.

General Journal Description

Date

Post. Ref.

Debit

Page 1 Credit

ANS: General Journal Description

Date Dec. 1

Mar. 1

Post. Ref.

Page 1 Credit

Debit

Notes Receivable Accounts Receivable

800

Interest Receivable Interest Income ($800  .15  1/12)

Cash Notes Receivable Interest Receivable Interest Income ($800  .15  2/12)

830

800

800 10 20

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Notes receivable MSC: ACBSP-APC-15-Current Assets Reporting 16. Assume that part of accounts and other receivables on Kittson Company’s February 2, 2010, balance sheet is comprised of $4,322,500 of notes receivable. Two notes make up the amount. The first note has a face value of $3,000,000 and bears interest at 7 percent for 90 days. The second note has a face value of $1,322,500 and bears interest at 9 percent for 120 days. Record the journal entry for the collection of the 7 percent note on May 3 and the dishonor of the 9 percent note on June 2. (Omit explanations; assume no interest had been accrued.) Round amounts to nearest dollar.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

Post. Ref.

Debit

Page 1 Credit

ANS:

Date May 3

June 2

General Journal Description Cash Notes Receivable Interest Income ($3,000,000 x .07 x 90/365)

3,051,781

Accounts Receivable Notes Receivable Interest Income ($1,322,500 x .09 x 120/365)

1,361,632

3,000,000 51,781

1,322,500 39,132

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Notes receivable MSC: ACBSP-APC-15-Current Assets Reporting 17. Determine the interest on the following notes payable: Round answers to two decimal places. a. $3,000 at 10 percent for 60 days b. $600 at 16 percent for 4 months c. $5,000 at 12 percent for 45 days d. $900 at 14 percent for 30 days

ANS: a. $49.32 ($3,000  .1  60/365) b. $32.00 ($600  .16  4/12) c. $73.97 ($5,000  .12  45/365) d. $10.36 ($900  .14  30/365) PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Notes receivable MSC: ACBSP-APC-15-Current Assets Reporting MATCHING Match each definition with the correct term below. a. One way to control a cash fund and cash advances. b. A minimum amount that a bank requires a company to keep in its bank account as part of a credit-granting arrangement. c. The method of estimating uncollectible accounts that calculates the Uncollectible Accounts Expense. d. The process of accounting for the difference between the balance on a company’s bank statement and the balance in its Cash account. e. The total proceeds of a promissory note. f. An unconditional promise to pay a definite sum of money on demand or at a future date. g. The method of accounting for uncollectible accounts that matches bad debts against the sales they help produce. h. Short-term financial assets that arise from credit sales made in the ordinary course of doing business. i. A method of conducting business transactions that does not involve the actual transfer of cash. j. The cost of borrowing money or the return on lending money. k. A potential liability that can develop into a real liability if a particular event occurs. l. The method of estimating uncollectible accounts that calculates the targeted balance of Allowance for Uncollectible Accounts. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Compensating balance Accounts receivable Contingent liability Imprest system Electronic funds transfer (EFT) Bank reconciliation Allowance method Percentage of net sales method Accounts receivable aging method Interest Promissory note Maturity value

1. ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Cash management MSC: ACBSP-APC-15-Current Assets Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

2. ANS: H PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 3. ANS: K PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Short-term assets' management issues MSC: ACBSP-APC-15-Current Assets Reporting 4. ANS: A PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Cash management MSC: ACBSP-APC-15-Current Assets Reporting 5. ANS: I PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Cash and cash equivalents MSC: ACBSP-APC-15-Current Assets Reporting 6. ANS: D PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bank reconciliation MSC: ACBSP-APC-11-Bank Reconciliation 7. ANS: G PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 8. ANS: C PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 9. ANS: L PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 10. ANS: J PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Notes receivable MSC: ACBSP-APC-15-Current Assets Reporting 11. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Notes receivable MSC: ACBSP-APC-15-Current Assets Reporting 12. ANS: E PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Notes receivable MSC: ACBSP-APC-15-Current Assets Reporting PROBLEM 1. Why do businesses need to keep some currency on hand? ANS: Businesses need to keep some currency on hand to provide money for cash registers in order to make change; to pay small, spur-of-the-moment expenses such as coffee cups for the break room; or to provide money in advance to salespersons for their travel expenses. PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement KEY: Short-term assets' management issues MSC: ACBSP-APC-15-Current Assets Reporting

LOC: Comprehension

2. The following data exist for Alcona Company:

Accounts Receivable Sales

2013 $ 160,000 1,020,000

2012 $ 180,000 821,000

Calculate the receivable turnover and the average days' sales uncollected for 2013. Round answers to one decimal place. ANS: Receivable turnover = $1,020,000 ÷ [($160,000 + $180,000) ÷ 2] = 6.0 times Average days' sales uncollected = 365 ÷ 6 = 60.8 days PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 3. Jayne Luke started a computer business in her basement less than a year ago. Her personal attention to clients and persistence in obtaining new customers has caused the business to grow at a tremendous pace. Jayne has become so busy she has neglected to keep after clients who have failed to pay her. As a result, Jayne has a large amount of accounts receivable and notes receivable on her balance sheet but not much cash. She continues to service clients, but she now realizes that her cash will soon be exhausted. Suggest some options Jayne has to achieve a strong cash balance. ANS: Some options Jayne Luke could explore to increase her cash balance are to (1) hire someone to work as an account collector for her, (2) use her large amount of receivables as collateral for a loan, (3) sell her accounts receivable to a factor, and (4) discount the notes receivable at a bank. PTS: 1 DIF: Challenging OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement KEY: Short-term assets' management issues MSC: ACBSP-APC-15-Current Assets Reporting

LOC: Critical Thinking

4. The following information pertains to the bank transactions of Crawford Company: a. Cash on the books as of September 30 was $499. Cash as shown on the bank statement for the same date was $1,330. b. A deposit of $160, representing cash receipts of September 30, did not appear on the bank statement. c. Outstanding checks totaled $240. d. Bank service charges for September amounted to $9. e. The bank collected for Crawford Company $840 (which includes $40 interest) on a note left for collection. f. An NSF check for $80 from a customer, Jack Betz, was returned with the statement. 1. Prepare a bank reconciliation for Crawford Company as of September 30. 2. State the amount of cash that would appear on the balance sheet as of September 30. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Crawford Company Bank Reconciliation September 30, 2013

ANS: 1. Crawford Company Bank Reconciliation September 30, 2013 Balance per bank, September 30 Add deposit in transit

$1,330 160 $1,490 240 $1,250

Less outstanding checks Adjusted bank balance, September 30 Balance per books, September 30 Add: Note collected by bank Interest on note collected by bank Less: Bank service charges NSF check of Jack Betz Adjusted book balance, September 30

$ 499 $800 40

9 80

840 $1,339

89 $1,250

2. $1,250 PTS: 1 DIF: Challenging OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Bank reconciliation MSC: ACBSP-APC-11-Bank Reconciliation

5. Under what specific circumstance will application of the direct charge-off method be in accordance with the matching principle? ANS: When a company makes a credit sale, say, early in the accounting period and writes off that account later in the same accounting period, then the matching principle would be followed under the direct charge-off method. PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 6. Assume that part of accounts and other receivables on Todd Toys' balance sheet is $3,200,000 as of February 2, 2013. Also assume that Allowance for Uncollectible Accounts has a credit balance of $110,000 and that Todd estimates its uncollectible accounts as 0.1 percent of net sales and net sales for the year is $22,020,000. Record the adjusting entry to recognize uncollectible accounts using the percentage of net sales method. Omit explanations.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

Post. Ref.

Debit

Page 1 Credit

ANS:

Date 2013 Feb.

General Journal Description

2 Uncollectible Accounts Expense* Allowance for Uncollectible Accounts

22,020 22,020

*$22,020,000 x .001 = $22,020 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting

7. Assume that part of accounts and other receivables on Thompson Toys' balance sheet is $16 million and that Thompson estimates its uncollectible accounts as 2 percent of all accounts receivable. Record the adjusting entry assuming that the company uses the accounts receivable aging method to recognize uncollectible accounts if the Allowance for Uncollectible Accounts has a balance of: a. $104,000 credit b. $46,000 debit

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date a.

General Journal Description Uncollectible Accounts Expense* Allowance for Uncollectible Accounts To adjust balance in the Allowance Account from $104,000 to $320,000.

Uncollectible Accounts Expense** Allowance for Uncollectible Accounts To adjust balance in the Allowance Account from $46,000 debit to $320,000 credit. *($16,000,000 x .02) – $104,000 = $216,000 **($16,000,000 x .02) + $46,000 = $366,000

Post. Ref.

Debit

Page 1 Credit

216,000 216,000

366,000 366,000

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 8. The general ledger account for Accounts Receivable shows a debit balance of $37,500. The Allowance for Uncollectible Accounts has a debit balance of $1,000. Net sales for the year were $375,000. In the past, 2 percent of net sales have proved uncollectible. An aging of accounts receivable accounts results in an estimate of $6,250 of uncollectible accounts receivable. Calculate (a) Uncollectible Accounts Expense and (b) the ending balance of the Allowance for Uncollectible Accounts using (i) the percentage of net sales method and (ii) the accounts receivable aging method. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: a. (i) $7,500 ($375,000  .02) (ii) $7,250 ($6,250 + $1,000) b. (i) $6,500 ($7,500 – $1,000) (ii) $6,250 (given) PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 9. The general ledger account for Accounts Receivable shows a debit balance of $40,000. The Allowance for Uncollectible Accounts has a credit balance of $2,000. Net sales for the year were $250,000. In the past, 3 percent of net sales have proved uncollectible. An aging of accounts receivable accounts results in an estimate of $9,000 of uncollectible accounts receivable. Calculate (a) Uncollectible Accounts Expense and (b) the ending balance of the Allowance for Uncollectible Accounts using (i) the percentage of net sales method and (ii) the accounts receivable aging method. ANS: a. (i) $7,500 ($250,000  .03) (ii) $7,000 ($9,000 – $2,000) b. (i) $9,500 ($7,500 + $2,000) (ii) $9,000 (given) PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 10. Caplan Corporation uses the accounts receivable aging method to account for Uncollectible Accounts Expense. As of December 31, Caplan's accountant prepared the following data about ending receivables: $20,000 was not yet due (1 percent expected not to be collected), $10,000 was 1-60 days past due (4 percent expected not to be collected), and $2,000 was over 60 days past due (8 percent expected not to be collected). At December 31, Allowance for Uncollectible Accounts had a credit balance prior to adjustment of $200. In the journal provided, prepare Caplan's end-of-period adjustment for estimated uncollectible accounts. Also prepare the entry that would have been made had the credit balance instead been a debit balance. Omit explanations.

General Journal Description

Date

Post. Ref.

Debit

Page 1 Credit

ANS: General Journal Description

Date Dec.

31 Uncollectible Accounts Expense Allowance for Uncollectible Accounts Entry assuming $200 credit balance. [($20,000  .01) + ($10,000  .04) + ($2,000  .08)] – $200 31 Uncollectible Accounts Expense Allowance for Uncollectible Accounts Entry assuming $200 debit balance. [($20,000  .01) + ($10,000  .04) + ($2,000  .08)] + $200

Post. Debit Ref. 560

Page 1 Credit

560

960 960

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 11. Assuming that the allowance method is being used, prepare journal entries to record the following transactions. Omit explanations. Apr. May Sept. Oct.

15 15 15 15

Sold merchandise to Rice Company for $12,000 on account. Received $6,000 from Rice Company. Wrote off Rice Company’s account as uncollectible. Unexpectedly received payment in full from Rice Company.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date Apr.

May

Sept.

Oct.

General Journal Description

Post. Ref.

Debit

15 Accounts Receivable Sales

12,000

15 Cash Accounts Receivable

6,000

15 Allowance for Uncollectible Accounts Accounts Receivable

6,000

15 Accounts Receivable Allowance for Uncollectible Accounts

6,000

15 Cash Accounts Receivable

6,000

Page 1 Credit

12,000

6,000

PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting

12. In the journal provided, prepare the entries for the following transactions. (Omit explanations.) Dec.

1 12 31

Feb.

5 17

Date

Sold merchandise on account to Katurah Wells for $600. Received payment of $400 from Katurah Wells. Made adjusting entry for Uncollectible Accounts Expense, using the percentage of net sales method. Net sales for the year totaled $14,000, uncollectible accounts are estimated at 2 percent, and Allowance for Uncollectible Accounts has a $50 credit balance prior to adjustment. Wrote off Katurah Wells's balance because she filed for bankruptcy. Unexpectedly received the $200 from Katurah Wells. General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date Dec.

Feb.

General Journal Description

Post. Ref.

Debit

1 Accounts Receivable Sales

600

12 Cash Accounts Receivable

400

31 Uncollectible Accounts Expense Allowance for Uncollectible Accounts ($14,000 x .02)

280

5 Allowance for Uncollectible Accounts Accounts Receivable ($600 – $400)

200

17 Accounts Receivable Allowance for Uncollectible Accounts

200

17 Cash Accounts Receivable

200

Page 1 Credit

600

400

280

200

PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 13. Explain the difference between the two methods used to estimate uncollectible accounts and identify which financial statement is emphasized by each method. ANS: The first method analyzes the net credit sales of the current period and is referred to as the percentage of net sales method. Because revenue from the current period only is being considered, the calculation results in an estimate of the uncollectible accounts expense for that same period. This is an attempt to quantify the risk taken by making sales on account in that period. Both the revenue being analyzed and the expense being calculated are income statement items; thus the emphasis is on the effect on net income on the current period's income statement. The second method is called the accounts receivable aging method. The accounts receivable are grouped according to how long they have been open. A different percentage of uncollectibility is applied to each age group and then all answers are summed. This results in an estimate of the amount of current receivables that will not be collected; it becomes the new balance for the Allowance for Uncollectible Accounts account. An asset account is being analyzed and its related contra-asset account balance is estimated. Thus this method emphasizes an accurate balance sheet presentation of net accounts receivable and total assets. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Critical Thinking KEY: Uncollectible accounts receivable MSC: ACBSP-APC-12-Receivables Reporting 14. Carlson Corporation engaged in the following transactions involving promissory notes in 2012 and 2013. Journalize these transactions in the journal provided. (Omit explanations.) Round to nearest whole dollar. 2012 Sept. 1 Nov. 1 Dec. 1 31 2013 Mar. 1

Date

Sold land to Duane Eppy for $30,000. A six-month, 10 percent note was received in exchange (no gain or loss realized). Received a 30-day, 12 percent note receivable from Tricha Kalson in settlement of her accounts receivable of $500. Tricha Kalson dishonored her note issued 30 days earlier. Round to nearest whole dollar. Recorded accrued interest on the note received on September 1.

Received payment in full from Duane Eppy. General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS: General Journal Description

Date 2012 Sept. 1

Nov. 1

Dec. 1

2013 Mar. 1

Notes Receivable Land

Post. Ref.

Page 1 Credit

Debit

30,000 30,000

Notes Receivable Accounts Receivable

500

Accounts Receivable Notes Receivable Interest Income ($500 x .12 x 30/365)

505

Interest Receivable Interest Income ($30,000 x .1 x 4/12)

1,000

Cash Notes Receivable Interest Receivable Interest Income ($30,000 x .1 x 2/12)

31,500

500

500 5

1,000

30,000 1,000 500

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Notes receivable MSC: ACBSP-APC-15-Current Assets Reporting

Chapter 08 - Current Liabilities and Fair Value Accounting TRUE/FALSE 1. Working capital equals current assets minus current liabilities. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 2. Payables turnover is measured in number of days. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 3. The days’ payable is the number of times, on average, that accounts payable are paid in an accounting period. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 4. The days' payable shows how long, on average, a company takes to pay its accounts payable. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 5. Because failure to record a liability generally leads to failure to record an expense, it usually results in an understatement of income. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Current liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 6. Because accounting measures should be verifiable, liabilities should not be estimated. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Current liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 7. The classification of a liability as current or long-term is important because it may affect the evaluation of a company's liquidity. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Classification of liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting

8. Liabilities generally arise from future transactions. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Current liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 9. To determine the payables turnover, one first calculates the days' payable. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 10. A liability must always be classified as long-term if it is due in more than one year. ANS: F PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Classification of liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 11. If an accrued liability for salaries is not recorded, income for the following period will be understated. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 12. All liabilities involve an obligation of one sort or another. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Classification of liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 13. Lines of credit from the bank must be disclosed in the financial statements or in the notes. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 14. Interest on a promissory note is recognized when the note is issued. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 15. The term wages refers to the compensation of employees who are paid at an hourly rate. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Definitely determinable liabilities MSC: ACBSP-APC-14-Payroll/Other Compensation

16. Commercial paper consists of secured loans that are sold to the public. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 17. The declaration of dividends is solely the decision of the corporation's board of directors. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 18. There is no limit to the amount of income subject to the Medicare tax. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recording payroll taxes MSC: ACBSP-APC-14-Payroll/Other Compensation 19. There is a limit to the amount of income subject to the FUTA tax. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recording payroll taxes MSC: ACBSP-APC-14-Payroll/Other Compensation 20. Commercial paper normally is issued by companies with poor credit ratings. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 21. If any portion of a long-term debt is to be paid in the next year, that portion should be classified as a current liability. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Classification of liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 22. Unearned revenue arises from the acceptance of payment in advance for a service to be performed. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 23. Current liabilities are classified as either definitely determinable liabilities or estimated liabilities. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Categories of current liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting

24. A liability for dividends exists only when the board of directors declares them. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 25. Salaries are compensation of employees at a yearly or monthly rate. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Definitely determinable liabilities MSC: ACBSP-APC-14-Payroll/Other Compensation 26. The entry that includes a debit to Payroll Taxes and Benefits Expense also includes credits to Federal Unemployment Tax Payable and State Unemployment Tax Payable. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recording payroll taxes MSC: ACBSP-APC-14-Payroll/Other Compensation 27. Social security and Medicare taxes are borne entirely by the employer. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Payment of payroll and payroll taxes MSC: ACBSP-APC-14-Payroll/Other Compensation

OBJ: 2 LOC: Recall

28. Gross earnings minus deductions equals take-home pay. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Computation of employee take-home pay MSC: ACBSP-APC-14-Payroll/Other Compensation

OBJ: 2 LOC: Recall

29. Both the employee and the employer must bear the tax burden for unemployment benefits. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Payment of payroll and payroll taxes MSC: ACBSP-APC-14-Payroll/Other Compensation

OBJ: 2 LOC: Recall

30. The federal and state unemployment tax rates are not identical. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recording payroll taxes MSC: ACBSP-APC-14-Payroll/Other Compensation

31. The entry that includes a debit to Payroll Taxes and Benefits Expense would also include credits to Social Security Tax Payable and Medicare Tax Payable. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recording payroll taxes MSC: ACBSP-APC-14-Payroll/Other Compensation 32. An estimated liability is a definite obligation of the firm even though the amount cannot be definitely determined. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Estimated liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 33. The amount of property tax payable is usually an estimated liability for a portion of the year. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Estimated liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 34. A liability is usually established for product warranties despite uncertainty as to the amount of the liability. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Estimated liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 35. If the amount of a liability cannot be exactly determined, it should not be recorded. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Estimated liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 36. The costs associated with coupons and rebates are usually reflected in liability accounts. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Estimated liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 37. Unearned revenue is an example of a definitely determinable liability. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 38. Only the used portion of a line of credit is recognized as a liability. ANS: T PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

39. At the time a company signs a contract to pay an employee a certain salary in the future, it records a liability. ANS: F PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Definitely determinable liabilities MSC: ACBSP-APC-14-Payroll/Other Compensation 40. For notes payable whose interest is stated separately, the adjusting entry would consist of a debit to Interest Payable and a credit to Interest Expense. ANS: F PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 41. The current portion of long-term debt is classified as a current liability only if it is due within the next year and is to be paid from current assets. ANS: T PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 42. Product warranties are an expense of the period in which the product is sold. ANS: T PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Estimated liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 43. When a business sells an item and collects a state sales tax on it, a current liability to the state arises. ANS: T PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 44. The product warranty liability is an example of a definitely determinable liability. ANS: F PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Estimated liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 45. Accrued liabilities often arise as a result of the passage of time. ANS: T PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting

46. Vacation pay is charged properly as an expense in the month in which the employee earns the vacation pay. ANS: T PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Recording payroll taxes MSC: ACBSP-APC-14-Payroll/Other Compensation 47. Property Taxes Expense is recorded only in the month it is paid. ANS: F PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Estimated liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 48. Promotional costs, such as coupons and rebates, are usually not recorded as an expense with a related liability. ANS: T PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Estimated liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 49. A contingent liability is a legal obligation that does not meet the technical requirements for recognition as a liability. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Contingent liabilities and commitments MSC: ACBSP-APC-16-Current Liabilities Reporting

OBJ: 3 LOC: Recall

50. A contingent liability is not entered into the accounting records under any circumstances. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Contingent liabilities and commitments MSC: ACBSP-APC-16-Current Liabilities Reporting

OBJ: 3 LOC: Recall

51. A commitment is recognized when the amount can be reasonably estimated and the likelihood of loss is probable. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Contingent liabilities and commitments MSC: ACBSP-APC-16-Current Liabilities Reporting

OBJ: 3 LOC: Recall

52. The most common examples of commitments are leases and purchase agreements. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Contingent liabilities and commitments MSC: ACBSP-APC-16-Current Liabilities Reporting

OBJ: 3 LOC: Recall

53. A contingent liability is recognized when the likelihood of loss is probable and the amount can be reasonably estimated. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Contingent liabilities and commitments MSC: ACBSP-APC-16-Current Liabilities Reporting

OBJ: 3 LOC: Recall

54. A contingent liability is a liability that may materialize in the future because of something that happened in the past. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Contingent liabilities and commitments MSC: ACBSP-APC-16-Current Liabilities Reporting

OBJ: 3 LOC: Recall

55. Potential vacation pay should be accounted for as a contingent liability. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Contingent liabilities and commitments MSC: ACBSP-APC-16-Current Liabilities Reporting

OBJ: 3 LOC: Recall

56. Lawsuits against a company in connection with an industrial accident would not be disclosed in the notes to the financial statements as a contingent liability until the lawsuits have been settled. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Contingent liabilities and commitments MSC: ACBSP-APC-16-Current Liabilities Reporting

OBJ: 3 LOC: Recall

57. When a company discounts a note receivable at the bank, it has a contingent liability. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Contingent liabilities and commitments MSC: ACBSP-APC-16-Current Liabilities Reporting

OBJ: 3 LOC: Recall

58. A contingent liability always becomes a true liability. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Contingent liabilities and commitments MSC: ACBSP-APC-16-Current Liabilities Reporting

OBJ: 3 LOC: Comprehension

59. The market approach to the measurement of fair value converts future cash flows to a single present value. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Fair value accounting MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Recall

60. The cost approach to the measurement of fair value is based on the amount that currently would be required to replace an asset with the same or a comparable asset. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Fair value accounting MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Recall

61. Future value refers to the amount of principle plus interest after one or more periods. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Recall

62. An ordinary annuity is a series of equal payments made at the end of equal intervals of time. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Recall

63. When compound interest is used, interest accumulates quicker than when simple interest is used. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Comprehension

64. The annual interest earned on an amount deposited into a bank account will increase each year when simple interest is used. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Comprehension

65. The annual interest earned on an amount deposited into a bank account will be the same each year when simple interest is used. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Comprehension

66. All factors in a future value table must be greater than or equal to 1.000. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Comprehension

67. The lower the interest rate, the lower the present value factor. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Comprehension

68. All factors in a present value of a single sum table are less than 1.000. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Comprehension

69. The higher the interest rate, the lower the future value factor. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Comprehension

70. Decision makers rely on the future values, rather than on the present values, of future cash flows. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Comprehension

71. In a deferred payment arrangement, an implied or imputed interest rate is usually charged. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Applications of time value of money MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

OBJ: 5 LOC: Comprehension

72. The theoretical value of an asset is the present value of the expected benefits. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Applications of time value of money MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 5 LOC: Comprehension

73. An asset purchased according to a deferred payment plan should be recorded based on the present value of the total cash paid. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Applications of time value of money MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 5 LOC: Comprehension

74. If the net present value of a proposed investment is negative, it means that the investment should not be made. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Applications of time value of money MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 5 LOC: Comprehension

75. Assets purchased under a deferred payment plan should be recorded at the present value of the installment payments. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Applications of time value of money MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 5 LOC: Comprehension

76. A company wishes to make deposits at the end of each of the next four years to accumulate a fund of $60,000. The annual contributions equal $60,000 multiplied by the appropriate present value of an ordinary annuity factor. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Applications of time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 5 LOC: Application

MULTIPLE CHOICE 1. All of the following are measures of liquidity and cash flow except a. payables turnover. b. return on assets. c. the current ratio. d. days’ payable. ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

2. Days' payable is the shortest in which of the following industries? a. Grocery stores b. Computers c. Machinery d. Auto and home supply ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 3. Current liabilities are debts that are expected to be satisfied within a. one year or the normal operating cycle, whichever is shorter. b. one year or the normal operating cycle, whichever is longer. c. one year. d. the normal operating cycle. ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Classification of liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 4. Failure to record a liability probably will a. result in an overstated net income. b. result in overstated total liabilities and stockholders' equity. c. have no effect on net income. d. result in overstated total assets. ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recognition of liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 5. Usually, failure to record a liability means failure to record a(n) a. revenue. b. dividend. c. expense. d. current asset. ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recognition of liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 6. Days’ payable is measured a. in days. b. as a percentage. c. in dollars. d. in times. ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

7. To find the days' payable, a. divide 365 by the payables turnover. b. multiply the payables turnover by 365. c. divide the payables turnover by 365. d. subtract 365 from the payables turnover. ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 8. Which of the following most likely would be classified as a current liability? a. Mortgage payable b. Taxes payable c. Ten-year notes payable d. Bonds payable ANS: B PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Classification of liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 9. A liability is recognized when a. the exact due date is known. b. it is paid for. c. an obligation has arisen. d. the exact amount of the liability is known. ANS: C PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Recognition of liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 10. Which of the following most likely is an example of an accrued liability? a. Interest payable b. Accounts payable c. Long-term debt d. Sales tax payable ANS: A PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Classification of liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 11. Which of the following typically would not be done to satisfy a current liability? a. Use long-term assets to satisfy the liability b. Render a service to satisfy the liability c. Use current assets to satisfy the liability d. Take on another current liability to satisfy the liability ANS: A PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Current liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting

12. Which of the following descriptions would not fit the definition of a liability? a. Obligation to deliver services already paid for b. Result of past transaction c. Future obligation for future salary payments d. Present obligation for future payment ANS: C PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Recognition of liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 13. Which of the following does not represent a liability? a. An obligation for estimated income taxes payable b. Interest that has accrued on a bank loan c. An obligation to pay for goods purchased, payable one year after purchase d. An obligation for future purchases of goods ANS: D PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Recognition of liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 14. On January 2, 2013, Chester Company, a calendar-year company, issued $80,000 of notes payable, of which $20,000 is due on January 2 for each of the next four years. The proper balance sheet presentation on December 31, 2013, is a. Current Liabilities, $80,000. b. Current Liabilities, $20,000; Long-Term Liabilities, $60,000. c. Long-Term Liabilities, $80,000. d. Current Liabilities, $60,000; Long-Term Liabilities, $20,000. ANS: B PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Classification of liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 15. The following information is known for Alcorn Company for the year ended December 31: Cash $83,700 Accounts receivable 69,000 Beginning merchandise inventory 123,000 Ending merchandise inventory 108,000 Land 435,000 Buildings 240,000 Beginning accounts payable 105,000 Ending accounts payable 144,000 Wages payable 71,100 Mortgage payable 624,000 Net sales 1,968,000 Purchases 1,143,000 Compute Alcorn Company’s payables turnover for the current year (round to two decimal places). a. 10.89 times b. 9.18 times c. 8.52 times d. 7.94 times © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: B Cost of goods sold: $123,000 + $1,143,000 - $108,000 = $1,158,000 Change in merchandise inventory: $123,000 – $108,000 = $15,000 decrease Payables turnover: (1,158,000 – $15,000) ÷ [($105,000 + $144,000) ÷ 2] = 9.18 times PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 16. The following information is known for Alcorn Company for the year ended December 31: Cash $83,700 Accounts receivable 69,000 Beginning merchandise inventory 123,000 Ending merchandise inventory 108,000 Land 435,000 Buildings 240,000 Beginning accounts payable 105,000 Ending accounts payable 144,000 Wages payable 71,100 Mortgage payable 624,000 Net sales 1,968,000 Purchases 1,143,000 Compute Alcorn Company’s days’ payable for the current year (round to two decimal places). a. 39.76 days b. 38.75 days c. 56.07 days d. 54.07 days ANS: A Cost of goods sold: $123,000 + $1,143,000 - $108,000 = $1,158,000 Change in merchandise inventory: $123,000 – $108,000 = $15,000 decrease Payables turnover: (1,158,000 – $15,000) ÷ [($105,000 + $144,000) ÷ 2] = 9.18 times Days’ payable: 365 ÷ 9.18 = 39.76 days PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 17. Sales Tax Payable is an example of a(n) a. estimated liability. b. contingent liability. c. trade liability. d. definitely determinable liability. ANS: D PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting

18. All of the following are classified as definitely determinable liabilities except a. sales tax payable. b. estimated property warranty liability. c. dividends payable. d. unearned revenue. ANS: B PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 19. Which of the following is most likely a definitely determinable liability during interim periods? a. Estimated property tax payable b. Accrued interest payable c. Estimated product warranty liability d. Estimated income taxes payable ANS: B PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 20. Dividends Payable is an example of a(n) a. contingent liability. b. definitely determinable liability. c. estimated liability. d. long-term liability. ANS: B PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 21. Which of the following taxes is not subject to a maximum amount per employee per year? a. State unemployment tax b. Federal unemployment tax c. Social security tax d. Medicare tax ANS: D PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recording payroll taxes MSC: ACBSP-APC-14-Payroll/Other Compensation 22. All of the following can be employee payroll withholdings except a. state income taxes. b. medical insurance premium payments. c. social security tax. d. state unemployment tax. ANS: D PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recording payroll taxes MSC: ACBSP-APC-14-Payroll/Other Compensation

23. Payroll Taxes and Benefits Expense includes all of the following except a. state income taxes. b. pension contributions. c. Medicare taxes. d. unemployment taxes. ANS: A PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recording payroll taxes MSC: ACBSP-APC-14-Payroll/Other Compensation 24. All of the following are estimated liabilities except a. liability for vacation pay. b. payroll liabilities. c. product warranty liability. d. property tax liability. ANS: B PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Estimated liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 25. Which of the following most likely is an estimated liability? a. Incomes taxes payable b. Payroll liabilities c. Sales tax payable d. Current portion of long-term debt ANS: A PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Estimated liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 26. Which of the following is a tax borne by the employer but not the employee? a. Federal income tax b. State unemployment tax c. Medicare tax d. Social security tax ANS: B PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recording payroll taxes MSC: ACBSP-APC-14-Payroll/Other Compensation 27. Which of the following businesses most likely would have a large Unearned Revenue account balance at all times? a. Dry cleaners b. Realtor c. Magazine publisher d. Department store ANS: C PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting

28. Which of the following is both an estimated liability and a contingent liability? a. Co signature on $500 loan b. Current portion of long-term debt c. Warranty liability d. Liability for dividends ANS: C PTS: 1 DIF: Moderate OBJ: 2 | 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Estimated liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 29. Recording estimated product warranty expense in the year of the sale best follows which of the following accounting principles? a. Matching b. Consistency c. Historical cost d. Full disclosure ANS: A PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Estimated liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 30. A company receives $200 for a sale, of which $8 is for sales tax and $12 is for excise tax. The journal entry to record the sale is: a. Cash 180 Sales 180 b. Excise Tax expense Sales Tax expense Cash Sales

12 8 180

c. Sales Cash

200

d. Cash

200 Sales Tax Payable Excise tax payable Sales

200

8 12 180

ANS: D PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting

31. A company receives $180 for a sale, of which $10 is for sales tax. The journal entry to record the sale is: a. Sales Tax expense 10 Cash 170 Sales 180 b. Cash

170 Sales

170

c. Cash

180 Sales

180

d. Cash

180 Sales Tax Payable Sales

10 170

ANS: D PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 32. Use this information to answer the following question. The transactions below pertain to Bolivar Company, whose fiscal year ends September 30. Sept.

10 30

Received cash for a 90-day, 12 percent, $50,000 note payable. Interest is in addition to the face value. Made end-of-year adjusting entry to accrue interest expense.

The entry to record the September 10 transaction (amounts rounded) is: a. Cash 1,480 Notes Payable 1,480 b. Cash

48,520 Accounts receivable

c. Cash

48,520 48,520

Notes Payable d. Cash

48,520 50,000

Notes Payable

50,000

ANS: D PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting

33. Use this information to answer the following question. The transactions below pertain to Bolivar Company, whose fiscal year ends September 30. Sept.

10 30

Received cash for a 90-day, 12 percent, $50,000 note payable. Interest is in addition to the face value. Made end-of-year adjusting entry to accrue interest expense.

The September 30 adjusting entry, rounded to the nearest dollar, to accrue the interest expense on the note payable is: a. Interest Expense 329 Cash 329 b. Cash

329 Interest Expense

329

c. Interest Expense Interest Payable

329

d. Interest Expense Notes Payable

329

ANS: C $50,000 x .12 x 20/365 = $329 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 34. What would be the adjusting entry for a note payable whose interest is not included in the face amount of the note? a. Debit Interest Receivable and credit Interest Income. b. Debit Interest Expense and credit Cash. c. Debit Interest Expense and credit Interest Payable. d. Debit Cash and credit Notes Payable. ANS: C PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 35. An employee has gross earnings of $1,200 and withholdings of $91.80 for social security and Medicare taxes and $120 for income taxes. The employer pays $91.80 for social security and Medicare taxes and $9.60 for FUTA. The total cost of this employee to the employer is a. $1,301.40. b. $1,200.00. c. $1,393.20. d. $1,209.60.

ANS: A $1,200 + $91.80 + $9.60 = $1,301.40 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Recording the payroll MSC: ACBSP-APC-14-Payroll/Other Compensation 36. Use this information to answer the following question. The following totals for the month of July were taken from the payroll register of Greene Company: Salaries expense Social security and Medicare taxes withheld Income taxes withheld Medical insurance deductions Life insurance deductions Salaries subject to federal and state unemployment taxes of 6.2 percent

$24,000 1,100 5,000 500 400 8,000

The journal entry to record the monthly payroll on July 31 would include a a. debit to Salaries Expense for $24,000. b. debit to Salaries Payable for $24,000. c. credit to Salaries Payable for $24,000. d. debit to Salaries Expense for $17,000. ANS: A PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Recording the payroll MSC: ACBSP-APC-14-Payroll/Other Compensation 37. Use this information to answer the following question. The following totals for the month of July were taken from the payroll register of Greene Company: Salaries expense Social security and Medicare taxes withheld Income taxes withheld Medical insurance deductions Life insurance deductions Salaries subject to federal and state unemployment taxes of 6.2 percent

$24,000 1,100 5,000 500 400 8,000

The entry to record the payment of net payroll would include a a. debit to Salaries Payable for $24,000. b. debit to Salaries Payable for $15,900. c. debit to Salaries Payable for $17,000. d. credit to Cash for $18,100. ANS: C Salaries payable: $24,000 – $1,100 – $5,000 – $500 – $400 = $17,000 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Recording the payroll MSC: ACBSP-APC-14-Payroll/Other Compensation © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

38. Use this information to answer the following question. The following totals for the month of July were taken from the payroll register of Greene Company: Salaries expense Social security and Medicare taxes withheld Income taxes withheld Medical insurance deductions Life insurance deductions Salaries subject to federal and state unemployment taxes of 6.2 percent

$24,000 1,100 5,000 500 400 8,000

The entry to record the accrual of employer's payroll taxes would include a debit to Payroll Taxes and Benefits Expense for a. $2,496. b. $1,100. c. $1,596. d. $496. ANS: C $1,100 + ($8,000 x .062) = $1,596 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Recording payroll taxes MSC: ACBSP-APC-14-Payroll/Other Compensation 39. Use this information to answer the following question. The following totals for the month of July were taken from the payroll register of Greene Company: Salaries expense Social security and Medicare taxes withheld Income taxes withheld Medical insurance deductions Life insurance deductions Salaries subject to federal and state unemployment taxes of 6.2 percent

$24,000 1,100 5,000 500 400 8,000

The amount of liabilities relating to payroll, other than Salaries Payable, is a. $8,356. b. $7,496. c. $7,256. d. $8,596. ANS: D ($1,100 x 2) + $5,000 + $500 + $400 + ($8,000 x .062) = $8,596 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Recording payroll taxes MSC: ACBSP-APC-14-Payroll/Other Compensation

40. Use this information to answer the following question. The following totals for the month of July were taken from the payroll register of Greene Company: Salaries expense Social security and Medicare taxes withheld Income taxes withheld Medical insurance deductions Life insurance deductions Salaries subject to federal and state unemployment taxes of 6.2 percent

$24,000 1,100 5,000 500 400 8,000

The entry to record the accrual of federal unemployment tax (assume FUTA tax of .8 percent) would include a a. credit to Federal Unemployment Tax Payable for $64. b. debit to Federal Unemployment Tax Payable for $64. c. debit to FUTA Tax Expense for $64. d. credit to Payroll Taxes and Benefits Expense for $64. ANS: A $8,000 x .008 = $64 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Recording payroll taxes MSC: ACBSP-APC-14-Payroll/Other Compensation 41. Use this information to answer the following question. Baker Company has the following information for the pay period of January 1-15. Payment occurs on January 20. Gross payroll Social security and Medicare rate State unemployment tax rate

$16,000 7.65%

Federal income taxes withheld Federal unemployment tax rate

$1,800 .8%

5.4%

Salaries Payable would be recorded for a. $12,976. b. $10,760. c. $14,200. d. $11,984. ANS: A $16,000 – ($16,000 x .0765) – $1,800 = $12,976 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Recording the payroll MSC: ACBSP-APC-14-Payroll/Other Compensation

42. Use this information to answer the following question. Baker Company has the following information for the pay period of January 1-15. Payment occurs on January 20. Gross payroll Social security and Medicare rate State unemployment tax rate

$16,000 7.65%

Federal income taxes withheld Federal unemployment tax rate

$1,800 .8%

5.4%

The entry to record the payroll would include a a. debit to Salaries Payable for the net amount. b. credit to State Unemployment Tax Payable. c. debit to Salaries Expense for the amount paid to the employees. d. debit to Salaries Expense for the gross payroll. ANS: D PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Recording the payroll MSC: ACBSP-APC-14-Payroll/Other Compensation 43. Use this information to answer the following question. Baker Company has the following information for the pay period of January 1-15. Payment occurs on January 20. Gross payroll Social security and Medicare rate State unemployment tax rate

$16,000 7.65%

Federal income taxes withheld $1,800 Federal unemployment tax rate .8%

5.4%

The entry on January 20 would be a debit to a. Salaries Payable and a credit to Cash. b. Salaries Payable and a credit to Salaries Expense. c. Salaries Expense and a credit to Cash. d. Salaries Expense and a credit to Salaries Payable. ANS: A PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Recording the payroll MSC: ACBSP-APC-14-Payroll/Other Compensation 44. Use this information to answer the following question. Gross payroll Social security and Medicare rate State unemployment tax rate

$48,000 7.65%

Federal income taxes withheld Federal unemployment tax rate

$5,400 .8%

5.4%

Payroll Taxes and Benefits Expense would be recorded for a. $3,672. b. $6,648. c. $12,048. d. $2,976. ANS: B ($48,000 x .0765) + ($48,000 x .054) + ($48,000 x .008) = $6,648 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Recording payroll taxes MSC: ACBSP-APC-14-Payroll/Other Compensation 45. Use this information to answer the following question. Gross payroll Social security and Medicare rate

$48,000 7.65%

State unemployment tax rate

Federal income taxes withheld Federal unemployment tax rate

$5,400 .8%

5.4%

The entry to record the payroll taxes expense would include a credit to a. Salaries Payable. b. Federal Income Taxes Payable. c. Social Security Tax Payable. d. Cash. ANS: C PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Recording payroll taxes MSC: ACBSP-APC-14-Payroll/Other Compensation 46. During July, Audio City sold 200 radios for $50 each. Each radio had cost Audio City $30 to purchase and carried a two-year warranty. If 5 percent typically need to be replaced over the warranty period and one actually is replaced during July, the entry to record the Product Warranty Expense is: a. Product Warranty Expense 30 Estimated Product Warranty Liability 30 b. Product Warranty Expense Cash

150

c. Product Warranty Expense Estimated Product Warranty Liability

300

d. Estimated Product Warranty Liability Product Warranty Expense

600

150

300

600

ANS: C Estimated Product Warranty Liability: 200 x $30 x .05 = $300 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Estimated liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

47. Total payroll for a given week is $24,000. If 70 percent of the company's employees typically qualify to receive two weeks' paid vacation per year, assuming 50 working weeks, the entry to record the estimated liability for vacation pay for the week is: a. Estimated Liability for Vacation Pay 1,680 Cash 1,680 b. Vacation Pay Expense Cash

960

c. Vacation Pay Expense Estimated Liability for Vacation Pay

672

d. Cash

336

960

672

Estimated Liability for Vacation Pay

336

ANS: C Estimated Liability for Vacation Pay: $24,000 x .7 x 2/50 = $672 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Estimated liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 48. During March, Photo Mart sold 300 instant cameras for $200 each. Each camera had cost Photo Mart $138 to purchase and carried a one-year warranty. If 4 percent typically need to be replaced over the warranty period and two actually are replaced during March, the entry to record the Product Warranty Expense for the month is: a. Product Warranty Expense 552 Estimated Product Warranty Liability 552 b. Product Warranty Expense Cash

1,104

c. Product Warranty Expense Cash

2,208

d. Product Warranty Expense Estimated Product Warranty Liability

1,656

1,104

2,208

1,656

ANS: D Estimated Product Warranty Liability: 300 x $138 x .04 = $1,656 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Estimated liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting

49. Of a company's employees, 50 percent typically qualify to receive two weeks' paid vacation a year in 50 working weeks. The entry to record the amount of estimated liability for vacation pay for a week in which the total payroll is $2,900 a. Estimated Liability for Vacation Pay 116 Cash 116 b. Vacation Pay Expense Cash

232

c. Vacation Pay Expense Estimated Liability for Vacation Pay

d. Cash

232

Estimated Liability for Vacation Pay

ANS: C Estimated Liability for Vacation Pay: $2,900 x .5 x 2/50 = $58 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Estimated liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 50. When accounting for property taxes, which of the following accounts normally would not be credited? a. Prepaid Property Taxes b. Cash c. Estimated Property Taxes Payable d. Property Taxes Expense ANS: D PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Estimated liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 51. Holmes Company produces widgets that cost $120 each and have a 5 percent failure rate during the warranty period. If 500 widgets are sold, the entry to record the estimated product warranty expense would be a. Product Warranty Expense 600 Estimated Product Warranty Liability 600 b. Product Warranty Expense Estimated Product Warranty Liability

3,000 3,000

c. Product Warranty Expense Cash

300

d. Estimated Product Warranty Liability Cash

150

300

150

ANS: B Estimated Product Warranty Liability: $120 x 500 x .05 = $3,000 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Estimated liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 52. If product X cost $50 and had a 4 percent failure rate during the warranty period, the entry to record the estimated product warranty expense in a month when 1,000 units are sold would be a. Product Warranty Expense 2,000 Estimated Product Warranty Liability 2,000 b. Product Warranty Expense Estimated Product Warranty Liability

200

c. Product Warranty Expense Cash

d. Estimated Product Warranty Liability Cash

200

ANS: A Estimated Product Warranty Liability: $50 x 1,000 x .04 = $2,000 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Estimated liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 53. Of a company's employees, 75 percent typically qualify to receive two weeks' paid vacation out of 50 working weeks per year. The entry to record the amount of estimated liability for vacation pay for a week in which the total payroll is $19,200 : a. Estimated Liability for Vacation Pay 288 Cash 288 b. Vacation Pay Expense Estimated Liability for Vacation Pay c. Vacation Pay Expense Cash d. Cash

576 576 14,400 14,400 512

Estimated Liability for Vacation Pay

512

ANS: B Estimated Liability for Vacation Pay: $19,200 x .75 x 2/50 = 576 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Estimated liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting

54. Assume that a company received $2,400 in advance for one year membership fee in the fitness center. The entry that would be made to record the recognition of revenue at the end of first month is: a. Revenue 2,400 Cash 2,400 b. Cash

200 Revenue

200

c. Unearned revenue Revenue

200

d. Revenue Unearned revenue

200

ANS: C Unearned revenue: $2,400 x 1/12 = $200 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 55. Meggie’s Fitness center received $720 from a customer in advance for one year membership in the fitness center. The entry that would be made to record the fee receipt is: a. Unearned revenue 720 Cash 720 b. Cash

720 Unearned revenue

720

c. Unearned revenue Revenue

720

d. Revenue Unearned revenue

720

ANS: B PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting

56. The adjusting entry that would be made at the year-end accruing the interest expense of $100 on a note is: a. Interest Expense 100 Notes payable 100 b. Interest Payable Interest Expense

100

c. Interest Expense Interest Payable

100

d. Notes payable Interest Expense

100

ANS: C PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 57. A customer is injured using a company's product. The potential liability that may result is called a(n) a. contingent liability. b. estimated liability. c. definitely determinable liability. d. estimated warranty liability. ANS: A PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Contingent liabilities and commitments MSC: ACBSP-APC-16-Current Liabilities Reporting

OBJ: 3 LOC: Recall

58. A contingent liability is recorded in the accounting records a. if the contingency has not been described already in the notes to the financial statements. b. if it probably will become an actual liability and the exact amount is known. c. under all circumstances. d. if it probably will become an actual liability and the amount can be reasonably estimated. ANS: D PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Contingent liabilities and commitments MSC: ACBSP-APC-16-Current Liabilities Reporting

OBJ: 3 LOC: Recall

59. Which of the following is a contingent liability? a. Unearned revenues b. Excise tax payable c. Payroll liabilities d. Disputed additional tax assessment ANS: D PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Contingent liabilities and commitments MSC: ACBSP-APC-16-Current Liabilities Reporting

OBJ: 3 LOC: Recall

60. A contingent liability is best described as a(n) a. current liability. b. probable liability. c. potential liability. d. estimated liability. ANS: C PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Contingent liabilities and commitments MSC: ACBSP-APC-16-Current Liabilities Reporting

OBJ: 3 LOC: Recall

61. Purchase agreements are a. estimates. b. commitments. c. liabilities. d. contingencies. ANS: B PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Contingent liabilities and commitments MSC: ACBSP-APC-16-Current Liabilities Reporting

OBJ: 3 LOC: Recall

62. Liabilities that might arise from which of the following probably would be disclosed only in the notes to the financial statements? a. A lawsuit with a reasonably estimable loss b. Two year purchase agreement c. Possible bankruptcy of an important customer d. Estimated income taxes for the current year ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Contingent liabilities and commitments MSC: ACBSP-APC-16-Current Liabilities Reporting

OBJ: 3 LOC: Comprehension

63. Which of the following is an example of a commitment? a. Lease b. Incomes taxes payable c. Sales taxes payable d. Dividend payable ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Contingent liabilities and commitments MSC: ACBSP-APC-16-Current Liabilities Reporting

OBJ: 3 LOC: Comprehension

64. Which of the following phrases is not descriptive of an ordinary annuity? a. Payments made at the beginning of equal periods of time b. Both present and future value can be calculated c. Compound interest assumed d. Series of equal payments ANS: A

PTS: 1

DIF: Easy

OBJ: 4

NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Recall

65. Which of the following statements is true regarding the time value of money? a. Compound interest will produce equal amounts of interest each period on a fixed deposit. b. Earning simple interest is more beneficial than earning compound interest. c. When making a purchase, it is better to make payment as soon as possible. d. It is better to receive $1 now than a year from now. ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Comprehension

66. The future value of an ordinary annuity table would not include the factor a. 0.971. b. 1.000. c. 8.0192. d. 25.290. ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Comprehension

67. The higher the interest rate assumed, the a. higher the present value of an ordinary annuity. b. more one must deposit today to accumulate to a desired sum. c. lower the future value of a sum invested in the bank today. d. lower the present value of a sum due in the future. ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Comprehension

68. A business accepts a 12 percent, $38,000 note due in three years. Assuming simple interest, how much will the business receive when the note falls due? a. $42,560 b. $51,680 c. $47,120 d. $38,000 ANS: B $38,000 + ($38,000 x .12 x 3) = $51,680 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Time value of money MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

69. A business accepts a 9 percent, $25,000 note due in 120 days. Assuming simple interest, how much (amount rounded) will the business receive when the note falls due? a. $25,000 b. $25,075 c. $25,740 d. $27,260 ANS: C $25,000 + ($25,000 x .09 x 120/365) = PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Time value of money MSC: ACBSP-APC-16-Current Liabilities Reporting 70. Use this information to answer the following question. Periods

Future Value of $1 at 12 Percent

1 2 3

1.120 1.254 1.405

Future Value of Ordinary Annuity of $1 at 12 Percent 1.000 2.120 3.374

A single deposit of $4,000 made at the beginning of period 1 at a 12% interest rate would grow to how much at the end of three years? a. $4,480.00 b. $5,620.00 c. $5,016.00 d. $13,496.00 ANS: B $4,000 x 1.405 = $5,620 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

71. Use this information to answer the following question. Periods

Future Value of $1 at 12 Percent

1 2 3

1.120 1.254 1.405

Future Value of Ordinary Annuity of $1 at 12 Percent 1.000 2.120 3.374

If an accumulation of $6,000 is desired at the end of three years, at a 12% interest rate what amount must be deposited at the end of each of the three years? a. $1,778.30 b. $20,244.00 c. $4,270.46 © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

d. $8,430.00 ANS: A $6,000 ÷ 3.374 = $1,778.30 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

72. Use this information to answer the following question. Periods

Future Value of $1 at 12 Percent

1 2 3

1.120 1.254 1.405

Future Value of Ordinary Annuity of $1 at 12 Percent 1.000 2.120 3.374

A deposit of $5,400 made at the end of each year for three years at a 12% interest rate would grow to how much? a. $7,587.00 b. $18,219.60 c. $16,200.00 d. $18,144.00 ANS: B $5,400 x 3.374 = $18,219.60 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

73. Compound interest is computed quarterly on $700 for seven years at 12 percent annual interest. The future value table is used by multiplying the $700 by which factor? a. 28 periods at 3 percent b. 7 periods at 3 percent c. 7 periods at 12 percent d. 28 periods at 7 percent ANS: A Periods: 7 x 4 = 28 Percent: 12 ÷ 4 = 3 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

74. Use this information to answer the following question. Periods

Present Value of $1 at 7 Percent

1 2 3

0.935 0.873 0.816

Present Value of Ordinary Annuity of $1 at 7 Percent 0.935 1.808 2.624

What amount must be deposited today at a 12% interest rate to grow to $900 in three years? a. $662.00 b. $734.40 c. $342.98 d. $841.50 ANS: B $900 x 0.816 = $734.40 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

75. Use this information to answer the following question. Periods

Present Value of $1 at 7 Percent

1 2 3

0.935 0.873 0.816

Present Value of Ordinary Annuity of $1 at 7 Percent 0.935 1.808 2.624

What is the present value of receiving $1,200 at the end of each year for three years at a 12% interest rate? a. $3,366.00 b. $979.20 c. $2,937.60 d. $3,148.80 ANS: D $1,200 x 2.624 = $3,148.80 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

76. Use this information to answer the following question. Periods

Present Value of $1 at 7 Percent

1 2 3

0.935 0.873 0.816

Present Value of Ordinary Annuity of $1 at 7 Percent 0.935 1.808 2.624

What amount must be deposited today at a 12% interest rate so that $1,200 may be withdrawn at the end of each year for three years? a. $3,600.00 b. $3,850.28 c. $3,148.80 d. $3,366.00 ANS: C $1,200 x 2.624 = $3,148.80 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

77. Use this information to answer the following question. Periods

Present Value of $1 at 7 Percent

1 2 3

0.935 0.873 0.816

Present Value of Ordinary Annuity of $1 at 7 Percent 0.935 1.808 2.624

If $100 is invested at a 12% interest rate, how much will it grow to at the end of the three years? a. $100  .935  3 b. $100 ÷ .816 c. ($100 ÷ 2.624)  3 d. $100  2.624 ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Application

78. Dorothy wishes to deposit an amount into her savings account that will enable her to withdraw $1,500 per year for the next five years. She should deposit $1,500, multiplied by the a. present value of a single sum factor. b. present value of an ordinary annuity factor. c. future value of a single sum factor. d. future value of an ordinary annuity factor.

ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Applications of time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 5 LOC: Application

79. First City Bank computes interest semiannually. If the interest rate is currently 6 percent per annum, the amount deposited today should be multiplied by which future value factor to calculate the amount that will accumulate by the end of 10 years? a. 20 periods at 12 percent b. 20 periods at 3 percent c. 10 periods at 6 percent d. 10 periods at 3 percent ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Applications of time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 5 LOC: Application

80. Fabian Company is considering the purchase of a machine that will save the company $4,000 per year in operating costs for a period of 10 years. The most it should pay for the machine is equal to a. $4,000 times the present value of an ordinary annuity for 10 periods. b. $40,000. c. $4,000 divided by the future value of a single sum at the end of 10 periods. d. $4,000 times the future value of an ordinary annuity for 10 periods. ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Applications of time value of money MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 5 LOC: Application

81. A company purchases an asset on a deferred payment plan, ultimately paying $10,000. On the payment date, the company would a. credit Cash for less than $10,000. b. debit Interest Expense for the imputed amount. c. debit the asset account for $10,000. d. debit Accounts Payable for $10,000. ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Applications of time value of money MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 5 LOC: Application

82. A company wishes to make annual contributions into a fund intended to retire $400,000 in debt five years from now. The amount to contribute each year equals $400,000 a. divided by the appropriate future value of an ordinary annuity factor. b. times the appropriate present value of an ordinary annuity factor. c. times the appropriate future value of an ordinary annuity factor. d. divided by the appropriate present value of an ordinary annuity factor.

ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Applications of time value of money MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 5 LOC: Application

83. A company sells merchandise on a deferred payment plan, ultimately receiving $5,000 on the account receivable. On the payment date, the company would a. credit Accounts Receivable for less than $5,000. b. debit Interest Income for the imputed amount. c. credit Sales for less than $5,000. d. debit the asset account for $5,000. ANS: A PTS: 1 DIF: Challenging NAT: AACSB Analytic | AICPA FN Measurement KEY: Applications of time value of money MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 5 LOC: Analysis

84. A company places $20,000 into a money market account for four months. The account is expected to pay 9 percent annual interest, compounded monthly. After one month, the entry to record interest earned is: a. Short-Term Investments 150 Interest Income 150 b. Cash

150 Interest Income

150

c. Interest Income Cash

150

d. Cash

150

Interest Receivable

150

ANS: A $20,000 x .09 x 1/12 = $150 PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement KEY: Applications of time value of money MSC: ACBSP-APC-15-Current Assets Reporting

LOC: Analysis

SHORT ANSWER 1. A company enters into a contract to purchase a certain quantity of goods from another company during the following month. At this point, would a liability exist? Explain why or why not. ANS: A liability would not exist because, at this point, the goods have not been delivered, and therefore no obligation exists.

PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Recognition of liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 2. Ronald Company has current assets of $115,000 and current liabilities of $75,000 of which accounts payable are $65,000. Arnold's cost of goods sold is $420,000, its merchandise inventory increased by $20,000, and accounts payable were $45,000 the prior year. Calculate Ronald's payables turnover, and days' payable. ANS: Payables Turnover = (Cost of Goods Sold ± Change in Merchandise Inventory) ÷ Average Accounts Payable ($420,000 + $20,000) ÷ [($65,000 + $45,000) ÷ 2] = 8 times Days’ Payable = 365 days ÷ 8 = 45.6 days PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 3. On December 1, Grenada Company borrowed $80,000 from the bank, issuing a 90-day, 15 percent promissory note. Interest is in addition to the face value. In the journal provided, prepare Grenada's December 1 entry, December 31 adjusting entry without explanation for accrued interest, and March 1 entry at maturity. Round to the nearest whole dollar.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date Dec.

Mar.

General Journal Description

Post. Ref.

Page 1 Credit

Debit

1 Cash Notes Payable

80,000 80,000

31 Interest Expense Interest Payable $80,000  .15  30/365 = $986

986

1 Notes Payable Interest Payable Interest Expense Cash $80,000  .15  60/365 = $1,973

80,000 986 1,973

986

82,959

PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 4. Anson's Auto Parts had cash sales of $10,000 for the month of April. Sales are subject to a 6 1/2 percent sales tax and an 8 percent excise tax. In the journal provided, prepare a compound entry without explanation to record Anson's Auto Parts sales and related sales and excise taxes for the month.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date Apr.

General Journal Description

Post. Ref.

Page 1 Credit

Debit

30 Cash Sales Sales Tax Payable ($10,000  .065) Excise Tax Payable ($10,000  .08)

11,450 10,000 650 800

PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 5. Kahn Company had cash sales of $60,000 for the month of June. Sales are subject to a 4 1/2 percent sales tax and a 6 percent excise tax. In the journal provided, prepare a compound entry without explanation to record Kahn's sales and related sales and excise taxes for the month.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date June

General Journal Description 30 Cash Sales Sales Tax Payable ($60,000  .045) Excise Tax Payable ($60,000  .06)

Post. Ref.

Debit

Page 1 Credit

66,300 60,000 2,700 3,600

PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting

6. Kemper Company manufactures and sells widgets. Each widget costs $120 and sells for $200. Each widget carries a warranty that provides for free replacement if it fails for any reason during the next 36 months. In the past, 4 percent of the widgets have had to be replaced under the warranty. During May, Kemper sold 4,000 widgets and replaced 300 under warranty. Calculate the product warranty expense for the month. Show your computation. ANS: $19,200 (4,000  .04  $120) PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Estimated liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 7. Packett Company allows each employee two weeks' paid vacation after the employee has worked at the company for one year. On the basis of past experience, management estimates that 80 percent of employees will qualify for vacation pay this year. Assume that the March payroll is $300,000. Compute the vacation pay expense for the month assuming 50 working weeks a year. Show your computation. ANS: $9,600 ($300,000  .80  2/50) PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 8. Darla Katz earns an hourly wage of $12, with time-and-a-half pay for hours worked over 40 per week. During the most recent week, she worked 46 hours, her federal tax withholding totaled $62, her state tax withholding totaled $18, and $3 was withheld for union dues. Assuming a 6.2 percent social security tax rate and a 1.45 percent Medicare tax rate, prepare the entry without explanation in the journal provided to record Katz's wages and related liabilities. Round to the nearest penny.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date

General Journal Description

Page 1 Post. Debit Credit Ref. Wages Expense 588.00 Social Security Tax Payable 36.46 Medicare Tax Payable 8.53 Employees' Federal Income Taxes Payable 62.00 Employees' State Income Taxes Payable 18.00 Union Dues Payable 3.00 Wages Payable 460.01 [(40  $12) + (6  $18)] = $588 ($588  .062) = $36.46 ($588  .0145) = $8.53

PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Recording the payroll MSC: ACBSP-APC-14-Payroll/Other Compensation 9. State whether each situation below implies a definitely determinable liability (D), an estimated liability (E), a contingent liability (C), or no liability at all (X). _____ a. Lawsuit filed against the company _____ b. Payroll liabilities _____ c. Unearned revenues _____ d. Accounts payable _____ e. Product warranty liability _____ f. Dividend to be declared in future _____ g. Current portion of long-term debt _____ h. Discounted notes receivable _____ i. Liability for vacation pay _____ j. Guarantee of debt of other companies ANS: a. C b. D c. D d. D e. E

f. X g. D h. C i. E & C j. C

PTS: 1 DIF: Easy OBJ: 2 | 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Categories of current liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 10. Under what circumstances is a contingent liability reflected in the accounting records as though an actual liability exists? ANS: For a contingent liability to be reflected in the accounting records, it must be probable that the contingent liability will become an actual liability, and the amount must be subject to reasonable estimation. PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Contingent liabilities and commitments MSC: ACBSP-APC-16-Current Liabilities Reporting

LOC: Comprehension

11. Calculate answers to the following questions: a. To what amount will a $1,600 deposit grow, assuming 9 percent annual interest, five years, and simple interest? b. To what amount will a $1,000 deposit grow, assuming 10 percent annual interest paid semiannually, three years, and simple interest? ANS: a. $2,320 [($1,600  .09  5) + $1,600] b. $1,300 [($1,000  .05  6) + $1,000] PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

12. Calculate answers to the following questions using future value and/or present value tables. a. If an accumulation of $1,000 is desired at the end of four years, what bank deposit must be made now to accomplish that goal, assuming 10 percent interest compounded annually? b. A deposit of $600 made at the end of every six months for five years would grow to what amount, assuming 8 percent interest compounded semiannually. Round amounts to the nearest dollar. ANS: a. $683 [($1,000  .683 (PV of $1)] b. $4,867 [($600  8.111 (FV of O.A. @ n = 10, i = 4%)] PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

13. Calculate answers to the following questions using future value and/or present value tables. Round amounts to the nearest dollar. a. What is the present value of receiving $1,000 at the end of each year for six years, assuming 7 percent interest compounded annually? b. What amount must be deposited at the bank today to grow to $300 in five years, assuming 14 percent interest compounded semiannually? ANS: a. $4,767 [($1,000  4.767 (PV of O.A. @ n=6, i=7%)] b. $152 [($300  .508 (PV of $1 @ n = 10, i = 7%)] PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

14. The owner of an amusement park is considering installing a new ride. The ride would cost $20,000, produce a net cash flow of $2,500 annually, and last for nine years. a. Assuming an interest rate of 10 percent, what is the present value of the net cash flows expected from the ride? Use future value and/or present value tables in calculating your answer. Round amounts to the nearest dollar. b. Should the ride be purchased? ANS: a. $14,398 [($2,500  5.759 (PV of O.A. @ n=9, i=10%)] b. No, not if 10 percent is the interest rate. PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

15. Seacrest Company purchased a machine on January 2, 2013. Under the terms of the purchase agreement, the company is required to make 14 quarterly installment payments of $29,000 each, beginning April 1, 2013. Assuming that the interest rate is 16 percent compounded quarterly, determine the purchase price of the machine. Use future value and/or present value tables in calculating your answer. ANS: Purchase price = $29,000  10.563 (PV of O.A. @ n = 14, i = 4%) = $306,327 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

MATCHING Match each definition with the correct term below. a. Definite debts or obligations whose exact dollar amount cannot be known until a later date. b. Liabilities due beyond one year or beyond the normal operating cycle. c. Unsecured loans that are sold to the public , usually through professionally managed investment firms. d. The cost of using money for a specific period. e. A potential liability that depends on a future event arising out of a past transaction. f. Debts and obligations that a company expects to satisfy within one year or within its normal operating cycle. g. The interest cost for two or more periods when, after each period, the interest earned in that period is added to the amount on which interest is calculated in future periods. h. A legal obligation that does not meet the technical requirements for recognition as a liability. i. A person who is not an employee of the organization and so is not accounted for under the payroll system. j. The interest cost for one or more periods when the principal sum stays the same from period to period. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Long-term liabilities Current liabilities Independent contractor Commercial paper Estimated liabilities Contingent liability Commitment Interest Simple interest Compound interest

1. ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Classification of liabilities MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 2. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Classification of liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 3. ANS: I PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Recording the payroll MSC: ACBSP-APC-14-Payroll/Other Compensation 4. ANS: C PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Current liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 5. ANS: A PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Estimated liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 6. ANS: E PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Contingent liabilities and commitments © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

10.

MSC: ACBSP-APC-16-Current Liabilities Reporting ANS: H PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Contingent liabilities and commitments MSC: ACBSP-APC-16-Current Liabilities Reporting ANS: D PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting ANS: J PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting ANS: G PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 3 LOC: Recall

OBJ: 4 LOC: Recall

PROBLEM 1. Carroll Company has current assets of $230,000 and current liabilities of $150,000 of which accounts payable are $130,000. Arnold's cost of goods sold is $840,000, its merchandise inventory increased by $40,000, and accounts payable were $90,000 the prior year. Calculate Ronald's working capital, current ratio, payables turnover, and days' payable. ANS: Working Capital = Current Assets – Current Liabilities $230,000 – $150,000 = $80,000 Current Ratio = Current Assets ÷ Current Liabilities $230,000 ÷ $150,000 = 1.53 Payables Turnover = (Cost of Goods Sold ± Change in Merchandise Inventory) ÷ Average Accounts Payable ($840,000 + $40,000) ÷ [($130,000 + $90,000) ÷ 2] = 8 times Days’ Payable = 365 days ÷ 8 = 45.63 days PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 2. Prepare journal entries without explanations for the following transactions involving notes payable for Marion Company, whose fiscal year ends September 30. Sept.

Nov.

30 9

Received cash for a 60-day, 12 percent, $20,000 note payable. Interest is in addition to the face value. Made end-of-year adjusting entry to accrue interest expense for the note. Paid amount due on the note plus interest.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date Sept.

General Journal Description 10 Cash Notes Payable 30 Interest Expense Interest Payable $20,000  .12  20/365 = $131.51

Nov.

9 Notes Payable Interest Payable Interest Expense Cash $20,000  .12  40/365 = $263.01

Post. Ref.

Debit

Page 1 Credit

20,000.00 20,000.00 131.51 131.51

20,000.00 131.51 263.01 20,394.52

PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 3. Prepare journal entries without explanations for the following transactions involving notes payable for Gomez Company, whose fiscal year ends June 30. June

Sept.

20 Paid a trade account payable with a 90-day, 9 percent $60,000 note. Interest is in addition to the face value. 30 Made end-of-year adjusting entry to accrue interest expense for the note. 30 Made end-of-year closing entry pertaining to interest expense. 18 Paid amount due on note, plus interest.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date June

Sept.

General Journal Description 20 Accounts Payable Notes Payable

Post. Ref.

Debit 60,000.00

60,000.00

30 Interest Expense Interest Payable $60,000  .09  10/365 = $147.95

147.95

30 Income Summary Interest Expense

147.95

18 Notes Payable Interest Payable Interest Expense Cash $60,000  .09  80/365 = $1,183.56

Page 1 Credit

147.95

147.95 60,000.00 147.95 1,183.56 61,331.51

PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 4. Lee Provo is paid $8 per hour, plus time-and-one-half for hours over 40 for a given week. During the week of January 21, Provo worked 46 hours. Social security taxes are 6.2 percent, Medicare taxes are 1.45 percent, $50 is withheld for federal income taxes, $12 is withheld for state income taxes, and $15 is withheld for medical insurance. In addition, Provo's employer must pay social security taxes of 6.2 percent, Medicare taxes of 1.45 percent, state unemployment taxes of 5.4 percent, and federal unemployment taxes of .8 percent. Calculate (a) Provo's gross earnings, (b) Provo's take-home pay, (c) the employer's payroll taxes expense, and (d) the total cost of employing Provo for the week. Round all amounts to the nearest penny. ANS: a. $392.00 [(40  $8) + (6  $12)] b. $285.02 [392 – ($392  .062) – ($392  .0145) – $50 – $12 – $15] c. $54.28 [($392  .062) + ($392  .0145) + ($392  .062)] d. $446.28 ($392 + $54.28) PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Recording the payroll MSC: ACBSP-APC-14-Payroll/Other Compensation

5. Peter Perry is paid $12 per hour, plus double-time for hours worked on weekends. During the two-week period ending March 5, Perry worked 70 hours on weekdays and 8 hours on weekends. Social security taxes are 6.2 percent, Medicare taxes are 1.45 percent, $130 is withheld for federal taxes, $36 is withheld for state income taxes, and $48 is withheld for charities. In addition, Perry’s employer must pay social security taxes of 6.2 percent, Medicare taxes of 1.45 percent, federal unemployment taxes of .8 percent, and state unemployment taxes of 5.4 percent. Calculate (a) Perry’s gross earnings, (b) Perry’s net pay, (c) the employer's payroll taxes expense, and (d) the total cost of employing Perry for the two-week period. Round all amounts to the nearest penny. ANS: a. $1,032.00 [(70  $12) + (8  $24)] b. $739.05 [1,032 – ($1,032  .062) – ($1,032  .0145) – $130 – $36 – $48] c. $142.93 [($1,032  .062) + ($1,032  .0145) + ($1,032  .062)] d. $1,174.93 ($1,032 + $142.93) PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Recording the payroll MSC: ACBSP-APC-14-Payroll/Other Compensation 6. The following totals for the month of March were taken from the payroll register of the Foothill Company: Salaries (all subject to social security and Medicare taxes) Federal income taxes withheld Medical insurance deductions Life insurance deductions Salaries subject to unemployment taxes Medicare tax rate Social security tax rate

$14,000 3,500 700 400 11,000 1.45% 6.2%

Prepare journal entries without explanations to record the following. Round amounts to the nearest dollar. a. Monthly payroll b. Accrual of employer's payroll taxes (assuming the social security and Medicare taxes to be equal to the amount for employees, a FUTA tax of .8 percent, and a state unemployment tax of 5.4 percent)

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date a.

General Journal Description

Post. Ref.

Debit

Salaries Expense Social Security Tax Payable Medicare Tax Payable Employees' Federal Income Taxes Payable Medical Insurance Premiums Payable Life Insurance Premiums Payable Salaries Payable $14,000  .062 = $868 $14,000  .0145 = $203

14,000

Payroll Taxes Expense Social Security Tax Payable Medicare Tax Payable Federal Unemployment Tax Payable State Unemployment Tax Payable $11,000  .008 = $88 $11,000  .054 = $594

1,753

Page 1 Credit

868 203 3,500 700 400 8,329

868 203 88 594

PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Recording the payroll MSC: ACBSP-APC-14-Payroll/Other Compensation 7. Contrast the accounting problems presented by definitely determinable liabilities and those associated with estimated liabilities. ANS: Definitely determinable liabilities require the accountant to determine the existence and amount of the liabilities and to see that they are recorded properly. With estimated liabilities, the primary accounting problem is to estimate and record the amount of the liability. PTS: 1 DIF: Challenging OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement KEY: Definitely determinable liabilities | Estimated liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting

LOC: Critical Thinking

8. Hatley Corporation borrowed $10 million to finance the construction of a new building. In addition to the annual interest that is not included in the face, one-tenth of the principal amount borrowed is to be repaid each year. If the borrowing occurred one month prior to year end, how should the loan be presented on the upcoming balance sheet? ANS: Nine million dollars of the loan should be classified as a long-term liability. The first $1 million principal repayment should be classified as a current liability because it will be repaid within a year of the balance sheet date. PTS: 1 DIF: Challenging OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Critical Thinking KEY: Definitely determinable liabilities MSC: ACBSP-APC-16-Current Liabilities Reporting 9. Explain why the cost of employing someone is more than just the wage or salary paid to the employee. ANS: The cost of employing an individual includes the gross wages or salary paid to the employee plus payroll taxes such as state and federal unemployment tax. The employer also pays social security and Medicare taxes in an amount equal to what the employee contributed. Other costs that could be incurred are paid benefits such as medical insurance, pension plan contributions, profit-sharing plans, etc. PTS: 1 DIF: Challenging OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Critical Thinking KEY: Recording the payroll MSC: ACBSP-APC-14-Payroll/Other Compensation 10. List four different types of contingent liabilities and two different types of commitments. ANS: Contingent Liabilities: Lawsuits Income tax disputes Discounted notes receivable Guarantees of debt Failure to follow government regulations Commitments: Purchase agreement Lease Note: answers may vary PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Contingent liabilities and commitments MSC: ACBSP-APC-16-Current Liabilities Reporting

LOC: Comprehension

11. You win the grand prize and can choose between receiving $200,000 today or $40,000 per year for seven years. Ignoring income taxes, how would you go about making your decision? ANS: The present value of the $40,000 annuity must be calculated and the results compared with the $200,000 receivable today. The higher figure will dictate the decision. Choosing an appropriate interest rate to use in the present value computation is critical. An interest rate of 10 percent or more makes the first option more desirable. PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Critical Thinking

12. Calculate answers to the following questions using future value and/or present value tables. a. Tally purchased machinery by executing a $30,000 non-interest-bearing note due in four years. For how much should the machinery be recorded, assuming that the going rate for similar notes is 6 percent? b. Mindy Kwon is making bank deposits of $3,000 at the end of each year for five years, for purposes of buying a car. Assuming an interest rate of 7 percent, how expensive of a car will she be able to purchase? c. To how much will $2,000 grow, assuming it is invested for 2-1/2 years, with interest of 8 percent, compounded quarterly? d. Liz Astor would like to make a lump-sum deposit today so that she can withdraw $10,000 at the end of each year for the next three years. Assuming a 9 percent interest rate, what should she invest today? ANS: a. $23,760 [30,000  .792 (PV of $1)] b. $12,300 [3,000  4.1 (PV of O.A.)] c. $2,439 [2,000 ÷ 0.82 (PV of $1 @ n = 10, i = 2%)] d. $25,310 [10,000  2.531 (PV of O.A.)] PTS: 1 DIF: Moderate OBJ: 4 | 5 NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

13. Calculate answers to the following questions using future value and/or present value tables. a. If $100 is deposited in an account paying 8 percent simple interest, what will be the value of the account in five years? b. If an accumulation of $4,000 is desired at the end of four years, what amount must be deposited now to accomplish that goal, assuming 12 percent interest compounded annually? c. A deposit of $1,000 made at the end of every six months for five years will grow to what amount, assuming 10 percent interest compounded semiannually? d. What is the present value of $150 received at the end of each year for 4 years, assuming 9 percent interest compounded annually? e. What amount must be deposited at the bank today to grow to $10,000 in five years, assuming 14 percent interest compounded semiannually? ANS: a. $140 [(100  .08  5) + $100] b. $2,544 [4,000  .636 (PV of $1)] c. $7,722 [1,000  7.722 (PV of $1 @ n = 10, i = 5%)] d. $486 [150  3.240 (PV of O.A.)] e. $5,080 [10,000  .508 (PV of $1 @ n = 10, i = 7%)] PTS: 1 DIF: Moderate OBJ: 4 | 5 NAT: AACSB Analytic | AICPA FN Measurement KEY: Time value of money MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

Chapter 09 - Long Term Assets TRUE/FALSE 1. Asset impairment occurs when the fair value of a long-term asset falls below its carrying value. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Matching rule and long-term assets MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 1 LOC: Recall

2. Fair value is the amount for which an asset could be bought or sold in a current transaction. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Valuation of long-term assets MSC: ACBSP-APC-13-Long-term Assets Reporting 3. Book value refers to unexpired portion of an asset’s cost. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Valuation of long-term assets MSC: ACBSP-APC-13-Long-term Assets Reporting 4. A natural resource is subject to a process called depletion. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Natural resources MSC: ACBSP-APC-13-Long-term Assets Reporting 5. A reduction in carrying value as a result of impairment is recorded as a gain. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Matching rule and long-term assets MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 1 LOC: Recall

6. Depreciation refers to the periodic allocation of the cost of a tangible long-lived asset over its estimated useful life. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 7. Intangible assets are subject to a process called depletion. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting

8. Mineral deposits are subject to a process called amortization. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Natural resources MSC: ACBSP-APC-13-Long-term Assets Reporting 9. An older term for long-term assets is variable assets. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Acquisition of long-term assets MSC: ACBSP-APC-13-Long-term Assets Reporting 10. Land held for speculative purposes should be classified as a long-term investment. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Acquisition of long-term assets MSC: ACBSP-APC-13-Long-term Assets Reporting 11. Inventory is not classified as a long-term asset. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Long-term assets MSC: ACBSP-APC-13-Long-term Assets Reporting 12. Free cash flow is a good measure of a company's ability to finance long-term assets. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Long-term assets MSC: ACBSP-APC-13-Long-term Assets Reporting 13. In the calculation of free cash flow, dividends and purchases of plant assets are both deducted. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Long-term assets MSC: ACBSP-APC-13-Long-term Assets Reporting 14. If the net present value of a long-term asset under consideration for purchase is negative, then the asset should not be purchased. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Capital investment process MSC: ACBSP-APC-13-Long-term Assets Reporting 15. A positive net present value of a long-term asset under consideration for purchase indicates that the asset should not be purchased. ANS: F PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Capital investment process MSC: ACBSP-APC-13-Long-term Assets Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

16. A tractor held by a farm equipment company for sale to farmers is classified as a long-term asset. ANS: F PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Long-term assets MSC: ACBSP-APC-13-Long-term Assets Reporting 17. A building not currently used because economic conditions have limited a company's expansion should not be classified as property, plant, and equipment. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Long-term assets MSC: ACBSP-APC-13-Long-term Assets Reporting 18. Leasehold improvements become the property of the lessor at the end of the lease. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Recall

19. A betterment adds to the physical layout of an asset. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Recall

20. The replacement of tires on a truck is considered an ordinary repair. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Recall

21. Small expenditures for what ordinarily are considered revenue expenditures are expensed as incurred. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Recall

22. Additions and betterments are examples of revenue expenditures. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Recall

23. The cost of land would not include the cost of a building purchased with the land and torn down because it was not needed. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Recall

24. The cost of equipment would include the cost of test runs to see that the equipment is operating properly. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Recall

25. Driveways and parking lots are properly included in the Land Improvements account because they are subject to depreciation. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Recall

26. The cost of land should include accrued property taxes paid by the purchaser. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Recall

27. The cost of repairing a machine damaged during installation should be charged to the cost of the equipment. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Recall

28. The cost of a sewage system should be included in the Land Improvements account. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Recall

29. A capital expenditure is an expenditure that benefits several future accounting periods. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Recall

30. Leasehold improvements are subject to depreciation because they have a limited life. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Recall

31. Ordinary repairs usually result in a debit to the appropriate Accumulated Depreciation account. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Comprehension

32. Extraordinary repairs are recorded with a debit to Accumulated Depreciation. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Comprehension

33. Installation of an air-conditioning system is considered a betterment. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Comprehension

34. A debit to Accumulated Depreciation will increase the carrying value of an asset. ANS: T PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 35. The routine overhaul of the engine of a company vehicle is an example of an ordinary repair. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Comprehension

36. A capital expenditure will result in an immediate increase in long-term assets. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Comprehension

37. The cost of assets acquired for a lump sum should be apportioned between the acquired assets. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Comprehension

38. A revenue expenditure results in the immediate recognition of an expense. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Comprehension

39. A capital expenditure results in the recognition of an asset. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Comprehension

40. In accounting, depreciation means the decline in value of an asset. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 41. One reason for an asset's limited useful life is physical deterioration. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 42. Depreciation is a process of allocation, not of valuation. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting

43. The straight-line method is an accelerated method of depreciation. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 44. Residual value is not relevant when calculating double-declining-balance depreciation. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 45. Federal tax law does not allow the rapid write-off of plant assets. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 46. Depreciation for tax purposes is identical to depreciation for financial reporting purposes. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 47. For tax purposes, small businesses may expense the first $500,000 of equipment expenditures, rather than having to allocate their costs over a number of years. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 48. Typically, depreciation calculations are rounded to the nearest whole month. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 49. One argument in favor of accelerated depreciation is that repair expense is likely to be smaller in later years. ANS: F PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 50. One argument in favor of accelerated depreciation is that the assets benefit is greater in the earlier years. ANS: T PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

51. When depreciation rates are revised, only the remaining years of the asset's life are affected by the new computation. ANS: T PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 52. Depreciation should not be recorded for a depreciable asset that is increasing in value. ANS: F PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 53. Accelerated methods of depreciation result in higher net income in the last years of an asset's life compared to the straight-line method. ANS: T PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 54. Computation of a partial year's depreciation is often required for the proper determination of net income. ANS: T PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 55. Group depreciation is not an appropriate method for a large company calculating depreciation on office equipment. ANS: F PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 56. Prior to the disposal of an asset, depreciation should be updated and recorded. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Disposal of depreciable assets MSC: ACBSP-APC-13-Long-term Assets Reporting 57. Gain on Sale of Machinery is recorded as a credit. ANS: T PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Disposal of depreciable assets MSC: ACBSP-APC-13-Long-term Assets Reporting

58. When the trade-in allowance exceeds the carrying value of an asset exchanged, a loss has occurred. ANS: F PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Disposal of depreciable assets MSC: ACBSP-APC-13-Long-term Assets Reporting 59. Plant asset exchanges can only be categorized as the exchange of similar assets. ANS: F PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Disposal of depreciable assets MSC: ACBSP-APC-13-Long-term Assets Reporting 60. When disposing of equipment, the Equipment account is credited for the existing carrying value. ANS: F PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Disposal of depreciable assets MSC: ACBSP-APC-13-Long-term Assets Reporting 61. When disposing of equipment, Accumulated Depreciation is debited for the existing accumulated depreciation on the equipment. ANS: T PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Disposal of depreciable assets MSC: ACBSP-APC-13-Long-term Assets Reporting 62. When an asset lasts longer than its estimated useful life, depreciation no longer should be recorded past the point at which its carrying value equals its residual value. ANS: T PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 63. A $2,000 gain on the sale of an asset means that $2,000 in cash was received. ANS: F PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Disposal of depreciable assets MSC: ACBSP-APC-13-Long-term Assets Reporting 64. In calculating the depletion of a natural resource, its useful life in years is irrelevant. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Natural resources MSC: ACBSP-APC-13-Long-term Assets Reporting 65. Natural resources are classified as long-term assets on the balance sheet. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Natural resources MSC: ACBSP-APC-13-Long-term Assets Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

66. Under the successful efforts method, the costs of both successful and unsuccessful exploration for oil and gas are recorded as assets. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Natural resources MSC: ACBSP-APC-13-Long-term Assets Reporting 67. An on-site building with a twelve-year life will be abandoned after the associated timber tract with a nine-year life is depleted. The building should be depreciated over twelve years. ANS: F PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Natural resources MSC: ACBSP-APC-13-Long-term Assets Reporting 68. Drilling equipment with a five-year useful life is used solely in conjunction with an oil well that has an eight-year life. The equipment should be depreciated over eight years. ANS: F PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Natural resources MSC: ACBSP-APC-13-Long-term Assets Reporting 69. Goodwill equals the excess paid for a business over the fair market value of the net assets purchased. ANS: T PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 70. According to generally accepted accounting principles, most expenditures for intangible assets acquired from others should be treated as revenue expenditures when incurred. ANS: F PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 71. A patent has a legal life of 30 years. ANS: F PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 72. The exclusive right to sell a computer program is called a copyright. ANS: F PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 73. The exclusive right to use an identifying symbol is called a trademark. ANS: T PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

74. Customer lists are classified as intangible assets. ANS: T PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 75. Noncompete covenants should be amortized over the specified life of the contract. ANS: T PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 76. If the fair value of goodwill is less than its carrying value, an impairment loss must be recorded. ANS: T PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 77. Licenses are properly classified as intangible assets. ANS: T PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 78. An intangible asset with a determinable useful life should be amortized over the legal life of the asset. ANS: F PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 79. Estimated useful life and legal life are synonymous terms when dealing with intangible assets. ANS: F PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 80. A copyright should be amortized over useful life of the copyright and not the life of the author, plus 70 years. ANS: T PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 81. Research and development costs normally are capitalized and amortized over the estimated sales life of the product developed. ANS: F PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

82. The cost of developing computer software should be capitalized and amortized over the software's useful life after it has been proved technologically feasible. ANS: T PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 83. When a company can prove it is worth more than its balance sheet indicates, it may record some goodwill. ANS: F PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 84. The cost to defend a patent successfully should be added to the acquisition cost of the patent. ANS: T PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting MULTIPLE CHOICE 1. Which of the following is not a component of free cash flow? a. Sales of plant assets b. Gross profit c. Dividends d. Net cash flows from operating activities ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Long-term assets MSC: ACBSP-APC-13-Long-term Assets Reporting 2. Which of the following assets is not subject to depreciation, depletion, or amortization? a. Buildings b. Oil Fields c. Land d. Copyrights ANS: C PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Long-term assets

OBJ: 1 LOC: Recall

3. The term used to describe the allocation of the cost of an intangible asset to the periods it benefits is a. depletion. b. apportionment. c. amortization. d. depreciation. ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

4. Which of the following is not classified properly as property, plant, and equipment? a. Land improvements, such as parking lots and fences b. Natural resources c. Land used in ordinary business operations d. A truck held for resale by an automobile dealership ANS: D PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Long-term assets MSC: ACBSP-APC-13-Long-term Assets Reporting 5. The unexpired cost of a plant asset is referred to as its a. depreciable cost. b. carrying value. c. fair value. d. impairment value. ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Valuation of long-term assets MSC: ACBSP-APC-13-Long-term Assets Reporting 6. Which of the following is not a characteristic of all long-term assets? a. Possess physical substance b. Not for resale c. Used in operations of business d. Useful life of more than a year ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Long-term assets MSC: ACBSP-APC-13-Long-term Assets Reporting 7. Which of the following is not considered an intangible asset? a. Software b. Mines c. A franchise d. Goodwill ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 8. Which of the following is subject to depletion? a. A coal mine b. Plant machinery c. A copyright d. Land ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Natural resources MSC: ACBSP-APC-13-Long-term Assets Reporting

9. Carrying value a. equals cost minus accumulated depreciation. b. equals cost minus residual value. c. is the expired cost of an asset. d. is the same as residual value. ANS: A PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Valuation of long-term assets

OBJ: 1 LOC: Recall

10. The cost of a long-term asset is expensed a. in the period in which it is sold. b. in the period in which it is acquired. c. as the asset benefits the company. d. when it is paid for. ANS: C PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Valuation of long-term assets MSC: ACBSP-APC-13-Long-term Assets Reporting 11. If net cash flows from operating activities total $208,000, purchases of plant assets total $60,000, dividends total $24,000, and sales of plant assets total $34,000, the free cash flow equals a. $158,000. b. $326,000. c. $210,000. d. $90,000. ANS: A $208,000 – $24,000 – $60,000 + $34,000 = $158,000 PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Long-term assets MSC: ACBSP-APC-13-Long-term Assets Reporting 12. Which of the following would not be included in the cost of land? a. Grading the land b. Sewer assessment from local government c. Cost of making a driveway d. Commission to real estate agent ANS: C PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Recall

13. Which of the following would not be debited to the Machinery account? a. Installation costs b. Electricity used by the machine c. Freight charges d. Cost of trial runs ANS: B

PTS: 1

DIF: Easy

OBJ: 2

NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

LOC: Recall

14. Interest costs are included in the cost of an asset in conjunction with a. long-term assets being purchased. b. long-term assets acquired for speculative purposes. c. long-term assets being constructed. d. natural resources and intangible assets. ANS: C PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Recall

15. The construction of a new wing on an existing building is best described as a(n) a. addition. b. ordinary repair. c. revenue expenditure. d. leasehold expenditure. ANS: A PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Recall

16. The Land account would include all of the following costs except a. lawyers’ fees. b. accrued taxes paid by the purchaser. c. the cost of building a fence. d. the cost of tearing down a building. ANS: C PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Recall

17. The Equipment account would include all of the following costs except a. buying expenses. b. maintenance costs. c. equipment test runs. d. excise taxes and tariffs. ANS: B PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Recall

18. The cost of tearing down a building on land just purchased should be a. debited to the Land account. b. debited to the Land Improvements account. c. debited to the Buildings account. d. expensed immediately. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Comprehension

19. A capital expenditure results in a debit to a(n) a. expense account. b. revenue account. c. asset account. d. stockholders’ equity account. ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Comprehension

20. An expenditure for which of the following items would be considered a revenue expenditure? a. Plant assets b. Ordinary repair c. Addition d. Betterment ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Comprehension

21. Which of the following is not a characteristic of an ordinary repair? a. An expense of the current period. b. Periodic in nature. c. Necessary to maintain the asset in good operational condition. d. Extends the useful life or increases the residual value of the asset. ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Comprehension

22. Extraordinary repairs usually are recorded by making a debit to a. a capital account. b. Repair Expense. c. a contra-asset account. d. an asset account. ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Comprehension

23. Which of the following would be considered a capital expenditure? a. A truck tune-up b. Machine maintenance c. Installation of a solar heating system d. Painting a room ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Comprehension

24. Which of the following would be considered a revenue expenditure? a. Cleaning the ink from a printing press b. Addition of a storeroom c. Purchase of office furniture d. Installation of audiovisual equipment in a classroom ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Comprehension

25. A revenue expenditure results in a a. debit to an expense account. b. credit to an expense account. c. debit to an asset account. d. credit to an asset account. ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Comprehension

26. The Accumulated Depreciation account typically is debited when a(n) a. betterment has been made. b. ordinary repair has been made. c. extraordinary repair has been made. d. addition has been made. ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Comprehension

27. Which of the following would be considered a revenue expenditure? a. Purchase of a microcomputer b. Installation of a heating system c. Addition of a building wing d. Replacement of a truck's battery

ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Comprehension

28. Which of the following would be considered a capital expenditure? a. Cost to acquire a printing press b. Cost to lubricate a machine c. Cost to replace some light bulbs d. Cost to paint the factory wall ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Comprehension

29. An expenditure to lengthen the useful life of a company vehicle would require a a. credit to Company Vehicles. b. debit to Vehicle Maintenance Expense. c. credit to Depreciation Expense. d. debit to Accumulated Depreciation. ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Comprehension

30. Which of the following would not be considered a capital expenditure? a. The addition of a building wing b. A tune-up of a company vehicle c. A complete overhaul of an air-conditioning system d. The cost of installing a piece of equipment ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Comprehension

31. In general, a cost incurred in conjunction with a long-term asset is included in the long-term asset account when the cost a. is incurred subsequent to asset use. b. exceeds a certain dollar amount. c. is incurred prior to asset use. d. will expire in less than one year. ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Comprehension

32. It is necessary to distinguish between capital and revenue expenditures because of which of the following accounting rules or principles? a. Matching b. Conservatism c. Cost-benefit d. Consistency ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Comprehension

33. The expensing of a long-lived asset such as a wastebasket is justified by which of the following accounting rules or principles? a. Matching b. Materiality c. Cost-benefit d. Conservatism ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Comprehension

34. Land and a building on the land are purchased for $1,296,000. The appraised values of the land and building are $340,000 and $1,020,000, respectively. The cost allocated to the land should be a. $992,000. b. $324,000. c. $344,000. d. $972,000. ANS: B Appraised percentage of land: $340,000 ÷ ($340,000 + $1,020,000) = 25% Cost allocated to land: $1,296,000 x 25% = $324,000 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

LOC: Application

35. Land and a building on the land are purchased for $672,000. The appraised values of the land and building are $120,000 and $600,000, respectively. The cost allocated to the building should be a. $56,000. b. $244,000. c. $300,000. d. $560,000. ANS: D Appraised percentage of building: $600,000 ÷ ($120,000 + $600,000) = 83.33% Cost allocated to building: $672,000 x 83.33% = $560,000

PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

LOC: Application

36. A company purchases land and a building on the land. The land is appraised at $160,000 and the building at $640,000. If the Land account is debited for $208,000, then the total purchase price for the land and building must have been a. $800,000. b. $832,000. c. $1,040,000. d. $848,000. ANS: C Appraised percentage of land: $160,000 ÷ ($160,000 + $640,000) = 20% Total purchase price: $208,000 ÷ 20% = $1,040,000 PTS: 1 DIF: Challenging OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

LOC: Analysis

37. If a capital expenditure is incorrectly recorded on a company's books as a revenue expenditure, which of the following statements will be true? a. Net income will be overstated for the year. b. Stockholders' equity will be overstated at year end. c. Total assets will be understated at year end. d. Net income in the following year will be understated. ANS: C PTS: 1 DIF: Challenging NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Analysis

38. If a revenue expenditure is incorrectly recorded on a company's books as a capital expenditure, which of the following statements will be true? a. Stockholders' equity will be understated at year end. b. Net income in the following year will be unaffected. c. Total assets will be understated at year end. d. Net income will be overstated for the year. ANS: D PTS: 1 DIF: Challenging NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

OBJ: 2 LOC: Analysis

39. Which of the following most appropriately describes depreciation? a. Decline in value of plant asset b. Allocation of cost of plant asset c. Physical deterioration of plant asset d. Gradual obsolescence of plant asset © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: B PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 40. All of the following are needed for the computation of depreciation except a. residual value. b. estimated useful life. c. cost. d. current market value. ANS: D PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 41. The depreciable cost of an asset is a. the unexpired cost of the asset. b. original cost minus residual value. c. the expired cost of the asset. d. original cost minus accumulated depreciation. ANS: B PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 42. Salvage value is not the same as a. carrying value. b. residual value. c. disposal value. d. scrap value. ANS: A PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 43. Which of the following methods ignores residual value initially but eventually considers it in the calculation of depreciation? a. Straight-line b. Double-declining-balance c. Group d. Production ANS: B PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 44. Which of the following would not be a basis for estimating the useful life of a piece of equipment? a. Potential production in units b. Potential miles of service c. Salvage value d. Years of service

ANS: C PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 45. Which of the following depreciation methods is the most logical for a machine that produces discrete (i.e., separate) units? a. Double-declining-balance b. Straight-line c. Group d. Production ANS: D PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 46. All of the following are possible reasons for using accelerated depreciation except a. greater efficiency of assets when new. b. increasing repair costs in later years. c. rapid changes in technology. d. increasing use of an asset over the years. ANS: D PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 47. Which of the following accounting principles best justifies accelerated depreciation accounting? a. Materiality b. Matching c. Cost-benefit d. Conservatism ANS: B PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 48. A graph depicting yearly depreciation expense under an accelerated depreciation method will contain a line that goes a. vertically straight down. b. down as one goes from left to right. c. down and then up as one goes from left to right. d. up and down in a zig-zag as one goes from left to right. ANS: B PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 49. Accelerated depreciation assumes all of the following except that a. asset benefit increases with each year of use. b. the asset provides more benefit in the early years. c. obsolescence makes an asset less valuable in its later years. d. repair expense is less in the early years than in the later years. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: A PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 50. Which of the following is irrelevant in computing a machine's depreciation expense using the production method? a. Actual units produced in a given period b. Residual value c. Estimated useful life in years d. Estimated units produced over its life ANS: C PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 51. When calculating a partial year's depreciation, the length of time an asset has been owned usually is rounded to the nearest month. This rounding practice is justified by the principle or rule of a. matching. b. materiality. c. cost-benefit. d. conservatism. ANS: B PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 52. Machinery was purchased for $90,000. It had an estimated residual value of $14,000 and has a current carrying value of $18,000. Its depreciable cost must have been a. $72,000. b. $76,000. c. $64,000. d. $58,000. ANS: B $90,000 – $14,000 = $76,000 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 53. A machine was purchased for $78,000. It has a current carrying value of $36,000 and had a depreciable cost of $50,000. Its estimated residual value must have been a. $36,000. b. $28,000. c. $22,000. d. $42,000. ANS: B $78,000 – $50,000 = $28,000 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

54. Equipment was purchased for $78,000. It had an estimated residual value of $12,000 and has a current carrying value of $50,000. Its depreciable cost must have been a. $62,000. b. $42,000. c. $66,000. d. $28,000. ANS: C $78,000 – $12,000 = $66,000 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 55. Office furniture was purchased for $28,000. It had an estimated residual value of $4,000 and has a current carrying value of $12,000. Its depreciable cost must have been a. $30,000. b. $18,000. c. $24,000. d. impossible to determine from the facts given. ANS: C $28,000 – $4,000 = $24,000 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 56. A truck was purchased for $80,000. It has a current carrying value of $52,000 and had a depreciable cost of $72,000. Its estimated residual value must have been a. $8,000. b. $20,000. c. $28,000. d. impossible to determine from the facts given. ANS: A $80,000 – $72,000 = $8,000 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 57. A building was purchased for $460,000. It currently has accumulated depreciation of $80,000 and had a residual value of $100,000. Assuming the use of straight-line depreciation, its estimated useful life must have been a. 5 years. b. 10 years. c. 14 years. d. impossible to determine from the facts given.

ANS: D PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 58. A delivery truck was purchased for $32,000 two years ago. It has a carrying value of $24,000 and an estimated residual value of $4,000. Assuming the use of straight-line depreciation, the truck's estimated useful life must have been a. three and one-half years. b. seven years. c. 14 years. d. impossible to determine from the facts given. ANS: B Depreciation expense per year: $32,000 – $24,000 = $8,000 ÷ 2 = $4,000 Estimated useful life: ($32,000 – $4,000) ÷ $4,000 = 7 years PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 59. If an asset costs $70,000, has a residual value of $6,000, and has a useful life of five years, the entry to record depreciation in the second year, using the double-declining-balance method, is: a. Depreciation Expense - Asset 16,100 Cash 16,100 b. Depreciation Expense - Asset 16,800 Accumulated Depreciation - Asset

16,800

c. Depreciation Expense - Asset 17,500 Accumulated Depreciation - Asset

17,500

d. Accumulated Depreciation - Asset Depreciation Expense - Asset

18,200 18,200

ANS: B Annual depreciation rate: 100% ÷ 5 x 2 = 40% Depreciation expense, Year 1: $70,000 x 40% = $28,000 Depreciation expense, Year 2: ($70,000 – $28,000) x 40% = $16,800 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 60. A piece of equipment is purchased for $70,000. It has a five-year life and a $10,000 residual value. Under the straight-line method, what is the asset's carrying value after three years? a. $46,000 b. $34,000 c. $24,000 d. $36,000

ANS: B Annual depreciation expense: ($70,000 – $10,000) ÷ 5 = $12,000 Carrying value after three years: $70,000 – ($12,000 x 3) = $34,000 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 61. A truck is purchased for $35,000. It has a five-year life and a $5,000 residual value. Under the double-declining-balance method, what is the accumulated depreciation after two years? a. $19,200 b. $21,200 c. $22,400 d. $25,600 ANS: C Annual depreciation rate: 100% ÷ 5 x 2 = 40% Depreciation expense, Year 1: $35,000 x 40% = $14,000 Depreciation expense, Year 2: ($35,000 – $14,000) x 40% = $8,400 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 62. Hickman Company purchases a piece of equipment on Jan. 2, 2013, for $60,000. The equipment has an estimated life of eight years or 50,000 units of production and an estimated residual value of $6,000. Hickman uses a calendar fiscal year. The entry to record the amount of depreciation for 2013, using the straight-line method, is: a. Depreciation Expense– Equipment 7,500 Cash 7,500 b. Depreciation Expense — Equipment Accumulated Depreciation– Equipment

6,750

c. Depreciation Expense — Equipment Accumulated Depreciation– Equipment

5,000

6,750

d. Accumulated Depreciation - Equipment Cash

5,000 4,500 4,500

ANS: B Depreciation expense: ($60,000 – $6,000) ÷ 8 = $6,750 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting

63. Hickman Company purchases a piece of equipment on Jan. 2, 2013, for $60,000. The equipment has an estimated life of eight years or 50,000 units of production and an estimated residual value of $6,000. Hickman uses a calendar fiscal year. The entry to record the amount of depreciation for 2013, using the double-declining-balance method, is: a. Depreciation Expense– Equipment 9,000 Cash 9,000 b. Cash

10,000 Accumulated Depreciation– Equipment

10,000

c. Depreciation Expense — Equipment Accumulated Depreciation– Equipment

11,000

d. Depreciation Expense — Equipment Accumulated Depreciation– Equipment

15,000

11,000

15,000

ANS: D Annual depreciation rate: 100% ÷ 8 x 2 = 25% Depreciation expense, Year 1: $60,000 x 25% = $15,000 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 64. Hickman Company purchases a piece of equipment on Jan. 2, 2013, for $60,000. The equipment has an estimated life of eight years or 50,000 units of production and an estimated residual value of $6,000. Hickman uses a calendar fiscal year. The entry to record the amount of depreciation for 2013, using the production method and assuming that 6,100 units are produced, is: a. Equipment 6,100 Accumulated Depreciation– Equipment 6,100 b. Equipment Accumulated Depreciation– Equipment

6,344

c. Depreciation Expense — Equipment Accumulated Depreciation– Equipment

6,588

d. Depreciation Expense — Equipment Accumulated Depreciation– Equipment

6,832

6,344

6,588

6,832

ANS: C Annual depreciation rate: ($60,000 – $6,000) ÷ 50,000 = $1.08 Depreciation expense: 6,100 x $1.08 = $6,588 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting

65. Equipment is purchased for $80,000. It has an eight-year useful life and a $39,250 residual value. Under the double-declining-balance method, what is the depreciation expense for year 3? a. $11,250 b. $5,250 c. $5,750 d. $6,250 ANS: C Annual depreciation rate: 100% ÷ 8 x 2 = 25% Depreciation expense, Year 1: $80,000 x 25% = $20,000 Depreciation expense, Year 2: ($80,000 – $20,000) x 25% = $15,000 Depreciation expense, Year 3: ($60,000 – $15,000) – $39,250 = $5,750 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 66. On January 1, a machine with a useful life of five years and a residual value of $6,000 is purchased for $30,000. What is the depreciation expense in year 3 under straight-line depreciation? a. $6,000 b. $4,800 c. $14,400 d. $18,000 ANS: B ($30,000 – $6,000) ÷ 5 = $4,800 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 67. On January 1, a machine with a useful life of five years and a residual value of $6,000 is purchased for $30,000. What is the depreciation expense in year 2 using the double-declining-balance method? a. $7,200 b. $9,600 c. $8,160 d. $12,000 ANS: A Annual depreciation rate: 100% ÷ 5 x 2 = 40% Depreciation expense, Year 1: $30,000 x 40% = $12,000 Depreciation expense, Year 2: ($30,000 – $12,000) x 40% = $7,200 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting

68. Equipment is purchased for $120,000. It has a five-year useful life and a $20,000 residual value. Under the double-declining-balance method, what is the depreciation expense for year 3? a. $17,280 b. $15,360 c. $14,400 d. $12,800 ANS: A Annual depreciation rate: 100% ÷ 5 x 2 = 40% Depreciation expense, Year 1: $120,000 x 40% = $48,000 Depreciation expense, Year 2: ($120,000 – $48,000) x 40% = $28,800 Depreciation expense, Year 3: ($120,000 – $48,000 – $28,800) x 40% = $17,280 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 69. A building was purchased for $500,000. It has accumulated depreciation of $80,000 and had a residual value of $100,000. Assuming the use of straight-line depreciation, its estimated useful life must have been a. 15 years. b. ten years. c. five years. d. impossible to determine from the facts given. ANS: D PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 70. McMinn, Inc. purchased equipment for $100,000. The equipment had an estimated useful life of eight years and an estimated residual value of $12,000. After five years of use, the estimated residual value is changed to $18,000. Assuming straight-line depreciation, depreciation expense in year 6 would be a. $9,000. b. $11,000. c. $10,250. d. $15,000. ANS: A Original depreciation: ($100,000 – $12,000) ÷ 8 = $11,000 Carrying value before estimate revision: $100,000 – ($11,000 x 5) = $45,000 Depreciation in year 6: ($45,000 – $18,000) ÷ 3 = $9,000 PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting

71. Danny's Delivery Service purchased a delivery van for $30,000. The van had an estimated useful life of six years and an estimated residual value of $6,000. After four years of use, the total estimated useful life is revised to seven years. Assuming straight-line depreciation, depreciation expense in year 5 would be a. $2,667. b. $4,667. c. $2,000. d. $1,143. ANS: A Original depreciation: ($30,000 – $6,000) ÷ 6 = $4,000 Carrying value before estimate revision: $30,000 – ($4,000 x 4) = $14,000 Depreciation in year 3: ($14,000 – $6,000) ÷ 3 = $2,667 PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 72. Equipment costing $60,000 with a residual value of $6,000 and an estimated life of eight years has been depreciated using the straight-line method for two years. Assuming a revised estimated total life of five years, the depreciation expense for year 3 would be a. $6,750. b. $9,000. c. $13,500. d. $10,800. ANS: C Original depreciation: ($60,000 – $6,000) ÷ 8 = $6,750 Carrying value before estimate revision: $60,000 – ($6,750 x 2) = $46,500 Depreciation in year 3: ($46,500 – $6,000) ÷ 3 = $13,500 PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 73. An asset was purchased for $200,000. It had an estimated residual value of $40,000 and an estimated useful life of ten years. After four years of use, the estimated residual value is revised to $28,000. Assuming straight-line depreciation, depreciation expense in year 5 of use would be a. $18,000. b. $17,144. c. $28,668. d. $15,333. ANS: A Original depreciation: ($200,000 – $40,000) ÷ 10 = $16,000 Carrying value before estimate revision: $200,000 – ($16,000 x 4) = $136,000 Depreciation in year 5: ($136,000 – $28,000) ÷ 6 = $18,000 PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

74. A company purchases for $24,000 an asset that has a useful life of six years and no salvage value. After two years, the company spends $4,000 for a major overhaul that will extend the machine's useful life four years beyond the original six. Assuming straight-line depreciation, how much depreciation should be taken in year 3? a. $2,800 b. $2,500 c. $2,000 d. $4,000 ANS: B Original depreciation: $24,000 ÷ 6 = $4,000 Carrying value before overhaul: $24,000 – ($4,000 x 2) = $16,000 Depreciation in year 3: ($16,000 + $4,000) ÷ 8 = $2,500 PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 75. When an asset is sold, a gain is calculated as the difference between a. sale price and the depreciable cost of the asset sold. b. sale price and the carrying value of the asset sold. c. carrying value and the residual value of the asset sold. d. sale price and the original cost of the asset sold. ANS: B PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Disposal of depreciable assets MSC: ACBSP-APC-13-Long-term Assets Reporting 76. The entry to record the sale of equipment costing $80,000, with accumulated depreciation of $68,000 and sale price of $17,600, is: a. Cash 17,600 Accumulated Depreciation— Equipment 68,000 Equipment 80,000 Gain on Sale of Equipment 5,600 b. Accumulated Depreciation— Equipment Equipment Gain on Sale of Equipment

68,000

c. Accumulated Depreciation— Equipment Loss on Sale of Equipment Equipment

17,600 62,400

d. Accumulated Depreciation— Equipment Loss on Sale of Equipment Equipment

68,000 12,000

50,400 17,600

80,000

ANS: A PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Disposal of depreciable assets MSC: ACBSP-APC-13-Long-term Assets Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

77. An asset that cost $24,000 and has accumulated depreciation of $18,000 is sold for $5,200. The entry to record the sale is: a. Accumulated Depreciation— Asset 6,000 Asset 6,000 b. Cash Accumulated Depreciation— Asset Loss on Sale of Asset Asset

5,200 18,000 800

c. Loss on Sale of Asset Asset

18,800

d. Asset Accumulated Depreciation— Asset

18,000

24,000

18,800

18,000

ANS: B PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Disposal of depreciable assets MSC: ACBSP-APC-13-Long-term Assets Reporting 78. A truck that cost $24,000 and on which $18,000 of accumulated depreciation has been recorded was disposed of on January 1. If the truck was discarded as having no value, the entry to record this event is: a. Truck 24,000 Accumulated Depreciation— Truck 24,000 b. Truck Accumulated Depreciation— Truck

18,000

c. Accumulated Depreciation— Truck Truck Gain on Sale of Equipment

24,000

d. Accumulated Depreciation— Truck Loss on Sale of Truck Truck

18,000 6,000

18,000

18,000 6,000

24,000

ANS: D PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Disposal of depreciable assets MSC: ACBSP-APC-13-Long-term Assets Reporting

79. A truck that cost $12,000 and on which $9,000 of accumulated depreciation has been recorded was disposed of on January 1. Assume that the truck was disposed of for $2,000 cash. The entry to record this event is: a. Accumulated Depreciation— Truck 3,000 Truck 3,000 b. Accumulated Depreciation— Truck Loss on Sale of Truck Truck

9,000 3,000 12,000

c. Cash Accumulated Depreciation— Truck Loss on Sale of Truck Truck

2,000 9,000 1,000

d. Truck Accumulated Depreciation— Truck

9,000

12,000

9,000

ANS: C PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Disposal of depreciable assets MSC: ACBSP-APC-13-Long-term Assets Reporting 80. A truck that cost $24,000 and on which $18,000 of accumulated depreciation has been recorded was disposed of on January 1. Assume that the truck was traded for a similar truck having a price of $26,000, that an $3,600 trade-in was allowed, and that the balance was paid in cash. The amount of the gain or loss recognized on this transaction would be a. a $2,400 loss. b. a $2,400 gain. c. no gain recognized. d. no loss recognized. ANS: A $24,000 – $18,000 – $3,600 = $2,400 loss PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Disposal of depreciable assets MSC: ACBSP-APC-13-Long-term Assets Reporting 81. How is Accumulated Depletion disclosed in the financial statements? a. Contra-asset account b. Expense account c. Contra-expense account d. Revenue account ANS: A PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Natural resources MSC: ACBSP-APC-13-Long-term Assets Reporting

82. Which of the following items is not classified as a natural resource? a. Mineral deposits b. A gas reserve c. An oil well d. Patent ANS: D PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Natural resources MSC: ACBSP-APC-13-Long-term Assets Reporting 83. Plant assets used in conjunction with a natural resource typically are depreciated a. using income tax depreciation. b. using an accelerated depreciation method. c. on the same basis as depletion is computed. d. on a straight-line basis. ANS: C PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Natural resources MSC: ACBSP-APC-13-Long-term Assets Reporting 84. The depletion calculation is similar to which of the following depreciation methods? a. Double-declining-balance b. Straight-line c. Group d. Production ANS: D PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Natural resources MSC: ACBSP-APC-13-Long-term Assets Reporting 85. The amount of depletion of a coal mine in a year may differ from the depletion expense in the same year because a. depletion expense includes other costs in addition to depletion. b. depletion is based on the passage of time, whereas depletion expense is not. c. the mine is not in operation all year. d. some coal is unsold at the end of the year. ANS: D PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Natural resources MSC: ACBSP-APC-13-Long-term Assets Reporting 86. A specialized piece of equipment closely associated with a mine is most likely to be depreciated over a shorter than normal useful life because the a. equipment will be fully utilized. b. income tax laws require that a shorter life be used. c. equipment contains certain defects. d. mine is expected to be fully depleted in the shorter length of time. ANS: D PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Natural resources MSC: ACBSP-APC-13-Long-term Assets Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

87. The cost of a natural resource is expensed in the year during which the resource is a. purchased. b. extracted. c. paid for. d. sold. ANS: D PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Natural resources MSC: ACBSP-APC-13-Long-term Assets Reporting 88. Failure to record depletion for a given accounting period will result in a. understated total assets. b. understated total liabilities. c. overstated net income. d. overstated total liabilities. ANS: C PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Natural resources MSC: ACBSP-APC-13-Long-term Assets Reporting 89. Which of the following statements is true about successful efforts accounting? a. It is a depreciation method b. All costs are recorded as assets and then depleted over the resource's useful life. c. The cost of a dry well would be written off immediately as a loss. d. The cost of successful exploration is recorded as an asset and is not written off. ANS: C PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Natural resources MSC: ACBSP-APC-13-Long-term Assets Reporting 90. Which of the following statements is true about the full-costing method? a. The cost of a dry well would be written off immediately as a loss. b. All costs are recorded as assets, and then depleted over the resource's useful life. c. All costs are written off immediately as a loss. d. All costs are recorded as assets, but remain on the books as assets. ANS: B PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Natural resources MSC: ACBSP-APC-13-Long-term Assets Reporting

91. Cocke Mining Company purchases a gravel pit for $5,000,000. It estimates that 10,000,000 tons of gravel can be extracted over the pit's useful life. If 930,000 tons are extracted and sold during the first year, the entry to record the depletion expense is: a. Depletion Expense – Gravel pit 465,000 Accumulated Depletion – Gravel pit 465,000 b. Depletion Expense – Gravel pit 116,250 Accumulated Depletion – Gravel pit

116,250

c. Depletion Expense – Gravel pit 232,500 Accumulated Depletion – Gravel pit

232,500

d. Depletion Expense – Gravel pit 348,750 Accumulated Depletion – Gravel pit

348,750

ANS: A Depletion cost per ton: $5,000,000 ÷ 10,000,000 = $0.50 per ton Depletion expense: 930,000 x $0.50 = $465,000 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Natural resources MSC: ACBSP-APC-13-Long-term Assets Reporting 92. Cocke Mining Company purchases a gravel pit for $5,000,000. It estimates that 10,000,000 tons of gravel can be extracted over the pit's useful life. If 1,000,000 tons are extracted during the first year but only 750,000 tons are sold, what amount should be recorded for Gravel Inventory and Accumulated Depletion, respectively? a. $125,000 and 375,000 b. $375,000 and $125,000 c. $375,000 and 375,000 d. $125,000 and $500,000 ANS: D Depletion cost per ton: $5,000,000 ÷ 10,000,000 = $0.50 per ton Gravel inventory: 250,000 x $0.50 = $125,000 Accumulated depletion: 1,000,000 x $0.50 = $500,000 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Natural resources MSC: ACBSP-APC-13-Long-term Assets Reporting 93. In 2012, Hamblen Enterprises purchased an oil well for $24,000,000. It is estimated that 160,000,000 barrels can be extracted from the well. Depletion expense during 2013, when 4,000,000 barrels were extracted and sold, totaled a. $60,000. b. $600,000. c. $66,666. d. $6,666,666.

ANS: B Depletion per unit: $24,000,000 ÷ 160,000,000 = $0.15 2013 Depletion expense: 4,000,000 x $0.15 = $600,000 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Natural resources MSC: ACBSP-APC-13-Long-term Assets Reporting 94. A company purchases an oil well for $400,000. It estimates that the well contains 500,000 barrels, has a ten-year life, and has no salvage value. If the company extracts and sells 40,000 barrels during the first year, how much depletion expense should be recorded? a. $80,000 b. $32,000 c. $40,000 d. $200,000 ANS: B Depletion per unit: $400,000 ÷ 500,000 = $0.80 Depletion expense: 40,000 x $0.80 = $32,000 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Natural resources MSC: ACBSP-APC-13-Long-term Assets Reporting 95. Underestimating the number of tons of a mineral that can be mined over a mineral deposit's life will not result in a. understated total assets each year. b. understated net income each year. c. understated depletion expense each year. d. overstated accumulated depletion each year. ANS: C PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Natural resources MSC: ACBSP-APC-13-Long-term Assets Reporting 96. The exclusive right to sell a product within a certain geographic area is called a a. noncompete covenant. b. franchise. c. trademark. d. copyright. ANS: B PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 97. The federal government grants patents for a. 5 years. b. 20 years. c. 30 years. d. the useful life of the patent.

ANS: B PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 98. The exclusive right to sell a computer program is covered by which intangible? a. Software b. Goodwill c. Customer list d. Trademark ANS: A PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 99. Which of the following costs normally is expensed in the year incurred, regardless of the extent of future benefit? a. Technology b. Customer lists c. Research and development d. Leasehold improvements ANS: C PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 100. The exclusive right to publish and sell a literary, artistic, or musical work is called a a. leasehold. b. noncompete covenant. c. copyright. d. franchise. ANS: C PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 101. According to generally accepted accounting principles, the proper accounting treatment for the cost of a trademark that management feels will retain its value indefinitely is to a. write the cost off immediately. b. amortize the cost over a reasonable life. c. amortize the cost over five years. d. carry the cost as an asset indefinitely. ANS: B PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting

102. According to generally accepted accounting principles, the proper accounting treatment of the cost of developing intangible assets is to a. carry the cost as an asset indefinitely. b. amortize the cost over five years. c. amortize the cost over a reasonable life. d. write off the cost immediately. ANS: D PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 103. A leasehold is a payment a. for the right to use certain property. b. for the right to sublease certain property. c. to give up or to get out of a lease. d. to improve leased property. ANS: A PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 104. According to generally accepted accounting principles, goodwill is recorded as an asset a. when favorable factors combine to create goodwill. b. when a company has superior earning power. c. when it is paid for as part of the purchase of a business. d. under no circumstances. ANS: C PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 105. A symbol or name used to identify a product or service is called a. goodwill. b. a noncompete covenant c. a trademark. d. a license. ANS: C PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 106. A contract limiting the rights of others to go into business in a specific industry or line of business for a specified period is called a a. noncompete covenant. b. leasehold. c. license. d. trademark. ANS: A PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

107. A copyright is obtained for what becomes a very successful book. The publisher expects the book to generate sales for ten years. The copyright should be a. amortized over the author's life plus 70 years. b. expensed immediately. c. amortized over 10 years. d. amortized over a reasonable life. ANS: C PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 108. The symbol used to identify the publisher of your accounting textbook is an example of a a. license. b. customer list. c. trademark. d. copyright. ANS: C PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 109. When an intangible asset becomes worthless, a. it should remain on the books at its existing carrying value. b. its remaining carrying value should be written off immediately as a loss. c. prior years' accounting records should be adjusted retroactively. d. its remaining carrying value should be amortized over 20 years. ANS: B PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting SHORT ANSWER 1. Indicate whether each of the following assets is subject to depreciation, depletion, amortization, or none of these. _____ a. Copyrights _____ b. Patents _____ c. Oil well _____ d. Company vehicle _____ e. Land

_____ _____ _____ _____ _____

f. Trademark g. Mineral deposit h. Office equipment i. Office supplies j. Leasehold improvement

ANS: a. amortization b. amortization c. depletion d. depreciation e. none of these f. amortization g. depletion h. depreciation i. none of these © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

j. amortization PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Long-term assets MSC: ACBSP-APC-13-Long-term Assets Reporting 2. The following financial information is known for Crockett Company. Net income Total current assets Net cash flows from operating activities Total current liabilities Purchases of plant assets Sales of plant assets Total expenses Dividends

$ 54,000 545,000 320,000 205,000 85,000 104,000 356,000 54,000

Using the above information, calculate free cash flow for Crockett Company. ANS: Net cash flows from operating activities Less: dividends Less: purchases of plant assets Plus: sales of plant assets Free Cash Flow

320,000 (54,000) (85,000) 104,000 285,000

PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Long-term assets MSC: ACBSP-APC-13-Long-term Assets Reporting 3. Indicate whether each of the following expenditures should be classified as land, land improvements, buildings, equipment, or none of these. _____ a. Parking lots _____ b. Electricity used by equipment _____ c. Sewage system cost _____ d. Interest on building construction loan _____ e. Cost of trial runs for equipment _____ f. Drainage costs _____ g. Cost to install equipment _____ h. Fences _____ i. Unpaid (past) property taxes assumed _____ j. Cost of tearing down a building when land and a building on it are purchased ANS: a. land improvement b. none of these c. land d. buildings e. equipment f. land g. equipment © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

h. land improvement i. land j. land PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

LOC: Comprehension

4. In general, how does one determine whether or not an expenditure should be included in the acquisition cost of property, plant, and equipment? ANS: The acquisition cost of property, plant, and equipment includes all expenditures deemed reasonable and necessary to prepare the asset for its intended purpose (use) and place. PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

LOC: Comprehension

5. Indicate whether each of the following items normally would be considered a capital expenditure or a revenue expenditure. _____ a. Oil change for company vehicle _____ b. Replacement of a few roof shingles _____ c. Cost to overhaul the heating system _____ d. Battery replacement for company vehicle _____ e. Painting factory walls _____ f. Installation of expensive paneling in executive offices ANS: a. revenue expenditure b. revenue expenditure c. capital expenditure d. revenue expenditure e. revenue expenditure f. capital expenditure PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

LOC: Comprehension

6. Indicate whether each of the following items normally would be considered a capital expenditure or a revenue expenditure. _____ a. Replacement of shake roof with tile roof _____ b. Cost to replace light bulbs _____ c. Window-cleaning costs _____ d. Cost to rebuild company vehicle engine _____ e. Cost to construct parking lot _____ f. Cost of a wastebasket ANS: a. capital expenditure b. revenue expenditure c. revenue expenditure d. capital expenditure e. capital expenditure f. revenue expenditure PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

LOC: Comprehension

7. Dickson Corporation purchased land adjacent to its plant to improve access for trucks making deliveries. Expenditures incurred by the company were as follows: purchase price, $80,000; broker's fees, $14,000; title search and other fees, $12,000; demolition of an old building on the property, $7,400; grading, $2,400; digging foundation for the road, $6,000; laying and paving driveway, $50,000; lighting, $15,000; signs, $3,000. List the items and the amounts that should be included in the Land account. ANS: Purchase price Broker’s fees Title search and other fees Demolition of old building Grading Total land price

$ 80,000 14,000 12,000 7,400 2,400 $115,800

PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

LOC: Application

8. Present two arguments in favor of the use of accelerated depreciation. ANS: First, assets tend to be more productive in the early years of their useful life. According to the matching rule, more depreciation should be taken in those years in which productivity and revenues are highest. Second, an increasing repair and maintenance expense, combined with a decreasing depreciation expense, produces a fairly constant expense over the years. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 9. The following machines were purchased during 2013: Machine A for $12,000 on April 7 Machine B for $8,000 on August 28 Machine C for $10,000 on November 5 Assuming that each machine has an estimated useful life of six years and a 10 percent residual value, calculate total depreciation expense for 2013 (assume that the company depreciates the asset on straight-line basis, reports on a calendar-year basis and rounds to the nearest month). ANS: Machine A Machine B Machine C Total

$1,350 ($12,000 – ($12,000 x .1) = $10,800 ÷ 6 = $1,800  9/12) 400 ($8,000 – ($8,000 x .1) = $7,200 ÷ 6 = $1,200  4/12) 250 ($10,000 – ($10,000 x .1) = $9,000 ÷ 6 = $1,500  2/12) $2,000

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 10. Oren Company's air-conditioning system has just completed the eighth year of an estimated ten-year life. The system cost $60,000 and now has accumulated depreciation of $48,000. At the beginning of the ninth year, the company expects to spend $16,000 on a complete renovation of the system and expects the total life of the system to be fifteen years. Neither the capacity of the system nor the residual value was increased. The company uses the straight-line method to determine depreciation. Determine the following: (a) the account debited for the cost of renovation, (b) the carrying value of the system after renovation, and (c) the depreciation expense for the ninth year. ANS: a. Accumulated Depreciation b. $28,000 ($60,000 – $48,000 + $16,000) c. $4,000 (28,000 ÷ (15 – 8)) PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 11. Guilford Company's air-conditioning system has just completed the eighth year of an estimated ten-year life. The system cost $30,000 and now has accumulated depreciation of $24,000. At the beginning of the ninth year, the company expects to spend $8,000 on a complete renovation of the system and expects the total life of the system to be fifteen years. Neither the capacity of the system nor the residual value was increased. The company uses the straight-line method to determine depreciation. Determine the following: (a) the account debited for the cost of renovation, (b) the carrying value of the system after renovation, and (c) the depreciation expense for the ninth year.

ANS: a. Accumulated Depreciation b. $14,000 ($30,000 – $24,000 + $8,000) c. $2,000 (14,000 ÷ (15 – 8)) PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 12. Overton Corporation purchased a truck for $80,000. The company expected the truck to last four years or 100,000 miles, with an estimated residual value of $8,000 at the end of that time. During the second year, the truck was driven 27,500 miles. Compute the depreciation for the second year under each of the following methods: (a) straight-line, (b) production, and (c) double-declining-balance. (Show your work.) ANS: a. $18,000 ($80,000 – $8,000 = $72,000 ÷ 4) b. $19,800 ($72,000 ÷ 100,000 = $0.72  27,500) c. $20,000 (100% ÷ 4 = 25%  2 = 50%  $80,000 = $40,000; $80,000 – $40,000 = $40,000  50% = $20,000) PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 13. Saticoy Corporation purchased a truck for $50,000. The company expected the truck to last five years or 100,000 miles, with an estimated residual value of $5,000 at the end of that time. During the second year, the truck was driven 23,000 miles. Compute the depreciation for the second year under each of the following methods: (a) straight-line, (b) production, and (c) double-declining-balance. (Show your work.) ANS: a. $9,000 ($50,000 – $5,000 = $45,000 ÷ 5) b. $10,350 ($45,000 ÷ 100,000 = $0.45  23,000) c. $12,000 (100% ÷ 5 = 20%  2 = 40%  $50,000 = $20,000; $50,000 – $20,000 = $30,000  40% = $12,000) PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 14. Speedy Printing purchased a new printing press for $80,000. It depreciates the press over a five-year period, using the double-declining-balance method of depreciation. If the press has an $8,000 estimated residual value, calculate depreciation expense for each of the five years. (Show your work.)

ANS: Year 1: $32,000 (100% ÷ 5 = 20%  2 = 40%  $80,000) Year 2: $19,200 ($80,000 – $32,000 = $48,000  .4) Year 3: $11,520 ($48,000 – $19,200 = $28,800  .4) Year 4: $6,912 ($28,800 – $11,520 = $17,280  .4) Year 5: $2,368 ($17,280 – $6,912 = $10,368 – $8,000) PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 15. Shelby Manufacturing Company purchased three machines during the year: Feb. 7 July 29 Oct. 9

Machine 1 Machine 2 Machine 3

$ 5,400 36,000 64,800

Each machine is expected to last six years and have no residual value. The company's fiscal year corresponds to the calendar year. Using the straight-line method, compute the depreciation charge for each machine for the year. Round amounts to the nearest dollar. ANS: Machine 1: $5,400 ÷ 6  11/12 = $825 Machine 2: $36,000 ÷ 6  5/12 = $2,500 Machine 3: $64,800 ÷ 6  3/12 = $2,700 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 16. Marcus Photography purchased photographic equipment for $75,000. The equipment was to be used for ten years and had a $5,000 estimated residual value. After the company took three years of straight-line depreciation, it decided that the equipment would instead have a $2,000 residual value and a total useful life of eleven years. Calculate depreciation expense that should be recorded in year 4. (Show your work.) ANS: Original depreciation: ($75,000 – $5,000) ÷ 10 = $7,000 Carrying value before change in estimate: $75,000 – ($7,000 x 3) = $54,000 Depreciation in year 4: ($54,000 – $2,000) ÷ 8 = $6,500 PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting

17. A truck that cost $20,000 and on which $8,000 of depreciation had been recorded was disposed of for $11,600. Indicate whether a gain or loss should be recorded, and for what amount. ANS: $400 loss ($20,000 – $8,000 = $12,000 – $11,600) PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Disposal of depreciable assets MSC: ACBSP-APC-13-Long-term Assets Reporting 18. A machine that cost $72,000 and on which $52,000 of depreciation had been recorded was disposed of for $20,800. Indicate whether a gain or a loss should be recorded, and for what amount. ANS: $800 gain ($72,000 – $52,000 = $20,000 – $20,800) PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Disposal of depreciable assets MSC: ACBSP-APC-13-Long-term Assets Reporting 19. Under what circumstances will a loss be recorded on the sale of equipment, and what effect will the loss have on stockholders' equity? ANS: A loss will be recorded when the proceeds (cash) on the sale of the equipment are less than the equipment's carrying value (cost minus accumulated depreciation). Losses reduce net income and thus stockholders' equity on the balance sheet. PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Critical Thinking KEY: Disposal of depreciable assets MSC: ACBSP-APC-13-Long-term Assets Reporting 20. In 2013, Minneapolis Mining purchased a mineral deposit for $12,000,000. It is estimated that 15,000,000 tons can be extracted from the mine. Calculate depletion expense during 2013 when 700,000 tons were extracted and sold. ANS: $560,000 ($12,000,000 ÷ 15,000,000 = $.80  700,000) PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Natural resources MSC: ACBSP-APC-13-Long-term Assets Reporting

21. In 2013, McMinn Mining purchased a mineral deposit for $72,000,000. It is estimated that 30,000,000 tons can be extracted from the mine. Calculate depletion expense during 2013 when 1,600,000 tons were extracted and sold. ANS: $3,840,000 ($72,000,000 ÷ 30,000,000 = $2.40  1,600,000) PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Natural resources MSC: ACBSP-APC-13-Long-term Assets Reporting 22. What is goodwill and when may it be recorded? ANS: Goodwill represents the excess paid for a company over the fair market value of the net assets purchased; it may be recorded only when the company is purchased. PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 23. For each of the following descriptions, provide the name of the intangible asset that is being described. a. Exclusive right to use a name or symbol b. Exclusive right to sell photographic reproductions of a painting c. Excess paid for a business over the fair market value of the net assets purchased d. Long-term exclusive right to use certain property e. A right to an exclusive territory or market f. Exclusive right to use an invention to sell or manufacture a certain product or use a specific process ANS: a. Trademark b. Copyright c. Goodwill d. Leasehold e. Franchise or license f. Patent PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting MATCHING Match each definition with the correct term below. a. Enlargements of a plant’s physical layout. b. A right to occupy land or buildings under a long-term contract. c. The portion of an asset’s acquisition cost that a company expects to recover when it disposes of the asset. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

d. The proportional allocation of the cost of a natural resource to the units extracted. e. A registered symbol that can be used only by its owner to identify a product or service. f. The excess of the amount paid for a business over the fair market value of the business’s net assets. g. The periodic allocation of the cost of an intangible long-lived asset to the periods it benefits. h. Improvements to a plant asset that do not add to the plant’s physical layout. i. The total number of service units expected from a long-term asset. j. The periodic allocation of the cost of a tangible long-lived asset over its estimated useful life. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Depreciation Depletion Amortization Additions Betterments Residual value Estimated useful life Leasehold Goodwill Trademark

1. ANS: J PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Long-term assets MSC: ACBSP-APC-13-Long-term Assets Reporting 2. ANS: D PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Long-term assets MSC: ACBSP-APC-13-Long-term Assets Reporting 3. ANS: G PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Long-term assets MSC: ACBSP-APC-13-Long-term Assets Reporting 4. ANS: A PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting 5. ANS: H PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting 6. ANS: C PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 7. ANS: I PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 8. ANS: B PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 9. ANS: F PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 10. ANS: E PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting PROBLEM 1. Long-term assets include tangible assets, natural resources, and intangible assets. Explain the difference between each of these types of assets and explain how each is accounted for on the income statement. ANS: Tangible Assets: Tangible assets have physical substance and include buildings, equipment, and land. Most tangible assets are accounted for on the income statement through depreciation which is the periodic allocation of the cost of the asset over the estimated useful life of the asset. Although land is a tangible asset, it is not depreciated as it has an unlimited life. Natural Resources: Natural resources are assets that are extracted from land and are purchased for their economic value. Coal, oil, and lumber are examples of natural resources. They are accounted for on the income statement through depletion which is the proportional allocation of the cost of the natural resource to the units extracted. Intangible Assets: Intangible assets are assets that have no physical substance such as copyrights, trademarks, goodwill, and software. Most intangible assets are accounted for on the income statement through amortization which is the periodic allocation of the cost of the asset to the periods it benefits. Some intangible assets, such as goodwill, are not subject to annual amortization but are still subject to an annual impairment test. PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Long-term assets MSC: ACBSP-APC-13-Long-term Assets Reporting 2. Indicate whether each of the following expenditures should be classified as land, land improvements, buildings, equipment, or none of these. _____ a. Clearing costs _____ b. Driveway cost _____ c. Computer installation cost _____ d. Architect's fee for building plans _____ e. Surveying costs _____ f. Cost of assembly line trial run _____ g. Property taxes paid after purchase _____ h. Grading costs _____ i. Insurance and freight on computer purchased _____ j. Cost of lighting for parking lot _____ k. Landscaping cost _____ l. Material and labor costs incurred to construct factory _____ m. Cost of tearing down a warehouse on land just purchased © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

_____ n. Utilities cost during first year _____ o. Cost of building wing _____ p. Sales tax on file cabinets purchased _____ q. Real estate commissions on land purchased _____ r. Contractor's fee for building construction _____ s. Cost to put up chain-link fence _____ t. Accrued taxes on land purchased ANS: a. land b. land improvements c. equipment d. buildings e. land f. equipment g. none of these h. land i. equipment j. land improvements k. land l. buildings m. land n. none of these o. buildings p. equipment q. land r. buildings s. land improvements t. land PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

LOC: Comprehension

3. A company purchases land, a building on the land, and equipment in the building all for $400,000 cash. The appraised values are $270,000, $135,000, and $45,000 for the land, building, and equipment, respectively. In the journal provided, record the entry for the purchase.(Omit explanation.)

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

Debit

Page 1 Credit

ANS:

Date

General Journal Description Land ($270,000 ÷ $450,000  $400,000) Buildings ($135,000 ÷ $450,000  $400,000) Equipment ($45,000 ÷ $450,000  $400,000) Cash

PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

Post. Ref.

240,000 120,000 40,000 400,000

LOC: Application

4. If the purchase of machinery is treated incorrectly as a revenue expenditure, what will be the effect on net income and total assets in the year of purchase and in the following year, and why? ANS: In the year of purchase, both net income and total assets will be understated as a result of the overstatement of expenses. In the following year, net income will be overstated because of the lack of the depreciation that should have been charged, and total assets will continue to be understated. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

PTS: 1 DIF: Challenging OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement KEY: Acquisition cost of property, plant, and equipment MSC: ACBSP-APC-13-Long-term Assets Reporting

LOC: Critical Thinking

5. In the journal provided, prepare entries for the following independent transactions. (Omit explanations.) a. Purchased land and a building on the land for $960,000. The appraised values of the land and building are $350,000 and $650,000, respectively. b. Paid $5,000 for a sewage system, $15,000 for a parking lot, $1,000 to tear down a shack on land just purchased, and $10,000 for a block wall. c. Purchased a truck two years ago for $18,000 with an original six-year estimated useful life and $3,000 residual value. After a full two years of use, revised the residual value to $4,000 and the useful life to a total of seven years. Record depreciation for year 3, assuming the straight-line method. d. Purchased a machine on May 1, 2013 (assume a calendar-year accounting period) for $15,000. The machine has an estimated life of 10,000 hours and no salvage value. Record depreciation for 2013 under the production method, assuming that the machine was used 2,000 hours.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS: General Journal Description

Date a.

Post. Ref.

Debit

Land [$960,000  (350,000 ÷ 1,000,000)] Buildings [$960,000  (650,000 ÷ 1,000,000)] Cash

336,000 624,000

Land ($5,000 + $1,000) Land Improvements ($15,000 + $10,000) Cash

6,000 25,000

Depreciation Expense–Truck Accumulated Depreciation–Truck $18,000 – $3,000 = ($15,000 ÷ 6)  2 = $5,000; $18,000 – $5,000 = ($13,000 – $4,000) ÷ 5 = $1,800

1,800

Depreciation Expense–Machinery Accumulated Depreciation–Machinery $15,000 ÷ 10,000 = $1.50  2,000 = $3,000

3,000

Page 1 Credit

960,000

31,000

1,800

3,000

PTS: 1 DIF: Moderate OBJ: 2 | 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Acquisition cost of property, plant, and equipment | Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 6. On January 2, 2012, Topanga Company purchased a machine for $90,000. The machine has a five-year estimated useful life and a $6,000 estimated residual value. In addition, the company expects to use the machine 200,000 hours. Assuming that the machine was used 35,000 hours during 2013, complete the following chart. If a figure cannot be determined, indicate so by placing an X in the box. (Show your work.) Method

Depreciation Expense for 2013

Carrying Value at 12/31/13

Straight-line Production Double-declining-balance

ANS: Method Straight-line Production Double-declining-balance

Depreciation Expense for Carrying Value at 12/31/13 2013 $16,800a $56,400b X . 14,700c 21,600d

32,400e

($90,000 – $6,000) ÷ 5 $90,000 – (2  $16,800) c $84,000 ÷ 200,000 = $.42  35,000 d $90,000  40% = $36,000; $90,000 – 36,000 = $54,000  40% e $90,000 – $36,000 – $21,600 b

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 7. On January 2, 2012, Vanowen Company purchased a machine for $80,000. The machine has an eight-year estimated useful life and an $8,000 estimated residual value. In addition, the company expects to use the machine 200,000 hours. Assuming that the machine was used 35,000 hours during 2013, complete the following chart. If a figure cannot be determined, indicate so by placing an X in the box. (Show your work.) Method

Depreciation Expense for 2013

Carrying Value at 12/31/13

Depreciation Expense for 2013 $9,000a

Carrying Value at 12/31/13 $62,000b X .

Straight-line Production Double-declining-balance ANS: Method Straight-line Production

12,600c

Double-declining-balance

15,000d

45,000e

$80,000 – $8,000 = $72,000 ÷ 8 $80,000 – (2  $9,000) c $72,000 ÷ 200,000 = $0.36  35,000 d $80,000  (100% ÷ 8 x 2 = 25%) = $20,000; $80,000 – $20,000 = $60,000  25% e $80,000 – $20,000 – $15,000 b

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 8. Al's Car Wash purchased a piece of equipment on October 1, 2011, for $27,000. The equipment has an estimated life of four years or 40,000 units of production and an estimated residual value of $2,000. Compute depreciation for 2011, 2012, and 2013 using the following methods: (a) straight-line, (b) production, and (c) double-declining-balance. Assume that the company's fiscal year corresponds to the calendar year and that 3,000, 12,000, and 8,000 units were produced in the respective years. (Show your work.) ANS: a. Straight-line 2011: $1,562.50 ($27,000 – $2,000 = $25,000 ÷ 4 = $6,250  3/12) 2012: $6,250 ($25,000 ÷ 4) 2013: $6,250 ($25,000 ÷ 4) b. Production 2011: $1,875 ($25,000 ÷ 40,000 = $0.625  3,000) 2012: $7,500 ($.625  12,000) 2013: $5,000 ($0.625  8,000) c. Double-declining balance 2011: $3,375 ($27,000  50% = $13,500  3/12) 2012: $11,812.50 ($27,000 – $3,375 = $23,625  50%) 2013: $5,906.25 ($23,625 – $11,812.50 = $11,812.50  50%) PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 9. On January 1, 2012, Rhea Manufacturing Company purchased for $80,000 a machine that will produce an estimated 75,000 units of Product X. The machine has an estimated useful life of four years and an estimated residual value of $8,000. Calculate the following amounts, rounding answers to the nearest dollar: (a) the carrying value of the machine after it has been used for three and one-half years, under the straight-line method; (b) depreciation expense for 2013, under the production method (assume that 13,000 units were produced that year); and (c) accumulated depreciation at the end of 2013 under the double-declining-balance method. (Show your work.) ANS: a. Annual depreciation: $80,000 – $8,000 = $72,000 ÷ 4 = $18,000 Accumulated depreciation: $18,000 x 3.5 = $63,000 Carrying value: $80,000 – $63,000 = $17,000 b. Depreciation expense per unit: $80,000 – $8,000 = $72,000 ÷ 75,000 = $0.96 Depreciation expense for 2013: $0.96  13,000 = $12,480

c. Annual depreciation rate: 100% ÷ 4 x 2 = 50% Depreciation expense, Year 1: $80,000 x 50% = $40,000 Depreciation expense, Year 2: $80,000 – $40,000 = $40,000  50% = $20,000 Accumulated depreciation: $40,000 + $20,000 = $60,000 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 10. On January 1, 2012, Pung Manufacturing Company purchased for $94,000 a machine that will produce an estimated 75,000 units of Product X. The machine has an estimated useful life of five years and an estimated residual value of $4,000. Calculate the following amounts: (a) the carrying value of the machine after it has been used for three and one-half years, under the straight-line method; (b) depreciation expense for 2013, under the production method (assume that 13,000 units were produced that year); and (c) accumulated depreciation at the end of 2013, under the double-declining-balance method. (Show your work.) ANS: a. Annual depreciation: $94,000 – $4,000 = $90,000 ÷ 5 = $18,000 Accumulated depreciation: $18,000 x 3.5 = $63,000 Carrying value: $94,000 – $63,000 = $31,000 b. Depreciation expense per unit: $94,000 – $4,000 = $90,000 ÷ 75,000 = $1.20 Depreciation expense for 2013: $1.20  13,000 = $15,600 c. Annual depreciation rate: 100% ÷ 5 x 2 = 40% Depreciation expense, Year 1: $94,000 x 40% = $37,600 Depreciation expense, Year 2: $94,000 – $37,600 = $56,400  40% = $22,560 Accumulated depreciation: $37,600 + $22,560 = $60,160 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 11. On January 1, 2009, Town Spa Pizza purchased for $16,000 a delivery truck that will be driven an estimated 100,000 miles. The truck has an estimated useful life of ten years and an estimated residual value of $5,000. Calculate the following amounts: (a) depreciation expense for 2013, under the production method (assume that 17,000 miles were driven that year); (b) the accumulated depreciation after the truck has been used for five and one-half years, under the straight-line method; and (c) depreciation expense for 2011, under the double-declining-balance method. (Show your work.) ANS: a. Depreciation expense per unit: $16,000 – $5,000 = $11,000 ÷ 100,000 = $0.11 Depreciation expense for 2013: $0.11  17,000 = $1,870 b. Annual depreciation: $16,000 – $5,000 = $11,000 ÷ 10 = $1,100 Accumulated depreciation: $1,100 x 5.5 = $6,050

c. Annual depreciation rate: 100% ÷ 10 x 2 = 20% Depreciation expense, 2009: $16,000 x 20% = $3,200 Depreciation expense, 2010: $16,000 – $3,200 = $12,800  20% = $2,560 Depreciation expense, 2011: $12,800 – $2,560 = $10,240  20% = $2,048 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 12. On January 1, 2009, Tipton’s Pizza purchased for $48,000 a delivery truck that will be driven an estimated 120,000 miles. The truck has an estimated useful life of eight years and an estimated residual value of $12,000. Calculate the following amounts: (a) depreciation expense for 2013, under the production method (assume that 17,000 miles were driven that year); (b) the accumulated depreciation after the truck has been used for five and one-half years, under the straight-line method; and (c) depreciation expense for 2011, under the double-declining-balance method. ANS: a. Depreciation expense per unit: $48,000 – $12,000 = $36,000 ÷ 120,000 = $0.30 Depreciation expense for 2013: $0.30  17,000 = $5,100 b. Annual depreciation: $48,000 – $12,000 = $36,000 ÷ 8 = $4,500 Accumulated depreciation: $4,500 x 5.5 = $24,750 c. Annual depreciation rate: 100% ÷ 8 x 2 = 25% Depreciation expense, 2009: $48,000 x 25% = $12,000 Depreciation expense, 2010: $48,000 – $12,000 = $36,000  25% = $9,000 Depreciation expense, 2011: $36,000 – $9,000 = $27,000  25% = $6,750 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting 13. Suppose an accounting intern mistakenly calculated depreciation expense on the Land account. She assigned it a 50-year life and a residual value of $10,000,000. Using the cost of the land (assume it was $811,000,000) and the straight-line method of depreciation, discuss the dollar effect of this error on pretax earnings and total assets. ANS: The depreciable amount would be the $811,000,000 cost less the estimated $10,000,000 residual value, or $801,000,000. Depreciating this amount over fifty years would calculate to $16,020,000 of depreciation expense per year. The pretax earnings and the total assets would be understated by this significant amount. PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Critical Thinking KEY: Depreciation MSC: ACBSP-APC-13-Long-term Assets Reporting

14. On November 1, 2011, Rob's Auto Repair purchased diagnostic equipment for $18,000. The equipment had an estimated residual value of $3,000 and a five-year life and was sold on May 1, 2013. Assuming that the company depreciates the asset on a straight-line basis and reports on a calendar-year basis, journalize the following independent transactions in the journal provided. (Omit explanations.) a. The entry to update depreciation to May 1, 2013 b. The entry to record the sale for $15,000 c. The entry to record the sale instead for $11,000 d. The entry to record the sale instead for $13,500

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date a.

General Journal Description

Post. Ref.

Debit

Depreciation Expense–Equipment Accumulated Depreciation–Equipment ($18,000 – $3,000) ÷ 5 = $3,000  4/12

1,000

Cash Accumulated Depreciation–Equipment ($3,000  2/12) + $3,000 + $1,000 Equipment Gain on Sale of Equipment 15,000 – ($18,000 – $4,500)

15,000 4,500

Cash Accumulated Depreciation–Equipment Loss on Sale of Equipment 11,000 – ($18,000 – $4,500) Equipment

11,000 4,500 2,500

Cash Accumulated Depreciation–Equipment Equipment

13,500 4,500

PTS: 1 DIF: Moderate OBJ: 3 | 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Depreciation | Disposal of depreciable assets MSC: ACBSP-APC-13-Long-term Assets Reporting

Page 1 Credit

1,000

18,000 1,500

18,000

LOC: Application

15. On October 1, 2011, Racie's Auto Repair purchased diagnostic equipment for $13,600. The equipment had an estimated residual value of $4,000 and an eight-year life and was sold on April 1, 2013. Assuming that the company depreciates the asset on a straight-line basis and reports on a calendar-year basis, journalize the following independent transactions in the journal provided. (Omit explanations.) a. The entry to update depreciation to April 1, 2013 b. The entry to record the sale for $12,000 c. The entry to record the sale instead for $8,600 d. The entry to record the sale instead for $11,800

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date a.

General Journal Description Depreciation Expense–Equipment Accumulated Depreciation–Equipment ($13,600 – $4,000) ÷ 8 = $1,200  3/12

Post. Ref.

Debit 300

300

Cash Accumulated Depreciation–Equipment ($1,200  3/12) + $1,200 + $300 Equipment Gain on Sale of Equipment 12,000 – ($13,600 – $1,800)

12,000 1,800

Cash Accumulated Depreciation–Equipment Loss on Sale of Equipment 8,600 – ($13,600 – $1,800) Equipment

8,600 1,800 3,200

Cash Accumulated Depreciation–Equipment Equipment

11,800 1,800

PTS: 1 DIF: Moderate OBJ: 3 | 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Depreciation | Disposal of depreciable assets MSC: ACBSP-APC-13-Long-term Assets Reporting

Page 1 Credit

13,600 200

13,600

LOC: Application

16. A truck that cost $80,000 and on which $60,000 of accumulated depreciation had been recorded was disposed of on July 1, the first day of the new fiscal year. Prepare entries in journal form (without explanation) to record the disposal under each of the following assumptions: a. It was discarded as having no value. b. It was sold for $14,400 cash. c. It was sold for $27,000 cash.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date

General Journal Description

a.July1 Loss on Disposal of Truck Accumulated Depreciation–Truck Truck $80,000 – $60,000 = $20,000 loss July1 b. Cash Accumulated Depreciation–Truck Loss on Sale of Truck Truck $80,000 – $60,000 = $20,000 – $14,400 = $5,600 loss July1 c. Cash Accumulated Depreciation–Truck Truck Gain on Sale of Truck $80,000 – $60,000 = $20,000; $27,000 – $20,000 = $7,000 gain

Post. Ref.

Debit

Page 1 Credit

20,000 60,000 80,000

14,400 60,000 5,600 80,000

27,000 60,000 80,000 7,000

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Disposal of depreciable assets MSC: ACBSP-APC-13-Long-term Assets Reporting 17. A truck that cost $29,600 and on which $21,600 of accumulated depreciation had been recorded was disposed of on September 1, the first day of the new fiscal year. Prepare entries in journal form without explanation to record the disposal under each of the following assumptions: a. It was discarded as having no value. b. It was sold for $6,000 cash. c. It was sold for $11,200 cash.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date

General Journal Description

a.Sep.1 Loss on Disposal of Truck Accumulated Depreciation–Truck Truck $29,600 – $21,600 = $8,000 loss Sep.1 b. Cash Accumulated Depreciation–Truck Loss on Sale of Truck Truck $29,600 – $21,600 = $8,000 – $6,000 = $2,000 loss Sep.1 c. Cash Accumulated Depreciation–Truck Truck Gain on Sale of Truck $29,600 – $21,600 = $8,000; $11,200 – $8,000 = $3,200 gain

Post. Ref.

Page 1 Debit Credit 8,000 21,600 29,600

6,000 21,600 2,000 29,600

11,200 21,600 29,600 3,200

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Disposal of depreciable assets MSC: ACBSP-APC-13-Long-term Assets Reporting 18. Bob Quinn is in the gravel business and has engaged you to assist in evaluating his company, Quinn Gravel Company. Your first step is to collect the facts about the company's operations. On January 3, 2013, Bob purchased a piece of property with gravel deposits for $3,155,000. He estimated that the gravel deposits contained 4,700,000 cubic yards of gravel. The gravel is used for making roads. After the gravel is gone, the land, which is in the desert, will be worth only about $100,000. The equipment required to extract the gravel cost $726,000. In addition, Bob had to build a small frame building to house the mine office and a small dining hall for the workers. The building cost $76,000 and will have no residual value after its estimated useful life of ten years. It cannot be moved from the mine site. The equipment has an estimated useful life of six years (with no residual value) and also cannot be moved from the mine site. Trucks for the project cost $154,000 (estimated life, six years; residual value, $10,000). The trucks, of course, can be used at a different site. Bob estimated that in five years all the gravel would be mined and the mine would be shut down. During 2013, 1,175,000 cubic yards of gravel were mined. The average selling price during the year was $1.33 per cubic yard, and at the end of the year 125,000 cubic yards remained unsold. Operating expenses were $426,000 for labor and $116,000 for other expenses. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

a. Prepare adjusting entries to record depletion and depreciation for the first year of operation (2013). Assume that the depreciation rate is equal to the percentage of the total gravel mined during the year, unless the asset is movable. For movable assets, use the straight-line method. (Omit explanations.)

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

b. Prepare an income statement for 2013 for Quinn Gravel Company. Quinn Gravel Company Income Statement For the Year Ended December 31, 2013

c. What is your evaluation of the company's operations? Explain your evaluation and offer suggestions. Ignore income tax effects. ANS: a. Date 2013 Dec.

Dec.

General Journal Description

Post. Ref.

Debit

31 Depletion Expense–Gravel Depositsa Gravel Inventoryb Accumulated Depletion–Gravel Deposits To record depletion for the year:

682,500 81,250

31 Depreciation Expense–Buildingsc Depreciation Expense–Equipmentd Depreciation Expense–Truckse Accumulated Depreciation–Buildings Accumulated Depreciation–Equipment Accumulated Depreciation–Trucks To record depreciation for the year:

19,000 181,500 24,000

Page 1 Credit

763,750

19,000 181,500 24,000

Depletion rate = ($3,155,000 – $100,000) ÷ 4,700,000 cubic yards = $.65/cubic yard (1,175,000 – 125,000) cubic yards sold  $0.65 = $682,500 b 125,000 cubic yards not sold  $0.65 = $81,250 c Percentage of gravel mined = depreciation rate = 1,175,000 ÷ 4,700,000 = 25% Building: $76,000  25% = $19,000 d Equipment: $726,000  25% = $181,500 a

Trucks: ($154,000 – $10,000) ÷ 6 years = $24,000

b. Quinn Gravel Company Income Statement For the Year Ended December 31, 2013 $1,396,500 Sales (1,050,000 cubic yards  $1.33) Cost of Gravel Sold $763,750 Total Gravel Mined (1,175,000  $0.65) 81,250 Less Gravel Inventory on Hand (125,000  $0.65) Cost of Gravel Sold 682,500 Gross Margin $ 714,000 Operating Expenses Labor Expenses $426,000 Other Expenses 116,000 Depreciation Expense–Buildings 19,000 Depreciation Expense–Equipment 181,500 Depreciation Expense–Trucks 24,000 Total Operating Expenses 766,500 Net loss ($ 52,500) c. Quinn Gravel Company is doing very poorly, as indicated by the net loss of $52,500. Based on the income statement, the gross margin is 51.1 percent of sales ($714,000 ÷ $1,396,500). Since the cost of gravel sold is set by the depletion cost, the only way to improve gross margin would be to raise the selling price. This action may be impossible because of competition. In this case, operating expenses must be reduced. The most logical candidate for reduction is Labor Expenses because it is the largest expense. Bob should try to reduce labor costs. Another large operating expense is Depreciation Expense for equipment. This expense is large because the equipment cannot be moved after the gravel pit is depleted and therefore must be written off over a short life. Perhaps Bob can find a way to increase the residual value by finding alternative uses or buyers for the equipment after the pit is depleted. If this can be done, depreciation expense can be reduced. PTS: 1 DIF: Challenging OBJ: 3 | 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Critical Thinking KEY: Depreciation | Natural resources MSC: ACBSP-APC-13-Long-term Assets Reporting 19. Leroy Mining Company purchased land containing an estimated 10,000,000 tons of ore for a cost of $750,000. The land without the ore is estimated to be worth $150,000 (the residual value). Buildings costing $45,000 with an estimated useful life of 20 years were erected on the site. Because of the remote location, the buildings have no residual value. The company expects that all the usable ore can be mined in eight years. During its first year of operation, the company mined 1,000,000 tons of ore and at the end of the year had an inventory of 200,000 tons. Determine the following amounts for the first year: (a) depletion charge per ton; (b) depletion expense for the year; and (c) depreciation expense for buildings, using the straight-line method. (Show your work.)

ANS: a. $0.06 ($750,000 – $150,000 = $600,000 ÷ 10,000,000) b. $48,000 ($0.06  800,000) c. $5,625 ($45,000 ÷ 8) PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Natural resources MSC: ACBSP-APC-13-Long-term Assets Reporting 20. John Jackson obtained a ten-year sublease on a busy corner to open a used car business. To obtain the sublease, he had to pay $14,000 to the current tenant, who had 12 years to go on his lease. The annual cost of the lease is $18,000. In addition to paying for the sublease, Bob paid $10,000 to pave the lot. The paving will have no residual value after its useful life of ten years. Prepare entries in journal form to record the following (omit explanations): a. The payment for the sublease b. The payment for the paving c. The lease payment for the first year d. The expense, if any, associated with the sublease for the first year e. The expense, if any, associated with the paving, using the straight-line method for the first year

Date

General Journal Description

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Debit

Page 1 Credit

ANS: General Journal Description

Date

Page 1 Post. Debit Credit Ref. 14,000 14,000

Leasehold Cash

Leasehold Improvements Cash

10,000

Lease Expense Cash

18,000

Amortization Expense Leasehold $14,000 ÷ 10

1,400

Depreciation Expense–Leasehold Improvements Accumulated Depreciation–Leasehold Improvements $10,000 ÷ 10

1,000

10,000

18,000

1,400

1,000

PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting 21. For each of the following descriptions, provide the name of the intangible asset that is being described. a. The amount paid for a business in excess of its fair market value b. A registered symbol or name to identify a product or service c. An exclusive right for 20 years to produce a particular product d. A contract restricting the rights of others to operate in a specific industry e. A right to occupy land or buildings under a long-term rental contract f. An exclusive right to sell literary, artistic, or musical works and computer software g. Capitalized costs associated with computer programs developed for sale, lease, or internal use h. A right to an exclusive territory or market i. A planned search for a new product, as well as pure research j. Access to the names of subscribers or patrons ANS: a. Goodwill b. Trademark c. Patent d. Noncompete covenant e. Leasehold f. Copyright g. Software © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

h. Franchise i. Research and development j. Customer list PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Intangible assets MSC: ACBSP-APC-13-Long-term Assets Reporting

Chapter 10 - Long-Term Liabilities TRUE/FALSE 1. Financial leverage is also known as trading on the debt. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Financial leverage MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 2. The debt to equity ratio is a measure of financial leverage. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 3. The interest coverage ratio is expressed in times. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 4. Bondholders share voting rights with stockholders. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 5. The debt to equity ratio is expressed as a percent. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 6. The higher the debt to equity ratio, the greater the financial risk the company is taking. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 7. The practice of off-balance-sheet financing is legal. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Managing a corporation MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

8. The interest coverage ratio measures the degree of protection a company has from default on interest payments. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 9. Leases of short-term assets are capital leases, and leases of long-term assets are operating leases. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Long-term leases MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 10. A capital lease is a lease of property, plant, or equipment that is in effect an installment purchase. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Long-term leases MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 11. Accounting for operating leases can be thought of as similar to accounting for mortgage payments. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Long-term leases MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 12. Under a defined contribution pension plan, retirement benefits are based entirely on the annual contribution to the fund plus earnings thereon. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Pensions MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 13. Accounting for a defined benefit pension plan is more complex than accounting for a defined contribution plan. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Pensions MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 14. Costs of postretirement benefits other than pension plans should be expensed when paid to the retired employee. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Other postretirement benefits MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

15. An operating lease represents both an asset and a liability. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Long-term leases MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 16. Financial leverage refers to the issuance of stock to raise cash. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Financial leverage MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 17. Interest on debt is tax-deductible to the issuing corporation, whereas dividends on stock are not. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Decision to issue long-term debt MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 18. A corporation's stockholders are the primary recipients of financial leverage. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Financial leverage MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 19. Entering into a capital lease is an example of off-balance-sheet financing. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Managing a corporation

OBJ: 1 LOC: Comprehension

20. Failure to make interest payments on debt can force a company into bankruptcy. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Decision to issue long-term debt MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 21. When earnings from an investment exceed the interest payments on the investment, negative financial leverage has occurred. ANS: F PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Financial leverage MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 22. Deferred income taxes arise when accounting methods used for financial reporting differ from those used on the income tax return. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Estimated liabilities MSC: ACBSP-APC-22-Long-Term Liabilities Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

23. Under a capital lease, each monthly payment is debited by the lessee to Rent Expense. ANS: F PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Long-term leases MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 24. When the terms of a lease require that the lessee record an asset and a liability, the two accounts are recorded at the present value of the total lease payments required. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Long-term leases MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 25. Under a capital lease, the lessee records both an asset and a liability. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Long-term leases MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 26. Under a capital lease, the lessor, not the lessee, should record depreciation. ANS: F PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Long-term leases MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 27. In a monthly mortgage payment, a smaller amount is devoted to interest expense than in the previous month's payment. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Mortgages payable MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 28. When a monthly mortgage payment is made and recorded, the debit to Mortgage Payable represents the reduction in the principal balance. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Mortgages payable MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 29. As the interest coverage ratio increases, the risk for creditors decreases. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ratio analysis MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 30. The more debt securities a corporation issues, the greater the risk of default. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Decision to issue long-term debt MSC: ACBSP-APC-22-Long-Term Liabilities Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

31. Bondholders are debtors of the issuing corporation. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 32. Secured bonds are also known as debentures. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 33. Unamortized Bond Premium is subtracted from Bonds Payable on the balance sheet. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 34. Face interest rate is another term for market interest rate. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 35. The callable feature of a bond can be exercised by the issuer. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 36. The convertibility feature of a bond can be exercised by the issuing corporation. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 37. Unamortized Bond Discount is a contra-asset account. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 38. If the market interest rate at the date of issuance of a bond exceeds the face interest rate, the bond will probably be sold at a premium. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

39. A bond agreement is referred to as the premium. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 40. Interest on bonds usually is paid annually. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 41. Bond certificates are issued to the issuing corporation by the SEC. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 42. Most bonds issued today are coupon bonds rather than registered bonds. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 43. The par value of a bond is equal to its market value. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 44. When all the bonds of an issue mature at the same time, they are called serial bonds. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 45. The market interest rate is also called the face interest rate. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 46. Discounts or premiums are contra-accounts that are subtracted from or added to bonds payable on the balance sheet. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

47. If the face interest rate at the date of bond issuance exceeds the market interest rate, the bond will probably be sold at a discount. ANS: F PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 48. The convertible feature of bonds is useful if a company wants to retire a bond issue. ANS: F PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 49. The call price of bonds is usually below face value. ANS: F PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 50. A corporation probably does not know who owns its coupon bonds. ANS: T PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 51. An $160,000 bond issue priced at 97-3/4 is sold for $156,400. ANS: T $160,000 x .9775 = $156,400 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 52. The carrying amount always approaches the face value over the life of the bond. ANS: T PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 53. Once a corporation issues bonds, it need only pay interest to the bondholders over the life of the bonds, usually semi-annually, and not repay principal of the bonds at maturity. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

54. Bond issue costs have the effect of increasing a premium, or reducing a discount, on bonds issued. ANS: F PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 55. If a bond has a face interest rate of 6 percent, a face value of $40,000, and pays interest semi-annually, each interest payment will amount to $2,400. ANS: F $40,000 x .06 x 6/12 = $1,200 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 56. If a bond with a face value of $1,000 and a face interest rate of 7 percent is issued for $970, the market interest rate at the date of issuance must have been greater than 7 percent. ANS: T PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 57. The present value of a bond is determined by subtracting the discounted value of the payment at maturity from the discounted value of a series of fixed interest payments. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 58. When the present value of a bond issue is calculated, both the present value of a single sum table and the present value of an annuity table must be used. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 59. If the market interest rate at the date of issuance of a bond exceeds the face interest rate, the present value of the face value plus the present value of all the future interest payments will equal an amount greater than the face value of the bond. ANS: F PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

60. When the present value of a bond issue is calculated, the discount rate used should equal the face interest rate of the bonds. ANS: F PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 61. The present value of a bond can be more or less than the face value of the bond. ANS: T PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 62. Whether a bond is sold at a discount or a premium, its carrying value will not equal its face value on the maturity date. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 63. The effective interest method produces a constant dollar amount of bond interest expense to be reported each interest period. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 64. When there are material differences between the results of using the straight-line method and using the effective interest method of amortization, the straight-line method should be used. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 65. Issuing bonds at a discount has the effect of decreasing interest expense below the face amount of interest. ANS: F PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 66. Total interest cost for a bond issued at a premium equals the total of the periodic interest payments plus the premium. ANS: T PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

67. Under the effective interest method of amortizing a bond discount, the bond interest expense recorded for each period increases over the life of the bond. ANS: T PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 68. The carrying value of a bond issued at a premium is calculated at any given point in time by adding the balance of the unamortized premium from the bond's face value. ANS: T PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 69. When a bond has been issued at a discount, the carrying value at the end of one period is equal to the carrying value at the beginning of the period plus the amount of discount that was amortized during the period. ANS: T PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 70. When the effective interest method of amortization is used, the amount of bond interest expense for a given period is calculated by multiplying the market interest rate by the bond's carrying value at the beginning of the given period. ANS: T PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 71. Regardless of whether the straight-line method or the effective interest method is used, the carrying value of a term bond issued at a discount will decrease continually over the life of the bond. ANS: F PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 72. The calculation of cash for interest to be paid each interest period in connection with a bond payable is influenced by any premium or discount upon issuance. ANS: F PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

73. The amount of unamortized discount at the end of an interest period is equal to the amount of the unamortized discount at the beginning of the period minus the amount of discount that was amortized during the period. ANS: T PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 74. When a bond issue is converted into common stock, total contributed capital is increased by the face value of the bonds converted. ANS: F PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 75. When bonds are converted to stock, no gain or loss is recognized. ANS: T PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 76. When bonds are called for retirement, any excess of the bonds' call price over the bonds' carrying value is reported as a loss on the income statement. ANS: T PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 77. If bonds are retired by an issuer by purchase on the open market at a price below the bonds' carrying value, a gain will result. ANS: T PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 78. When bonds are converted to stock, any excess carrying value of the bonds over the par value of the stock is to be recorded as Capital Stock. ANS: F PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 79. It is the bondholder rather than the issuer who may exercise the call feature of a callable bond. ANS: F PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

MULTIPLE CHOICE 1. The debt to equity ratio is expressed in terms of a. a percentage. b. dollars. c. units. d. times. ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 2. The interest coverage ratio equals income before income taxes plus interest expense divided by a. income before income taxes. b. gross profit. c. interest expense. d. income taxes. ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 3. Which of the following is not descriptive of a defined benefit plan? a. The pension expense account must be determined by actuarial calculations. b. The employer guarantees the employee certain benefits upon retirement. c. The accounting for annual pension expense is simple. d. The annual contribution is based on estimated future benefits. ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Pensions MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 4. Under an operating lease, the lessee a. debits Capital Lease Equipment. b. debits Rent Expense. c. records depreciation on the leased asset. d. credits Capital Lease Obligations. ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Long-term leases MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 5. Under a capital lease, the lessee does not record which of the following? a. Rent expense b. Capital lease obligations c. Depreciation on the leased asset d. Capital lease assets ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Long-term leases MSC: ACBSP-APC-22-Long-Term Liabilities Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

6. Under a defined benefit pension plan, a. actuarial computations are unnecessary. b. accounting for annual pension expense is simple. c. retirement payments are based on the amount accumulated in the pension fund. d. the employer guarantees the employees certain benefits upon retirement. ANS: D PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Pensions MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 7. Which of the following is not an advantage of issuing long-term debt? a. The stockholders do not relinquish any control. b. The interest is tax-deductible. c. The risk of becoming bankrupt is reduced. d. Increased earnings accrue to the stockholders. ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Decision to issue long-term debt MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 8. All of the following are advantages of issuing bonds rather than stock except a. financial leverage. b. payment of bond interest is not required c. bond interest is tax-deductible. d. bondholders do not have voting rights. ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Decision to issue long-term debt MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 9. Interest coverage ratio is a measure of a. how much debt a company carries. b. income after taxes and interest divided by interest expense. c. stockholders' control. d. protection from default on interest. ANS: D PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 10. A deferred income tax liability arises when a. a revenue item is not subject to income taxes. b. there is a difference between financial reporting requirements and income tax filing requirements. c. a corporation is able to obtain an extension on its income tax filing. d. an expense is not deductible for tax purposes. ANS: B PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Estimated liabilities MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

11. The advantages of financial leverage accrue primarily to a. management. b. stockholders. c. bondholders. d. lenders. ANS: B PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Financial leverage MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 12. Which of the following is an example of off-balance-sheet financing? a. Leases b. Bonds c. Mortgages d. Pensions ANS: A PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Managing a corporation MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 13. Which of the following qualifies as a capital lease? a. Three-year lease on a company vehicle b. Five-year lease on equipment with an option to renew for one more year c. Seven-year lease on a machine that has a seven-year useful life d. Monthly lease on office space that can be canceled with 30 days' notice ANS: C PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Long-term leases MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 14. Other postretirement benefits should be expensed a. on the employee's retirement date. b. as they are received by the employee. c. when the employee is hired. d. as the employee earns them. ANS: D PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Other postretirement benefits MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 15. Which of the following statements best describes the behavior over time of the components of equal mortgage payments? a. The proportion of interest expense to payment of principal remains the same. b. Payment of principal increases and interest expense decreases. c. Both payment of principal and interest expense decrease. d. Interest expense increases and payment of principal decreases. ANS: B PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Mortgages payable MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

16. All of the following are operating leases except a a. monthly lease on a building that can be canceled with 60 days' notice. b. Seven-year lease on a new building. c. Four-year lease on a truck with an option to renew for two more years. d. Ten-year lease of a computer with an option to buy for a small amount at the end of the lease. ANS: D PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Long-term leases MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 17. Which of the following statements is not true about trading on the equity? a. It can become a disadvantage to a corporation. b. It is another phrase for financial leverage. c. It will increase the number of shares of stock owned. d. It will increase the interest a corporation must pay. ANS: C PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Financial leverage MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 18. Adair Corporation purchased a building on January 2 by signing a long-term $1,200,000 mortgage with monthly payments of $11,000. The mortgage carries an interest rate of 10 percent. The entry to record the mortgage will include a a. debit to the Mortgage Payable account for $1,200,000. b. credit to the Cash account for $1,200,000. c. debit to the Cash account for $1,200,000. d. credit to the Mortgage Payable account for $1,200,000. ANS: D PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Mortgages payable MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 19. Adair Corporation purchased a building on January 2 by signing a long-term $1,200,000 mortgage with monthly payments of $11,000. The mortgage carries an interest rate of 10 percent. The entry to record the first monthly payment will be: a. Mortgage Interest Expense 11,000 Cash 11,000 b. Mortgage Payable Mortgage Interest Expense Cash

1,000 10,000

c. Mortgage Interest Expense Mortgage Payable Cash

1,000 10,000

d. Mortgage Payable Cash

11,000

ANS: B Mortgage interest expense: $1,200,000 x .1 ÷ 12 = $10,000 PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Mortgages payable MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 20. Adair Corporation purchased a building on January 2 by signing a long-term $1,200,000 mortgage with monthly payments of $11,000. The mortgage carries an interest rate of 10 percent. The amount owed on the mortgage at the end of the first month will be a. $1,200,000. b. $1,199,000. c. $1,190,000. d. $1,189,000. ANS: B Mortgage interest expense: $1,200,000 x .1 ÷ 12 = $10,000 Portion of Monthly Mortgage Payment to Paydown Mortgage: $11,000 - $10,000 = $1,000 Balance on mortgage: $1,200,000 – $1,000 = $1,199,000 PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Mortgages payable MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 21. A company with income before income taxes of $192,000, and $40,000 in interest expense, has an interest coverage ratio of a. 5.8 times. b. 4.8 times. c. 3.8 times. d. 6.8 times. ANS: A ($192,000 + $40,000) ÷ $40,000 = 5.8 times PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 22. Bonds that mature in installments are called a. term bonds. b. debenture bonds. c. zero coupon bonds. d. serial bonds. ANS: D PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

23. An unsecured bond is the same as a a. serial bond. b. zero coupon bond. c. debenture bond. d. secured bond. ANS: C PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 24. A corporation issues bond certificates to a. owners. b. principals. c. creditors. d. debtors. ANS: C PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 25. A secured bond is a. a bond that is secured by specific assets of the issuing corporation. b. the agreement between the issuing corporation and the bondholders. c. a bond that is unsecured. d. a bond that has past due interest payments. ANS: A PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 26. Debenture bonds are a. bonds that have a single maturity date. b. bonds secured by specific assets of the issuing corporation. c. issued only by the federal government. d. issued on the general credit of the corporation and do not pledge certain assets as collateral. ANS: D PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 27. Term bonds are bonds that a. mature on several different dates. b. all have the same maturity date. c. must be secured. d. are also called serial bonds. ANS: B PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

28. Term bonds are bonds that a. are also called serial bonds. b. may be called in and redeemed by the issuing corporation prior to their scheduled maturity date. c. are secured by specific assets of the issuing corporation. d. mature in one lump sum at a single maturity date. ANS: D PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 29. If the market interest rate is higher than the face interest rate at the date of issuance, bonds will a. not sell until the face interest rate is adjusted. b. sell at face value. c. sell at a discount. d. sell at a premium. ANS: C PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 30. If bonds are issued at a premium, the face interest rate is a. lower than the market rate of interest. b. higher than the market rate of interest. c. too low to attract investors. d. adjusted to a higher effective rate of interest. ANS: B PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 31. The responsibility for receiving the proper amount of interest falls on the bondholder most heavily in the case of a. unsecured bonds b. secured bonds c. coupon bonds. d. registered bonds. ANS: C PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 32. A bond with a face value of $1,000 has a current price quote of 98.00. This bond is selling for a. $1,080.00. b. $1,030.00. c. $980.00. d. $880.00. ANS: C $1,000 x .98 = $980

PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 33. A bond with a face value of $20,000 has a current price quote of 102.62. The price in dollars and cents is a. $20,005.24. b. $20,401.24. c. $20,052.40. d. $20,524.00. ANS: D $20,000 x 1.0262 = $20,524 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 34. Bond issue costs a. must be expensed when incurred. b. must be amortized over the life of the bonds. c. are recorded in an asset account and not amortized. d. appear on the balance sheet as a liability. ANS: B PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 35. Any unamortized bond discount should be reported on the balance sheet of the issuing corporation as a(n) a. asset. b. direct deduction from retained earnings in the stockholders' equity section. c. addition to the face amount of the bonds in the liability section. d. direct deduction from the face amount of the bonds in the liability section. ANS: D PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 36. Bonds Payable should be classified as a long-term liability on a balance sheet unless the issue is a. not maturing within one year of the balance sheet date. b. maturing within one year of the balance sheet date and is to be paid by segregated assets that are classified as long-term assets. c. maturing within one year of the balance sheet date and is to be retired by the use of current assets. d. maturing within one year of the balance sheet date and is to be replaced by another bond issue. ANS: C PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

37. The entry to record the issuance of bonds at a discount on an interest payment date should include a a. debit to Cash for the face amount of the bonds. b. debit to Cash for the face amount of the bonds plus the amount of discount. c. debit to Cash for the face amount of the bonds minus the amount of discount. d. credit to Cash for the face amount of the bonds. ANS: C PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 38. Bond issue costs have the effect of a. decreasing the face value of the bond. b. increasing a bond premium. c. decreasing the effective interest rate. d. increasing a bond discount. ANS: D PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 39. If Crittenden Corporation issued Ten bonds of $3,000 at 99.75 on the interest date. The entry to record this transaction is: a. Cash 2,993 Bonds Payable 2,993 b. Cash

29,925 Bonds Payable

c. Cash

29,925 30,000

Unamortized Bond Premium Bonds Payable d. Cash Unamortized Bond Discount Bonds Payable

75 29,925 29,925 75 30,000

ANS: D Cash: $3,000 x 10 x .9975 = $29,925 Bonds Payable: $3,000 x 10 = $30,000 Unamortized bond discount: $30,000 – $29,925 = $75 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 40. Which of the following is not needed in calculating the value of a bond? a. Face interest rate b. Market interest rate c. Present value of periodic interest payments d. Future value of face (maturity) amount ANS: D PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

41. On January 2, 2013, Barham Corporation issued ten-year bonds payable with a face value of $400,000 and a face interest rate of 9 percent. The bonds were issued to yield a market interest rate of 10 percent. Interest is payable semi-annually on January 2 and July 1. In calculating the present value of the bond issue on January 2, 2013, a. the 9 percent rate will be used to calculate the present value of the face amount and the present value of the periodic interest payments. b. a 5 percent rate will be used to calculate the present value of the face amount and the present value of the periodic interest payments. c. the 10 percent rate will be used to calculate the present value of the face amount and the present value of the periodic interest payments. d. the 10 percent rate will be used to calculate the present value of the face amount and a 5 percent rate will be used to calculate the present value of the periodic interest payments. ANS: B PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 42. On January 2, 2013, Owsley Corporation issued 20-year bonds payable with a face value of $600,000 and a face interest rate of 10 percent. The bonds were issued to yield a market interest rate of 12 percent. Interest is payable annually on January 2. In calculating the present value of the bond issue of January 2, 2013, the a. 12 percent rate will be used to calculate the present value of the face amount and the 10 percent rate will be used to calculate the present value of the periodic interest payments. b. 12 percent rate will be used to calculate the present value of the face amount and the present value of the periodic interest payments. c. 10 percent rate will be used to calculate the present value of the face amount and the present value of the periodic interest payments. d. 10 percent rate will be used to calculate the present value of the face amount and the 12 percent rate will be used to calculate the present value of the periodic interest payments. ANS: B PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 43. A $10,000, 8%, 5-year bond pays fixed interest of $400 every 6 months. If the current market rate of interest is 6%, what is the present value of the bond? (Round to the nearest dollar.) a. b. c. d.

$10,004 $10,882 $10,852 $10,054

ANS: C The present value of the bond is equal to the present value of the series of interest payments plus the present value of the payment at maturity, based on the market rate of interest, which is 6%. Both factors are determined using 10 periods (5 years x 2 periods per year) and 3% (6% ÷ 2 periods per year). The present value of the series of interest payments is $3,412 ($400 x 8.530), and the present value of the payment at maturity is $7,440 ($10,000 x 0.744). Therefore, the present value of the bond is $10,852 ($7,440 + $3,412).

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 44. A bond premium has the effect of a. lowering the carrying value of the bond. b. raising the effective interest rate above the face interest rate. c. increasing the amount of cash paid for interest each six months. d. lowering the effective interest rate below the face interest rate. ANS: D PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 45. When bonds are issued at a premium, the total interest cost of the bonds over the life of the bonds is equal to the amount of a. interest payments made over the life of the bonds minus the amount of issuance premium. b. issuance premium. c. interest payments made over the life of the bonds plus the amount of issuance premium. d. interest payments made over the life of the bonds. ANS: A PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 46. The effective interest method of amortization of bond premiums and discounts is superior to the straight-line method because it results in a(n) a. more variable interest rate. b. uniform rate of interest. c. interest rate that increases or decreases slightly over time. d. interest rate that is close to the market interest rate. ANS: B PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 47. In 2010, Hopkins Corporation issued ten-year, 10 percent bonds when the market interest rate was 12 percent. Interest is payable annually. During 2013, the market rate of interest for similar bonds was 14 percent. Using the effective interest method of amortization, what interest rate will be used to calculate interest expense for 2013? a. 14 percent b. 10 percent c. 4 percent d. 12 percent ANS: D PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

48. Spencer Corporation issued 30-year term bonds at a premium in 2013. Interest is payable semi-annually. Which of the following statements is true, assuming that the effective interest method of amortization is used for the bond premium? a. Interest expense decreases each six-month interest period. b. Interest expense as a percentage of the bond's book value changes from period to period. c. Interest expense increases each six-month interest period. d. Interest expense remains constant in amount for each interest period. ANS: A PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 49. When the effective interest method of amortization is used for a bond premium, the amount of interest expense for an interest period is calculated by multiplying the a. carrying value of the bonds at the beginning of the period by the face interest rate. b. face value of the bonds at the beginning of the period by the effective interest rate. c. carrying value of the bonds at the beginning of the period by the effective interest rate. d. face value of the bonds at the beginning of the period by the face interest rate. ANS: C PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 50. The amortization of a bond premium will result in reporting an amount of interest expense for an interest period that a. exceeds the amount of cash to be paid for interest for the period. b. is less than the amount of cash to be paid for interest for the period. c. has no predictable relationship with the amount of cash to be paid for interest for the period. d. equals the amount of cash to be paid for interest for the period. ANS: B PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 51. When the straight-line method of amortization is used for a bond discount, the amount of interest expense for an interest period is calculated by a. adding the amount of discount amortization for the period to the amount of cash paid for interest during the period. b. deducting the amount of discount amortization for the period from the amount of cash paid for interest during the period. c. multiplying the carrying value of the bonds by the effective interest rate. d. multiplying the face value of the bonds by the face interest rate. ANS: A PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

52. If bonds payable were issued initially at a discount, the carrying value of the bonds at a balance sheet date will be calculated by a. deducting the amount of discount amortized between the issuance date and the balance sheet date from the carrying value at the previous balance sheet date. b. deducting the balance of unamortized bond discount from the current carrying value. c. adding the balance of unamortized bond discount to the face value. d. adding the amount of discount amortized between the issuance date and the balance sheet date to the face value. ANS: A PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 53. When bonds have been issued at a premium, the periodic amortization of the premium will a. increase the carrying value of the bonds. b. have no effect on the carrying value of the bonds. c. decrease the carrying value of the bonds. d. cause the carrying value always to equal the face value of the bonds. ANS: C PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 54. The total interest cost on seventy-eight, ten-year, 6 percent, $1,000 bonds that are issued at 98 is a. $48,360. b. $45,240. c. $47,580. d. $46,800. ANS: A Interest to be paid in cash: 78 x $1,000 x .06 x 10 = $46,800 Amount of discount: (78 x $1,000) – (78 x $1,000 x .98) = $1,560 Total interest cost: $46,800 + $1,560 = $48,360 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

55. Trigg Corporation issued $200,000 of 20-year, 6 percent bonds at 98 on one of its semi-annual interest dates. The straight-line method of amortization is to be used. The entry to record the bond interest expense on the next interest payment date is: a. Bond Interest Expense 6,100 Unamortized Bond Discount 100 Cash 6,000 b. Bond Interest Expense Unamortized Bond Discount Cash

12,200

c. Cash

6,100

200 12,000

Unamortized Bond Discount d. Bond Interest Expense Cash

6,100 6,000 6,000

ANS: A Bond interest payable in cash: $200,000 x .06 x 6/12 = $6,000 Unamortized bond discount: ($200,000 x .02) ÷ 40 = $100 Bond interest expense: $6,000 + $100 = $6,100 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 56. Suffolk Corporation issued $100,000 of 20-year, 6 percent bonds at 98 on one of its semi-annual interest dates. The straight-line method of amortization is to be used. After seven years, what is the carrying value of the bonds? a. $98,350 b. $98,700 c. $99,300 d. $99,650 ANS: B Initial carrying value: $100,000 x .98 = $98,000 Semi-annual discount amortization: ($100,000 – $98,000) ÷ 40 = $50 Carrying value after seven years: $98,000 + ($50 x 14) = $98,700 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 57. Suffolk Corporation issued $100,000 of 20-year, 6 percent bonds at 98 on one of its semi-annual interest dates. The straight-line method of amortization is to be used. What is the total interest cost of the bonds? a. $120,000 b. $122,000 c. $118,000 d. $117,500 © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: B Total interest payments: $100,000 x .06 x 20 = $120,000 Total amount of discount: $100,000 – ($100,000 x .98) = $2,000 Total interest cost: $120,000 + $2,000 = $122,000 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 58. Kenton Corporation issued $556,000 of 30-year, 8 percent bonds at 106 on one of its semi-annual interest dates. The straight-line method of amortization is to be used. The entry to record the bond interest expense on the next interest payment date is: a. Bond Interest Expense 22,240 Cash 22,240 b. Bond Interest Expense Unamortized Bond Premium Cash c. Bond Interest Expense Cash

43,368 1,112

d. Bond Interest Expense Unamortized Bond Premium Cash

21,684 556

44,480 21,040 21,040

22,240

ANS: D Semiannual interest payment: $556,000 x .08 x 6/12 = $22,240 Unamortized bond premium: ($556,000 x .06) ÷ 60 = $556 Bond interest expense: $22,240 – $556 = $21,684 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 59. Kenton Corporation issued $600,000 of 30-year, 8 percent bonds at 106 on one of its semi-annual interest dates. The straight-line method of amortization is to be used. What is the total interest cost of the bonds? a. $1,439,000 b. $1,404,000 c. $1,440,000 d. $1,476,000 ANS: B Total semiannual interest payments: $600,000 x .08 x 30 = $1,440,000 Unamortized bond premium: ($600,000 x .06) = $36,000 Bond interest expense: $1,440,000 – $36,000 = $1,404,000 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

60. Kenton Corporation issued $562,000 of 30-year, 8 percent bonds at 106 on one of its semi-annual interest dates. The straight-line method of amortization is to be used. After 11 years, what is the carrying value of the bonds? a. $578,860 b. $579,984 c. $576,050 d. $583,356 ANS: D Carrying value at bond issuance: $562,000 x 1.06 = $595,720 Amortized bond premium: ($562,000 x .06) x 22/60 = $12,364 Carrying value of bonds: $595,720 – $12,364 = $583,356 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 61. A company issued $300,000 of 20-year, 8 percent bonds at 96. If interest is paid semi-annually, the entry to record the amount of bond interest expense (assuming the straight-line method of amortization) on any interest date is a. Bond Interest Expense 12,000 Cash 12,000 b. Bond Interest Expense 24,300 Unamortized Bond Discount Cash

300 24,000

c. Bond Interest Expense Cash

23,700

d. Bond Interest Expense 12,300 Unamortized Bond Discount Cash

300 12,000

ANS: D Semiannual interest payment: $300,000 x .08 x 6/12 = $12,000 Unamortized bond discount: ($300,000 x .04) ÷ 40 = $300 Bond interest expense: $12,000 + $300 = $12,300 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

62. A ten-year bond has a face value of $10,000, a face interest rate of 11 percent, an unamortized bond premium of $400, and an effective interest rate of 10 percent. The bonds were issued on one of the semi-annual interest payment dates. The entry to record the bond interest expense on the first semi-annual interest payment date is: (assuming the effective interest method of amortization), a. Bond Interest Expense 520 Unamortized Bond Premium 30 Cash 550 b. Bond Interest Expense Cash

520

c. Bond Interest Expense Cash

550

d. Unamortized Bond Premium Cash

520

550

520

ANS: A Semiannual interest payment: $10,000 x .11 x 6/12 = $550 Bond interest expense: ($10,000 + $400) x .1 x 6/12 = $520 Unamortized bond premium: $550 – $520 = $30 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 63. Rowan Corporation issued ten-year term bonds on January 1, 2013, with a face value of $400,000. The face interest rate is 6 percent and interest is payable semi-annually on June 30 and December 31. The bonds were issued for $345,480 to yield an effective annual rate of 8 percent. The effective interest method of amortization is to be used. The entry to record the bond interest expense on the first interest payment date is: (Round answer to the nearest dollar.) a. Bond Interest Expense 12,000 Cash 12,000 b. Bond Interest Expense 10,364 Unamortized Bond Discount 1,636 Cash 16,000 c. Bond Interest Expense Cash

13,819 13,819

d. Bond Interest Expense 13,819 Unamortized Bond Discount 1,819 Cash 12,000 ANS: D Semiannual interest payment: $400,000 x .06 x 6/12 = $12,000 Bond interest expense: $345,480 x .08 x 6/12 = $13,819 Unamortized bond discount: $13,819 – $12,000 = $1,819 © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 64. Rowan Corporation issued ten-year term bonds on January 1, 2013, with a face value of $400,000. The face interest rate is 8 percent and interest is payable semi-annually on June 30 and December 31. The bonds were issued for $345,480 to yield an effective annual rate of 10 percent. The effective interest method of amortization is to be used. The entry on June 30, 2013, to record the payment of interest and amortization of discount will be: a. Bond Interest Expense 16,000 Cash 16,000 b. Bond Interest Expense 17,274 Unamortized Bond Discount 1,274 Cash 16,000 c. Bond Interest Expense Cash

17,274 17,274

d. Bond Interest Expense 20,000 Unamortized Bond Discount 6,181 Cash 13,819 ANS: B Semiannual interest payment: $400,000 x .08 x 6/12 = $16,000 Bond interest expense: $345,480 x .1 x 6/12 = $17,274 Unamortized bond discount: $17,274 – $16,000 = $1,274 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 65. Rowan Corporation issued ten-year term bonds on January 1, 2013, with a face value of $400,000. The face interest rate is 6 percent and interest is payable semiannually on June 30 and December 31. The bonds were issued for $345,480 to yield an effective annual rate of 8 percent. The effective interest method of amortization is to be used. How much bond interest expense (rounded to the nearest dollar) should be reported on the income statement for the year ended December 31, 2013? a. $24,000 b. $27,711 c. $27,566 d. $27,638 ANS: B Semi-annual interest payment: $400,000 x .06 x 6/12 = $12,000 Interest expense June 30, 2013: $345,480 x .08 x 6/12 = $13,819 Interest expense December 31, 2013: [$345,480 + ($13,819 – $12,000)]x .08 x 6/12 = $13,892 Interest expense on income statement: $13,819 + $13,892 = 27,711 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

66. Rowan Corporation issued ten-year term bonds on January 1, 2013, with a face value of $400,000. The face interest rate is 6 percent and interest is payable semi-annually on June 30 and December 31. The bonds were issued for $345,480 to yield an effective annual rate of 8 percent. The effective interest method of amortization is to be used. The entry to be recorded on December 31, 2013, for the payment of interest (rounded to the nearest dollar) and the amortization of discount is: a. Bond Interest Expense 13,819 Unamortized Bond Discount 1,819 Cash 12,000 b. Bond Interest Expense 13,892 Unamortized Bond Discount 1,892 Cash 12,000 c. Bond Interest Expense Cash

13,892 13,892

d. Bond Interest Expense 12,000 Unamortized Bond Discount 12,000 ANS: B Semi-annual interest payment: $400,000 x .06 x 6/12 = $12,000 Interest expense June 30, 2013: $345,480 x .08 x 6/12 = $13,819 Interest expense December 31, 2013: [$345,480 + ($13,819 – $12,000)] x .08 x 6/12 = $13,892 Unamortized bond discount: $13,892 – $12,000 = $1,892 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 67. Rowan Corporation issued ten-year term bonds on January 1, 2013, with a face value of $400,000. The face interest rate is 6 percent and interest is payable semi-annually on June 30 and December 31. The bonds were issued for $345,480 to yield an effective annual rate of 8 percent. The effective interest method of amortization is to be used. The carrying value of the bonds payable on the December 31, 2013, balance sheet date should be (rounded to the nearest dollar) a. $348,206. b. $349,118. c. $349,191. d. $345,480. ANS: C Semi-annual interest payment: $400,000 x .06 x 6/12 = $12,000 Interest expense June 30, 2013: $345,480 x .08 x 6/12 = $13,819 Interest expense December 31, 2013: [$345,480 + ($13,819 – $12,000)] x .08 x 6/12 = $13,892 Carrying value December 31, 2013: [$345,480 + ($13,819 – $12,000) + ($13,892 – $12,000)] = $349,191 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

68. Lenz Corporation issued ten-year, 8 percent bonds payable in 2012 at a premium. During 2012, the company's accountant failed to amortize any of the bond premium. The omission of the premium amortization will a. cause net income for 2012 to be overstated. b. not affect net income reported for 2012. c. cause net income for 2012 to be understated. d. cause retained earnings at the end of 2012 to be overstated. ANS: C PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 69. Bonds that contain a provision that allows the issuing corporation to buy back the bonds prior to the maturity date are called a. unsecured bonds b. callable bonds. c. convertible bonds. d. coupon bonds ANS: B PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 70. Bonds that contain a provision that allows the holders to exchange the bonds for other securities of the issuing corporation are called a. registered bonds b. unsecured bonds c. callable bonds. d. convertible bonds. ANS: D PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 71. When bonds are converted to common stock, which of the following could be part of the entry? a. Credit to Gain on Conversion of Bonds b. Credit to Unamortized Bond Premium c. Credit to Unamortized Bond Discount d. Debit to Common Stock ANS: C PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 72. When bonds payable are converted into stock, the carrying value of the bonds should be a. credited to Retained Earnings. b. credited to contributed capital accounts. c. debited to Retained Earnings. d. debited to Loss on Conversion of Bonds. ANS: B PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

73. A company has $1,634,000 in bonds payable with an unamortized premium of $40,000. If one-fourth of the bonds are converted to common stock, the entry that would record the conversion is: a. Bonds Payable 408,500 Common Stock 408,500 b. Bonds Payable Common Stock

448,500 448,500

c. Common Stock Bonds Payable d. Bonds Payable Unamortized Bond Premium Common Stock

398,500 398,500 408,500 10,000 418,500

ANS: D PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 74. A $300,000 bond issue with a carrying value of $311,000 is called at 103 and retired. The entry to record the retirement of bonds would be: a. Bonds Payable 309,000 Cash 309,000 b. Bonds Payable Cash

311,000

c. Cash

300,000 Bonds Payable

311,000

300,000

d. Bonds Payable 300,000 Unamortized Bond Premium 11,000 Cash 309,000 Gain on Retirement of Bonds 2,000 ANS: D Call value: $300,000 x 1.03 = $309,000 Gain on retirement of bonds: $311,000 – $309,000 = $2,000 PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

75. A $100,000 bond issue with a carrying value of $94,000 is called at 102 and retired. The entry to record the retirement of bonds would be: a. Bonds Payable 100,000 Loss on Retirement of Bonds 8,000 Unamortized Bond Discount 6,000 Cash 102,000 b. Bonds Payable Cash

94,000 94,000

c. Bonds Payable 100,000 Gain on Retirement of Bonds 6,000 Cash 94,000 d. Bonds Payable Loss on Retirement of Bonds Cash

100,000 2,000 102,000

ANS: A Call value: $100,000 x 1.02 = $102,000 Unamortized bond discount: $100,000 – $94,000 = $6,000 Loss on retirement of bonds: $102,000 – $94,000 = $8,000 PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 76. A company has $1,800,000 in bonds payable with an unamortized discount of $42,000. If two-thirds of the bonds are converted to common stock, the carrying value of the bonds payable will decrease by a. $586,000. b. $1,172,000. c. $1,228,000. d. $1,256,000. ANS: B ($1,800,000 – $42,000) x 2/3 = $1,172,000 PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

77. A $200,000 bond issue with a carrying value of $194,000 is called at 101 and retired. The entry to record the retirement of bonds would be: a. Bonds Payable 200,000 Gain on Retirement of Bonds 6,000 Cash 194,000 b. Bonds Payable Cash

200,000 200,000

c. Bonds Payable 200,000 Loss on Retirement of Bonds 8,000 Unamortized Bond Discount 6,000 Cash 202,000 d. Bonds Payable Loss on Retirement of Bonds Cash

194,000 8,000 202,000

ANS: C Call value: $200,000 x 1.01 = $202,000 Unamortized bond discount: $200,000 – $194,000 = $6,000 Loss on retirement of bonds: $202,000 – $194,000 = $8,000 PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 78. A $200,000 bond issue with a carrying value of $206,000 is called at 101 and retired. The entry to record the retirement of bonds would be: a. Bonds Payable 202,000 Loss on Retirement of Bonds 4,000 Cash 206,000 b. Bonds Payable 200,000 Unamortized Bond Premium 6,000 Cash 202,000 Gain on Retirement of Bonds 4,000 c. Bonds Payable Loss on Retirement of Bonds Cash

200,000 6,000 206,000

d. Bonds Payable Cash

206,000 206,000

ANS: B Call value: $200,000 x 1.01 = $202,000 Unamortized bond premium: $206,000 – $200,000 = $6,000 Gain on retirement of bonds: $206,000 – $202,000 = $4,000

PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 79. A bond issue of $50,000 with a carrying value of $49,000 is converted into $10 par value common stock at the rate of fifty shares for each $1,000 bond. The entry to record the conversion of bonds would be: a. Bonds Payable 50,000 Loss on Retirement of Bonds 1,000 Unamortized Bond Discount 1,000 Common Stock 50,000 b. Bonds Payable 50,000 Common Stock 25,000 Additional Paid-In Capital 25,000 c. Bonds Payable 50,000 Common Stock 25,000 Additional Paid-In Capital 24,000 Unamortized Bond Discount 1,000 d. Bonds Payable 49,000 Unamortized Bond Discount 1,000 Common Stock 25,000 Additional Paid-In Capital 25,000 ANS: C Unamortized bond discount: $50,000 – $49,000 = $1,000 Common stock: $50,000 ÷ $1,000 x 50 x $10 = $25,000 Additional paid-in-capital: $50,000 – $25,000 – $1,000 = $24,000 PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

80. Hooper Corporation has bonds outstanding with a face value of $100,000 and a carrying value of $103,000 on December 31, 2013. If the company calls in and retires these bonds on December 31, 2013, for $105,000, the entry to record the retirement would be: a. Bonds Payable 103,000 Cash 103,000 b. Bonds Payable Cash

105,000

c. Bonds Payable Loss on Retirement of Bonds Cash

100,000 3,000 103,000

d. Bonds Payable Loss on Retirement of Bonds Unamortized Bond Premium Cash

100,000 2,000 3,000 105,000

105,000

ANS: D Call value: $100,000 x 1.05 = $105,000 Unamortized bond premium: $103,000 – $100,000 = $3,000 Loss on retirement of bonds: $105,000 – $103,000 = $2,000 PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting SHORT ANSWER 1. When fixed mortgage payments are made, in what way does the interest portion change each month, and why? ANS: Each month, the basis for the interest calculation (i.e., the loan balance) decreases. Therefore, as the loan balance decreases, the interest portion of the fixed mortgage payment also decreases each month and the principal portion increases. PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Mortgages payable MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 2. Bracken Corporation had income before income taxes of $8,000,000 and interest expense of $900,000. Calculate Bracken’s interest coverage ratio, rounded to one decimal place. ANS: 9.9 times [($8,000,000 + $900,000) ÷ $900,000] PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

3. When a bond sells at a premium, what is probably true about the market interest rate versus the face interest rate? Discuss. ANS: For someone to pay a premium for the purchase of a bond, the face interest rate probably exceeds the market interest rate for similar bonds. Thus one is paying a premium for the prospect of superior interest income. PTS: 1 DIF: Moderate OBJ: 2 | 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 4. When a bond sells at a discount, what is probably true about the market interest rate versus the face interest rate? Discuss. ANS: For someone to purchase a bond at a discount, the market interest rate probably exceeds the face interest rate for similar bonds. The discount received is offset by the lower-than-market interest to be received. PTS: 1 DIF: Moderate OBJ: 2 | 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 5. When determining the value of a bond using present value, what are the two components used in the calculation? ANS: One component is the present value of the periodic interest payments over the life of the bond. The other component is the present value of the single payment at maturity. PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 6. Montgomery Corporation has a 7 percent, $300,000 bond issue that originally was issued five years ago. There are now ten years remaining on the bond issue, and the market interest rate is 12 percent. Interest is paid semi-annually. Calculate the current market value of the bond issue, using present value tables. ANS: Present value of 20 periodic payments at 6 percent: ($300,000 x .07 x 6/12)  11.470 Present value of single payment at the end of 20 periods at 6 percent: $300,000  0.312 Present value of $300,000 bond issue

$120,435 93,600 $214,035

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

7. Flint Corporation issues $1,000,000 of 30-year, 8 percent bonds at 106. Interest is paid semi-annually, and the effective interest method is used for amortization. Assume that the market interest rate for similar investments is 7 percent and that the bonds are issued on an interest date. a. What amount was received for the bonds? b. How much interest is paid each interest period? c. How much bond interest expense is recorded on the first interest date (after the issue date)? d. What is the carrying value of the bonds after the first interest date (after the issue date)? ANS: a. $1,060,000 ($1,000,000  1.06) b. $40,000 ($1,000,000  0.08  6/12) c. $37,100 ($1,060,000  0.07 x 6/12) d. $1,057,100 (1,060,000 – ($40,000 – $37,100)) PTS: 1 DIF: Moderate OBJ: 3 | 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 8. West Valley Corporation issues $800,000 of 20-year, 9 percent bonds at 95. Interest is paid semi-annually, and the effective interest method is used for amortization. Assume that the market interest rate for similar investments is 10 percent and that the bonds are issued on an interest date. a. What amount was received for the bonds? b. How much interest is paid each interest period? c. How much bond interest expense is recorded on the first interest date (after the issue date)? d. What is the carrying value of the bonds after the first interest date (after the issue date)? ANS: a. $760,000 ($800,000  0.95) b. $36,000 ($800,000  0.09  6/12) c. $38,000 ($760,000  0.1 x 6/12) d. $762,000 (760,000 + ($38,000 – $36,000)) PTS: 1 DIF: Moderate OBJ: 3 | 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

9. Technically, what is meant by the amortization of a bond discount, and why is it necessary? ANS: Amortization of a bond discount is the periodic conversion of unamortized bond discount into interest expense. A bond discount in reality is additional interest. Accordingly, the matching rule dictates that this interest expense be recorded over the period of benefit (life of the bond). PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 10. On January 1, 2013, Woolfe Corporation issued five-year term bonds with a face value of $1,400,000. Interest is payable annually on December 31. The bonds were issued for $1,454,600. The effective interest method of amortization is used. Woolfe reported Bond Interest Expense of $130,914 on its income statement for the year ended December 31, 2013. Calculate the effective interest rate for these bonds. ANS: 9 percent ($130,914 ÷ $1,454,600) PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement KEY: Bonds

LOC: Analysis

11. Comment on the change in both the carrying value and the balance of the Unamortized Bond Discount account over the life of a bond issue. ANS: The carrying value starts out lower than the face value when bonds are issued at a discount. Over the life of the bonds, carrying value increases and eventually equals the face value at the end of the bond term. The balance in the Unamortized Bond Discount account represents an amount that will be allocated to increase interest expense. Over the bond term, its balance is systematically reduced and will be zero at the end of the bond term. PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Critical Thinking KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 12. Comment on the change in both the carrying value and the balance of the Unamortized Bond Premium account over the life of a bond issue. ANS: The carrying value starts out higher than the face value when bonds are issued at a premium. Over the life of the bonds, carrying value decreases and eventually equals the face value at the end of the bond term. The balance in the Unamortized Bond Premium account represents an amount that will be allocated to reduce interest expense. Over the bond term, its balance is systematically reduced and will be zero at the end of the bond term.

PTS: 1 DIF: Challenging OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Critical Thinking KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 13. When bonds are converted to common stock, what is the basis for recording (valuing) the stock issued? ANS: The value assigned to the stock issued should be equal to the existing carrying value of the bonds converted. Accordingly, no gain or loss is recorded. PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 14. Trimble Corporation has $1,000,000 worth of 7 percent convertible bonds outstanding. On September 1, 2013, there is $40,000 of unamortized discount associated with these bonds. The bonds are convertible at the rate of 30 shares of $10 par value common stock for each $1,000 bond. On September 1, 2013, an interest payment date, bondholders presented $700,000 of the bonds for conversion. Prepare an entry in journal form without explanation to record the conversion of the bonds.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date 2013 Sept.

General Journal Description

1 Bonds Payable Unamortized Bond Discount ($40,000  700,000 ÷ 1,000,000) Common Stock [($700,000 ÷ $1,000)  30  $10] Additional Paid-in Capital ($700,000 – $28,000 – $210,000)

Post. Ref.

Page 1 Credit

Debit

700,000 28,000 210,000 462,000

PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 15. Valdez Corporation has outstanding $1,500,000 of 10 percent bonds callable at 103. On July 1, a semi-annual interest payment date, the unamortized bond premium equaled $60,000. On that date, $900,000 of the bonds were called and retired. Prepare an entry in journal form without explanation to record the retirement of the bonds on July 1.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date July

General Journal Description 1 Bonds Payable Unamortized Bond Premium ($60,000  900,000 ÷ 1,500,000) Gain on Retirement of Bonds ($900,000 + $36,000 – $927,000) Cash ($900,000  1.03)

Post. Ref.

Debit

Page 1 Credit

900,000 36,000 9,000 927,000

PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 16. On December 31, 2012, the balance sheet of the Gable Corporation reported 1,000 bonds outstanding with a face value of $1,000,000 and a related unamortized discount of $70,000. The bonds are convertible at the rate of 25 shares of common stock for each $1,000 bond. On January 1, 2013, the bondholders presented $800,000 of the bonds for conversion. The entry to record this conversion contained a credit to Additional Paid-in Capital for $344,000. Calculate the par value per share of the common stock. ANS: $20.00 [800,000 – ($70,000  $800,000 ÷ $1,000,000 ) = $744,000 – $344,000 = $400,000 ÷ (25  800,000 ÷ $1,000)] PTS: 1 DIF: Challenging OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting MATCHING Match each definition with the correct term below. a. A security that represents money that a corporation borrows from the investing public. b. A long-term debt secured by real property. c. Bonds that are issued in the name of the bondholder. d. The method of bond amortization that uses a constant interest rate each period to amortize the bond premium or discount. e. Bonds that do not require periodic interest payments but instead promise to pay a fixed amount at the maturity date. f. The excess of the face value over the issue price of a bond. g. A contract that requires a company to pay benefits to its employees after they retire. h. The excess of the issue price over the face value of a bond. i. A liability or an asset that results from using different methods to calculate income taxes on the income statement and income tax liability on the income tax return. j. The method of bond amortization that equalizes amortization of a bond discount or premium for each interest period over the life of the bond. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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

Mortgage Pension plan Deferred income taxes Bond Discount Premium Registered bonds Zero coupon bonds Straight-line method Effective-interest method

1. ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Mortgages payable MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 2. ANS: G PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Pensions MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 3. ANS: I PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Estimated liabilities MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 4. ANS: A PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 5. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 6. ANS: H PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 7. ANS: C PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 8. ANS: E PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 9. ANS: J PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 10. ANS: D PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting PROBLEM 1. Alby Corporation purchased a warehouse by signing a long-term $800,000 mortgage with monthly payments of $6,200. The mortgage carries an interest rate of 9 percent. Prepare entries in journal form without explanations to record the purchase and the first two monthly payments. Round answers to the nearest dollar. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date

General Journal Description Purchase: Building Mortgage Payable First Payment: Mortgage Interest Expense ($800,000  0.09  1/12) Mortgage Payable ($6,200 – $6,000) Cash Second Payment: Mortgage Interest Expense [($800,000 – $200)  0.09  1/12] Mortgage Payable ($6,200 – $5,999) Cash

Post. Ref.

Debit

Page 1 Credit

800,000 800,000

6,000 200 6,200

5,999 201 6,200

PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Mortgages payable MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

2. Dennis Corporation entered into a long-term lease for a piece of equipment. The lease term calls for an annual payment of $2,000 for six years, which approximates the useful life of the equipment. Assume a discount factor of 16 percent. (Note: Present value of a single sum factor at six years and 16% is 0.410; present value of an annuity factor at six years and 16% is 3.685.) Round answers to the nearest dollar. a. Prepare the entry without explanation to record the leased equipment. b. Prepare the entry without explanation to record annual depreciation, assuming the straight-line method and no residual value. c. Prepare the entry without explanation to record the first annual payment of $2,000, after the company has had the equipment for one year.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date a.

General Journal Description

Post. Ref.

Debit

Capital Lease Equipment ($2,000  3.685) Capital Lease Obligations

7,370

Depreciation Expense, Capital Lease Equipment Accumulated Depreciation, Capital Lease Equipment ($7,370 ÷ 6)

1,228

Interest Expense ($7,370  16%) Capital Lease Obligation ($2,000 – $1,179) Cash

1,179 821

Page 1 Credit

7,370

1,228

2,000

PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Long-term leases MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

3. For each of the following descriptions, provide the name of the item that is being described. a. A security representing money that a corporation borrows from the investing public. b. Bonds that are issued on the basis of a corporation’s general credit. c. The fixed rate of interest paid to bondholders based on the face value of the bonds. d. The excess of the face value of the bond over the issue price of the bond. e. The total value of bonds issued at one time. f. Bonds that all mature at the same time. g. The excess of the issue price of the bond over the face value of the bond. h. A contract that defines the rights, privileges, and limitations of the bondholders. i. Bonds that carry a pledge of certain corporate assets as a guarantee of repayment. j. The rate of interest paid in the market based on bonds of similar risk. k. Bonds that mature on different dates. l. Bonds that are issued in the names of the bondholders. m. Bonds that are not registered with the organization. ANS: a. Bond b. Unsecured bonds c. Face interest rate d. Discount e. Bond issue f. Term bonds g. Premium h. Bond indenture i. Secured bonds j. Market or effective interest rate k. Serial bonds l. Registered bonds m. Coupon bonds PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 4. On July 1, 2013, Gallatin Corporation issued bonds with a face value of $1,000,000. The bonds carry a face interest rate of 10 percent that is payable each July 1 and January 1. a. Prepare the entry in journal form without explanation for the issuance assuming the bonds are issued at 97. b. Prepare the entry in journal form without explanation for the issuance assuming the bonds are issued at 102.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date 2013 a. July

b. July

General Journal Description 1 Cash ($1,000,000  0.97) Unamortized Bond Discount ($1,000,000 – $975,000) Bonds Payable 1 Cash ($1,000,000  1.02) Bonds Payable Unamortized Bond Premium ($1,020,000 – $1,000,000)

Post. Ref.

Debit

Page 1 Credit

970,000 30,000 1,000,000 1,020,000 1,000,000 20,000

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 5. On July 1, 2013, Aloha Corporation issued bonds with a face value of $400,000. The bonds carry a face interest rate of 8 percent that is payable each July 1 and January 1. a. Prepare the entry in journal form without explanation for the issuance of the bonds assuming the bonds are issued at 98. b. Prepare the entry in journal form without explanation for the issuance of the bonds assuming the bonds are issued at 101.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date a.Jul.1

b. Jul.1

General Journal Description

Post. Ref.

Debit

Cash ($400,000  0.98) Unamortized Bond Discount ($400,000 – $392,000) Bonds Payable

392,000

Cash ($400,000  1.01) Bonds Payable Unamortized Bond Premium ($404,000 – $400,000)

404,000

Page 1 Credit

8,000 400,000

400,000 4,000

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 6. On July 1, 2013, Owsley Corporation issued bonds with a face value of $1,200,000. The bonds carry a face interest rate of 8 percent that is payable each July 1 and January 1. a. Prepare an entry in journal form without explanations to record the issuance assuming the bonds are issued at 100. b. Prepare an entry in journal form without explanations to record the issuance assuming the bonds are issued at 97. c. Prepare an entry in journal form without explanations to record the issuance assuming the bonds are issued at 103.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date 2013 a. July

b. July

General Journal Description

Post. Ref.

Debit

1 Cash Bonds Payable

1,200,000

1 Cash ($1,200,000  0.97)

1,164,000

Page 1 Credit

1,200,000

Unamortized Bond Discount [1,200,000 – ($1,200,000  0.97)]

36,000

Bonds Payable

c. July

1 Cash ($1,200,000  1.03)

1,200,000

1,236,000

Unamortized Bond Premium [($1,200,000  1.03) – $1,200,000] Bonds Payable

36,000

1,200,000

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 7. On January 1, 2013, Lurline Corporation issued ten-year, 8 percent bonds with a face value of $500,000. The semi-annual interest dates are June 30 and December 31. The bonds were issued for $437,740 to yield an effective annual rate of 10 percent. The accounting year ends on December 31. Prepare entries in journal form without explanations to record the bond issue on January 1, 2013, and the payments of interest and amortization of discount on June 30 and December 31, 2013. Use the effective interest method of amortization. Round answers to the nearest dollar.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date 2013 Jan.

June

Dec.

General Journal Description

Post. Ref.

Debit

1 Cash (given) Unamortized Bond Discount ($500,000 – $437,740) Bonds Payable

437,740

30 Bond Interest Expense ($437,740  0.10 x 6/12) Unamortized Bond Discount ($21,887 – $20,000) Cash ($500,000  0.08  6/12)

21,887

31 Bond Interest Expense [($437,740 + $1,887)  0.1 x 6/12] Unamortized Bond Discount ($21,981 – $20,000) Cash ($500,000  0.08  6/12)

Page 1 Credit

62,260 500,000

1,887 20,000

21,981 1,981 20,000

PTS: 1 DIF: Moderate OBJ: 3 | 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

8. On January 2, 2013, Boyd Corporation issued ten-year, 8 percent bonds with a face value of $500,000. The semi-annual interest dates are June 30 and December 31. The bonds were issued for $437,740 to yield a market interest rate of 10 percent. The accounting year ends on December 31. Prepare entries in journal form without explanations to record the bond issue on January 2, 2013, and the payments of interest and amortization of discount on June 30 and December 31, 2013. Use the straight-line method of amortization. Round answers to the nearest dollar.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date 2013 Jan.

June

Dec.

General Journal Description

Post. Ref.

Debit

1 Cash (given) Unamortized Bond Discount ($500,000 – $437,740) Bonds Payable

437,740

30 Bond Interest Expense ($20,000 + $3,113) Unamortized Bond Discount ($62,2600 ÷ 20) Cash ($500,000  0.08  6/12)

23,113

31 Bond Interest Expense ($20,000 + $3,113) Unamortized Bond Discount ($62,2600 ÷ 20) Cash ($500,000  0.08  6/12)

23,113

Page 1 Credit

62,260 500,000

3,113 20,000

PTS: 1 DIF: Moderate OBJ: 3 | 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 9. On November 1, 2012, Fields Corporation issued $800,000 worth of ten-year, 9 percent bonds. The semi-annual interest dates are November 1 and May 1. Because the market interest rate of similar investments was 8.5 percent, the bonds were issued at a price of 103. Ignoring year-end accruals, prepare entries in journal form without explanations to record the bond issue on November 1, 2012, and the payments of interest and amortization of premium on May 1 and November 1, 2013. Use the effective interest method of amortization. Round answers to the nearest dollar.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

Post. Ref.

Debit

Page 1 Credit

ANS:

Date 2012 Nov.

2013 May

General Journal Description

1 Cash ($800,000  1.03) Unamortized Bond Premium ($824,000 – $800,000) Bonds Payable

824,000

1 Bond Interest Expense ($824,000 .085 x 6/12)

35,020

Unamortized Bond Premium ($36,000 – $35,020) Cash ($800,000  0.09  6/12) Nov.

1 Bond Interest Expense [($824,000 – $980)  0.085 x 6/12] Unamortized Bond Premium ($36,000 – $34,978) Cash ($800,000  0.09  6/12)

PTS: 1 DIF: Moderate OBJ: 3 | 5 NAT: AACSB Analytic | AICPA FN Measurement

24,000 800,000

980 36,000

34,978 1,022 36,000

LOC: Application

KEY: Bonds

MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

10. Strathern Corporation issued ten-year term bonds dated January 1, 2012, with a face value of $800,000. The face interest rate is 10 percent, and interest is payable semi-annually on June 30 and December 31. The bonds were issued for $708,400 to yield an effective annual rate of 12 percent. Use the effective interest method of amortization. Round answers to the nearest dollar. a. Prepare entries in journal form without explanations to record the bond issue on January 1, 2012, and the payments of interest and amortization on June 30 and December 31, 2012.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

b. Calculate the total amount to be reported as Bond Interest Expense on the income statement for the year ended 2013. c. Calculate the carrying value of the bonds on December 31, 2013.

ANS: a. Date 2012 Jan.

June

Dec.

General Journal Description

Post. Ref.

Debit

1 Cash (given) Unamortized Bond Discount ($800,000 – $708,400) Bonds Payable

708,400

30 Bond Interest Expense ($708,400  0.12 x 6/12) Unamortized Bond Discount ($42,504 – $40,000) Cash ($800,000  0.10  6/12)

42,504

31 Bond Interest Expense [($708,400 + $2,504)  0.12 x 6/12] Unamortized Bond Discount ($42,654 – $40,000) Cash

Page 1 Credit

91,600 800,000

2,504 40,000

42,654 2,654 40,000

b. $85,795 [($708,400 + $2,504 + $2,654)  0.12 x 6/12 = $42,813] + [($708,400 + $2,504 + $2,654 + ($42,813 – $40,000))  0.12 x 6/12 = $42,982] c. $719,353 ($708,400 + $2,504 + $2,654 + ($42,813 – $40,000) + ($42,982 – $40,000)) PTS: 1 DIF: Challenging OBJ: 3 | 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 11. A notice appeared in the Grant Street Times stating that Dollar Savings Association of Texas was issuing $2.9 billion in zero coupon bonds. “The Bonds do not pay interest periodically. The only scheduled payment to the holder of a Bond will be the amount at maturity,” the ad read. The details of two components of the issue were as follows: $500,000,000 Bonds due December 12, 2017, at 3.254; $500,000,000 Bonds due December 12, 2027, at 1.380; plus accrued amortization, if any, of the original issue discount from December 12, 1987, to date of delivery. a. Assuming all the bonds were issued on December 12, 1987, prepare entries in journal form to record each component shown above.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

b. Determine the approximate market interest rate on each of the two components of the bond issue. Assume that interest is compounded annually. Use Table 3 in the appendix on future value and present value tables. c. Prepare entries in journal form to record bond interest expense for each of the first two years (December 12, 1988 and 1989) on the component of the bond due in 2017 (ignore effects of fiscal year ends). What advantages or disadvantages are there to Dollar in issuing zero coupon bonds?

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS: a. General Journal Description

Date 1987 Dec.

Post. Ref.

Debit

12 Cash Unamortized Bond Discount Bonds Payable Issue of $500,000,000 of zero coupon bonds due 2017 at 3.254 $500,000,000  0.03254 = $16,270,000

16,270,000 483,730,000

12 Cash Unamortized Bond Discount Bonds Payable Issue of $500,000,000 of zero coupon bonds due 2027 at 1.38 $500,000,000  0.01380 = $6,900,000

6,900,000 493,100,000

Page 1 Credit

500,000,000

b. Since there are no interest payments on this bond, its present value is equal to the present value of a single payment. The formula is Present Value = Maturity Value  Factor. The present value factors are equal to the issue prices (or percentages). Component due in 2017 Present Value Factor = 0.03254 From Table 3 in the appendix on future value and present value tables, the row for 30 periods (2017 minus 1987) gives 0.033 as the present value factor for 12 percent. Obviously, 0.03254 is very close to this factor. Therefore, the market interest rate on this component of the bond issue approximates 12 percent. Component due in 2027 Present Value Factor = 0.0138 From Table 3 in the appendix on future value and present value tables, the row for 40 periods (2027 minus 1987) shows the following present value factors: 0.011 for 12 percent 0.022 for 10 percent One can see that 0.0138 falls between 0.011 and 0.022. Therefore, the effective market rate will be between 10 percent and 12 percent, or about 11.5 percent.

c. Date 1988 Dec.

1989 Dec.

General Journal Description

Post. Ref.

Debit

12 Bond Interest Expense Unamortized Bond Discount To record amortization of bond discount using effective interest rate $16,270,000  0.12

1,952,400

12 Bond Interest Expense Unamortized Bond Discount To record amortization of bond discount using effective interest rate ($16,270,000 + $1,952,400)  0.12

2,186,688

Page 1 Credit

1,952,400

2,186,688

An advantage of issuing zero coupon bonds is that cash flow is enhanced because periodic interest payments are not required. A disadvantage is that provision must be made for payment of the large face value at maturity. PTS: 1 DIF: Challenging OBJ: 3 | 4 | 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 12. On December 31, 2012, the balance sheet of Gamma Corporation reported bonds outstanding with a face value of $2,000,000 and a related unamortized premium of $60,000. Interest is payable semiannually on January 1 and July 1. a. Prepare an entry in journal form without explanations to record the retirement of bonds with a face value of $1,200,000 on January 1, 2013, assuming the bonds were redeemed at a call price of 104. b. Prepare an entry in journal form without explanation on January 1, 2013, to record the conversion of bonds with a face value of $800,000 into common stock. Each $1,000 bond is convertible into 30 shares of $20 par value common stock.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS: General Journal Description

Date 2013 a. Jan.

b. Jan.

Post. Ref.

Debit

Bonds Payable Unamortized Bond Premium ($60,000  $1,200,000 ÷ $2,000,000) Loss on Retirement of Bonds ($1,248,000 – $1,236,000) Cash (1.04  $1,200,000)

1,200,000 36,000

Bonds Payable Unamortized Bond Premium (($60,000  $800,000 ÷ $2,000,000) Common Stock ($800,000 ÷ $1,000  30  $20) Additional Paid-in Capital ($824,000 – $480,000)

800,000 24,000

Page 1 Credit

12,000 1,248,000

480,000 344,000

PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting 13. On December 31, 2012, the balance sheet of L and H Corporation reported bonds outstanding with a face value of $1,000,000 and a related unamortized premium of $50,000. Interest is payable semiannually on January 1 and July 1. a. Prepare an entry in journal form without explanations to record the retirement of bonds with a face value of $600,000 on January 1, 2013, assuming the bonds were redeemed at a call price of 103. b. Prepare an entry in journal form without explanation on January 1, 2013, to record the conversion of bonds with a face value of $400,000 into common stock. Each $1,000 bond is convertible into 25 shares of $10 par value common stock.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS: General Journal Description

Date 2013 a. Jan.

b. Jan.

Post. Ref.

Debit

Bonds Payable Unamortized Bond Premium ($50,000  600,000 ÷ $1,000,000) Gain on Retirement of Bonds ($630,000 – $618,000) Cash ($600,000  1.03)

600,000 30,000

Bonds Payable Unamortized Bond Premium ($50,000  $400,000 ÷ $1,000,000) Common Stock ($400,000 ÷ $1,000  25  $10) Additional Paid-in Capital ($420,000 – $100,000)

400,000 20,000

Page 1 Credit

12,000 618,000

100,000 320,000

PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Bonds MSC: ACBSP-APC-22-Long-Term Liabilities Reporting

Chapter 11 - Stockholders' Equity TRUE/FALSE 1. The price/earnings (P/E) ratio is a common measure of management’s performance. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 2. The dividends yield is measured in terms of “times.” ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 3. Return on equity equals net income divided by average stockholders' equity. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 4. The board of directors carries out the day-to-day operations of the business. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Managing a corporation MSC: ACBSP-APC-20-Accounting for Corporations 5. Stockholders elect the officers who appoints the board of directors of a corporation. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Managing a corporation MSC: ACBSP-APC-20-Accounting for Corporations 6. The limited liability of a stockholder can be viewed as both an advantage and a disadvantage. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Forming a corporation MSC: ACBSP-APC-20-Accounting for Corporations 7. Corporate earnings are not subject to double taxation. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Forming a corporation MSC: ACBSP-APC-20-Accounting for Corporations

8. The par value of stock refers to its value on the open market. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Equity financing MSC: ACBSP-APC-20-Accounting for Corporations 9. One disadvantage of a corporation is the continuous existence of the corporation. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Forming a corporation MSC: ACBSP-APC-20-Accounting for Corporations 10. A corporation is a separate entity for legal purposes. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Forming a corporation MSC: ACBSP-APC-20-Accounting for Corporations 11. The liability of a stockholder is usually limited to the stockholder's investment in the corporation and the stockholder’s personal assets. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Forming a corporation MSC: ACBSP-APC-20-Accounting for Corporations 12. A corporation often uses an underwriter for an initial public offering (IPO). ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Equity financing MSC: ACBSP-APC-20-Accounting for Corporations 13. An advantage of the corporate form is that the board cannot hire professional managers to attend to the corporation's affairs. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Managing a corporation MSC: ACBSP-APC-20-Accounting for Corporations 14. Stock options often are granted by a corporation to management personnel as a means of additional compensation to and motivation of these employees. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Stock options as compensation MSC: ACBSP-APC-20-Accounting for Corporations 15. The par value of stock is an arbitrary amount assigned to each share of stock. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Equity financing MSC: ACBSP-APC-20-Accounting for Corporations © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

16. Underwriters typically charge 5 percent of the selling price to guarantee the sale of initial public offerings of stock. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Equity financing MSC: ACBSP-APC-20-Accounting for Corporations 17. A dividend that represents a return to the stockholders of a part of their paid-in capital rather than a distribution out of retained earnings is called a cash dividend. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 18. Cash dividends become a liability of a corporation when the stock goes ex-dividend. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic LOC: Recall MSC: ACBSP-APC-20-Accounting for Corporations

OBJ: 1 KEY: Dividends

19. A cash dividend is usually paid when a company is going out of business or reducing its operations. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 20. No entry is required on the date of record for a cash dividend. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 21. The Dividends account is closed by transferring to Retained Earnings at the end of the period. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 22. Start-up and organization costs should be amortized over ten years or more. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Equity financing MSC: ACBSP-APC-20-Accounting for Corporations 23. Start-up and organization costs include state incorporation fees and attorneys’ fees for drawing up the articles of incorporation. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Forming a corporation MSC: ACBSP-APC-20-Accounting for Corporations © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

24. Corporations are subject to less government control and regulation than are other forms of business. ANS: F PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Managing a corporation MSC: ACBSP-APC-20-Accounting for Corporations 25. The sale of shares in a corporation by one stockholder to another does not affect the total capital of the corporation. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Forming a corporation MSC: ACBSP-APC-20-Accounting for Corporations 26. The death of a stockholder results in the dissolution of the corporation. ANS: F PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Forming a corporation MSC: ACBSP-APC-20-Accounting for Corporations 27. Financing a business with common stock is riskier than financing it with bonds. ANS: F PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Equity financing MSC: ACBSP-APC-20-Accounting for Corporations 28. The declaration of a cash dividend causes an increase in a corporation's liabilities at the date of record. ANS: F PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 29. The entry required to record start-up and organization costs will cause a decrease in net income for the period. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Equity financing MSC: ACBSP-APC-20-Accounting for Corporations 30. The stockholders' equity in a corporation consists of capital contributed by stockholders and retained earnings. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Components of stockholders' equity | Contributed capital MSC: ACBSP-APC-20-Accounting for Corporations

OBJ: 2 LOC: Recall

31. Stockholders who own common stock usually have voting rights, whereas stockholders who own preferred stock usually do not have voting rights. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Preferred stock | Common stock MSC: ACBSP-APC-20-Accounting for Corporations 32. Preferred stock is considered the residual equity of a corporation. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Preferred stock | Common stock MSC: ACBSP-APC-20-Accounting for Corporations 33. Treasury shares are shares that are issued and outstanding. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations 34. Retained earnings are a component of contributed capital. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Contributed capital MSC: ACBSP-APC-20-Accounting for Corporations 35. Retained earnings represent the stockholders’ claims to assets resulting from profitable operations. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Components of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations

OBJ: 2 LOC: Recall

36. The word preferred in the phrase preferred stock means that an owner of preferred stock has some advantages over a bondholder. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Preferred stock MSC: ACBSP-APC-20-Accounting for Corporations 37. Dividends in arrears are often disclosed in the notes to the financial statements. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 38. Dividends in arrears pertain to noncumulative preferred stock. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Dividends | Preferred stock MSC: ACBSP-APC-20-Accounting for Corporations © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

39. Dividends on cumulative preferred stock become a liability of the corporation at the end of each year. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Preferred stock | Dividends MSC: ACBSP-APC-20-Accounting for Corporations 40. Callable preferred stock is preferred stock that may be redeemed or retired at the option of the stockholder. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Preferred stock MSC: ACBSP-APC-20-Accounting for Corporations 41. Stockholders are entitled to any dividends in arrears when a corporation calls in its preferred stock. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Dividends | Preferred stock MSC: ACBSP-APC-20-Accounting for Corporations 42. Once an owner of convertible preferred stock has converted to common, he or she cannot convert back to preferred. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Preferred stock MSC: ACBSP-APC-20-Accounting for Corporations 43. The number of authorized shares should always equal or exceed the number of outstanding shares. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Components of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations

OBJ: 2 LOC: Comprehension

44. No rights or privileges are associated with common stock. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Components of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations

OBJ: 2 LOC: Comprehension

45. When no-par common stock has a stated value, the stated value of the shares issued normally is not considered the legal capital of the corporation. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Stock issuance MSC: ACBSP-APC-20-Accounting for Corporations

46. The concept of legal capital exists to protect the corporation's assets for the stockholders of the corporation. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Stock issuance MSC: ACBSP-APC-20-Accounting for Corporations 47. When common stock with a par value is sold for a price that exceeds par value, the Common Stock account is credited for an amount equal to the cash proceeds. ANS: F PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Stock issuance MSC: ACBSP-APC-20-Accounting for Corporations 48. The balance in the Additional Paid-in Capital account must be added to the balance of the Common Stock account to compute the amount of legal capital for a corporation with a par value common stock. ANS: F PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Stock issuance MSC: ACBSP-APC-20-Accounting for Corporations 49. For accounting purposes, stated value is treated differently than par value. ANS: F PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Stock issuance MSC: ACBSP-APC-20-Accounting for Corporations 50. When no-par common stock without a stated value is issued for cash, the Common Stock account is credited for an amount equal to the cash proceeds. ANS: T PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Stock issuance MSC: ACBSP-APC-20-Accounting for Corporations 51. Treasury stock usually is recorded at cost when purchased. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations 52. The cost of treasury stock is deducted from total Contributed Capital and Retained Earnings in determining total stockholders' equity. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations

53. The sale of treasury stock at an amount greater than cost does not result in a gain on the income statement. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations 54. Treasury stock is reported in the stockholders’ equity section of the balance sheet. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations 55. The entry to record the purchase of treasury stock will cause total stockholders' equity to decrease by the amount of the cost of the treasury shares. ANS: T PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations 56. When treasury stock is sold at a price below its cost, the entry to record the sale has the effect of reducing total stockholders' equity. ANS: F PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations 57. The entry to record the retirement of treasury stock will include a debit to Common Stock for the amount of the par value of the shares. ANS: T PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations 58. A liability arises when the board of directors declares a stock dividend. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Stock dividend MSC: ACBSP-APC-20-Accounting for Corporations 59. A person owning stock on the date of payment will receive stock dividends that have been declared. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Stock dividend MSC: ACBSP-APC-20-Accounting for Corporations

60. A stock dividend is a pro rata distribution of cash to a corporation's stockholders. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Stock dividend MSC: ACBSP-APC-20-Accounting for Corporations 61. A large stock dividend normally results in a transfer from Retained Earnings to Contributed Capital of an amount equal to the par value of the stock. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Stock dividend MSC: ACBSP-APC-20-Accounting for Corporations 62. A stock dividend does not affect the total amount of stockholders' equity. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Stock dividend MSC: ACBSP-APC-20-Accounting for Corporations 63. The account Common Stock Distributable is classified as a stockholders’ equity account. ANS: T PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Stock dividend MSC: ACBSP-APC-20-Accounting for Corporations 64. A stock dividend exceeding 20 to 25 percent is properly treated as a stock split. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Stock dividend MSC: ACBSP-APC-20-Accounting for Corporations 65. A stock split normally decreases total stockholders' equity. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Stock split MSC: ACBSP-APC-20-Accounting for Corporations 66. A stock split results in a transfer of the market value of the stock from Retained Earnings to Contributed Capital. ANS: F PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Stock split MSC: ACBSP-APC-20-Accounting for Corporations 67. A stock dividend will cause a decrease in total contributed capital at the date the dividend is declared. ANS: F PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Stock dividend MSC: ACBSP-APC-20-Accounting for Corporations © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

68. A stock dividend will cause an increase in the total number of shares issued and outstanding. ANS: T PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Stock dividend MSC: ACBSP-APC-20-Accounting for Corporations 69. A 3-for-1 stock split will have the same effect on the number of shares outstanding as a 300 percent stock dividend. ANS: F PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Stock split MSC: ACBSP-APC-20-Accounting for Corporations 70. A statement of retained earnings is not as informative as a statement of stockholders' equity. ANS: T PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Statement of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations 71. A statement of stockholders' equity can take the place of a statement of retained earnings. ANS: T PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Statement of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations 72. The date on a statement of stockholders' equity is for a period of time rather than for a specific point in time. ANS: T PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Statement of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations 73. Book value per share of stock represents the amount of equity the shareholder of one share of stock has in the net assets of the company. ANS: T PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Book value of stock MSC: ACBSP-APC-20-Accounting for Corporations 74. In computing book value per share of common stock, common stock distributable is included in the number of shares outstanding. ANS: T PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Book value of stock MSC: ACBSP-APC-20-Accounting for Corporations 75. The declaration of cash dividends will increase the book value per share of common stock. ANS: F PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Book value of stock MSC: ACBSP-APC-20-Accounting for Corporations © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

76. The book value of one share of callable preferred stock is equal to the call value of the preferred share minus any dividends in arrears. ANS: F PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Book value of stock MSC: ACBSP-APC-20-Accounting for Corporations MULTIPLE CHOICE 1. The price/earnings (P/E) ratio is measured in terms of a. dollars. b. a percentage. c. times. d. days. ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 2. Dividend yield equals a. market price per share divided by dividends per share. b. net income divided by market price per share. c. net income divided by total equity d. dividends per share divided by market price per share. ANS: D PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 3. Return on equity is measured in terms of a. days. b. times. c. a percentage. d. dollars. ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 4. A disadvantage of the corporate form of business is a. limited liability. b. professional management. c. ease of transfer of ownership. d. double taxation. ANS: D PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Forming a corporation MSC: ACBSP-APC-20-Accounting for Corporations

5. A disadvantage of the corporate form of business is a. centralized authority and responsibility. b. its status as a separate legal entity. c. government regulation. d. continuous existence. ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Forming a corporation MSC: ACBSP-APC-20-Accounting for Corporations 6. An advantage of the corporate form of business is a. possible lack of control by owners. b. possible restrictions due to lack of liability. c. continuous existence d. government regulation. ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Forming a corporation MSC: ACBSP-APC-20-Accounting for Corporations 7. Which of the following is a correct statement relating to the concept of mutual agency and the corporate form of business? a. There is no mutual agency with the corporate form of business. b. Mutual agency may or may not exist in a corporation, depending on the individual state law. c. Mutual agency always exists in the corporate form of business. d. Mutual agency may or may not exist in a corporation, depending on a vote by the shareholders. ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Forming a corporation MSC: ACBSP-APC-20-Accounting for Corporations 8. Which of the following phrases is not descriptive of the corporate form of business? a. Professional management b. Continuous existence c. Limited liability d. Single taxation ANS: D PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Forming a corporation MSC: ACBSP-APC-20-Accounting for Corporations 9. A corporation has a. government regulations. b. a limited existence. c. unlimited liability. d. no tax liability. ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Forming a corporation MSC: ACBSP-APC-20-Accounting for Corporations © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

10. Par value a. is established for a share of stock after it is issued. b. is an arbitrary amount assigned to each share of stock. c. represents what a share of stock is worth. d. represents the current selling price for a share of stock. ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Equity financing MSC: ACBSP-APC-20-Accounting for Corporations 11. A good measure of confidence in a corporation's future is a. par value. b. price/earnings ratio. c. dividends yield. d. return on equity. ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 12. A corporation records the cash payment of the dividend a. on the payment date. b. on the record date. c. on the declaration date. d. when the stock sells ex-dividend. ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 13. A liquidating dividend is a. a dividend that exceeds current retained earnings. b. normally declared when a corporation is experiencing large profits. c. a dividend that exceeds current profits. d. legal in most states. ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 14. To evaluate the amount of dividends they receive, investors use the ratio called a. Price Earning ratio b. Dividend yield ratio c. Return on assets d. Dividend turnover ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

15. Start-up and organization costs for a corporation that is to operate a retail store would include the costs of a. promoters' fees and printing stock certificates. b. advertising for a grand opening sale. c. the initial purchase of inventory. d. counters and racks to display merchandise. ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Equity financing MSC: ACBSP-APC-20-Accounting for Corporations 16. Which of the following statements is not descriptive of common stock? a. Stockholders are considered owners, not creditors, of a corporation. b. The payment of dividends is never required. c. Dividends paid are an expense for the issuing corporation. d. Issuing stock is less risky than issuing bonds. ANS: C PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Equity financing MSC: ACBSP-APC-20-Accounting for Corporations 17. Which of the following could be described as both an advantage and a disadvantage of incorporation? a. Ease of capital generation b. Limited liability c. Government regulations d. Lack of mutual agency ANS: B PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Forming a corporation MSC: ACBSP-APC-20-Accounting for Corporations 18. Which of the following statements is true of stock option plans? a. They give employees the right to purchase stock in the company at a fixed price on a future date. b. They are not a form of motivating employees. c. The compensation expense from stock option plans is not tax deductible. d. They must be offered to all employees. ANS: A PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Stock options as compensation MSC: ACBSP-APC-20-Accounting for Corporations 19. Which of the following is the appropriate entry to record the declaration of cash dividends? a. Dividends Payable – Debit; Cash – Credit b. Additional Paid-in Capital – Debit; Dividends Payable – Credit c. Dividends– Debit; Dividends Payable – Credit d. Retained Earnings– Debit; Cash – Credit ANS: C PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

20. Start-up and organization costs include all of the following except a. rent of new office. b. accountants’ fees. c. attorney's fees. d. state incorporation fees. ANS: A PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Equity financing MSC: ACBSP-APC-20-Accounting for Corporations 21. Start-up and organization costs a. are capitalized, but never amortized. b. are capitalized and amortized, usually over five years. c. are expensed in the year incurred. d. appear on the balance sheet as a current asset. ANS: C PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Equity financing MSC: ACBSP-APC-20-Accounting for Corporations 22. The board of directors of Autauga Corporation declared a cash dividend on July 15, 2013, to be paid on August 15, 2013, to shareholders holding the stock on August 1, 2013. Given these facts, the date August 1, 2013, is referred to as the a. date of declaration. b. date of payment. c. ex-dividend date. d. date of record. ANS: D PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 23. The entry to close the Dividends account which has a balance of $10,000, at the end of an accounting period will be: a. Dividends 10,000 Cash 10,000 b. Retained Earnings Cash

10,000 10,000

c. Dividends 10,000 Retained Earnings

10,000

d. Retained Earnings Dividends

10,000

ANS: D PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations

24. The board of directors of Blount Corporation declared a cash dividend of $5.00 per share on 57,000 shares of common stock on April 14, 2013. The dividend is to be paid on May 15, 2013, to shareholders of record on May 1, 2013. The proper entry to be recorded on April 14, 2013, will be: a. Dividends 285,000 Dividends Payable 285,000 b. Dividends payable Cash

285,000

c. Dividends Retained Earnings

285,000

d. Dividends payable Dividends

285,000

ANS: A PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 25. The board of directors of Blount Corporation declared a cash dividend of $5.00 per share on 57,000 shares of common stock on April 14, 2013. The dividend is to be paid on May 15, 2013, to shareholders of record on May 1, 2013. The effects of the entry to record the declaration of the dividend on April 14, 2013, are to a. decrease stockholders' equity and increase liabilities. b. increase stockholders' equity and increase liabilities. c. decrease stockholders' equity and decrease assets. d. increase stockholders' equity and decrease assets. ANS: A PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 26. The board of directors of Blount Corporation declared a cash dividend of $5.00 per share on 57,000 shares of common stock on April 14, 2013. The dividend is to be paid on May 15, 2013, to shareholders of record on May 1, 2013. The proper entry to be recorded on May 15, 2013, will be: a. Cash 285,000 Dividends Payable 285,000 b. Dividends Payable Cash

285,000

c. Cash

285,000

Dividends d. Dividends Cash

285,000 285,000 285,000

ANS: B PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

27. The board of directors of Blount Corporation declared a cash dividend of $5.00 per share on 57,000 shares of common stock on April 14, 2013. The dividend is to be paid on May 15, 2013, to shareholders of record on May 1, 2013. The effects of the entry to record the payment of the dividend on May 15, 2013, are to a. increase assets and decrease stockholders' equity. b. decrease stockholders' equity and decrease liabilities. c. decrease liabilities and decrease assets. d. increase stockholders' equity and decrease liabilities. ANS: C PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 28. The entry to record the declaration of a cash dividend will a. not affect working capital. b. reduce working capital. c. not affect total stockholders' equity. d. increase total stockholders' equity. ANS: B PTS: 1 DIF: Challenging OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 29. The net effects on a corporation of the declaration and payment of a cash dividend are to a. increase assets and increase stockholders' equity. b. decrease liabilities and decrease stockholders' equity. c. decrease assets and decrease stockholders' equity. d. increase stockholders' equity and decrease liabilities. ANS: C PTS: 1 DIF: Challenging OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 30. The contributed capital of a corporation does not include a. additional paid-in capital. b. preferred stock. c. the stated value of common stock issued. d. retained earnings. ANS: D PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Contributed capital MSC: ACBSP-APC-20-Accounting for Corporations 31. A corporation's residual equity is its a. preferred stock. b. treasury stock. c. common stock. d. authorized shares of all stock. ANS: C PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Components of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations

OBJ: 2 LOC: Recall

32. The maximum number of shares of common stock that may be issued according to the corporation's charter is referred to as a. authorized shares. b. outstanding shares. c. unissued shares. d. issued shares. ANS: A PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Components of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations

OBJ: 2 LOC: Recall

33. Holders of preferred stock normally do not have a. preference as to dividends. b. preference as to assets in liquidations. c. full voting rights. d. ownership interests in the corporation. ANS: C PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Preferred stock MSC: ACBSP-APC-20-Accounting for Corporations 34. Outstanding shares of stock are a. all shares that a corporation sells or transfers to stockholders. b. also called treasury shares. c. the maximum number of shares a corporation can issue. d. issued shares that are still in circulation. ANS: D PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Components of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations

OBJ: 2 LOC: Recall

35. Shares of treasury stock are a. issued shares that have been bought back by the corporation and are being held by the corporation. b. shares held by the U.S. Treasury Department. c. part of the total outstanding shares but not part of the total issued shares of a corporation. d. unissued shares that are held by the treasurer of the corporation. ANS: A PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Treasury stock

OBJ: 2 LOC: Recall

36. How should dividends in arrears be shown on a corporation's balance sheet? a. As an increase in liabilities b. In a note or in the body of the financial statements c. As a decrease in assets d. As an increase in stockholders' equity ANS: B PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement

OBJ: 2 LOC: Recall

KEY: Dividends

MSC: ACBSP-APC-20-Accounting for Corporations

37. When shares of preferred stock may be redeemed by the corporation at a certain price, the shares are said to be a. cumulative. b. nonconvertible. c. convertible. d. callable. ANS: D PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Preferred stock MSC: ACBSP-APC-20-Accounting for Corporations 38. Convertible preferred stock is preferred stock that may be exchanged for a. cash at the option of the corporation. b. common stock at the option of the corporation. c. cash at the option of the stockholder. d. common stock at the option of the stockholder. ANS: D PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Preferred stock MSC: ACBSP-APC-20-Accounting for Corporations 39. Most preferred stocks are callable preferred stocks, which means that the callable feature may be exercised by a. the state that issued the corporation's charter. b. a preferred stockholder. c. the issuing corporation. d. either the issuing corporation or a preferred stockholder. ANS: C PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Preferred stock MSC: ACBSP-APC-20-Accounting for Corporations 40. Dividends in arrears are dividends on a. noncumulative preferred stock that have not been declared for some specified period of time. b. common stock that may never be declared. c. cumulative preferred stock that have been declared but not yet paid. d. cumulative preferred stock that have not been declared for some specified period of time. ANS: D PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 41. Dividends in arrears cannot exist in conjunction with a. callable preferred stock. b. convertible preferred stock. c. noncumulative preferred stock. d. cumulative preferred stock. ANS: C PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement

OBJ: 2 LOC: Recall

KEY: Dividends | Preferred stock

MSC: ACBSP-APC-20-Accounting for Corporations

42. When callable preferred stock is called and surrendered, the shareholder is entitled to all of the following except a. dividends in arrears. b. the par value of the stock. c. a call premium. d. the market value of the stock. ANS: D PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Preferred stock MSC: ACBSP-APC-20-Accounting for Corporations 43. Preferred stock is least likely to have which of the following characteristics? a. Preference as to dividends b. The right of the holder to vote at stockholders' meetings c. Preference as to assets upon liquidation of the corporation d. The right of the holder to convert to common stock ANS: B PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Preferred stock MSC: ACBSP-APC-20-Accounting for Corporations 44. All of the following are stockholders' equity accounts except a. Common Stock. b. Preferred Stock. c. Retained Earnings. d. Cash. ANS: D PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Components of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations

OBJ: 2 LOC: Recall

45. All of the following normally are found in a corporation's stockholders' equity section except a. Common Stock. b. Additional Paid-in Capital. c. Retained Earnings. d. Dividends in Arrears. ANS: D PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Components of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations

OBJ: 2 LOC: Recall

46. Treasury shares plus outstanding shares equal a. unissued shares. b. subscribed shares. c. authorized shares. d. issued shares. ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement

OBJ: 2 LOC: Comprehension

KEY: Components of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations 47. The number of shares of issued stock equals a. unissued shares plus authorized shares. b. outstanding shares plus treasury shares. c. authorized shares plus outstanding shares. d. authorized shares minus treasury shares. ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Components of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations

OBJ: 2 LOC: Comprehension

48. Which of the following classifications represents the fewest shares of common stock? a. Outstanding shares b. Issued shares c. Treasury shares d. Impossible to determine ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Components of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations

OBJ: 2 LOC: Comprehension

49. Holders of common stock must be made aware of possible restrictions on common dividends when the preferred stock is a. convertible. b. cumulative. c. callable. d. noncumulative. ANS: B PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Dividends | Common stock MSC: ACBSP-APC-20-Accounting for Corporations 50. Which of the following would not be an account in the general ledger of a corporation? a. Dividends Payable b. Preferred Stock c. Common Stock d. Dividends in Arrears ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Components of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations

OBJ: 2 LOC: Comprehension

51. Use the following information to answer the question below. The following accounts appear in the ledger of Bullock Corporation on December 31, 2013: Preferred Stock Common Stock

$60,000 112,000

Additional Paid-in Capital, Preferred Additional Paid-in Capital, Common Retained Earnings

14,000 36,000 80,000

A balance sheet prepared on December 31, 2013, would report total contributed capital of a. $172,000. b. $186,000. c. $222,000. d. $302,000. ANS: C $60,000 + $112,000 + $14,000 + $36,000 = $222,000 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Contributed capital MSC: ACBSP-APC-20-Accounting for Corporations 52. Use the following information to answer the question below. The following accounts appear in the ledger of Bullock Corporation on December 31, 2013: Preferred Stock Common Stock Additional Paid-in Capital, Preferred Additional Paid-in Capital, Common Retained Earnings

$60,000 94,000 14,000 36,000 80,000

A balance sheet prepared on December 31, 2013, would report total stockholders' equity of a. $154,000. b. $168,000. c. $204,000. d. $284,000. ANS: D $60,000 + $94,000 + $14,000 + $36,000 + $80,000 = $284,000 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement KEY: Components of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations

LOC: Application

53. Chambers Corporation had the following shares of stock outstanding on December 31, 2013: Common stock, $100 par value, 100,000 shares outstanding Preferred stock, 8 percent, $200 par value, cumulative, 10,000 shares outstanding Dividends were in arrears for 2011 and 2012. On December 31, 2013, total cash dividends of $800,000 were declared. The total amounts payable to preferred stockholders and common stockholders, respectively, are a. $400,000 and $400,000. b. $320,000 and $480,000. c. $480,000 and $320,000. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

d. $160,000 and $640,000.

ANS: C 2011 Preferred dividends in arrears: 10,000 x $200 x .08 = $160,000 2012 Preferred dividends in arrears: 10,000 x $200 x .08 = $160,000 2013 Preferred dividends: 10,000 x $200 x .08 = $160,000 Total Preferred dividends: $160,000 + $160,000 + $160,000 = $480,000 Common dividends: $800,000 – $480,000 = $320,000 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 54. Cleburne Corporation has 3,000 shares of $200 par value, 7 percent cumulative preferred stock, and 10,000 shares of $20 par value common stock outstanding during its first five years of operation. Cleburne Corporation paid cash dividends as follows: 2009, $33,000; 2010, $0; 2011, $130,000; 2011, $60,000; 2013, $30,000. The amount of dividends the common stockholders received during 2009 was a. $0. b. $16,500. c. $33,000. d. $49,500. ANS: A Preferred dividends: 3,000 x $200 x .07 = $42,000 Total dividends paid in 2009: $33,000 No common dividends paid. PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 55. Elmore Corporation had the following shares of stock outstanding on December 31, 2013: Common stock, $250 par value, 200,000 shares outstanding Preferred stock, 8 percent, $50 par value, cumulative, 20,000 shares outstanding Dividends were in arrears for 2011 and 2012. On December 31, 2013, total cash dividends of $400,000 were declared. The total amounts payable to preferred stockholders and common stockholders, respectively, are a. $80,000 and $320,000. b. $240,000 and $160,000. c. $160,000 and $240,000. d. $200,000 and $200,000. ANS: B 2011 Preferred dividends in arrears: 20,000 x $50 x .08 = $80,000 2012 Preferred dividends in arrears: 20,000 x $50 x .08 = $80,000 2013 Preferred dividends: 20,000 x $50 x .08 = $80,000 Total Preferred dividends: $80,000 + $80,000 + $80,000 = $240,000 Common dividends: $400,000 – $240,000 = $160,000 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement

LOC: Application

KEY: Dividends

MSC: ACBSP-APC-20-Accounting for Corporations

56. Henry Corporation has 3,000 shares of $50 par value, 7 percent cumulative preferred stock, and 10,000 shares of $5 par value common stock outstanding during its first five years of operation. Henry Corporation paid cash dividends as follows: 2009, $4,500; 2010, $0; 2011, $32,500; 2012, $15,000; 2013, $7,500. The amount of dividends in arrears at the end of 2010 was a. $0. b. $6,000. c. $9,500. d. $16,500. ANS: D Preferred dividends each year: 3,000 x $50 x .07 = $10,500 Year 2009 2010

Preferred dividends $10,500 10,500

Dividends paid $4,500 0

Dividends in arrears $ 6,000 16,500

PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 57. Lamar Corporation has 3,000 shares of $150 par value, 7 percent cumulative preferred stock, and 10,000 shares of $15 par value common stock outstanding during its first five years of operation. Lamar Corporation paid cash dividends as follows: 2009, $25,500; 2010, $0; 2011, $97,500; 2012, $45,000; 2013, $22,500. The amount of dividends received by the preferred stockholders during 2011 was a. $97,500. b. $69,000. c. $37,500. d. $27,000. ANS: B Preferred dividends each year: 3,000 x $150 x .07 = $31,500 Year 2009 2010

Preferred dividends $31,500 31,500

Dividends paid $25,500 0

Dividends in arrears $ 6,000 37,500

Preferred dividends paid in 2011: $37,500 + $31,500 = $69,000 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 58. Beckham Corporation has 3,000 shares of $100 par value, 7 percent cumulative preferred stock, and 10,000 shares of $10 par value common stock outstanding during its first five years of operation. Beckham Corporation paid cash dividends as follows: 2009, $30,000; 2010, $0; 2011, $65,000; 2012, $30,000; 2013, $15,000. The amount of dividends received by the common stockholders during 2012 was a. $11,000. b. $13,000. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

c. $9,000. d. $15,000. ANS: C Preferred dividends each year: 3,000 x $100 x .07 = $21,000 Year 2009 2010 2011

Preferred dividends $21,000 21,000 21,000

Dividends paid $30,000 0 65,000

Dividends in arrears $ 0 21,000 0

Preferred dividends paid in 2012: $21,000 Common dividends paid in 2012: $30,000 – $21,000 = $9,000 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 59. Macon Corporation has 3,000 shares of $300 par value, 7 percent cumulative preferred stock, and 10,000 shares of $30 par value common stock outstanding during its first five years of operation. Macon Corporation paid cash dividends as follows: 2009, $42,000; 2010, $54,000; 2011, $195,000; 2012, $90,000; 2013, $45,000. The amount of dividends received by the preferred stockholders during 2013 was a. $52,500. b. $45,000. c. $49,500. d. $51,000. ANS: B Preferred dividends each year: 3,000 x $300 x .07 = $63,000 Year 2009 2010 2011 2012

Preferred dividends $63,000 63,000 63,000 63,000

Dividends paid $42,000 54,000 195,000 90,000

Dividends in arrears $21,000 30,000 0 0

Preferred dividends paid in 2013: $45,000 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 60. A corporation has 10,000 shares of 8 percent cumulative preferred stock and 20,000 shares of common stock outstanding. Par value for each is $200. No dividends were paid last year, but this year a $400,000 dividend is paid. How much of this $400,000 goes to the holders of common stock? a. $80,000 b. $160,000 c. $320,000 d. $360,000 ANS: A © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Preferred stock dividend: 10,000 x $200 x .08 x 2 years = $320,000 Common stock dividend: $400,000 – $320,000 = $80,000 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 61. A corporation has 5,000 shares of 8 percent noncumulative preferred stock and 10,000 shares of common stock outstanding. Par value for each is $50. No dividends were paid last year, but this year a $46,500 dividend is paid. How much of this $46,500 goes to the holders of common stock? a. $26,500 b. $31,500 c. $36,500 d. $41,500 ANS: A Preferred stock dividend: 5,000 x $50 x .08 = $20,000 Common stock: $46,500 – $20,000 = $26,500 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 62. If Willis Corporation has 80,000 shares of common stock authorized, 50,000 shares of common stock issued, and holds 12,000 shares of common stock as treasury stock, the total number of outstanding shares of Willis Corporation amounts to a. 22,000. b. 68,000. c. 38,000. d. 26,000. ANS: C 50,000 – 12,000 = 38,000 PTS: 1 DIF: Challenging OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement KEY: Components of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations

LOC: Analysis

63. Par value is the minimum cushion of capital established for the protection of a. investors (stockholders). b. management. c. creditors. d. all of these. ANS: C PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Stock issuance MSC: ACBSP-APC-20-Accounting for Corporations 64. The excess of the issuance price over the stated value of a no-par common stock should be credited to the a. Common Stock account. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

b. Preferred Stock account. c. Additional Paid-in Capital. d. Treasury Stock. ANS: C PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Stock issuance MSC: ACBSP-APC-20-Accounting for Corporations 65. The par value of the common stock represents the a. corporation’s legal capital. b. liquidation value of the stock. c. market value of a share of stock. d. amount the corporation received in cash when the stock was issued. ANS: A PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Stock issuance MSC: ACBSP-APC-20-Accounting for Corporations 66. In the rare instance when a par value stock is issued at a cash price below par, the excess of the par value over the amount of cash received should be a. credited to a liability account. b. debited to the Retained Earnings account. c. debited to an account titled Discount on Capital Stock. d. credited to the Retained Earnings account. ANS: C PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Stock issuance MSC: ACBSP-APC-20-Accounting for Corporations 67. When stock is issued for noncash assets or services, the dollar amount to be recorded for this exchange is determined by the a. treasurer of the corporation. b. par value of the stock. c. market value of the stock or the market value of the consideration received, whichever is greater. d. market value of the stock or the market value of the consideration received when the market value of the stock cannot be determined. ANS: D PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Stock issuance MSC: ACBSP-APC-20-Accounting for Corporations 68. Which of the following stock terms is least like the others? a. Market value b. Stated value c. Par value d. Legal capital ANS: A PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Stock issuance MSC: ACBSP-APC-20-Accounting for Corporations

69. When common stock is issued by a corporation for a cash price above par value, the excess of the cash proceeds over the par value should be reported in the financial statements as a component of a. retained earnings on the balance sheet. b. total liabilities on the balance sheet. c. operating income on the income statement. d. total contributed capital on the balance sheet. ANS: D PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Stock issuance MSC: ACBSP-APC-20-Accounting for Corporations 70. The Additional Paid-in Capital account normally arises in the accounting records when a. no-par common stock is issued. b. the stated value of capital stock is greater than the par value. c. the par value of the stock exceeds the market value. d. capital stock is issued at an amount greater than par value. ANS: D PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Stock issuance MSC: ACBSP-APC-20-Accounting for Corporations 71. If a corporation has issued common stock at various prices that exceed par value, legal capital will be made up of the a. par value of the shares issued. b. total stockholders' equity plus total liabilities. c. total amount of contributed capital. d. total amount of contributed capital plus retained earnings. ANS: A PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Stock issuance MSC: ACBSP-APC-20-Accounting for Corporations 72. Use the following information to answer the question below. When Sumter Corporation was formed on January 1, 2013, the corporate charter provided for 50,000 shares of $40 par value common stock. The following transactions were among those engaged in by the corporation during its first month of operation: 1. The corporation issued 200 shares of stock to its lawyer in full payment of the $10,000 bill for assisting the company in drawing up its articles of incorporation and filing the proper papers with the state agency. 2. The company issued 8,000 shares of stock at a price of $50 per share. 3. The company issued 7,000 shares of stock in exchange for equipment that had a fair market value of $320,000. The entry to record transaction 1 would be: a. Start-up and Organization Costs Common Stock b. Start-up and Organization Costs Common Stock Additional Paid-in Capital

8,000 8,000 10,000 8,000 2,000

c. Start-up and Organization Costs Additional Paid-in Capital

8,000

d. Start-up and Organization Costs Common Stock

10,000

8,000

10,000

ANS: B PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Stock issuance MSC: ACBSP-APC-20-Accounting for Corporations 73. Use the following information to answer the question below. When Sumter Corporation was formed on January 1, 2013, the corporate charter provided for 50,000 shares of $40 par value common stock. The following transactions were among those engaged in by the corporation during its first month of operation: 1. The corporation issued 200 shares of stock to its lawyer in full payment of the $10,000 bill for assisting the company in drawing up its articles of incorporation and filing the proper papers with the state agency. 2. The company issued 8,000 shares of stock at a price of $50 per share. 3. The company issued 7,000 shares of stock in exchange for equipment that had a fair market value of $320,000. The entry to record transaction 2 would be: a. Cash 400,000 Common Stock b. Cash

400,000

400,000 Common Stock Additional Paid-in Capital

320,000 80,000

c. Cash Additional Paid-in Capital Common Stock

320,000

d. Cash

320,000 Common Stock

80,000 400,000

320,000

ANS: B PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Stock issuance MSC: ACBSP-APC-20-Accounting for Corporations 74. Use the following information to answer the question below. When Sumter Corporation was formed on January 1, 2013, the corporate charter provided for 50,000 shares of $40 par value common stock. The following transactions were among those engaged in by the corporation during its first month of operation: 1. The corporation issued 200 shares of stock to its lawyer in full payment of the $10,000 bill for assisting the company in drawing up its articles of incorporation and filing the proper papers with the state agency. 2. The company issued 8,000 shares of stock at a price of $50 per share. 3. The company issued 7,000 shares of stock in exchange for equipment that had a fair market value of $320,000.

The entry to record transaction 3 would be: a. Equipment 280,000 Common Stock 280,000

b. Common Stock Equipment

c. Equipment Common Stock

280,000 280,000

320,000 320,000

d. Equipment 320,000 Common Stock 280,000 Additional Paid-in Capital 40,000 ANS: D PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Stock issuance MSC: ACBSP-APC-20-Accounting for Corporations 75. Use the following information to answer the question below. When Sumter Corporation was formed on January 1, 2013, the corporate charter provided for 50,000 shares of $40 par value common stock. The following transactions were among those engaged in by the corporation during its first month of operation: 1. The corporation issued 200 shares of stock to its lawyer in full payment of the $10,000 bill for assisting the company in drawing up its articles of incorporation and filing the proper papers with the state agency. 2. The company issued 8,000 shares of stock at a price of $50 per share. 3. The company issued 8,000 shares of stock in exchange for equipment that had a fair market value of $320,000. The entry to record transaction 3 would be: a. Equipment 320,000 Common Stock 320,000 b. Common Stock Equipment

320,000 320,000

c. Additional Paid-in Capital Equipment Common Stock

70,000 250,000 320,000

d. Cash

320,000 Equipment

320,000

ANS: A PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Stock issuance MSC: ACBSP-APC-20-Accounting for Corporations © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

76. According to generally accepted accounting principles, treasury stock usually should be recorded at a. market value. b. par value. c. cost. d. net realizable value. ANS: C PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations 77. On the balance sheet, treasury stock owned by the company is classified properly as a. contra-stockholders' equity. b. current assets. c. investments. d. a note to the financial statements. ANS: A PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations 78. The sale of treasury stock cannot result in a. an increase in Retained Earnings. b. the crediting of Paid-in Capital, Treasury Stock. c. the debiting of Paid-in Capital, Treasury Stock. d. an increase in total stockholders' equity. ANS: A PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations 79. The purchase of treasury stock will result in a. no net changes in assets, liabilities, or stockholders' equity. b. a decrease in assets and a decrease in stockholders' equity. c. an increase in assets and an increase in liabilities. d. an increase in assets and an increase in stockholders’ equity. ANS: B PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations

80. A company purchases 300 shares of its $50 par value common stock at $55 per share. It then reissues 50 shares at $57 per share. The entry upon reissue of the stock would be: a. Cash 2,850 Treasury Stock-Common 2,750 Paid-in Capital, Treasury Stock 100 b. Cash

2,850 Treasury Stock-Common Gain on Sale of Treasury Stock

c. Cash

2,750 100 2,850

Treasury Stock-Common Retained Earnings d. Cash

2,500 350 2,850

Treasury Stock-Common

2,850

ANS: A Cash: 50 x $57 = $2,850 Treasury Stock-Common: 50 x $55 = $2,750 Paid-in Capital, Treasury Stock: $2,850 – $2,750 = $100 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations 81. A company purchases 600 shares of its $200 par value common stock at $220 per share. It then reissues 100 shares at $228 per share. The entry upon reissue of the stock would be: a. Cash 22,800 Treasury Stock-Common 22,000 Paid-in Capital, Treasury Stock 800 b. Cash

22,800 Treasury Stock-Common

c. Cash

22,800 22,800

Treasury Stock-Common Gain on Sale of Treasury Stock d. Cash

22,000 800 22,800

Treasury Stock-Common Retained Earnings

20,000 2,800

ANS: A Cash: 100 x $228 = $22,800 Treasury Stock-Common: 100 x $220 = $22,000 Paid-in Capital, Treasury Stock: $22,800 – $22,000 = $800 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

82. A company purchases 400 shares of its $50 par value common stock at $55 per share. It then reissues 60 shares at $58 per share. The entry upon reissue of the stock would be: a. Cash 3,480 Treasury Stock-Common 3,300 Paid-in Capital, Treasury Stock 180 b. Cash

3,480 Treasury Stock-Common

c. Cash

3,480 3,480

Paid-in Capital, Treasury Stock d. Cash

3,480 3,480

Treasury Stock-Common Retained Earnings

3,000 480

ANS: A Cash: 60 x $58 = $3,480 Treasury Stock-Common: 60 x $58 = $3,300 Paid-in Capital, Treasury Stock: $3,480 – $3,300 = $180 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations 83. On January 1, 2013, Belmont Corporation had 50,000 shares of $10 par value common stock issued and outstanding. All 50,000 shares had been issued in a prior period at $15 per share. On February 1, 2013, Belmont purchased 2,000 shares of treasury stock for $18 per share and later sold the treasury shares for $20 per share on March 2, 2013. The entry to record the purchase of the treasury shares on February 1, 2013, would be: a. Cash 36,000 Treasury Stock-Common 36,000 b. Cash

36,000 Treasury Stock-Common Gain on Treasury Stock-Common

30,000 6,000

c. Treasury Stock, Common Loss on Treasury Stock-Common Cash

30,000 6,000

d. Treasury Stock, Common Cash

36,000

ANS: D Treasury Stock-Common: 2,000 x $18 = $36,000 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

84. On January 1, 2013, Belmont Corporation had 50,000 shares of $10 par value common stock issued and outstanding. All 50,000 shares had been issued in a prior period at $15 per share. On February 1, 2013, Belmont purchased 2,000 shares of treasury stock for $18 per share and later sold the treasury shares for $20 per share on March 2, 2013. The entry to record the sale of the treasury shares on March 2, 2013, would be: a. Cash 40,000 Treasury Stock-Common 40,000 b. Cash

40,000 Treasury Stock-Common Paid-in Capital, Treasury Stock

c. Cash

36,000 4,000 40,000

Treasury Stock-Common Retained Earnings d. Cash

36,000 4,000 40,000

Treasury Stock-Common Gain on Treasury Stock

36,000 4,000

ANS: B Cash: 2,000 x $20 = $40,000 Treasury Stock-Common: 2,000 x $18 = $36,000 Paid-in Capital, Treasury Stock: $40,000 – $36,000 = $4,000 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations 85. Use the following information to answer the question below. The following transactions involving Culbert Corporation occurred during the year: Apr.

May June

3 5

Purchased 2,000 shares of its own preferred stock for $40, the current market price. This is the first transaction involving its own stock engaged in by the company. Sold 400 of the shares purchased on April 1 for $50 per share. Retired 600 of the shares purchased on April 1. The original issue price was $20. The par value of the stock is $10.

The entry to record the April 1 transaction would be: a. Cash 80,000 Treasury Stock, Preferred b. Retained Earnings Cash

80,000

c. Paid-in Capital, Preferred Treasury Stock, Preferred

80,000

d. Treasury Stock, Preferred Cash

80,000

ANS: D Treasury Stock, Preferred: 2,000 x $40 = $80,000 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations 86. Use the following information to answer the question below. The following transactions involving Culbert Corporation occurred during the year: Apr.

May June

3 5

The entry to record the May 3 transaction would be: a. Treasury Stock, Preferred 20,000 Cash 20,000 b. Cash

20,000 Treasury Stock, Preferred Paid-in Capital, Treasury Stock

16,000 4,000

c. Cash Retained Earnings Treasury Stock, Preferred

8,000 12,000

d. Treasury Stock, Preferred Cash

16,000

20,000

16,000

ANS: B Cash: 400 x $50 = $20,000 Treasury Stock, Preferred: 400 x $40 = $16,000 Paid-in Capital, Treasury Stock: $20,000 – $16,000 = $4,000 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations 87. Use the following information to answer the question below. The following transactions involving Culbert Corporation occurred during the year: Apr.

May June

3 5

The par value of the stock is $10. The entry to record the June 5 transaction would be: a. Preferred Stock Additional Paid-in Capital, Preferred 6,000 Treasury Stock, Preferred b. Treasury Stock, Preferred Cash

12,000

c. Cash

6,000

6,000 12,000

12,000

Treasury Stock, Preferred d. Preferred Stock Additional Paid-in Capital, Preferred Retained Earnings Treasury Stock, Preferred

6,000 6,000 6,000 12,000 24,000

ANS: D Preferred Stock: 600 x $10 = $6,000 Additional Paid-in Capital, Preferred: 600 x ($20 – $10) = $6,000 Treasury Stock, Preferred: 600 x $40 = $24,000 Retained Earnings: $24,000 – $6,000 – $6,000 = $12,000 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations 88. Use the following information to answer the question below. On January 1, 2013, Falcon Corporation had 40,000 shares of $10 par value common stock issued and outstanding. All 40,000 shares had been issued in a prior period at $17 per share. On February 1, 2013, Falcon purchased 6,100 shares of treasury stock for $19 per share and later sold the treasury shares for $26 per share on March 2, 2013. What amount of gain due to these treasury stock transactions should be reported on the income statement for the year ended December 31, 2013? a. $0 b. $42,700 c. $6,100 d. $4,270 ANS: A PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations 89. Use the following information to answer the question below. On January 1, 2013, Falcon Corporation had 40,000 shares of $10 par value common stock issued and outstanding. All 40,000 shares had been issued in a prior period at $17 per share. On February 1, 2013, Falcon purchased 1,000 shares of treasury stock for $19 per share and later sold the treasury shares for $26 per share on March 2, 2013. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

The entry to record the sale of the treasury shares on March 2, 2013 is: a. Cash 26,000 Common Stock 19,000 Retained Earnings 7,000 b. Cash Retained Earnings Treasury Stock, Common

24,000

c. Cash

26,000

2,000 26,000

Treasury Stock, Common Gain on Treasury Stock, Common d. Cash

19,000 7,000 26,000

Treasury Stock, Common Paid-in Capital, Treasury Stock

19,000 7,000

ANS: D Cash: 1,000 x $26 = $26,000 Treasury Stock-Common: 1,000 x $19 = $19,000 Paid-in Capital, Treasury Stock: $26,000 – $19,000 = $7,000 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations 90. A corporation should account for the declaration of a 10 percent stock dividend by a. transferring from retained earnings to contributed capital an amount equal to the legal capital represented by the dividend shares. b. transferring from retained earnings to contributed capital an amount equal to the market value of the dividend shares. c. transferring from retained earnings to contributed capital whatever amount the board of directors deems appropriate. d. making only a memorandum entry in the general journal. ANS: B PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Stock dividend MSC: ACBSP-APC-20-Accounting for Corporations 91. On which of the following dates involving stock dividends does a liability arise? a. Date of distribution b. Date of declaration c. Date of record d. On no date ANS: D PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Stock dividend MSC: ACBSP-APC-20-Accounting for Corporations

92. A small stock dividend should be recorded on the basis of a. par or stated value. b. original issue price. c. market price. d. cost. ANS: C PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Stock dividend MSC: ACBSP-APC-20-Accounting for Corporations 93. Which of the following statements is not true about a 2-for-1 stock split? a. Total contributed capital remains the same. b. Par value per share is reduced to twice what it was before the split. c. A stockholder with twenty shares before the split owns forty shares after the split. d. The market price probably will decrease. ANS: B PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Stock split MSC: ACBSP-APC-20-Accounting for Corporations 94. Which of the following is not true about a 35 percent stock dividend? a. The market value of the stock is needed to record the stock dividend. b. Retained earnings decreases. c. Contributed capital increases. d. Par value per share remains the same. ANS: A PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Stock dividend MSC: ACBSP-APC-20-Accounting for Corporations 95. Which of the following transactions affects total retained earnings? a. Purchase of treasury stock b. Payment of previously declared cash dividend c. Declaration of a stock dividend d. Declaration of a stock split ANS: C PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Stock dividend MSC: ACBSP-APC-20-Accounting for Corporations 96. How will the declaration and distribution of a 10 percent stock dividend affect the issuing corporation's balance of retained earnings and total stockholders' equity, respectively? a. Decrease and no effect b. No effect and no effect c. Decrease and increase d. No effect and increase ANS: A PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Stock dividend MSC: ACBSP-APC-20-Accounting for Corporations

97. On July 1, 2013, Lee Corporation had 10,000 shares of its $200 par value common stock outstanding. On July 2, 2013, Lee declared a 15 percent stock dividend to be distributed on August 6, 2013, to shareholders of record on July 16, 2013. What amount of retained earnings should be transferred to contributed capital because of this dividend? a. None b. Market value of the stock at the date of distribution multiplied by the number of dividend shares c. Market value of the stock at the date of declaration multiplied by the number of dividend shares d. Par value per share multiplied by the number of dividend shares ANS: C PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Stock dividend MSC: ACBSP-APC-20-Accounting for Corporations 98. On June 1, 2013, Hale Corporation had 80,000 shares of $20 par value common stock outstanding. On June 2, 2013, Hale declared a 50 percent stock dividend to be distributed on July 5, 2013, to shareholders of record on June 15, 2013. What amount of retained earnings should be transferred to contributed capital because of this dividend? a. None b. Par value per share multiplied by the number of dividend shares c. Market value of the stock at the date of distribution multiplied by the number of dividend shares d. Market value of the stock at the date of declaration multiplied by the number of dividend shares ANS: B PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Stock dividend MSC: ACBSP-APC-20-Accounting for Corporations 99. At the beginning of 2013, Helms Corporation had 34,000 shares of $10 par value common stock issued and outstanding. During January 2013, Helms declared and distributed a 10 percent stock dividend. The market value of Helms's stock was $24 throughout the month of January. The entry to be recorded for the declaration of stock dividend is: a. Stock Dividends 81,600 Common Stock Distributable 34,000 Additional Paid-in Capital 47,600 b. Common Stock Distributable Common Stock

81,600

c. Common Stock Distributable Common Stock Retained Earnings

81,600

d. Stock Dividends Cash

68,000

81,600

34,000 47,600

68,000

ANS: A Stock dividends: 34,000 x .1 x $24 = $81,600 Common Stock Distributable: 34,000 x .1 x $10 = 34,000 Additional Paid-in Capital: $81,600 – $34,000 = $47,600 © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Stock dividend MSC: ACBSP-APC-20-Accounting for Corporations 100. On May 1, 2013, Monroe Corporation had 200,000 shares of $200 par value common stock outstanding with a market value of $320 per share. On May 2, 2013, Monroe announced a 4-for-1 stock split. After the split, the par value of the stock a. remained the same as before the split. b. was reduced to $50 per share. c. was reduced by $80 per share. d. was reduced by $50 per share. ANS: B $200 ÷ 4 = $50 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Stock split MSC: ACBSP-APC-20-Accounting for Corporations 101. Use this information to answer the following question. Hernandez Corporation has 60,000 shares of $20 par value common stock outstanding. The following transactions occurred during the year: Mar.

17 Declared a 10 percent stock dividend to stockholders of record on March 20. Market value of the stock was $26 on March 17. 30 Distributed the stock dividend.

The entry to record the transaction of March 17 would be: a. Stock Dividends 156,000 Common Stock Distributable 120,000 Additional Paid-in Capital 36,000 b. Common Stock Distributable Common Stock

120,000

c. Common Stock Distributable Common Stock Retained Earnings

156,000

d. Stock Dividends Cash

156,000

120,000

120,000 36,000

156,000

ANS: A Stock dividends: 60,000 x .1 x $26 = $156,000 Common Stock Distributable: 60,000 x .1 x $20 = 120,000 Additional Paid-in Capital: $156,000 – $120,000 = $36,000 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Stock dividend MSC: ACBSP-APC-20-Accounting for Corporations © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

102. Use this information to answer the following question. Hernandez Corporation has 60,000 shares of $20 par value common stock outstanding. The following transactions occurred during the year: Mar.

17 Declared a 10 percent stock dividend to stockholders of record on March 20. Market value of the stock was $26 on March 17. 30 Distributed the stock dividend.

The entry to record the transaction of March 30 would be: a. Common Stock Distributable 120,000 Common Stock 120,000 b. Common Stock Distributable Retained Earnings Common Stock

120,000 36,000 156,000

c. Common Stock Distributable Common Stock Additional Paid-in Capital

156,000

d. Common Stock Distributable Cash

120,000

120,000 36,000

120,000

ANS: A Common Stock: 60,000 x .1 x $20 = $120,000 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Stock dividend MSC: ACBSP-APC-20-Accounting for Corporations 103. Which of the following items will not be disclosed on a statement of stockholders' equity? a. Net income b. Issuance of common stock for cash c. Extraordinary gains and losses d. Issuance of common stock in exchange for noncash assets ANS: C PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Statement of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations 104. The purpose of a statement of stockholders' equity is to a. disclose the computation of book value per share of stock. b. budget the transactions expected to occur during the forthcoming period. c. replace the statement of retained earnings. d. summarize the changes in the components of stockholders' equity for a period of time. ANS: D PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Statement of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

105. The preparation of a statement of stockholders' equity makes which other financial statement unnecessary? a. Income statement b. Statement of cash flows c. Statement of retained earnings d. Balance sheet ANS: C PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Statement of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations 106. All of the following would appear on the statement of stockholders' equity except a. foreign currency translation adjustment. b. purchase of treasury stock. c. net income. d. declaration of a stock split. ANS: D PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Statement of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations 107. Which of the following items will not be disclosed on a statement of stockholders' equity? a. Conversion of preferred stock into common stock b. Results of discontinued operations c. Purchase of treasury stock d. Declaration of a stock dividend ANS: B PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Statement of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations 108. If only common stock is outstanding, total stockholders' equity divided by the number of shares of common stock outstanding is called the a. par or stated value per share. b. call value per share. c. book value per share. d. market value per share. ANS: C PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Book value of stock MSC: ACBSP-APC-20-Accounting for Corporations 109. Book value per share refers to the a. net assets represented by one share of a company's stock. b. highest price that investors will pay for a share of stock. c. issue price of the stock, less any market decline since issuance. d. par or stated value of a share of stock. ANS: A PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Book value of stock MSC: ACBSP-APC-20-Accounting for Corporations

110. Tallapoosa Corporation has total contributed capital of $300,000 and retained earnings of $170,000. It has 1,000 shares of $50 par value preferred stock with no dividends in arrears and 5,000 shares of $50 par value common stock. The preferred stock is callable at 105. The book value of each share of common stock is a. $84.00. b. $46.50. c. $83.50. d. $94.00. ANS: C Total stockholder’s equity ($300,000 + $170,000) Less equity to preferred stockholders (1,000 x 1.05 x $50) Equity pertaining to common stockholders Book value per share of common stock ($417,500 ÷ 5,000)

$470,000 52,500 $417,500 $83.50

PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Book value of stock MSC: ACBSP-APC-20-Accounting for Corporations 111. Winston Corporation has retained earnings of $400,000. It has 5,000 shares of 6 percent, $200 par value preferred stock outstanding that is callable at 102. The preferred stock is cumulative, and one year of dividends is in arrears. It also has 10,000 shares of $100 par value common stock outstanding. Assume all stock is issued at par. The book value of each share of preferred stock is a. $210. b. $216. c. $204. d. $220. ANS: B Total stockholder’s equity [$400,000 + (5,000 x $200) + (10,000 x $100)] Less equity to preferred stockholders (5,000 x 1.02 x $200) Less dividends in arrears (5,000 x $200 x .06) Equity allocated to preferred stockholders Equity pertaining to common stockholders Book value per share of preferred stock ($1,080,000 ÷ 5,000)

$2,400,000 1,020,000 60,000 1,080,000 $1,320,000 $216

PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Book value of stock MSC: ACBSP-APC-20-Accounting for Corporations 112. Winston Corporation has retained earnings of $400,000. It has 5,000 shares of 6 percent, $200 par value preferred stock outstanding that is callable at 102. The preferred stock is cumulative, and one year of dividends is in arrears. It also has 10,000 shares of $100 par value common stock outstanding. Assume all stock is issued at par. The book value of each share of common stock is a. $132. b. $138. c. $102. d. $100. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: A Total stockholder’s equity [$400,000 + (5,000 x $200) + (10,000 x $100)] Less equity to preferred stockholders (5,000 x 1.02 x $200) Less dividends in arrears (5,000 x $200 x .06) Equity allocated to preferred stockholders Equity pertaining to common stockholders Book value per share of common stock ($1,320,000 ÷ 10,000)

$2,400,000 1,020,000 60,000 1,080,000 $1,320,000 $132

PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Book value of stock MSC: ACBSP-APC-20-Accounting for Corporations SHORT ANSWER 1. Identify (by code letter) each of the following characteristics as being an advantage of (A), a disadvantage of (D), or not applicable to (N) the corporate form of business.

a. Separate legal entity b. Taxable entity resulting in double taxation c. Continuous existence d. Unlimited liability e. Government regulation f. Mutual agency g. Ease of transfer of ownership h. Ease of capital generation i. Lack of mutual agency j. Professional management ANS: a. A b. D c. A d. N e. D f. N g. A h. A i. A j. A PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Forming a corporation MSC: ACBSP-APC-20-Accounting for Corporations © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

2. Indicate on the blanks below the net effect (I = increase, D = decrease, NE = no effect) of each of the following entries on total stockholders' equity. a. To record the declaration of a cash dividend b. To record the payment of a previously declared and recorded cash dividend c. To close the Dividends account at the end of the accounting period ANS: a. D b. NE c. NE PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 3. Why must a corporation have sufficient retained earnings before it may declare cash dividends? ANS: By definition, a dividend is the distribution of assets generated by past earnings to the corporate owners. Accordingly, to pay a dividend that exceeds existing retained earnings is, in substance, to return a portion of the stockholders' investment (which normally is illegal). PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 4. Mercy Corporation has 2,000,000 authorized shares of $20 par value common stock. As of June 30, 2013, there were 1,000,000 shares issued and outstanding. On June 30, 2013, the board of directors declared a $0.40 per share cash dividend to be paid on August 1, 2013, to shareholders of record on July 15, 2013. Prepare the necessary entries in journal form to be recorded on (a) the date of declaration, (b) the date of record, and (c) the date of payment. (Omit explanations.)

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date

General Journal Description

Post. Ref.

2013 a. June 30 Dividends Dividends Payable 1,000,000  $.40

Debit

Page 1 Credit

400,000 400,000

b. July 15 No entry c. Aug. 1 Dividends Payable Cash

400,000 400,000

PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 5. Indicate on the blanks below the net effect (I = increase, D = decrease, NE = no effect) of each of the following entries on working capital. a. To record the declaration of a cash dividend b. To record the payment of a previously declared and recorded cash dividend c. To close the Dividends account at the end of the accounting period ANS: a. D b. NE c. NE PTS: 1 DIF: Challenging OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 6. Define outstanding stock. ANS: Outstanding stock is stock that has been issued and is still in circulation. It has not been repurchased and held by the issuing company. PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement KEY: Components of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations

LOC: Recall

7. How is it possible for a corporation to have more shares issued than it has outstanding? ANS: When a corporation buys back some shares that have been issued, it then has treasury shares. Treasury stock retains its status as issued shares but no longer represents outstanding shares. PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement KEY: Components of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations

LOC: Comprehension

8. The following information relates to the number of common shares of the Marengo Corporation: 80,000 Authorized shares

30,000 Unissued shares

5,000 Treasury shares

Calculate the number of outstanding shares from the information given. Show your calculations. ANS: 45,000 shares outstanding (80,000 – 30,000 = 50,000 Issued – 5,000 Treasury) PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement KEY: Components of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations

LOC: Application

9. The following information relates to the number of common shares of the Montgomery Corporation: 240,000 Authorized shares

90,000 Unissued shares

15,000 Treasury shares

Calculate the number of outstanding shares from the information given. Show your calculations. ANS: 135,000 shares outstanding (240,000 – 90,000 = 150,000 Issued – 15,000 Treasury) PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement KEY: Components of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations

LOC: Application

10. Why might someone prefer to invest in a company by purchasing preferred stock rather than common stock? ANS: The primary advantages of owning preferred stock rather than common stock are that preferred stockholders (a) are given preference when dividends are declared and (b) have priority standing in claims to assets of the corporation upon liquidation. PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Preferred stock | Common stock MSC: ACBSP-APC-20-Accounting for Corporations © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

11. Margil Industries has 40,000 shares of 9 percent cumulative preferred stock and 30,000 shares of common stock outstanding. Par value for each is $50. The company has paid no dividends for the past two years. This year, a $620,000 dividend is paid. How much of the $620,000 is paid to the common shareholders? ANS: Preferred stock dividend: 40,000  $50  0.09 = $180,000  3 = $540,000 Common stock dividend: $620,000 – $540,000 = $80,000 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 12. Randolph Corporation has 24,000 shares of 11 percent noncumulative preferred stock and 60,000 shares of common stock outstanding. Par value for each is $20. The company paid no dividends last year. This year, a $200,000 dividend is paid. How much of the $200,000 is paid to the preferred shareholders? ANS: Preferred stock dividend: 24,000 x $20 x .11 = $52,800 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 13. When stock is issued for noncash assets or services, how does one place a valuation (dollar amount) on the transaction? ANS: The transaction should be valued at the fair market value of the stock issued. If the stock value cannot be determined, then the fair market value of the assets or services received should be used. PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Stock issuance MSC: ACBSP-APC-20-Accounting for Corporations

14. Simpson Corporation is authorized to issue 100,000 shares of no-par stock. The company recently sold 40,000 shares for $13 per share. a. Prepare the entry in journal form to record the sale of the stock assuming there is no stated value. b. Prepare the entry in journal form if a $10 stated value is authorized by the company's board of directors. General Journal Page 1 Date Description Post. Debit Credit Ref.

ANS:

Date

General Journal Description

Post. Ref.

Debit

a. Cash Common Stock Issued 40,000 shares of no-par common stock for $13 per share

520,000

b. Cash Common Stock Additional Paid-in Capital Issued 40,000 shares of $10 stated value common stock for $13 per share

520,000

Page 1 Credit

520,000

400,000 120,000

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Stock issuance MSC: ACBSP-APC-20-Accounting for Corporations © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

15. Tallaposa Corporation issued 4,000 shares of its $20 par value common stock for some land. The land had a fair market value of $120,000. Prepare the entries in journal form necessary to record the stock issue for the land under each of the following conditions: a. The stock was selling for $28 per share on the day of the transaction. b. Management attempted to place a market value on the common stock but could not do so. General Journal Page 1 Date Description Post. Debit Credit Ref.

ANS:

Date

General Journal Description

Post. Ref.

Debit

a. Land Common Stock Additional Paid-in Capital Issued 4,000 shares of $20 par value common stock with a market value of $28 per share for land

112,000

b. Land Common Stock Additional Paid-in Capital

120,000

Page 1 Credit

80,000 32,000

80,000 40,000

Issued 4,000 shares of $20 par value common stock for land with a fair market value of $120,000 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Stock issuance MSC: ACBSP-APC-20-Accounting for Corporations 16. Poquito Corporation had both the following transactions occur on the same day: 1. Issued 30,000 shares of its $5 par value common stock for $360,000 cash. 2. Issued 10,000 shares of its $5 par value common stock in exchange for land and a building. The building is estimated to have a market value of $90,000. Prepare the entries in journal form to record the above transactions. Omit explanations, but show computations. General Journal Page 1 Date Description Post. Debit Credit Ref.

ANS:

Date

General Journal Description

Post. Ref.

Debit

1. Cash Common Stock Additional Paid-in Capital $5  30,000 = $150,000 $360,000 – $150,000 = $210,000

360,000

b. Land Building Common Stock Additional Paid-in Capital $360,000 ÷ 30,000 = $12 per share 10,000  $12 = $120,000 $120,000 – $90,000 = $30,000 10,000  $5 = $50,000 $120,000 – $50,000 = $70,000

30,000 90,000

Page 1 Credit

150,000 210,000

50,000 70,000

PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Stock issuance MSC: ACBSP-APC-20-Accounting for Corporations 17. If there is no change in the number of shares authorized and issued from one year to the next, but there is a change in the number of shares outstanding on those same dates, how would you explain that change? ANS: The change can be explained either by the purchase of treasury stock, or by the reissuance of treasury stock. Such transactions do not affect the number of issued shares, but they do affect the number of shares outstanding and the number of treasury shares. PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations 18. Prepare the entries in journal form necessary to record the following stock transactions of Fitzgerald Corporation. These transactions represent all treasury stock transactions entered into by the company. (Omit explanations.) June 1 Purchased 2,000 shares of its own $30 par value common stock for $70 per share, the current market price. 10 Sold 500 shares of treasury stock purchased on June 1 for $80 per share 20 Sold 700 shares of treasury stock purchased on June 1 for $58 per share. 30 Retired the remaining shares purchased on June 1. The original issue price was $42 per share. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date June

General Journal Description

Post. Ref.

Debit

1 Treasury Stock, Common Cash

140,000

10 Cash Treasury Stock, Common Paid-in Capital, Treasury Stock

40,000

20 Cash Paid-in Capital, Treasury Stock Retained Earnings Treasury Stock, Common

40,600 5,000 3,400

30 Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock, Common

24,000 9,600 22,400

Page 1 Credit

140,000

35,000 5,000

49,000

56,000

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

19. modified Prepare entries in journal form without explanations to record the following transactions involving Dailey Corporation's $10 par value common stock: Apr. 1 Purchased 500 shares of its own common stock for $24, the current market price. This is the first transaction involving its own stock engaged in by the company. May 1 Sold 100 of the shares purchased on April 1 for $30. June 1 Retired 100 of the shares purchased on April 1. The original issue price was $16. July 1 Sold 200 of the shares purchased on April 1 for $20.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date Apr.

May

June

July

General Journal Description

Post. Ref.

Debit

1 Treasury Stock, Common (500  $24) Cash

12,000

1 Cash (100  $30) Treasury Stock, Common (100  $24) Paid-in Capital, Treasury Stock ($3,000 – $2,400)

3,000

1 Common Stock (100  $10) Additional Paid-in Capital [100  ($16 – $10)] Retained Earnings ($2,400 – $2,200) Paid-in Capital, Treasury Stock (From May 1) Treasury Stock, Common (100  $24)

1,000 600 200 600

1 Cash (200  $20) Retained Earnings ($4,800 – $4,000) Treasury Stock, Common (200  $24)

4,000 800

Page 1 Credit

12,000

2,400 600

2,400

4,800

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations 20. The following amounts were reported by Ebert Corporation on December 31, 2012: Common stock—$5 par value $150,000 Additional paid-in capital 120,000 Treasury stock (8,000 shares at cost) 60,000 On January 3, 2013, 5,000 shares of treasury stock were sold. After the sale of the treasury shares, total stockholders' equity amounted to $277,500. No stockholders' equity transactions other than the sale of the treasury stock occurred between December 31, 2012, and January 3, 2013. From the information given, compute the selling price per share of the treasury stock. ANS: $13.50 per share [277,500 – ($150,000 + $120,000 – $60,000) = $67,500 ÷ 5,000] PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations

21. Draw two distinctions between accounting for a stock split and accounting for a stock dividend. ANS: A stock dividend requires a transfer from retained earnings to contributed capital, whereas a stock split does not (nor does it require an entry of any kind). A stock split, however, is accompanied by a proportionate reduction in par value, whereas a stock dividend is not. PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Stock dividend | Stock split MSC: ACBSP-APC-20-Accounting for Corporations 22. Indicate the effect (I = increase, D = decrease, NE = no effect) of a stock split on each of the items listed. a. Assets b. Balance of Common Stock account c. Total contributed capital d. Total retained earnings e. Total stockholders' equity f. Par value per share g. Total number of shares outstanding ANS: a. NE b. NE c. NE d. NE e. NE f. D g. I PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Stock split MSC: ACBSP-APC-20-Accounting for Corporations 23. Walker Corporation has 40,000 shares of $20 par value common stock outstanding. Prepare entries in journal form without explanations for the following transactions. (Market value of the stock was $30.00 on December 16 and $31.00 on December 23.) Dec.

16 23 30

Declared a 15 percent stock dividend. Distributed the stock dividend. Declared a 2-for-1 stock split.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date

General Journal Description

Dec. 16 Stock Dividends (40,000  0.15  $30) Common Stock Distributable (40,000  0.15  $20) Additional Paid-in Capital ($180,000 – $120,000) 23 Common Stock Distributable Common Stock

Post. Ref.

Debit

Page 1 Credit

180,000 120,000 60,000 120,000 120,000

30 Memorandum: 2-for-1 stock split; par value changed to $10.00; 92,000 shares now issued and outstanding [(40,000 + (40,000 x .15)) x 2] PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Stock dividend | Stock split MSC: ACBSP-APC-20-Accounting for Corporations

24. On its December 31, 2012, balance sheet, Houston Corporation reported its stockholders' equity as follows: Common stock—$5 par value, 100,000 shares authorized, 50,000 shares issued and outstanding $250,000 Additional paid-in capital 125,000 Retained earnings 400,000 Total stockholders' equity $775,000 During 2013, the following transactions occurred: Reacquired 2,500 shares at $7 per share. Issued 5,000 shares of common stock at $8 per share. Cash dividends of $1 per share of common stock. Net income for 2013 amounted to $80,000. No dividends were declared. Prepare the Statement of Stockholders' Equity as it should appear on December 31, 2013. Houston Corporation Statement of Stockholders’ Equity For the Year Ended December 31, 2013

ANS:

Balance, 12/31/12 Net Income Reacquired 2,500 shares at $7 per share Issuance of 5,000 shares of common stock Cash dividends Balance, 12/31/13

Houston Corporation Statement of Stockholders’ Equity December 31, 2013 Common Additional Retained Stock $5 Paid-In Earnings Par Value Capital $250,000 $125,000 $400,000 80,000

Treasury Stock

$(17,500) 25,000

15,000

$275,000

$140,000

Total

$775,000 80,000 (17,500) 40,000

(55,000) $425,000

(17,500)

(55,000) $822,500

PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Statement of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations 25. Compute the book values per share for (a) preferred and (b) common stock for Klemperer Corporation, whose stockholders' equity as of December 31, 2013, was as follows. Stockholders' Equity Contributed capital Preferred stock—6 percent cumulative, $100 par value, 40,000 shares issued and outstanding (1 year's dividends in arrears), callable at 110 Common stock—$5 par value, 4,000,000 shares authorized, 3,200,000 shares issued and outstanding Additional paid-in capital, common Total contributed capital Retained earnings Total stockholders' equity ANS: a. and b. Total stockholder’s equity Less equity to preferred stockholders (40,000 x $100 x 1.10) Less dividends in arrears (40,000 x $100 x .06) Equity allocated to preferred stockholders Equity pertaining to common stockholders Book value per share of preferred stock (4,640,000 ÷ 40,000) Book value per share of common stock ($27,360,000 ÷ 3,200,000)

$ 4,000,000 16,000,000 8,400,000 $28,400,000 3,600,000 $32,000,000

$32,000,000 4,400,000 240,000 4,640,000 $27,360,000 $116.00 $ 8.55

PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Book value of stock MSC: ACBSP-APC-20-Accounting for Corporations MATCHING Match each definition with the correct term below. a. The maximum number of shares of stock that a corporation’s state charter allows it to issue. b. A distribution among stockholders of the assets that a corporation’s earnings have generated. c. A summary of the changes in the components of the stockholders’ equity section of the balance sheet. d. A proportional distribution of shares among a corporation’s shareholders. e. Stock that does not have a par value. f. Represents a company’s total assets minus its liabilities. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

g. h. i. j. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

No-par stock that has a value assigned to it either by the board of directors or the state. A dividend declared by a company that is in excess of its retained earnings. The shares of stock that a corporation sells or otherwise transfers to stockholders. When a corporation increases the number of shares of stock issued and outstanding and reduces the par or stated value proportionally.

Dividend Liquidating dividend Authorized shares Issued shares No-par stock Stated value Stock dividend Stock split Statement of stockholders’ equity Book value

1. ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 2. ANS: H PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 3. ANS: A PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Components of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations 4. ANS: I PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Components of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations 5. ANS: E PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Stock issuance MSC: ACBSP-APC-20-Accounting for Corporations 6. ANS: G PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Stock issuance MSC: ACBSP-APC-20-Accounting for Corporations 7. ANS: D PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Stock dividend MSC: ACBSP-APC-20-Accounting for Corporations 8. ANS: J PTS: 1 DIF: Easy OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Stock split MSC: ACBSP-APC-20-Accounting for Corporations 9. ANS: C PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Statement of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations 10. ANS: F PTS: 1 DIF: Easy OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Book value of stock MSC: ACBSP-APC-20-Accounting for Corporations © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

PROBLEM 1. Use the following information to obtain the ratios requested below. Where necessary, carry answers to one decimal place. Dividends per share: $.1.08 Market price per share: $60 Net income: $176,000 Average stockholders' equity: $1,250,000 Earnings per share: $2.50 a. Dividends yield = _____________% b. Return on equity = _____________% c. Price/earnings (P/E) ratio = __________times ANS: a. 1.8% ($1.08 ÷ $60) b. 14.1% ($176,000 ÷ $1,250,000) c. 24 times ($60 ÷ $2.50) PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 2. Use the following information to obtain the ratios requested below. Where necessary, carry answers to one decimal place. Dividends per share: $.76 Market price per share: $40 Net income: $64,000 Stockholders' equity, beginning of year: $500,000 Stockholders' equity, end of year: $530,000 Earnings per share: $1.75 a. Dividends yield = _____________% b. Return on equity = _____________% c. Price/earnings (P/E) ratio = __________ times ANS: a. 1.9% ($0.76 ÷ $40) b. 12.4% [$64,000 ÷ (($500,000 + $530,000) ÷ 2)] c. 22.9 times ($40 ÷ $1.75) PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

3. Mercer Corporation has 200,000 shares of $10 stated value no-par common stock authorized, and 160,000 shares were outstanding during 2012. The following transactions relate to cash dividends of Mercer Corporation for the year ended December 31, 2012. Prepare entries in journal form without explanations to record the following transactions: June 1 Declared a semiannual cash dividend of $0.50 per common share. 15 Compiled the list of individual shareholders eligible for the dividend declared on June 1. July 5 Paid the dividend declared on June 1. Dec. 1 Declared a semiannual cash dividend of $0.50 per common share to be paid on January 5, 2010. 15 Compiled the list of individual shareholders eligible for the dividend declared on December 1. 31 Closed the Dividends account at year end.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS: General Journal Description

Date June

1 Dividends Dividends Payable 160,000  $0.50

Post. Ref.

Debit

Page 1 Credit

80,000 80,000

15 No entry July

Dec.

5 Dividends Payable Cash

80,000

1 Dividends Dividends Payable

80,000

15 No entry 31 Retained Earnings Dividends

160,000 160,000

PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 4. Duncan Corporation has 2,000 shares of $100 par value, 6 percent cumulative preferred stock and 20,000 shares of $10 par value common stock outstanding. In its first four years of operation, Duncan Corporation paid cash dividends as follows: 2010, $15,000; 2011, $0; 2012, $20,000; 2013, $25,000. Calculate the total cash dividends received by owners of preferred and common stock in each year. ANS: 2010: Preferred 2010: Common 2011: Preferred 2011: Common 2012: Preferred 2012: Common 2013: Preferred 2013: Common

$12,000 (2,000  $100  0.06) $3,000 ($15,000 – $12,000) $0 (none declared) $0 (none declared) $20,000 (2  $12,000 = $24,000 > $20,000 – $20,000) $0 ($20,000 – $20,000) $16,000 (12,000 + ($24,000 – $20,000)) $9,000 ($25,000 – $16,000)

PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations

5. Bibb Corporation had the following stock outstanding for years 2010 through 2013: Preferred Stock—$100 par value, 8 percent cumulative, 10,000 shares authorized, 4,000 shares issued and outstanding Common Stock—$20 par value, 10,000 shares authorized, 6,000 shares issued and outstanding Bibb paid $15,000, $30,000, $100,000, and $130,000 in cash dividends during 2010, 2011, 2012, and 2013, respectively. a. Calculate the total cash dividends received by owners of preferred and common stock and the dividends in arrears in each year. b. Now assume that the preferred stock is noncumulative rather than cumulative. Calculate the total cash dividends received by owners of preferred and common stock in each year. ANS: a. Preferred dividends each year: 4,000 x $100 x .08 = $32,000 Year 2010 2011 2012 2013

Preferred dividends $32,000 32,000 32,000 32,000

Preferred Dividends paid $15,000 30,000 51,000 32,000

Dividends in arrears $17,000 19,000 0 0

Common dividends $ 0 0 49,000 98,000

b. Preferred dividends each year: 4,000 x $100 x .08 = $32,000 Year 2010 2011 2012 2013

Preferred dividends $32,000 32,000 32,000 32,000

Preferred Dividends paid $15,000 30,000 32,000 32,000

Common dividends $ 0 0 68,000 98,000

PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 6. Paloma Corporation had 5,000 shares of $100 par value, 9 percent cumulative preferred stock and 30,000 shares of $10 par value common stock outstanding during each of its first four years of operation. The following amounts of cash dividends were paid during the years indicated: 2010, $0; 2011, $80,000; 2012, $220,000; 2013, $270,000. Determine the cash dividends per share paid to the preferred and common stockholders during each of the four years.

ANS: 2010: Preferred 2010: Common 2011: Preferred 2011: Common 2012: Preferred 2012: Common 2013: Preferred 2013: Common

$0 (none declared) $0 (none declared) $16.00 (5,000  $100  0.09 = $45,000  2 = $90,000 > $80,000 = $80,000 ÷ 5,000) $0 ($80,000 – $80,000) $11.00 [$45,000 + ($90,000 – $80,000) = $55,000 ÷ 5,000] $5.50 ($220,000 – $55,000 = $165,000 ÷ 30,000) $9.00 $9.00 ($45,000 ÷ 5,000) $7.50 $7.50 ($270,000 – $45,000 = $225,000 ÷ 30,000)

PTS: 1 DIF: Challenging OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 7. People's Electric Company omitted all its preferred stock dividends indefinitely in an effort to improve liquidity. All of the company's cumulative preferred stock was affected. According to the Wall Street Journal, “Some interpreted the drastic action as a requisite for the cash-strapped utility to secure a new credit agreement. . . . If the credit agreement falls through, the omission of preferred-stock dividends would suggest People's Electric is perilously close to filing for bankruptcy.” What is cumulative preferred stock? Why is the omission of dividends on those shares a drastic action? If new bank financing is not obtained, why would the company have to consider declaring bankruptcy? ANS: Cumulative preferred stock is capital stock on which the fixed amount of dividends accumulates from year to year if not paid. No dividends can be paid on common stock until all dividends in arrears and any amounts currently due on preferred stock have been paid. The failure to pay dividends on cumulative preferred stock is a drastic action because the company can quickly find itself with no hope of paying either preferred dividends in arrears or future dividends to common stockholders. To survive, the company must obtain new financing, such as a bank loan, to catch up on its preferred dividends. PTS: 1 DIF: Challenging OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Critical Thinking KEY: Dividends MSC: ACBSP-APC-20-Accounting for Corporations 8. The information that follows pertains to stockholders' equity data of Winston Corporation on December 31, 2013. Compute the amount of each item indicated by a letter in the listing below. Par value per common share Balance of Common Stock account No. of shares authorized No. of shares issued and outstanding

20 $300,000 40,000 a

Balance of Additional Paid-in Capital account

Balance of Retained Earnings account Total contributed capital Total stockholders' equity

$160,000 c $600,000

ANS: a. 15,000 shares ($300,000 ÷ $20) b. $140,000 ($600,000 – $160,000 – $300,000) c. $440,000 ($600,000 – $160,000) or ($300,000 + $140,000) PTS: 1 DIF: Moderate OBJ: 2 | 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Components of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations

LOC: Application

9. The information that follows pertains to stockholders' equity data of the Keswick Corporation on December 31, 2013. Compute the amount of each item indicated by a letter in the listing below. Round answers to two decimal places. Par value per common share Balance of Common Stock account No. of shares authorized No. of shares issued and outstanding Balance of Additional Paid-in Capital account Balance of Retained Earnings account Average issuance price per share of common stock Total stockholders' equity

$ $

20 a 20,000 15,000 b $ 50,000 c $510,000

ANS: a. $300,000 (15,000  $20) b. $160,000 ($510,000 – $50,000 – $300,000) c. $30.67 ($300,000 + $160,000 = $460,000 ÷ 15,000) PTS: 1 DIF: Challenging OBJ: 2 | 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Components of stockholders' equity MSC: ACBSP-APC-20-Accounting for Corporations

LOC: Analysis

10. Stonehurst Corporation is authorized to issue 100,000 shares of $5 stated value common stock and 2,000 shares of $100 par value, 6 percent preferred stock. Prepare entries in journal form without explanations to record the following transactions: July 15 Issued 1,000 shares of common stock to an attorney for a bill of $7,000 in connection with the organization of the corporation. 25 Issued 2,000 shares of preferred stock for cash of $120 per share. 27 Issued 10,000 shares of common stock in exchange for land for a plant site valued at $75,000. Aug. 1 Issued 5,000 shares of common stock for $35,000 in cash.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date

General Journal Description

Post. Ref.

Debit

July 15 Start-up and Organization Costs Common Stock (1,000  $5) Additional Paid-in Capital, Common ($7,000 – $5,000)

7,000

25 Cash (2,000  $120) Preferred Stock (2,000  $100) Additional Paid-in Capital, Preferred ($240,000 – $200,000)

240,000

27 Land (or Plant Site) Common Stock (10,000  $5) Additional Paid-in Capital, Common ($75,000 – $50,000)

75,000

1 Cash Common Stock (5,000  $5) Additional Paid-in Capital, Common ($35,000 – $25,000)

35,000

Aug.

Page 1 Credit

5,000 2,000

200,000 40,000

50,000 25,000

25,000 10,000

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Stock issuance MSC: ACBSP-APC-20-Accounting for Corporations 11. On its December 31, 2012, balance sheet, Montrose Corporation reported its stockholders' equity as follows: Common stock—$5 par value, 100,000 shares authorized, 50,000 shares issued and outstanding Additional paid-in capital Retained earnings Total stockholders' equity

$250,000 125,000 400,000 $775,000

During 2013, the following transactions occurred: Reacquired 2,500 shares at $7 per share. Sold 1,200 shares of treasury stock at $8 per share. Sold 500 shares of treasury stock at $6 per share. Net income for 2010 amounted to $80,000. a. Prepare the entries in journal form for the three transactions involving treasury stock. (Omit explanations.) © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

b. Compute the amount of total contributed capital to be reported on the December 31, 2013, balance sheet.

Date

General Journal Description

Post. Ref.

Debit

Post. Ref.

Debit

Page 1 Credit

ANS: a. Date

General Journal Description Treasury Stock, Common (2,500  $7) Cash

17,500

Cash (1,200  $8) Treasury Stock, Common (1,200  $7) Paid-in Capital, Treasury Stock ($9,600 – $8,400 = $1,200)

9,600

Cash (500  $6) Paid-in Capital, Treasury Stock ($3,500 – $3,000 = $500) Treasury Stock, Common (500  $7)

3,000

Page 1 Credit

17,500

8,400 1,200

500 3,500

b. $375,700 [250,000 + $125,000 + ($1,200 - $500)] PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

12. Kagel Corporation had 30,000 shares of $5 par value common stock issued and outstanding on December 31, 2012. Each share was issued during 2010 at $14 per share. Prepare the entries in journal form without explanations for the following transactions occurring in 2013: Jan.

Feb. Mar. Apr. May

31 20 16 5 8 31

Date

Purchased 5,000 shares of treasury stock for $16 per share. This is the first transaction involving its own stock ever engaged in by the company. Sold 1,000 shares of treasury stock for $15 per share. Sold 1,000 shares of treasury stock for $18 per share. Sold 1,000 shares of treasury stock for $11 per share. Retired 2,000 shares of treasury stock. Purchased 500 shares of treasury stock for $12 per share. Retired the 500 shares of treasury stock purchased on May 8. General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS:

Date

General Journal Description

Post. Ref.

Debit

4 Treasury Stock, Common (5,000  $16) Cash

80,000

31 Cash (1,000  $15) Retained Earnings ($16,000 – $15,000) Treasury Stock, Common (1,000  $16)

15,000 1,000

Feb. 20 Cash (1,000  $18) Treasury Stock, Common (1,000  $16) Paid-in Capital, Treasury Stock ($18,000 – $16,000)

18,000

Mar. 16 Cash (1,000  $11) Paid-in Capital, Treasury Stock (from 2/20) Retained Earnings ($16,000 – $13,000) Treasury Stock, Common (1,000  $16)

11,000 2,000 3,000

Jan.

Apr.

May

Page 1 Credit

80,000

16,000

16,000 2,000

16,000

5 Common Stock (2,000  $5) Additional Paid-in Capital [2,000  ($14 – $5)] Retained Earnings ($32,000 – $28,000) Treasury Stock, Common (2,000  $16)

10,000 18,000 4,000

8 Treasury Stock, Common (500  $12) Cash

6,000

31 Common Stock (500  $5) Additional Paid-in Capital [500  ($14 – $5)] Treasury Stock, Common (500  $12) Paid-in Capital, Retirement of Stock ($7,000 – $6,000)

2,500 4,500

32,000

6,000

6,000 1,000

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations 13. In its 2013 annual report, Etowah Company indicated that the number of common shares held in the treasury decreased from 45,546,171 in 2012 to 3,397,381 in 2013. The following also was reported: By Board authorization, effective December 31, 2013 the Company canceled 50 million shares of common stock held in treasury. As a result of the cancellation, common stock decreased by $62.5 million, capital in excess of par value of stock decreased by $114 million, and retained earnings decreased by $1,559.5 million. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

The shares canceled or retired represent almost 25 percent of the shares of common stock issued by Etowah. Using the information above, answer the following questions about Etowah Company in order to explain the accounting for the treasury shares by Etowah. a. Did the company buy any treasury shares during the year? b. Prepare the entry in journal form that was made to record the cancellation or retirement of the treasury shares. (Omit explanations.) c. At what average price were the treasury shares purchased, and at what average price were they originally issued? d. What do you think was management's reason for purchasing the treasury shares?

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS: a. Etowah must have purchased about 8,000,000 shares during the year, because the 50 million canceled plus the 3,397,381 held at the end of the year total 53,397,381. This figure less the beginning balance of 45,546,171 equals 7,851,210. b. The entry in journal form made by Etowah to record the cancellation (retirement) of the shares is as follows:

Date

General Journal Description Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock, Common Retired 50,000,000 shares of treasury stock

Post. Ref.

Debit

Page 1 Credit

62,500,000 114,000,000 1,559,500,000 1,736,000,000

c. The average cost of the treasury stock was $34.72 ($1,736,000,000 ÷ 50,000,000 shares). The average original issue price was $3.53 [($62,500,000 + $114,000,000) ÷ 50,000,000 shares]. d. A company may have several reasons for owning treasury shares, including requirements of employee stock option plans or for use in purchasing other companies. But because Etowah retired the great majority of its treasury shares, it is more likely that the company's primary objective in buying the shares was to increase stockholders' value. By buying and retiring a large percentage (almost 25 percent) of its outstanding shares, Etowah increased both the earnings per share and the market value of its shares; both of these outcomes would be favorable to the company's stockholders. PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis | Critical Thinking KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations 14. Issuing common and preferred stock generally has been popular among corporations. However, some companies have bought back their common stock. For what reasons would a company buy back its own shares? ANS: A company may have several reasons for buying back its own shares. One reason is that it may have uses for the shares, such as for employee stock purchase plans or purchasing other companies. A second reason is to increase the price of the company's stock. A third reason is to increase earnings per share: With fewer shares outstanding, earnings per share should be higher. When the economy has been growing slowly, this is a way to accelerate the growth in earnings per share. A fourth reason is to reduce the cash that will have to be paid in the future for cash dividends. With fewer shares outstanding, less cash will have to be paid. A fifth reason is that management feels that investing in the company's own stock is a sound idea because it is a good value. PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Critical Thinking KEY: Treasury stock MSC: ACBSP-APC-20-Accounting for Corporations 15. In the appropriate column below, indicate the effect (I = increase, D = decrease, NE = no effect) of the entry to record the declaration of a common stock dividend and the effect (I = increase, D = decrease, NE = no effect) of the entry to record the distribution of a (previously declared and recorded) common stock dividend on each of the items listed. Declaration

Distribution

a. Assets b. Balance of Common Stock account c. Total contributed capital d. Total retained earnings e. Total stockholders' equity f. Par value per share g. Total number of shares outstanding

ANS:

a. b. c. d. e. f. g.

Declaration NE NE I D NE NE NE

Distribution NE I NE NE NE NE I

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Stock dividend MSC: ACBSP-APC-20-Accounting for Corporations 16. On August 26, 2013, Booth Corporation's board of directors declared a 2 percent stock dividend applicable to the outstanding shares of its $5 par value common stock, of which 150,000 shares are authorized, 130,000 are issued, and 10,000 are held in the treasury. The stock dividend was distributable on September 25 to stockholders of record on September 10. On August 26, the market value of the common stock was $12 per share. On November 26, the board of directors declared a $0.20 per share cash dividend. No other stock transactions have occurred. Record the transactions on August 26, September 10, September 25, and November 26. Make the December 31 entry to close Dividends and Stock Dividends to Retained Earnings.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS: General Journal Description

Date 2013 Aug.

Sept.

Nov.

Dec.

26 Stock Dividends Common Stock Distributable Additional Paid-in Capital Declaration of a 2,400-share stock dividend (120,000 shares  0.02) on $5 par value common stock, to be distributed on September 25, at the market value of $28,800 (2,400 shares  $12 per share)

Post. Ref.

Debit

Page 1 Credit

28,800 12,000 16,800

10 No entry required. 25 Common Stock Distributable Common Stock Distribution of a stock dividend of 2,400 shares declared on August 26

12,000

26 Dividends Dividends Payable Declaration of a cash dividend 122,400 shares  $0.20

24,480

31 Retained Earnings Dividends Stock Dividends To close Dividends and Stock Dividends to Retained Earnings

53,280

12,000

24,480

24,480 28,800

PTS: 1 DIF: Moderate OBJ: 1 | 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Dividends | Stock dividend MSC: ACBSP-APC-20-Accounting for Corporations 17. a. Elton Corporation has 6,000 shares of $100 par value, 8 percent cumulative preferred stock and 10,000 shares of $50 par value common stock outstanding. All shares were issued at par value. In addition, retained earnings total $198,000. If the preferred stock is callable at $105 per share and one year's dividends are in arrears, compute book value per share of preferred stock. b. Assume the same facts as in a above. Calculate book value per share of common stock. c. Assume the same facts as in a above and that Elton Corporation declares a 15 percent stock dividend on its common stock. If the market value on the declaration date was $60 per share, for what amount will Additional Paid-in Capital, Common be credited? © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

d. Assume the same facts as in a above and that Elton Corporation declares a 4-for-1 stock split on its preferred stock. After the split, total par value of preferred stock equals what amount? ANS: a. and b. Total stockholder’s equity [(6,000 x $100) + (10,000 x $50) + $198,000] Less equity to preferred stockholders (6,000 x $105) Less dividends in arrears (6,000 x $100 x .08) Equity allocated to preferred stockholders Equity pertaining to common stockholders

$1,298,000 630,000 48,000 678,000 $620,000

Book value per share of preferred stock (678,000 ÷ 6,000) Book value per share of common stock ($620,000 ÷ 10,000)

$113 $ 62

c. $15,000 [10,000  0.15 = 1,500  ($60 – $50)] d. $600,000 (same as before, now 24,000 shares @ $25) PTS: 1 DIF: Challenging OBJ: 5 | 6 NAT: AACSB Analytic | AICPA FN Measurement KEY: Stock dividend | Stock split | Book value of stock MSC: ACBSP-APC-20-Accounting for Corporations

LOC: Critical Thinking

18. The stockholders' equity of Westester Corporation as of December 31, 2013, is as follows: Stockholders' Equity Contributed capital Preferred stock—7 percent cumulative, $100 par value, $103 call value, 30,000 shares authorized, issued, and outstanding Common stock—$10 par value, 1,500,000 shares authorized, 1,200,000 shares issued and outstanding Additional paid-in capital, common Total contributed capital Retained earnings Total stockholders' equity

$3,000,000 12,000,000 5,175,000 $20,175,000 2,750,000 $22,925,000

The preferred stock has one year's dividends in arrears. a. Compute the book value per share of preferred stock and the book value per share of common stock. (Round to the nearest cent.) b. Assume the preferred stock has two years' dividends in arrears. Compute the book value per share of preferred stock and the book value per share of common stock. (Round to the nearest cent.)

ANS: a. Total stockholder’s equity Less equity to preferred stockholders (30,000 x $100 x 1.03) Less dividends in arrears (30,000 x $100 x .07) Equity allocated to preferred stockholders

$22,925,000 3,090,000 210,000 3,300,000 $19,625,000

Equity pertaining to common stockholders Book value per share of preferred stock (3,300,000 ÷ 30,000) Book value per share of common stock ($19,625,000 ÷ 1,200,000) *rounded b. Total stockholder’s equity Less equity to preferred stockholders (30,000 x $100 x 1.03) Less dividends in arrears (30,000 x $100 x .07 x 2) Equity allocated to preferred stockholders

$110.00 $ 16.35*

$22,925,000 3,090,000 420,000

Equity pertaining to common stockholders Book value per share of preferred stock (3,510,000 ÷ 30,000) Book value per share of common stock ($19,415,000 ÷ 1,200,000) *rounded

3,510,000 $19,415,000 $117.00 $ 16.18*

PTS: 1 DIF: Moderate OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Book value of stock MSC: ACBSP-APC-20-Accounting for Corporations 19. At December 31, 2013, the book value per share of common stock of Big Time Corporation amounted to $21 per share. Determine the effect of each of the following items on the book value per share of common stock computation assuming each item occurs after December 31, 2013. Consider each item independently of the other items listed. Indicate your answer for each (I = increase, D = decrease, or NE = no effect) in the appropriate blank. a. Sale of newly issued shares of common stock at $23 per share b. Purchase of treasury stock for $16 per share c. Declaration of current cash dividends on preferred stock d. Declaration and distribution of stock dividends on common stock e. Sale of treasury stock (purchased at $16 per share) for $19 per share f. Entry to close net income for the period to the Retained Earnings account g. Dividends in arrears on preferred stock h. Purchase of a truck with cash i. Payment of a previously declared and recorded cash dividend on common stock ANS: a. I b. I c. D d. D © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

e. D f. I g. D h. NE i. NE PTS: 1 DIF: Challenging OBJ: 6 NAT: AACSB Analytic | AICPA FN Measurement LOC: Critical Thinking KEY: Book value of stock MSC: ACBSP-APC-20-Accounting for Corporations

Chapter 12 - The Statement of Cash Flows TRUE/FALSE 1. The statement of cash flows discloses the effect on cash of the purchase and sale of long-term investments and not of short-term investments. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Statement of cash flows MSC: ACBSP-APC-24-Statement of Cash Flows 2. It is unethical, and considered a form of manipulation, to classify a cash flow as an investing or financing activity, when it really is an operating activity. ANS: T PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA BB Legal LOC: Recall MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 KEY: Statement of cash flows

3. For purposes of preparing the statement of cash flows, cash is defined as not including cash equivalents. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Cash and cash equivalents MSC: ACBSP-APC-24-Statement of Cash Flows 4. A U.S. Treasury bill with an original maturity of one year or less is considered a cash equivalent. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Cash and cash equivalents MSC: ACBSP-APC-24-Statement of Cash Flows 5. The statement of cash flows shows the effects on cash of a company's operating, investing, and financing activities for an accounting period. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Statement of cash flows MSC: ACBSP-APC-24-Statement of Cash Flows 6. The primary purpose of the statement of cash flows is to provide information about a company's cash receipts and cash payments during an accounting period. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Statement of cash flows MSC: ACBSP-APC-24-Statement of Cash Flows 7. Cash equivalents include money market accounts, commercial paper, and U.S. Treasury bills. ANS: T PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Cash and cash equivalents MSC: ACBSP-APC-24-Statement of Cash Flows © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

8. The primary purpose of the statement of cash flows is to provide information about a company's investing and financing activities during an accounting period. ANS: F PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Statement of cash flows MSC: ACBSP-APC-24-Statement of Cash Flows 9. Noncash investing and financing transactions, such as the exchange of a long-term asset for a long-term liability, represent significant investing and financing activities and are not reflected in the financial statements. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Noncash investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Recall

10. Because noncash investing and financing transactions do not affect cash, they should be excluded from the statement of cash flows. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Noncash investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Recall

11. Cash inflows and outflows are not as subject to manipulation as earnings are. ANS: T PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA BB Legal LOC: Recall MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 KEY: Statement of cash flows

12. Repayments of accounts payable or accrued liabilities are considered repayments of loans under financing activities. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

13. Interest received would be included in the financing activities category on the statement of cash flows. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

14. The statement of cash flows explains the difference between net income as shown on the income statement and the net cash flows generated from operations. ANS: T PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Statement of cash flows MSC: ACBSP-APC-24-Statement of Cash Flows 15. Interest paid would be included in the investing activities category on the statement of cash flows. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

16. The acquisition of treasury stock with cash is shown as an investing activity on the statement of cash flows. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

17. The payment of taxes would be included in the investing activities section of the statement of cash flows. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

18. The purchase of trading securities with cash is considered an investing activity. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

19. Management never uses the statement of cash flows to determine whether short-term financing is necessary to pay current liabilities. ANS: F PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Statement of cash flows MSC: ACBSP-APC-24-Statement of Cash Flows 20. Cash flows to sales is a measure of free cash flow. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

21. Free cash flow is measured in terms of a dollar amount. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 22. Cash flows to assets is measured in “times.” ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 23. Net cash flows from investing activities would be needed to calculate cash flow yield, cash flows to assets, and cash flows to sales. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 24. A negative free cash flow indicates that the company has met all its planned cash commitments and has cash available to reduce debt or to expand. ANS: F PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 25. A cash flow yield of 2.0 times is considered better than one of 2.5 times. ANS: F PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 26. Under the indirect method, gains or losses from the sale of equipment used in operations would appear as adjustments in the cash flows from operating activities section of the statement of cash flows. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Recall

27. Amortization expense is added to net income in the cash flows from operating activities section of the statement of cash flows prepared using the indirect method. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

28. Decreases in current assets other than cash have positive effects on cash flows and increases in current assets have negative effects on cash flows. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

29. The income statement indicates a business's success or failure in earning an income from its operating activities, it also reflects the inflow and outflow of cash from operating activities. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

30. Interest received is one item deducted from net income as per the income statement to arrive at net cash flows from operating activities. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

31. Depreciation expense is one item added to net income as per the income statement to arrive at net cash flows from operating activities under the indirect method. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

32. When preparing a statement of cash flows using the indirect method, an increase in accounts receivable is deducted from net income. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

33. When preparing a statement of cash flows using the indirect method, an increase in accounts payable is deducted from net income. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

34. A decrease in the balance of merchandise inventory is added to net income when calculating net cash flows from operating activities using the indirect method. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

35. Determining net cash flows from operating activities using the indirect method reveals changes in the accounts receivable account. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

36. Purchases and sales of long-term investments for the period should be netted for disclosure in the investing activities section of the statement of cash flows. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from investing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 4 LOC: Recall

37. Investing activities centers on the long-term assets shown on the balance sheet and does not include any short-term investments shown under current assets on the balance sheet. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from investing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 4 LOC: Recall

38. When presenting decreases in long-term investments in the investing activities section of the statement of cash flows, the amount reflected equals the amount of the gain(s) or loss(es) from the transaction(s). ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from investing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 4 LOC: Comprehension

39. A decrease in plant assets shown in the investing activities section of the statement of cash flows would be presented based on the amount of the resulting gain or loss incurred. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from investing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 4 LOC: Comprehension

40. Cash inflows and outflows are netted in the investing activities section of the statement of cash flows in order to simplify the statement. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from investing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 4 LOC: Comprehension

41. Repayment of bonds payable would be reflected as a cash outflow in the financing activities section of the statement of cash flows. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from investing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 5 LOC: Recall

42. The net income for the period would appear in the cash flows from financing activities section of a statement of cash flows prepared using the indirect method. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 5 LOC: Recall

43. A schedule of noncash investing and financing activities is required if there are noncash investing and financing transactions. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 5 LOC: Recall

44. The activity on the balance sheet to be presented in the financing activities section of the statement of cash flows is based on an analysis of stockholders' equity only. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 5 LOC: Comprehension

45. The financing activities section of the statement of cash flows includes transactions or activities from the income statement and also takes into account stockholders' equity. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 5 LOC: Comprehension

46. Issuance of notes, either long-term or short-term, would be reflected in the financing activities section of the statement of cash flows. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 5 LOC: Comprehension

47. Dividends paid are reflected in the operating activities section of the statement of cash flows. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 5 LOC: Comprehension

MULTIPLE CHOICE 1. Noncash investing and financing transactions a. appear as a separate schedule on the statement of cash flows. b. appear in either the investing or financing activities section, but not both. c. are excluded from the statement of cash flows. d. appear in both the investing and financing activities sections. ANS: A PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Noncash investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Recall

2. Cash equivalents do not include a. U.S. Treasury bills. b. money market accounts. c. long-term investments. d. short term corporate notes. ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Cash and cash equivalents MSC: ACBSP-APC-24-Statement of Cash Flows 3. How are cash equivalents treated on a statement of cash flows? a. They are disclosed in the operating activities section. b. They are combined with the Cash account. c. They are disclosed in either the investing or financing activities section. d. They are excluded from the statement of cash flows. ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Cash and cash equivalents MSC: ACBSP-APC-24-Statement of Cash Flows

4. How are transfers between cash and cash equivalents treated on a statement of cash flows? a. They are disclosed as an investing activity. b. They are not shown as any type of cash flow. c. They are disclosed as a financing activity. d. They are disclosed as an operating activity. ANS: B PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Cash and cash equivalents MSC: ACBSP-APC-24-Statement of Cash Flows 5. The primary purpose of the statement of cash flows is to provide information a. about a company's cash receipts and cash payments during an accounting period. b. about a company's investing and financing activities during an accounting period. c. regarding a company's financial position at the end of an accounting period. d. regarding the results of operations for a period of time. ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Statement of cash flows MSC: ACBSP-APC-24-Statement of Cash Flows 6. Management would not use the statement of cash flows to a. assess the liquidity of the business. b. manage cash flows. c. pay its liabilities, dividends, and interest. d. determine the financial position of the company. ANS: D PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Statement of cash flows MSC: ACBSP-APC-24-Statement of Cash Flows 7. Investors and creditors would find the statement of cash flows least useful in assessing a. financial position at a point in time. b. ability to manage cash flows. c. ability to pay dividends and liabilities. d. the company’s dividend policy. ANS: A PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Statement of cash flows MSC: ACBSP-APC-24-Statement of Cash Flows 8. Aiken Corporation acquired a land site with a building by issuing a 30-year mortgage payable. In Aiken’s statement of cash flows, this transaction should be shown a. only as a cash flow from operating activity for the purchase of the land and building. b. only as a cash flow from financing activity for the issuance of the mortgage payable. c. in the schedule of noncash investing and financing transactions. d. as both a cash flow from investing activity and a cash flow from financing activity. ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Noncash investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

9. The most future-directed of the basic financial statements is the a. statement of stockholders' equity. b. statement of cash flows. c. income statement. d. balance sheet. ANS: B PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Statement of cash flows MSC: ACBSP-APC-24-Statement of Cash Flows 10. Which of the following is reported as a noncash investing and financing transaction on the statement of cash flows? a. Conversion of bonds payable to stock b. Purchase of treasury stock c. Payment of long-term debt d. Sale of preferred stock ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Noncash investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

11. Royer Corporation engaged in this transaction: Declared and issued a stock dividend. Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of cash flows. a. Financing activities section b. Operating activities section c. Does not represent a cash flow d. Investing activities section ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Noncash investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

12. Royer Corporation engaged in this transaction: Collected accounts receivable. Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of cash flows. a. Does not represent a cash flow b. Operating activities section c. Financing activities section d. Investing activities section ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

13. Royer Corporation engaged in this transaction: Purchased inventory with cash. Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of cash flows. a. Does not represent a cash flow b. Investing activities section c. Operating activities section d. Financing activities section ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

14. Royer Corporation engaged in this transaction: Retired long-term debt with cash. Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of cash flows. a. Operating activities section b. Does not represent a cash flow c. Investing activities section d. Financing activities section ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

15. Royer Corporation engaged in this transaction: Sold long-term investment. Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of cash flows. a. Financing activities section b. Schedule of noncash investing and financing transactions c. Operating activities section d. Investing activities section ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

16. Royer Corporation engaged in this transaction: Paid interest on note. Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of cash flows. a. Financing activities section b. Schedule of noncash investing and financing transactions c. Investing activities section d. Operating activities section ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

17. Royer Corporation engaged in this transaction: Issued stock for equipment. Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of cash flows. a. Financing activities section b. Operating activities section c. Investing activities section d. Schedule of noncash investing and financing transactions ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Noncash investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

18. Royer Corporation engaged in this transaction: Issued long-term note for plant assets. Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of cash flows. a. Schedule of noncash investing and financing transactions b. Financing activities section c. Operating activities section d. Investing activities section ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Noncash investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

19. Royer Corporation engaged in this transaction: Purchased one-year insurance policy for cash. Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of cash flows. a. Financing activities section b. Does not represent a cash flow c. Investing activities section d. Operating activities section ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

20. Royer Corporation engaged in this transaction: Abandoned fully depreciated equipment. Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of cash flows. a. Investing activities section b. Operating activities section c. Does not represent a cash flow d. Financing activities section ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Noncash investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

21. Royer Corporation engaged in this transaction: Received dividends on securities held. Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of cash flows. a. Schedule of noncash investing and financing transactions b. Operating activities section c. Financing activities section d. Investing activities section ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

22. Royer Corporation engaged in this transaction: Paid income taxes. Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of cash flows. a. Schedule of noncash investing and financing transactions b. Investing activities section c. Operating activities section d. Financing activities section ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

23. Royer Corporation engaged in this transaction: Issued common stock for cash. Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of cash flows. a. Operating activities section b. Does not represent a cash flow c. Investing activities section d. Financing activities section ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

24. Bamberg Corporation repaid a 90-day note payable. Indicate which section, if any, this transaction would appear in, or relate to, on a statement of cash flows. a. Financing activities section b. Schedule of noncash investing and financing transactions c. Operating activities section d. Investing activities section ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

25. Bamberg Corporation repaid a ten-year note payable. Indicate which section, if any, this transaction would appear in, or relate to, on a statement of cash flows. a. Financing activities section b. Schedule of noncash investing and financing transactions c. Investing activities section d. Operating activities section © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

26. Bamberg Corporation paid employee wages. Indicate which section, if any, this transaction would appear in, or relate to, on a statement of cash flows. a. Financing activities section b. Investing activities section c. Does not represent a cash flow d. Operating activities section ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

27. Bamberg Corporation purchased land for cash. Indicate which section, if any, this transaction would appear in, or relate to, on a statement of cash flows. a. Operating activities section b. Investing activities section c. Financing activities section d. Does not represent a cash flow ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

28. Bamberg Corporation transferred cash to a money market account. Indicate which section, if any, this transaction would appear in, or relate to, on a statement of cash flows. a. Does not appear on cash flow statement b. Operating activities section c. Investing activities section d. Financing activities section ANS: A PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Cash and cash equivalents MSC: ACBSP-APC-24-Statement of Cash Flows 29. Bamberg Corporation purchased land and building with a mortgage. Indicate which section, if any, this transaction would appear in, or relate to, on a statement of cash flows. a. Financing activities section b. Operating activities section c. Investing activities section d. Schedule of noncash investing and financing transactions ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Noncash investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

30. Bamberg Corporation received interest on an investment in a long-term note. Indicate which section, if any, this transaction would appear in, or relate to, on a statement of cash flows. a. Financing activities section b. Does not appear on cash flow statement c. Operating activities section d. Investing activities section ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

31. Bamberg Corporation converted loans payable to stock. Indicate which section, if any, this transaction would appear in, or relate to, on a statement of cash flows. a. Financing activities section b. Schedule of noncash investing and financing transactions c. Investing activities section d. Operating activities section ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Noncash investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

32. Bamberg Corporation acquired a long-term investment by issuance of long-term debt. Indicate which section, if any, this transaction would appear in, or relate to, on a statement of cash flows. a. Investing activities section b. Operating activities section c. Schedule of noncash investing and financing transactions d. Financing activities section ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Noncash investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

33. Bamberg Corporation purchased a 30-day U.S. Treasury bill. Indicate which section, if any, this transaction would appear in, or relate to, on a statement of cash flows. a. Does not appear on cash flow statement b. Operating activities section c. Investing activities section d. Financing activities section ANS: A PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Cash and cash equivalents MSC: ACBSP-APC-24-Statement of Cash Flows 34. Bamberg Corporation purchased a 60-day commercial paper. Indicate which section, if any, this transaction would appear in, or relate to, on a statement of cash flows. a. Does not appear on cash flow statement b. Operating activities section c. Financing activities section d. Investing activities section © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: A PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Cash and cash equivalents MSC: ACBSP-APC-24-Statement of Cash Flows 35. Bamberg Corporation purchased treasury stock with cash. Indicate which section, if any, this transaction would appear in, or relate to, on a statement of cash flows. a. Financing activities section b. Investing activities section c. Does not appear on cash flow statement d. Operating activities section ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

36. Bamberg Corporation sold buildings and equipment for cash. Indicate which section, if any, this transaction would appear in, or relate to, on a statement of cash flows. a. Operating activities section b. Investing activities section c. Financing activities section d. Does not appear on cash flow statement ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

37. Use this information to answer the following question. Oconee Corporation is preparing a statement of cash flows. The following transactions occurred during the year: 1. Sold machinery for $18,000 cash. 2. Purchased a building for $160,000 cash. 3. Issued $140,000 worth of stock to acquire an airplane. 4. Converted long-term bonds by issuing $200,000 worth of stock. 5. Declared and paid a $20,000 cash dividend. Transaction 1 would be found on the statement of cash flows in the a. cash flows from operating activities section. b. cash flows from financing activities section. c. noncash investing and financing transactions section. d. cash flows from investing activities section. ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

38. Use this information to answer the following question. Oconee Corporation is preparing a statement of cash flows. The following transactions occurred during the year: 1. Sold machinery for $18,000 cash. 2. Purchased a building for $160,000 cash. 3. Issued $140,000 worth of stock to acquire an airplane. 4. Converted long-term bonds by issuing $200,000 worth of stock. 5. Declared and paid a $20,000 cash dividend. Transaction 2 would be found on the statement of cash flows in the a. cash flows from operating activities section. b. cash flows from financing activities section. c. cash flows from investing activities section. d. noncash investing and financing transactions section. ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

39. Use this information to answer the following question. Oconee Corporation is preparing a statement of cash flows. The following transactions occurred during the year: 1. Sold machinery for $18,000 cash. 2. Purchased a building for $160,000 cash. 3. Issued $140,000 worth of stock to acquire an airplane. 4. Converted long-term bonds by issuing $200,000 worth of stock. 5. Declared and paid a $20,000 cash dividend. Transaction 3 would be found on the statement of cash flows in the a. cash flows from operating activities section. b. cash flows from financing activities section. c. noncash investing and financing transactions section. d. cash flows from investing activities section. ANS: C PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic LOC: Comprehension KEY: Noncash investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows 40. Use this information to answer the following question. Oconee Corporation is preparing a statement of cash flows. The following transactions occurred during the year: 1. Sold machinery for $18,000 cash. 2. Purchased a building for $160,000 cash. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

3. Issued $140,000 worth of stock to acquire an airplane. 4. Converted long-term bonds by issuing $200,000 worth of stock. 5. Declared and paid a $20,000 cash dividend. Transaction 4 would be found on the statement of cash flows in the a. cash flows from investing activities section. b. cash flows from operating activities section. c. cash flows from financing activities section. d. noncash investing and financing transactions section. ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Noncash investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

41. Use this information to answer the following question. Oconee Corporation is preparing a statement of cash flows. The following transactions occurred during the year: 1. Sold machinery for $18,000 cash. 2. Purchased a building for $160,000 cash. 3. Issued $140,000 worth of stock to acquire an airplane. 4. Converted long-term bonds by issuing $200,000 worth of stock. 5. Declared and paid a $20,000 cash dividend. Transaction 5 would be found on the statement of cash flows in the a. noncash investing and financing transactions section. b. cash flows from financing activities section. c. cash flows from operating activities section. d. cash flows from investing activities section. ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 1 LOC: Comprehension

42. The calculation of free cash flow could include all of the following except a. cash purchases of plant assets. b. net cash flows from operating activities. c. net income. d. dividends paid. ANS: C PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 43. Cash flows to assets is measured in terms of a. a percentage. b. times. c. days. d. dollars. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: A PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 44. If net cash flows from operating activities were $374,000, net income were $100,000, and net sales were $1,200,000, the cash flow yield would equal (Round amounts to one decimal place) a. 3.2 times. b. 26.7% c. 3.7 times. d. 31.2% ANS: C $374,000 ÷ $100,000 = 3.7 times PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 45. If net cash flows from operating activities were $316,000, net income were $200,000, and net sales were $2,000,000, cash flows to sales would equal (Round amounts to one decimal place) a. 10.0%. b. $116,000. c. 15.8%. d. 0.6 times. ANS: C $316,000 ÷ $2,000,000 = 15.8% PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 46. During the year, Heckart Corporation had net sales of $250,000, net income of $25,000, average total assets of $350,000, dividend payments of $17,500, net cash flows from operating activities of $37,500, purchases of plant assets of $37,500, and sales of plant assets of $45,000. Cash flow yield equals (Round amounts to one decimal place) a. 2.1 times. b. 1.5 times. c. 3.0 times. d. 1.9 times. ANS: B $37,500 ÷ $25,000 = 1.5 times PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

47. During the year, Clarendon Corporation had net sales of $500,000, net income of $50,000, average total assets of $700,000, dividend payments of $35,000, net cash flows from operating activities of $86,000, purchases of plant assets of $75,000, and sales of plant assets of $90,000. Cash flows to sales equals (Round amounts to one decimal place) a. 12.3 percent. b. 14.3 percent. c. 21.5 percent. d. 17.2 percent. ANS: D $86,000 ÷ $500,000 = 17.2 percent PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 48. During the year, Clarendon Corporation had net sales of $500,000, net income of $50,000, average total assets of $700,000, dividend payments of $35,000, net cash flows from operating activities of $52,000, purchases of plant assets of $75,000, and sales of plant assets of $90,000. Cash flows to assets equals (Round amounts to one decimal place) a. 13.0 percent. b. 10.4 percent. c. 8.7 percent. d. 7.4 percent. ANS: D $52,000 ÷ $700,000 = 7.4 percent PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 49. During the year, Clarendon Corporation had net sales of $500,000, net income of $50,000, average total assets of $700,000, dividend payments of $35,000, net cash flows from operating activities of $70,000, purchases of plant assets of $75,000, and sales of plant assets of $90,000. Free cash flow equals a. $35,000. b. $85,000. c. $20,000. d. $50,000. ANS: D $70,000 – $35,000 – $75,000 + $90,000 = $50,000 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

50. If the indirect method is used to prepare a statement of cash flows, which of the following would be deducted from net income to arrive at net cash flows from operating activities? a. Increase in accounts payable b. Increase in income taxes payable c. Increase in accounts receivable d. Decrease in prepaid rent ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

51. If the indirect method is used to prepare a statement of cash flows, which of the following would be added to net income to arrive at net cash flows from operating activities? a. Decrease in accrued liabilities b. Gain on sale of investments c. Decrease in prepaid expenses d. Increase in accounts receivable ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

52. The direct method of preparing a statement of cash flows a. is the overwhelming choice of most companies. b. begins with net income in the operating activities section. c. is more difficult to understand than the indirect method for the average reader. d. will produce the same net figure as the indirect method. ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

53. Assume the indirect method is used to compute net cash flows from operating activities. For this item extracted from the financial statements—Increase in Accounts Receivable—indicate the effect on net income in arriving at net cash flows from operating activities by choosing one of the following: a. Add to net income to arrive at net cash flows from operating activities b. Subtract from net income to arrive at net cash flows from operating activities c. Not used to adjust net income to calculate net cash flows from operating activities ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

54. Assume the indirect method is used to compute net cash flows from operating activities. For this item extracted from the financial statements—Interest Income (assume that cash received is equal to amount reported)—indicate the effect on net income in arriving at net cash flows from operating activities by choosing one of the following: a. Add to net income to arrive at net cash flows from operating activities © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

b. Subtract from net income to arrive at net cash flows from operating activities c. Not used to adjust net income to calculate net cash flows from operating activities ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

55. Assume the indirect method is used to compute net cash flows from operating activities. For this item extracted from the financial statements—Rent Income (assume that cash received is equal to amount reported)—indicate the effect on net income in arriving at net cash flows from operating activities by choosing one of the following: a. Add to net income to arrive at net cash flows from operating activities b. Subtract from net income to arrive at net cash flows from operating activities c. Not used to adjust net income to calculate net cash flows from operating activities ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

56. Assume the indirect method is used to compute net cash flows from operating activities. For this item extracted from the financial statements—Increase in Inventory—indicate the effect on net income in arriving at net cash flows from operating activities by choosing one of the following: a. Add to net income to arrive at net cash flows from operating activities b. Subtract from net income to arrive at net cash flows from operating activities c. Not used to adjust net income to calculate net cash flows from operating activities ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

57. Assume the indirect method is used to compute net cash flows from operating activities. For this item extracted from the financial statements—Increase in Prepaid Expenses—indicate the effect on net income in arriving at net cash flows from operating activities by choosing one of the following: a. Add to net income to arrive at net cash flows from operating activities b. Subtract from net income to arrive at net cash flows from operating activities c. Not used to adjust net income to calculate net cash flows from operating activities ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

58. Assume the indirect method is used to compute net cash flows from operating activities. For this item extracted from the financial statements—Decrease in Accounts Payable—indicate the effect on net income in arriving at net cash flows from operating activities by choosing one of the following: a. Add to net income to arrive at net cash flows from operating activities b. Subtract from net income to arrive at net cash flows from operating activities c. Not used to adjust net income to calculate net cash flows from operating activities ANS: B

PTS: 1

DIF: Moderate

OBJ: 3

NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

LOC: Comprehension

59. Assume the indirect method is used to compute net cash flows from operating activities. For this item extracted from the financial statements—Decrease in Accrued Liabilities—indicate the effect on net income in arriving at net cash flows from operating activities by choosing one of the following: a. Add to net income to arrive at net cash flows from operating activities b. Subtract from net income to arrive at net cash flows from operating activities c. Not used to adjust net income to calculate net cash flows from operating activities ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

60. Assume the indirect method is used to compute net cash flows from operating activities. For this item extracted from the financial statements—Interest Expense (assume that cash payments are equal to amount reported)—indicate the effect on net income in arriving at net cash flows from operating activities by choosing one of the following: a. Add to net income to arrive at net cash flows from operating activities b. Subtract from net income to arrive at net cash flows from operating activities c. Not used to adjust net income to calculate net cash flows from operating activities ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

61. Assume the indirect method is used to compute net cash flows from operating activities. For this item extracted from the financial statements—Decrease in Income Taxes Payable—indicate the effect on net income in arriving at net cash flows from operating activities by choosing one of the following: a. Add to net income to arrive at net cash flows from operating activities b. Subtract from net income to arrive at net cash flows from operating activities c. Not used to adjust net income to calculate net cash flows from operating activities ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

62. Assume the indirect method is used to compute net cash flows from operating activities. For this item extracted from the financial statements—Depreciation Expense—indicate the effect on net income in arriving at net cash flows from operating activities by choosing one of the following: a. Add to net income to arrive at net cash flows from operating activities b. Subtract from net income to arrive at net cash flows from operating activities c. Not used to adjust net income to calculate net cash flows from operating activities ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

63. Assume the indirect method is used to compute net cash flows from operating activities. For this item extracted from the financial statements—Gain on Sale of Investment—indicate the effect on net income in arriving at net cash flows from operating activities by choosing one of the following: a. Add to net income to arrive at net cash flows from operating activities b. Subtract from net income to arrive at net cash flows from operating activities c. Not used to adjust net income to calculate net cash flows from operating activities ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

64. Assume the indirect method is used to compute net cash flows from operating activities. For this item extracted from the financial statements—Gain on Disposal of Equipment—indicate the effect on net income in arriving at net cash flows from operating activities by choosing one of the following: a. Add to net income to arrive at net cash flows from operating activities b. Subtract from net income to arrive at net cash flows from operating activities c. Not used to adjust net income to calculate net cash flows from operating activities ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

65. If the indirect method is used, which of the following would be added to net income to arrive at net cash flows from operating activities? a. Increase in Inventory b. Depreciation expense c. Decrease in Accounts Payable d. Increase in Prepaid Insurance ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

66. If the indirect method is used, which of the following would be subtracted from net income to arrive at net cash flows from operating activities? a. Increase in Notes Payable b. Decrease in Inventory c. Decrease in Accounts Payable d. Depreciation Expense ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

67. If the indirect method is used, each of the following is a proper adjustment to net income to arrive at net cash flows from operating activities except a. adding a decrease in Prepaid Expenses. b. deducting an increase in Salaries Payable. c. deducting an increase in Accounts Receivable. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

d. adding a decrease in Inventory. ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

68. In preparing a statement of cash flows using the indirect method, a decrease in an unearned revenue account should a. be shown as a financing activity. b. be shown as a deduction from net income in computing net cash flows from operating activities. c. not be shown on the statement of cash flows. d. be shown as an addition to net income in computing net cash flows from operating activities. ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

69. When a statement of cash flows is prepared using the indirect method, a. net income is the starting point in determining cash flows from operations. b. dividend expense is not included. c. the increase in cash is different than when the direct method is used. d. the amount of cash collected from customers is calculated. ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

70. The indirect method of preparing a statement of cash flows a. eliminates the need for a schedule of noncash investing and financing transactions. b. provides a different result than the direct method. c. adjusts net income for changes in current accounts. d. shows collections from customers rather than the change in Accounts Receivable. ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

71. Which of the following items would not be included in a statement of cash flows prepared using the indirect method? a. Net income b. Depreciation expense c. Sale of a plant asset d. Cash paid for wages

ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

72. To determine whether a company's operations are covering its dividend payments, it is best to focus on which of the following sections of the statement of cash flows? a. Operating activities b. Financing activities c. Investing activities and financing activities d. Operating activities and investing activities ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Comprehension

73. Assume that the balance of accounts payable does not change during a period. When preparing a statement of cash flows, an increase in ending inventory over beginning inventory will result in an adjustment to net income under the indirect approach because a. the amount of cost of goods sold is equal to the amount of cash paid for purchases. b. consumed inventory is an expense but not a use of funds. c. the amount of cost of goods sold on an accrual basis is less than the amount of cash paid for purchases of inventory. d. the amount of cash paid for purchases of inventory is less than the amount of cost of goods sold on an accrual basis. ANS: C PTS: 1 DIF: Challenging NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 3 LOC: Analysis

74. Laguna’s Corporation sold investments for $102,000 cash that cost $90,000. The journal entry to record the increase in cash flow is: a. Cash 102,000 Investments 90,000 Gain on Sale of Investments 12,000 b. Cash Loss on Sale of Investments Investments

90,000 12,000

c. Investments Cash

102,000

d. Cash

90,000 Investments

102,000

90,000

ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from investing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 4 LOC: Application

75. Dillon Corporation purchased investments for $240,000 cash. The journal entry to record the outflow of cash is: a. Investments 240,000 Cash 240,000 b. Cash

240,000 Investments

240,000

c. Investments Purchases

240,000

d. Purchases Investments

240,000

ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from investing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 4 LOC: Application

76. Heckart Corporation purchased plant assets for $120,000 cash. The journal entry to record the outflow of cash is: a. Investments 120,000 Cash 120,000 b. Plant Assets Cash

120,000

c. Plant Assets Purchases

120,000

d. Purchases Plant Assets

120,000

ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from investing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 4 LOC: Application

77. Florence Corporation sold for $20,000 plant assets that cost $40,000 and that had an accumulated depreciation of $8,000. The journal entry to record the transaction is: a. Cash 20,000 Plant Assets 20,000 b. Plant Assets Cash

32,000

c. Cash Accumulated Depreciation Loss on Sale of Plant Assets Plant Assets

20,000 8,000 12,000

d. Cash Loss on Sale of Plant Assets Plant Assets

20,000 12,000

32,000

40,000

32,000

ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from investing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 4 LOC: Application

78. Investments that Edgefield Corporation sold for $500,000, which cost $425,000, would appear under investing activities as a a. $425,000 cash outflow. b. $425,000 cash inflow. c. $500,000 cash inflow. d. $500,000 cash outflow. ANS: C The entry to record this sale is debit Cash, $500,000; credit Investments, $425,000; credit Gain on Sale of Investments, $75,000. This transaction would appear in the investing activities section as a $500,000 cash inflow. PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from investing activities MSC: ACBSP-APC-24-Statement of Cash Flows

LOC: Application

79. Harry Company purchased land for $500,000 by issuing bonds for $400,000 and paying the remaining $100,000 in cash. Harry also sold a building that cost $980,000 and had accumulated depreciation of $434,000 for $640,000. Net cash flows from investing activities totaled a. ($406,000) b. $540,000 c. ($94,000) d. $0 ANS: B Cash outflow for cash paid for land: ($100,000) Cash inflow for sale of building: $640,000 Net cash flows from investing activities: $640,000 – $100,000 = $540,000 © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from investing activities MSC: ACBSP-APC-24-Statement of Cash Flows

LOC: Application

80. Kershaw Company sold an asset that cost $240,000 and had a book value of $144,000 for $180,000. The amount recorded in the investing activities section for this transaction would be a a. $180,000 inflow. b. $180,000 outflow. c. $36,000 inflow. d. $36,000 outflow. ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from investing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 4 LOC: Application

81. Analysis of the financing activities section of the statement of cash flows will disclose a. the extent of investments in plant and equipment. b. net income for the period. c. any sales or repurchases of stock. d. the amount of money loaned to others. ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 5 LOC: Comprehension

82. Northbrook Corporation issued $60,000 bonds payable to acquire Machinery. The journal entry to record the transaction is: a. Machinery 60,000 Cash 60,000 b. Machinery Bonds Payable

60,000

c. Bonds Payable Machinery

60,000

d. Cash

60,000 Bonds Payable

60,000

ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 5 LOC: Application

83. Laguna’s Corporation issued 30,000 shares of $5 par value common stock for $300,000. The journal entry to record the transaction is: a. Cash 300,000 Common Stock 300,000 b. Cash

150,000 Common Stock

c. Cash

150,000 300,000

Common Stock Additional Paid-In Capital d. Cash

150,000 150,000 150,000

Additional Paid-In Capital

150,000

ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 5 LOC: Application

84. Laguna’s Corporation purchased treasury stock for $100,000. The journal entry to record the transaction is: a. Cash 100,000 Treasury Stock 100,000 b. Treasury Stock Common Stock

100,000

c. Treasury Stock Cash

100,000

d. Common Stock Treasury Stock

100,000

100,000 100,000 100,000

ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

OBJ: 5 LOC: Application

85. Union Corporation issued 40,000 shares of $10 par value common stock for $600,000, purchased 10,000 shares of treasury stock with a par value of $20 for $150,000, and paid $20,000 in cash dividends. Net cash flows from financing activities totaled a. $0. b. $430,000. c. $280,000. d. ($470,000).

ANS: B Cash outflow from financing activities: $150,000 + $20,000 = $170,000 Cash inflow from financing activities: $600,000 Net cash flows from financing activities: $600,000 – $170,000 = $430,000 PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

LOC: Application

SHORT ANSWER 1. Indicate on the blanks below the type of activity (operating activity, financing activity, investing activity, noncash transaction) each of the following transactions represents. _____ a. Firm sold 16,000 shares of its own common stock for cash. _____ b. Sold $400,000 worth of products for cash. _____ c. Paid $240,000 dividend. _____ d. Received $3,000 in interest income. _____ e. Exchanged 12,000 shares of stock for 15-year bonds. _____ f. Paid $242,000 to the U.S. Treasury for income taxes. ANS: a. financing activity b. operating activity c. financing activity d. operating activity e. noncash transaction f. operating activity PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

LOC: Comprehension

2. Indicate on the blanks below the type of activity (operating activity, financing activity, investing activity, noncash transaction) each of the following transactions represents. _____ a. Company sold shares of its own stock for cash. _____ b. Acquired land and buildings by issuance of long-term mortgage payable. _____ c. Declared and paid cash dividends. _____ d. Received interest income. _____ e. Exchanged shares of stock for 15-year bonds. _____ f. Paid the U.S. Treasury for income taxes. _____ g. Collected proceeds from the sale of a long-term investment at cost. _____ h. Declared stock dividends. _____ i. Paid off long-term debt with cash. _____ j. Purchased equipment with cash.

ANS: a. financing activity b. noncash transaction c. financing activity d. operating activity e. noncash transaction f. operating activity g. investing activity h. noncash transaction i. financing activity j. investing activity PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

LOC: Comprehension

3. Provide the components for the calculation of free cash flow. ANS: Net cash flows from operating activities – Dividends – Purchases of plant assets + Sales of plant assets = Free cash flow PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 4. Use the following information to obtain the ratios below. Round amounts to one decimal place. Net cash flows from operating activities Net income Sales Average total assets Dividends Purchases of plant assets Sales of plant assets

$837 million 465 million 6,750 million 7,150 million 105 million 170 million 380 million

a. Cash flow yield = _______________ times b. Cash flows to sales = _______________ % c. Cash flows to assets = _______________ % d. Free cash flow = $ ________________ ANS: a. 1.8 times ($837 ÷ $465) b. 12.4% ($837 ÷ $6,750) c. 11.7% ($837÷ $7,150) d. $942 million ($837 – $105 – $170 + $380) © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 5. When preparing a statement of cash flows using the indirect method, why is depreciation added back to net income within the operating activities section? ANS: The indirect method begins with accrual-based net income, which includes a deduction for depreciation expense. However, depreciation expense does not represent a cash outflow and therefore must be added back to net income to cancel the deduction. As a result, depreciation expense will be omitted in the calculation of net cash flows from operating activities. PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

LOC: Comprehension

6. Using the indirect method, calculate the amount of net cash flows from operating activities from the following data. Show your work. Net Income Beginning Accounts Receivable Ending Accounts Receivable Beginning Prepaid Expenses Ending Prepaid Expenses

$112,000 10,000 8,800 2,000 2,800

Beginning Accounts Payable Ending Accounts Payable Depreciation Expense Amortization of Intangible Assets Dividends Declared and Paid

ANS: Net Income + Decrease in Accounts Receivable ($10,000 – $8,800) – Increase in Prepaid Expenses ($2,000 – $2,800) – Decrease in Accounts Payable ($6,000 – $5,600) + Depreciation + Amortization Net Cash Flows from Operating Activities PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

$ 6,000 5,600 20,400 1,600 4,400

$112,000 1,200 (800) (400) 20,400 1,600 $134,000

LOC: Application

7. Using the indirect method, calculate the amount of net cash flows from operating activities from the following data. Show your work. Net Income Beginning Accounts Receivable Ending Accounts Receivable Beginning Prepaid Expenses Ending Prepaid Expenses

$63,000 5,000 4,400 1,000 1,400

Beginning Accounts Payable Ending Accounts Payable Depreciation Expense Amortization of Intangible Assets Dividends Declared and Paid

ANS: Net Income + Decrease in Accounts Receivable ($5,000 – $4,400) – Increase in Prepaid Expenses ($1,000 – $1,400) – Decrease in Accounts Payable ($3,000 – $2,800) + Depreciation + Amortization Net Cash Flows from Operating Activities PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

$ 3,000 2,800 10,200 800 2,200

$63,000 600 (400) (200) 10,200 800 $74,000

LOC: Application

8. Platt Company prepares its statement of cash flows using the indirect method. Indicate whether each of the items below would be added to or deducted from net income to determine net cash flows from operating activities. a. Decrease in Inventory b. Decrease in Accounts Payable c. Depreciation Expense d. Loss on Disposal of Truck e. Increase in Accounts Receivable f. Increase in Wages Payable g. Amortization Expense h. Increase in Prepaid Rent i. Gain on Sale of Land j. Increase in Income Taxes Payable ANS: a. added to b. deducted from c. added to d. added to e. deducted from f. added to g. added to h. deducted from i. deducted from j. added to © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

LOC: Application

9. The activity from the Long-Term Investments account for Newberry Corporation appears below. In addition, the income statement shows a loss on the sale of investments of $64,000. Long-Term Investments Beginning balance, 2013 Purchases Sales Ending balance, 2013

$368,000 556,000 (404,000) $520,000

Based on the information given, compute the amounts to be shown and indicate how they would appear on the statement of cash flows. Assume that the indirect method is being used and that the investments were purchased for cash. ANS: Cash flows from investing activities: Purchases of long-term investments Sales of long-term investments Net cash flows from investing activities

($556,000) 340,000* ($216,000)

*$404,000 cost – $64,000 loss = funds generated of $340,000. The loss should be added to net income in the operating activities section. PTS: 1 DIF: Moderate OBJ: 3 | 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Determining cash flow from operating activities | Determining cash flow from investing activities MSC: ACBSP-APC-24-Statement of Cash Flows 10. The activity from the Long-Term Investments account for Rice Corporation appears below. In addition, the income statement shows a loss on the sale of investments of $16,000. Long-Term Investments Beginning balance, 2013 Purchases Sales Ending balance, 2013

$ 92,000 139,000 (101,000) $130,000

ANS: Cash flows from investing activities: Purchases of long-term investments Sales of long-term investments Net cash flows from investing activities

($139,000) 85,000* ($ 54,000)

*$101,000 cost – $16,000 loss = funds generated of $85,000. The loss should be added to net income in the operating activities section. PTS: 1 DIF: Moderate OBJ: 3 | 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Determining cash flow from operating activities | Determining cash flow from investing activities MSC: ACBSP-APC-24-Statement of Cash Flows 11. A company sells equipment with a carrying value of $10,000 for $7,000. Where, and for what amounts, would this transaction appear on a statement of cash flows using the indirect method? ANS: First, the loss on sale of $3,000 would be added back to net income within the operating activities section. Then the proceeds on the sale of $7,000 would be listed as an inflow of cash within the investing activities section. PTS: 1 DIF: Moderate OBJ: 3 | 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Determining cash flow from operating activities | Determining cash flow from investing activities MSC: ACBSP-APC-24-Statement of Cash Flows 12. Malzone Enterprises is preparing a statement of cash flows using the indirect method. Indicate whether each item is an operating activity, an investing activity, a financing activity, a noncash transaction, or an item that would not appear on or with Malzone's statement. a. The change in Accounts Payable during the period b. Depreciation expense c. Exchange of stock for a building d. Purchase of equipment e. Purchases of treasury stock f. Borrowing by issuing bonds g. A gain on the sale of equipment h. Collections from customers i. Dividends paid j. Income taxes paid k. Proceeds from sale of long-term investments at a loss l. The change in Inventory for the period ANS: a. operating activity b. operating activity c. noncash transaction d. investing activity e. financing activity © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

f. financing activity g. operating activity h. would not appear on or with statement i. financing activity j. would not appear on or with statement k. investing activity and operating activity (must add loss back to net income0 l. operating activity PTS: 1 DIF: Moderate OBJ: 3 | 4 | 5 NAT: AACSB Analytic | AICPA FN Measurement KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

LOC: Comprehension

13. York Company's cash balance at December 31, 2012, was $338,000. Calculate the company's cash balance at December 31, 2013, given the following information for the year ended December 31, 2013. Show your work. Net Income Depreciation and Amortization Expense Increase in Accounts Receivable (net) Decrease in Inventory Increase in Accounts Payable Net Cash Flows from Investing Activities Net Cash Flows from Financing Activities

ANS: Net Income + Depreciation and Amortization Expense – Increase in Accounts Receivable (net) + Decrease in Inventory + Increase in Accounts Payable = Net Cash Flows from Operating Activities + Net Cash Flows from Investing Activities – Net Cash Flows from Financing Activities = Increase in Cash during 2013 + Cash balance, December 31, 2012 = Cash balance, December 31, 2013

$740,000 196,000 28,000 50,000 40,000 266,000 (1,200,000)

$740,000 196,000 (28,000) 50,000 40,000 $ 998,000 266,000 (1,200,000) $ 64,000 338,000 $402,000

PTS: 1 DIF: Challenging OBJ: 3 | 4 | 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Statement of cash flows MSC: ACBSP-APC-24-Statement of Cash Flows

MATCHING Match each definition with the correct term below. a. The method of preparing the operating section of the statement of cash flows that adjusts each item on the income statement from the accrual basis to the cash basis. b. The amount of cash that remains after deducting the funds a company must commit to continue operating at its planned level. c. Activities of a business that involve obtaining resources from stockholders and creditors, providing stockholders with a return on their investments, and repaying the amounts borrowed from creditors. d. Investments that can be quickly converted into cash. e. Activities of a business that involve the purchase and sale of property, plant, and equipment and other long-term assets. f. The ratio of net cash flow from operating activities to average total assets. g. Activities of a business that involve the cash inflows and outflows that enter into the determination of net income. h. The ratio of net cash flow from operating activities to net income. i. The method of preparing the operating section of the statement of cash flows that does not require the adjustment of each item on the income statement. j. The ratio of net cash flow from operating activities to net sales. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Cash equivalents Operating activities Investing activities Financing activities Cash flows to sales Cash flow yield Free cash flow Cash flow to assets Indirect method Direct method

1. ANS: D PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Cash and cash equivalents MSC: ACBSP-APC-24-Statement of Cash Flows 2. ANS: G PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows 3. ANS: E PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows 4. ANS: C PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Operating, investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

5. ANS: J PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 6. ANS: H PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 7. ANS: B PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 8. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 9. ANS: A PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Statement of cash flows MSC: ACBSP-APC-24-Statement of Cash Flows 10. ANS: I PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Statement of cash flows MSC: ACBSP-APC-24-Statement of Cash Flows PROBLEM 1. Why does the acquisition of land in exchange for common stock qualify as a noncash investing and financing transaction? ANS: By acquiring land in exchange for shares of stock, a company has altered its balance sheet with transactions that would normally involve cash, therefore appearing on the statement of cash flows. Even though cash is not involved in this transaction, the balance sheet changes are significant occurrences that should be disclosed in a schedule of significant noncash transactions in conjunction with the statement of cash flows. PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement KEY: Noncash investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

LOC: Comprehension

2. During the year, Ollie's Outdoor Outfitters issued 20,000 shares of common stock in exchange for a prime piece of land. Two employees of the accounting department, Audrey and Neil, disagree as to the appearance of this particular transaction on the statement of cash flows. Audrey believes it to be a significant noncash transaction, and it therefore should be presented as such at the bottom of the statement. Neil contends that because this transaction did not cause any cash to flow in or out of the company, it has no place on the statement of cash flows. Who is correct and why?

ANS: Audrey is correct in her contention that the issuance of stock in exchange for land represents a significant noncash transaction and therefore should be disclosed in a separate schedule as part of the statement of cash flows. Usually, a transaction involving either part of this event would affect cash and would be included in the body of the cash flow statement. Because the movement of such items significantly affects the makeup of the balance sheet and income statement, adequate disclosure is necessary. Neil's comment that cash is not affected by this transaction is true, but because the composition of the other statements is significantly affected, this transaction should be included in the statement of cash flows. Also, the statement of cash flows attempts to link the income statement and balance sheet items and should report all significant transactions that affect the two statements. PTS: 1 DIF: Challenging OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement KEY: Noncash investing and financing activities MSC: ACBSP-APC-24-Statement of Cash Flows

LOC: Critical Thinking

3. For 2013, Dorchester Corporation had average total assets of $520,000, sales of $450,000, net income of $50,000, net cash flows from operating activities of $75,000, dividend payments of $25,000, purchases of plant assets of $60,000, and sales of plant assets of $55,000. Using this information, compute (a) cash flow yield, (b) cash flows to sales, (c) cash flows to assets, and (d) free cash flow. Round amounts to one decimal place. ANS: a. 1.5 times ($75,000 ÷ $50,000) b. 16.7 percent ($75,000 ÷ $450,000) c. 14.4 percent ($75,000 ÷ $520,000) d. $45,000 ($75,000 – $25,000 – $60,000 + $55,000) PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 4. For 2013, Fairfield Corporation had average total assets of $1,300,000, net sales of $1,125,000, net income of $125,000, net cash flows from operating activities of $150,000, dividend payments of $62,500, purchases of plant assets of $150,000, and sales of plant assets of $137,500. Using this information, compute (a) cash flow yield, (b) cash flows to sales, (c) cash flows to assets, and (d) free cash flow. Round amounts to one decimal place. ANS: a. 1.2 times ($150,000 ÷ $125,000) b. 13.3 percent ($150,000 ÷ $1,125,000) c. 11.5 percent ($150,000 ÷ $1,300,000) d. $75,000 ($150,000 – $62,500 – $150,000 + $137,500) PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

5. Following are the income statement and other information for Pickens Corporation. Pickens Corporation Income Statement For the Year Ended December 31, 2013 Sales Cost of goods sold Gross margin Operating expenses Depreciation expense Income before income taxes Income taxes expense Net income

$9,000 4,500 $4,500 $1,800 900

2,700 $1,800 450 $1,350

Accounts receivable (net) decreased by $2,250 during the year. Inventory increased by $1,350, and Accounts Payable decreased by $1,800 during the year. Income Taxes Payable increased by $450 during the year. Prepare a schedule of cash flows from operating activities using the indirect method.

Pickens Corporation Schedule of Cash Flows from Operating Activities For the Year Ended December 31, 2013

ANS: .

Pickens Corporation Schedule of Cash Flows from Operating Activities For the Year Ended December 31, 2013

Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash flows from operating activities Depreciation Changes in current assets and current liabilities Decrease in accounts receivable Increase in inventory Decrease in accounts payable Increase in income taxes payable Net cash flows from operating activities PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

$1,350

$ 900 2,250 (1,350) (1,800) 450

450 $1,800

LOC: Application

6. Following are the income statement and other information for Polk Corporation. Polk Corporation Income Statement For the Year Ended December 31, 2013 Sales Cost of goods sold Gross margin Operating expenses Depreciation expense Income before income taxes Income taxes expense Net income

$6,000 3,000 $3,000 $1,200 600

1,800 $1,200 300 $ 900

Accounts receivable (net) decreased by $1,500 during the year. Inventory increased by $900, and Accounts Payable decreased by $1,200 during the year. Income Taxes Payable increased by $300 during the year.

Prepare a schedule of cash flows from operating activities using the indirect method. Polk Corporation Schedule of Cash Flows from Operating Activities For the Year Ended December 31, 2013

ANS: .

Polk Corporation Schedule of Cash Flows from Operating Activities For the Year Ended December 31, 20xx Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash flows from operating activities Depreciation Changes in current assets and current liabilities Decrease in accounts receivable Increase in inventory Decrease in accounts payable Increase in income taxes payable Net cash flows from operating activities

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

$900

$600 1,500 (900) (1,200) 300

300 $1,200

LOC: Application

7. The following comparative balance sheet and other information relate to Runnels Corporation. Runnels Corporation Comparative Balance Sheets December 31, 2013 and 2012 Assets Cash Accounts receivable (net) Inventory Prepaid expenses Equipment (net) Investments and other assets Total assets Liabilities and Stockholders' Equity Accounts payable Income taxes payable Long-term note payable Common stock Retained earnings Total liabilities and stockholders' equity Additional information: Depreciation expense Cash dividends declared and paid

2013 $ 140 210 350 105 3,010 4,900 $8,715

2012 $ 140 280 420 70 2,800 4,200 $7,910

350 70 2,100 1,400 4,795 $8,715

280 140 1,400 1,400 4,690 $7,910

$280 70

a. Compute net income, assuming net income and the cash dividends were the only items affecting retained earnings. Show your work. b. Compute net cash flows from operating activities using the indirect method. ANS: a. Net income: Increase in retained earnings ($4,795 – $4,690) Dividends Net income b. Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash flows from operating activities Depreciation Changes in current assets and current liabilities Decrease in accounts receivable ($210 – $280) Decrease in inventory ($350 – $420) Increase in prepaid expenses ($105 – $70) Increase in accounts payable ($350 – $280) Decrease in income taxes payable ($70 – $140) Net cash flows from operating activities

$105 70 $175 $175

$280 70 70 (35) 70 (70)

385 $560

PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

LOC: Analysis

8. How is it possible for a company to show a net loss for a given year, yet produce positive net cash flows from operating activities? ANS: A net loss means that accrual-based expenses exceeded accrual-based revenue for the period. However, if you eliminate the effect of (add back) such noncash expenses as depreciation, it is possible to have produced positive net cash flows from operating activities. PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from operating activities MSC: ACBSP-APC-24-Statement of Cash Flows

LOC: Critical Thinking

9. The activity in the Plant Assets and related Accumulated Depreciation accounts for 2013 is shown below. In addition, the income statement shows a gain on sale of plant assets of $16,000. Plant Assets Beginning balance, 2013 Purchases Disposals Ending balance, 2013

Accumulated Depreciation $234,000 Beginning balance, 2013 $124,000 120,000 2013 Depreciation 36,000 (82,000) Disposals (26,000) $272,000 Ending balance, 2013 $134,000

Based on the information given, compute the amounts to be shown and indicate how they would appear on the statement of cash flows. Assume that the indirect method is being used and that the plant assets were purchased for cash. ANS: Cash flows from investing activities Purchases of plant assets Sales of plant assets Net cash flows from investing activities *Cost Accumulated depreciation Carrying value Gain on sale of plant assets Sale price

($120,000) 72,000* ($ 48,000) $82,000 (26,000) $56,000 16,000 $72,000

2013 depreciation expense of $36,000 is added to net income to arrive at net cash flows from operating activities. The $16,000 gain, however, should be deducted from net income in the operating activities section.

PTS: 1 DIF: Moderate OBJ: 3 | 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Determining cash flow from operating activities | Determining cash flow from investing activities MSC: ACBSP-APC-24-Statement of Cash Flows 10. Give two explanations for why the amount of cash outflow for equipment for the year might not equal the increase in the Equipment account balance from one balance sheet date to the next. ANS: Possible explanations for the cash expended for equipment not equaling the increase in the Equipment account during the year would be: 1. Some equipment owned at the beginning of the year was disposed of during the year. This would offset some of the acquisitions made during the year, thus causing the net increase in the Equipment account to be less than the amount acquired. 2. Some acquisitions of equipment may have been made for something other than cash. Other consideration such as inventory or shares of stock could have been given instead of cash. This would cause the Equipment account to increase without affecting the amount of cash disbursed. 3. Some acquisitions of equipment may have been made by giving a down payment in cash and a promissory note for the balance. Because the cash flow statement shows only the amount of cash expended, the down payment would be the amount that would appear, not the entire purchase price of the equipment. PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Determining cash flow from investing activities MSC: ACBSP-APC-24-Statement of Cash Flows

LOC: Critical Thinking

11. The following 2012 information relates to Raddatz, Inc.: Net Income Depreciation Expense Amortization of Intangible Assets Beginning Accounts Receivable Ending Accounts Receivable Beginning Inventory Ending Inventory Beginning Prepaid Expenses Ending Prepaid Expenses Beginning Accounts Payable Ending Accounts Payable Purchase of Long-Term Assets for Cash Cash from Issuance of Long-Term Debt Issuance of Stock for Cash Issuance of Stock for Long-Term Assets Purchase of Treasury Stock Sale of Long-Term Investment at Cost

$365,000 96,000 11,000 420,000 439,000 516,000 560,000 48,000 42,000 119,000 146,000 616,000 200,000 160,000 110,000 64,000 39,000

a. Calculate the net cash flows from operating activities. Show your work. b. Calculate the net cash flows from investing activities. Show your work. c. Calculate the net cash flows from financing activities. Show your work. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

d. Calculate the net change in cash. Show your work. ANS: a. Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash flows from operating activities Depreciation Amortization Changes in current assets and current liabilities Increase in accounts receivable ($439,000 – $420,000) Increase in inventory ($560,000 – $516,000) Decrease in prepaid expenses ($42,000 – $48,000) Increase in accounts payable ($146,000 – $119,000) Net cash flows from operating activities b.

$365,000

96,000 11,000 (19,000) (44,000) 6,000 27,000 $442,000

Cash flows from investing activities: Purchase of long-term assets Sale of long-term investment Net cash flows from investing activities

($616,000) 39,000 ($577,000)

Cash flows from financing activities: Issuance of long-term debt Issuance of stock Purchase of treasury stock Net cash flow from financing activities

$200,000 160,000 (64,000) $296,000

Net change in cash: Increase from operating activities Decrease from investing activities Increase from financing activities Net increase in cash

$442,000 (577,000) 296,000 $161,000

PTS: 1 DIF: Challenging OBJ: 3 | 4 | 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Statement of cash flows MSC: ACBSP-APC-24-Statement of Cash Flows 12. The following information relates to Lonborg Corporation for the year ended December 31, 2012: Net Income Depreciation Expense Amortization of Intangible Assets Beginning Accounts Receivable Ending Accounts Receivable Beginning Inventory Ending Inventory Beginning Prepaid Expenses Ending Prepaid Expenses Beginning Accounts Payable Ending Accounts Payable Purchase of Long-Term Assets for Cash

$300,000 72,000 9,000 336,000 351,000 413,000 450,000 34,000 38,000 95,000 116,000 493,000

Cash from Issuance of Long-Term Debt Issuance of Stock for Cash Issuance of Stock for Long-Term Assets Purchase of Treasury Stock Sale of Long-Term Investment at Cost

160,000 128,000 88,000 51,000 31,000

a. Calculate the net cash flows from operating activities. Show your work. b. Calculate the net cash flows from investing activities. Show your work. c. Calculate the net cash flows from financing activities. Show your work. d. Calculate the net change in cash. Show your work. ANS: a. Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash flows from operating activities Depreciation Amortization Changes in current assets and current liabilities Increase in accounts receivable ($351,000 – $336,000) Increase in inventory ($450,000 – $413,000) Increase in prepaid expenses ($38,000 – $34,000) Increase in accounts payable ($116,000 – $95,000) Net cash flows from operating activities b.

$300,000

72,000 9,000 (15,000) (37,000) (4,000) 21,000 $346,000

Cash flows from investing activities: Purchase of long-term assets Sale of long-term investment Net cash flows from investing activities

($493,000) 31,000 ($462,000)

Cash flows from financing activities: Issuance of long-term debt Issuance of stock Purchase of treasury stock Net cash flow from financing activities

$160,000 128,000 (51,000) $237,000

Net change in cash: Increase from operating activities Decrease from investing activities Increase from financing activities Net increase in cash

$346,000 (462,000) 237,000 $121,000

PTS: 1 DIF: Challenging OBJ: 3 | 4 | 5 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Statement of cash flows MSC: ACBSP-APC-24-Statement of Cash Flows

Chapter 13 - Financial Performance Measurement TRUE/FALSE 1. It is in the best interests of a company to base executive compensation on a single performance measure. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Recall

2. Per the Sarbanes-Oxley Act of 2002, a compensation committee, comprised of a public corporation's top executives, must be established to determine the salaries and wages of its employees. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Recall

3. Per the Sarbanes-Oxley Act of 2002, public corporations must establish a compensation committee to determine how its top executives will be compensated. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Recall

4. Investors, creditors, and customers are considered external users of financial statements. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Recall

5. Liquidity is the ability to earn a satisfactory net income. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Recall

6. Profitability is the ability to pay bills when due and to meet unexpected needs for cash. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Recall

7. Past performance is rarely a good indicator of future performance. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Recall

8. In general, the greater the investment risk taken, the lower the return required as compensation. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Recall

9. The analysis of risk and return is important to both investors and creditors. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Recall

10. Financial statement analysis can be both past- and future-oriented. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Recall

11. Disclosure of segment information is useless in the analysis of diversified companies. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Recall

12. Accounting methods may be a source of incomparability among companies. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Recall

13. Form 10-Q refers to the annual report filed with the SEC. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Recall

14. The most complete financial newspaper in the United States is the Financial Times. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Recall

15. Interim financial statements are subjected to a full audit by an independent auditor. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Recall

16. Companies file their quarterly reports with the SEC on Form 8K. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Recall

17. The use of rule-of-thumb measures is not an exact science and should be used with great care. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Comprehension

18. Rule-of-thumb measures are the best standards of comparison in financial performance evaluation. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Comprehension

19. A limitation of using industry norms in financial performance evaluation is that some companies in the same industry may not be comparable. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Comprehension

20. Both diversified companies and conglomerates operate in a single, well-defined industry. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Comprehension

21. Companies in the same industry are required to use the same methods to value inventory and to depreciate similar assets. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Comprehension

22. In a diversified company, segments may be represented by different industries, geographical markets, and major customers. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Comprehension

23. The comparison of financial measures or ratios of the same company over a period of times is superior to the use of rule-of-thumb measures. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Comprehension

24. Most companies issue interim financial statements to the public on a monthly basis. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Comprehension

25. Interim financial statements report data for a period of more than one year. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Comprehension

26. The annual report of a publicly held corporation usually does not contain the auditors' report. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Comprehension

27. For details about the financial histories of companies, one could consult publications of Moody's and Standard & Poor's. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Comprehension

28. The quality of a company’s earnings refers to the substance of earnings and their sustainability into future accounting periods. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Quality of earnings MSC: ACBSP-APC-23-Financial Statement Analysis 29. Quality of earnings is only affected by accounting methods and accounting estimates. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Quality of earnings MSC: ACBSP-APC-23-Financial Statement Analysis 30. Accounting estimates rarely affect the reported income of a company. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Quality of earnings MSC: ACBSP-APC-23-Financial Statement Analysis 31. Earnings caused by one-time items are typically sustained in the future. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Quality of earnings MSC: ACBSP-APC-23-Financial Statement Analysis 32. A reduction in the value of an asset below its carrying value on the balance sheet is called a restructuring. ANS: F PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Quality of earnings MSC: ACBSP-APC-23-Financial Statement Analysis 33. Both write-downs and restructurings reduce current operating income and boost future income by shifting future costs to the current period. ANS: T PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Quality of earnings MSC: ACBSP-APC-23-Financial Statement Analysis

34. Full disclosure in financial statements reduces problems in the interpretation of financial statements. ANS: T PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Quality of earnings MSC: ACBSP-APC-23-Financial Statement Analysis 35. Different accounting methods will often have different effects on net income. ANS: T PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Quality of earnings MSC: ACBSP-APC-23-Financial Statement Analysis 36. If two companies have identical net sales and use different inventory methods, income from continuing operations will likely be identical also. ANS: F PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Quality of earnings MSC: ACBSP-APC-23-Financial Statement Analysis 37. One-time decreases in earnings always indicate that earnings will be poor in the future. ANS: F PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Quality of earnings MSC: ACBSP-APC-23-Financial Statement Analysis 38. Vertical analysis will result in common-size statements. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Recall

39. Trend analysis requires the establishment of a base year for comparison purposes. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Recall

40. Vertical analysis is the same as common-size analysis. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Recall

41. Horizontal analysis will reveal, for example, the percentage of net sales consumed by salaries expense. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Recall

42. In a common-size income statement, each item is expressed as a percentage of net revenues. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Recall

43. In a common-size income statement, net income is represented by 100 percent. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Comprehension

44. In horizontal analysis, the base year is the most current year being examined. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Comprehension

45. It is possible for horizontal analysis to indicate a decrease in revenues from one year to another and an increase in net income. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Comprehension

46. In a common-size balance sheet, total assets are represented by 100 percent. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Comprehension

47. Determining the percentage change in an item from one year to the next is a type of horizontal analysis. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Comprehension

48. The index number used in trend analysis is computed by dividing the base year amount by the index year amount, and multiplying that result by 100. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Comprehension

49. When using an index number, one sets the first (oldest) number in a series equal to 100. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Comprehension

50. Common-size statements are useful in assessing the changes in the composition of statements over time. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Comprehension

51. A primary purpose of vertical analysis is to observe trends over a five-year period. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Comprehension

52. Trend analysis is a variation on horizontal analysis. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Comprehension

53. A 20 percent change in net sales will result in a 20 percent change in net income. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Application

54. The quick ratio and the debt to equity ratio are measures of short-term debt-paying ability. ANS: T PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

55. Ratio analysis is useful only if the ratio states a meaningful relationship between two numbers. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 56. The cash flow yield equals net income divided by net cash flows from operating activities. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 57. Dividends yield is a market strength ratio. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 58. To calculate cash flows to assets and cash flows to sales, one needs the figure for net cash flows from financing activities. ANS: F PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 59. Inventory turnover is a measure of liquidity that focuses on the relative size of inventory. ANS: T PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 60. Days' payable measures the relative size of accounts payable. ANS: F PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 61. Asset turnover is most closely associated with a company's liquidity position. ANS: F PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 62. Both profit margin and asset turnover affect a company's return on assets. ANS: T PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

63. Declining profitability and liquidity ratios are indications that a company may not survive. ANS: T PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 64. The interest coverage ratio and the debt to equity ratio are short-term measures of liquidity. ANS: T PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 65. The market price of a stock represents investors' collective view at a point in time. ANS: T PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 66. The price/earnings (P/E) ratio is an indication of investor confidence in a company. ANS: T PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 67. The operating cycle is equal to days' sales uncollected plus days' inventory on hand. ANS: T PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 68. The sale of plant assets and the payment of dividends will reduce free cash flow. ANS: F PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 69. The debt to equity ratio indicates the extent to which a company is leveraged. ANS: T PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis MULTIPLE CHOICE 1. Executive officers' compensation is typically comprised of all of the following except a. incentive bonuses. b. annual base salaries. c. declared dividends. d. stock option awards. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: C PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Recall

2. The ability to pay bills when due and to meet unexpected needs for cash most closely describes a. liquidity. b. long-term solvency. c. profitability. d. cash flow adequacy. ANS: A PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Recall

3. A general rule in choosing among alternative investments is the greater the risk taken, the a. lower the potential expected. b. lower the profits expected. c. greater the return required. d. greater the price of the investment. ANS: C PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Recall

4. A company is referred to as a diversified company or a conglomerate if it operates in a. one single major industry. b. many unrelated industries. c. many related industries. d. many and varied locations throughout the world. ANS: B PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Recall

5. Dun & Bradstreet publishes a. credit ratings of companies. b. data on average ratios and relationships. c. data on industry norms. d. all of these are correct. ANS: D PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Recall

6. All of the following are standard forms of the SEC, except a. Form 10-K. b. Form 8-K. c. Form 1040. d. Form 10-Q. ANS: C PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Recall

7. A corporation's compensation committee, as required by the Sarbanes-Oxley Act of 2002, determines the pay of a. the hourly wage earners. b. the top executives. c. the independent auditors. d. the members of the board of directors. ANS: B PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Recall

8. All of the following are key sources of financial news, except a. Barron's. b. Newsweek. c. Fortune. d. Forbes. ANS: B PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Recall

9. Which of the following must be reported by diversified companies for each of their operating segments? a. Assets, liabilities, and earnings per share b. Segment profit or loss, certain revenue and expense items, and segment assets c. Segment profit or loss, expenses, and unidentifiable assets d. Segment profit or loss, expenses, and earnings per share ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Comprehension

10. Which of the following is the least useful in evaluating a relationship as either favorable or unfavorable? a. Industry averages b. Past performance of the company c. Past and current performances of the company d. Rule-of-thumb measures © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Comprehension

11. The existence of diversified companies makes which of the following very difficult? a. The preparation of interim financial statements b. Use of more than one depreciation or inventory method c. The compilation of segmented information d. Comparison with industry norms ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Comprehension

12. Which of the following situations severely limits the use of industry norms as standards of comparison? a. The existence of conglomerates b. The fact that little information exists on industry norms c. The presentation of segmented information d. A downward turn in the economy ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Comprehension

13. Publicly held corporations must file annual reports with the SEC. All such reports are available a. to the general public. b. only to the SEC, the company's owners and management, and the company's auditors. c. only to the SEC, the company's management, and the company's auditors. d. only to other SEC companies and the issuing company's owners and management. ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Comprehension

14. One of the best places to look for early signals of change in a company's profitability is the a. year-end financial statements. b. annual report sent to stockholders. c. annual report sent to the SEC. d. interim financial statements. ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Comprehension

15. To find the most comprehensive information about a company's performance during the year, one would look to a. the annual report sent to stockholders. b. the annual report sent to the SEC. c. The Wall Street Journal. d. interim financial statements. ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Comprehension

16. The financial objective of long-term solvency is to a. be able to pay bills when they fall due. b. earn a satisfactory net income. c. be able to increase stockholders' wealth. d. be able to survive for many years. ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Comprehension

17. All of the following are limitations on the use of industry norms, except a. companies that are not strictly comparable. b. the use of different accounting procedures. c. the existence of conglomerates. d. the presentation of interim financial statements. ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Comprehension

18. Which of the following does not affect quality of earnings? a. Accounting estimates b. One-time items c. Accounting methods d. Industry norms ANS: D PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Quality of earnings MSC: ACBSP-APC-23-Financial Statement Analysis 19. An example of an accounting method that could affect operating income is a. inventory valuation method. b. revenue recognition method. c. depreciation method. d. all of these could affect operating income.

ANS: D PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Quality of earnings MSC: ACBSP-APC-23-Financial Statement Analysis 20. A reduction in the value of an asset below its carrying value on the balance sheet is called a a. discontinued operation. b. write-down. c. restructuring. d. gain. ANS: B PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Quality of earnings MSC: ACBSP-APC-23-Financial Statement Analysis 21. The choice of accounting method doesn’t affect cash flows except for possible differences in a. income taxes paid. b. depreciation expense recognized. c. rent expense paid. d. unearned revenues recognized. ANS: A PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Quality of earnings MSC: ACBSP-APC-23-Financial Statement Analysis 22. The nonoperating items that appear on the income statement include a. discontinued operations. b. gains or losses on the sale or disposal of these segments. c. both discontinued operations and gains or losses on the sale or disposal of these segments. d. neither discontinued operations nor gains or losses on the sale or disposal of these segments. ANS: C PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Quality of earnings MSC: ACBSP-APC-23-Financial Statement Analysis 23. A balance sheet that displays only component percentages is called a a. segmented balance sheet. b. common-size balance sheet. c. condensed balance sheet. d. comparative balance sheet. ANS: B PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Recall

24. Horizontal analysis of comparative financial statements includes the a. calculation of the percentage of net sales for each item listed. b. calculation of dollar amount changes and percentage changes from the previous to the current year. c. development of common-size statements. d. calculation of liquidity ratios. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: B PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Recall

25. In trend analysis, each item is expressed as a percentage of the a. total assets amount. b. retained earnings amount. c. net income amount. d. base year amount. ANS: D PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Recall

26. An example of horizontal analysis is a. common-size statements. b. trend analysis. c. ratio analysis. d. profitability analysis. ANS: B PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Recall

27. What is the best way to study the relationship of the components of financial statements? a. Perform horizontal analysis b. Perform ratio analysis c. Prepare common-size statements d. Perform trend analysis ANS: C PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Recall

28. In conducting horizontal analysis, it is important to focus attention on the changes in a. the rate of inflation. b. the composition of the statements. c. dollar amounts and their percentages. d. the accounting methods employed. ANS: C PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Recall

29. One reason that a common-size statement is a useful tool in financial performance evaluation is that it enables the user to a. make better comparisons of two companies of different sizes in the same industry. b. determine which companies in a single industry are of the same value. c. determine which companies in a single industry are of the same size. d. judge the relative potential of two companies of similar size in different industries. ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Comprehension

30. In a common-size income statement for a retail store, the 100 percent amount is for a. cost of goods sold. b. net revenues. c. gross profit. d. net income. ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Comprehension

31. In a common-size income statement for a retail store, the 100 percent amount is for a. cost of goods sold. b. net revenues. c. gross profit. d. net income. ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Comprehension

32. In a common-size balance sheet for a retail store, the 100 percent amount is for a. total property, plant, and equipment. b. merchandise inventory. c. total current assets. d. total assets. ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Comprehension

33. In a common-size balance sheet, which of the following is given a designation of 100 percent? a. Total assets b. Net income c. Current assets d. Cost of goods sold

ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Comprehension

34. In a common-size financial statement, a designation of 25 percent could not be given to a. net revenues. b. total current assets. c. total long-term debt. d. net earnings. ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Comprehension

35. In a trend analysis, an index number of 139 for 2013 sales indicates that a. sales for 2013 were 139 percent higher than sales for the same company in the base year. b. sales for 2013 were 139 percent of the sales for the same company in the base year. c. actual sales for 2013 exceeded budgeted sales for 2013 by 39 percent. d. sales for 2013 for this company were 139 percent of the sales figure of another company being used in the comparison. ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 3 LOC: Application

36. If Year 1 equals $1,400, Year 2 equals $1,554, and Year 3 equals $1,834, the index number to be assigned for Year 3 in trend analysis, assuming that Year 1 is the base year, is a. 100%. b. 131%. c. 136%. d. 141%. ANS: B Index = 100 x (Index Year Amount ÷ Base Year Amount) Index = 100 x ($1,834 ÷ $1,400) = 131% PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

LOC: Application

37. If sales for 2011 (the base year), 2012, and 2013 are $20,000, $15,600, and $29,600, respectively, the index numbers assigned to 2012 and 2013, respectively, are a. 156% and 143%. b. 78% and 148%. c. 128.2% and 158%. d. 62.4% and 153%.

ANS: B Index = 100 x (Index Year Amount ÷ Base Year Amount) Index for 2012 = 100 x ($15,600 ÷ $20,000) = 78% Index for 2013 = 100 x ($29,600 ÷ $20,000) = 148% PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

LOC: Application

38. If dividends declared per share during 2011 (the base year), 2012, and 2013 are $2.40, $1.80, and $1.92, respectively, the index numbers assigned to 2012 and 2013, respectively, are a. 75% and 80%. b. 180% and 70%. c. 133.3% and 100%. d. 60% and 85%. ANS: A Index = 100 x (Index Year Amount ÷ Base Year Amount) Index for 2012 = 100 x ($1.80 ÷ $2.40) = 75% Index for 2013 = 100 x ($1.92 ÷ $2.40) = 80% PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

LOC: Application

39. A common measure of profitability is the a. debt to equity ratio. b. asset turnover. c. current ratio. d. receivable turnover. ANS: B PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 40. A common measure of capital structure and leverage is the a. asset turnover. b. debt to equity ratio. c. current ratio. d. receivable turnover. ANS: B PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 41. Return on assets is most closely related to a. inventory turnover and profit margin. b. profit margin and asset turnover. c. interest coverage and the debt to equity ratios. d. profit margin and the debt to equity ratio. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

ANS: B PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 42. Which of the following ratios involves the market price of a company's stock? a. Return on equity b. Cash flow yield c. Profit margin d. Dividends yield ANS: D PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 43. Liquidity ratios are an indication of a company's a. ability to pay bills when they are due and to meet unexpected needs for cash. b. overall debt position. c. overall debt to equity position. d. ability to effectively employ its resources. ANS: A PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 44. The calculation of free cash flow contains a deduction for a. interest expense. b. dividends. c. net cash flows from operating activities. d. depreciation. ANS: B PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 45. The current ratio is a a. long-term solvency ratio. b. market strength ratio. c. profitability ratio. d. liquidity ratio. ANS: D PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 46. The receivable turnover and inventory turnover ratios are used to analyze a. profitability. b. liquidity. c. long-term solvency. d. leverage.

ANS: B PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 47. Days' inventory on hand is used to analyze a. long-term solvency. b. cash flow adequacy. c. profitability. d. liquidity. ANS: D PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 48. Which of the following describes the interest coverage ratio? a. Income after income taxes plus interest expense divided by interest expense b. Income before income taxes plus interest expense divided by interest expense c. Income after income taxes divided by interest expense d. Income before income taxes minus interest expense divided by interest expense ANS: B PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 49. Which of the following describes the asset turnover ratio? a. Average total assets divided by net income b. Average total assets divided by sales c. Net sales divided by average total assets d. Net sales divided by net income ANS: C PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 50. Which of the following describes the return on assets ratio? a. Net income divided by average total assets b. Net income plus income tax expense divided by average total assets c. Average total assets divided by net sales d. Average total assets divided by net income ANS: A PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 51. Which of the following best describes the debt to equity ratio? a. Stockholders' equity divided by total liabilities b. Average total assets divided by stockholders' equity c. Average total assets divided by total liabilities d. Total liabilities divided by stockholders' equity

ANS: D PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 52. The number of days' sales uncollected is determined by dividing a. the number of days in a year by average accounts receivable. b. sales by average accounts receivable. c. the number of days in a year by the receivable turnover. d. net income by average accounts receivable. ANS: C PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 53. Days' payable is a measure of a. volatility. b. long-term solvency. c. profitability. d. operating asset management. ANS: D PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 54. Cash flows to sales and cash flows to assets are measured in terms of a. times. b. a percentage. c. dollars. d. days. ANS: B PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 55. Which of the following is a leverage ratio? a. Return on equity b. Dividends yield c. Debt to equity ratio d. Payables turnover ANS: C PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 56. Which of the following is not a profitability ratio? a. Return on equity b. Return on assets c. Asset turnover d. Quick ratio

ANS: D PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 57. Free cash flow is measured in terms of a. a percentage. b. dollars. c. days. d. times. ANS: B PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 58. The price/earnings (P/E) ratio is measured in terms of a. dollars. b. days. c. a percentage. d. times. ANS: D PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 59. Net income is needed to calculate all of the following ratios, except a. return on assets. b. profit margin. c. return on equity. d. asset turnover. ANS: D PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 60. Cost of goods sold is needed to calculate a. payables turnover. b. the quick ratio. c. days' payable. d. days' sales uncollected. ANS: A PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 61. Market strength refers most closely to the ability to a. increase the wealth of stockholders. b. pay bills when they fall due. c. survive for many years. d. earn a satisfactory net income.

ANS: A PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 62. A quick ratio that is much smaller than the current ratio indicates that a. inventories represent a large portion of current assets. b. the company has a low inventory turnover. c. the company has a high inventory turnover. d. inventories represent a small portion of current assets. ANS: A PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 63. A high receivable turnover indicates that a. the company's inventory is moving very quickly. b. a large proportion of the company's sales is on credit. c. many customers are defaulting on their debts. d. customers are making payments very quickly. ANS: D PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 64. The receivable turnover amount is needed to calculate the a. inventory turnover. b. days' sales uncollected. c. days' inventory on hand. d. interest coverage ratio. ANS: B PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 65. A company that is leveraged is one that a. has a high earnings per share. b. contains equity financing. c. has minimized its risk of loss by acquiring a portfolio of investments. d. contains debt financing. ANS: D PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 66. The length of the operating cycle equals the days' sales uncollected plus the a. receivable turnover. b. days' payable. c. days' inventory on hand. d. payables turnover.

ANS: C PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 67. An increase in which of the following ratios is considered unfavorable? a. Cash flow yield b. Current ratio c. Price/earnings (P/E) ratio d. Debt to equity ratio ANS: D PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 68. An increase in which of the following ratios is considered unfavorable? a. Interest coverage ratio b. Cash flows to assets c. Quick ratio d. Days' sales uncollected ANS: D PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 69. Following are the financial statements for Starman Corporation for the year ended December 31, 2013. Assume that all balance sheet amounts represent both average and ending figures. Starman Corporation Balance Sheet December 31, 2013 Assets Cash Marketable securities Accounts receivable Inventory Long-term receivables Property, plant, and equipment Total assets

$ 20,000 30,000 50,000 100,000 35,000 65,000 $300,000

Liabilities and Stockholders' Equity Current liabilities Long-term liabilities Stockholders' equity Total liabilities and stockholders' equity

$100,000 60,000 140,000 $300,000

Starman Corporation Income Statement For the Year Ended December 31, 2013 Net sales Cost of goods sold Gross margin Operating expenses Income before income taxes Income taxes expense Net income

$400,000 240,000 $160,000 40,000 $120,000 30,000 $ 90,000

What is the current ratio for this corporation? a. 1.70 times b. 1.54 times c. 1.00 times d. 2.00 times ANS: D ($20,000 + $30,000 + $50,000 + $100,000) ÷ $100,000 = 2.00 times PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 70. Following are the financial statements for Starman Corporation for the year ended December 31, 2013. Assume that all balance sheet amounts represent both average and ending figures. Starman Corporation Balance Sheet December 31, 2013 Assets Cash Marketable securities Accounts receivable Inventory Long-term receivables Property, plant, and equipment Total assets

$ 20,000 30,000 50,000 100,000 35,000 65,000 $300,000

Liabilities and Stockholders' Equity Current liabilities Long-term liabilities Stockholders' equity Total liabilities and stockholders' equity

$100,000 60,000 140,000 $300,000

Starman Corporation Income Statement For the Year Ended December 31, 2013 Net sales Cost of goods sold Gross margin Operating expenses Income before income taxes Income taxes expense Net income

$400,000 240,000 $160,000 40,000 $120,000 30,000 $ 90,000

What is the receivable turnover for this corporation? a. 6.0 times b. 1.8 times c. 4.8 times d. 8.0 times ANS: D $400,000 ÷ $50,000 = 8.0 times PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 71. Following are the financial statements for Starman Corporation for the year ended December 31, 2013. Assume that all balance sheet amounts represent both average and ending figures. Starman Corporation Balance Sheet December 31, 2013 Assets Cash Marketable securities Accounts receivable Inventory Long-term receivables Property, plant, and equipment Total assets

$ 20,000 30,000 50,000 100,000 35,000 65,000 $300,000

Liabilities and Stockholders' Equity Current liabilities Long-term liabilities Stockholders' equity Total liabilities and stockholders' equity

$100,000 60,000 140,000 $300,000

Starman Corporation Income Statement For the Year Ended December 31, 2013 Net sales Cost of goods sold Gross margin Operating expenses Income before income taxes Income taxes expense Net income

$400,000 240,000 $160,000 40,000 $120,000 30,000 $ 90,000

What is the inventory turnover for this corporation? a. 1.6 times b. 1.2 times c. 2.4 times d. 4.0 times ANS: C $240,000 ÷ $100,000 = 2.4 times PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 72. Following are the financial statements for Starman Corporation for the year ended December 31, 2013. Assume that all balance sheet amounts represent both average and ending figures. Starman Corporation Balance Sheet December 31, 2013 Assets Cash Marketable securities Accounts receivable Inventory Long-term receivables Property, plant, and equipment Total assets

$ 20,000 30,000 50,000 100,000 35,000 65,000 $300,000

Liabilities and Stockholders' Equity Current liabilities Long-term liabilities Stockholders' equity Total liabilities and stockholders' equity

$100,000 60,000 140,000 $300,000

Starman Corporation Income Statement For the Year Ended December 31, 2013 Net sales Cost of goods sold Gross margin Operating expenses Income before income taxes Income taxes expense Net income

$400,000 240,000 $160,000 40,000 $120,000 30,000 $ 90,000

What is the return on assets for this corporation? a. 30.0 percent b. 75.0 percent c. 40.0 percent d. 53.3 percent ANS: A $90,000 ÷ $300,000 = 30.0 percent PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 73. Following are the financial statements for Starman Corporation for the year ended December 31, 2013. Assume that all balance sheet amounts represent both average and ending figures. Starman Corporation Balance Sheet December 31, 2013 Assets Cash Marketable securities Accounts receivable Inventory Long-term receivables Property, plant, and equipment Total assets

$ 20,000 30,000 50,000 100,000 35,000 65,000 $300,000

Liabilities and Stockholders' Equity Current liabilities Long-term liabilities Stockholders' equity Total liabilities and stockholders' equity

$100,000 60,000 140,000 $300,000

Starman Corporation Income Statement For the Year Ended December 31, 2013 Net sales Cost of goods sold Gross margin Operating expenses Income before income taxes Income taxes expense Net income

$400,000 240,000 $160,000 40,000 $120,000 30,000 $ 90,000

What is the profit margin for this corporation? a. 53.3 percent b. 40.0 percent c. 22.5 percent d. 30.0 percent ANS: C $90,000 ÷ $400,000 = 22.5 percent PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 74. Holiday Corporation provided these figures for the year ended December 31, 2013: Cost of goods sold, $516,117; change in inventory, $67,483 decrease; average accounts payable, $64,599. What is the company's payables turnover? Round your answer to one decimal place. a. 9.3 times b. 6.4 times c. 6.9 times d. 7.5 times ANS: C ($516,117 – $67,483) ÷ $64,599 = 6.9 times PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

75. The following information pertains to Jasmin Corporation. Assume that all balance sheet amounts represent both average and ending figures. Jasmin Corporation Partial Balance Sheet December 31, 2013 Liabilities and Stockholders' Equity Current liabilities Long-term liabilities Stockholders' equity Total liabilities and stockholders' equity

$ 60,000 90,000 150,000 $300,000

Jasmin Corporation Income Statement For the Year Ended December 31, 2013 Net sales Cost of goods sold Gross margin Operating expenses Income before income taxes Income taxes expense Net income

$80,000 45,000 $35,000 15,000 $20,000 5,000 $15,000

Jasmin Corporation had 6,000 shares of common stock issued and outstanding. The market price of Jasmin common stock on December 31, 2013, was $20. Jasmin paid dividends of $0.90 per share during 2013. What is the return on assets for this corporation? a. 5.0 percent b. 11.7 percent c. 26.7 percent d. 10.0 percent ANS: A $15,000 ÷ $300,000 = 5.0 percent PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

76. The following information pertains to Jasmin Corporation. Assume that all balance sheet amounts represent both average and ending figures. Jasmin Corporation Partial Balance Sheet December 31, 2013 Liabilities and Stockholders' Equity Current liabilities Long-term liabilities Stockholders' equity Total liabilities and stockholders' equity

$ 60,000 90,000 150,000 $300,000

Jasmin Corporation Income Statement For the Year Ended December 31, 2013 Net sales Cost of goods sold Gross margin Operating expenses Income before income taxes Income taxes expense Net income

$80,000 45,000 $35,000 15,000 $20,000 5,000 $15,000

Jasmin Corporation had 6,000 shares of common stock issued and outstanding. The market price of Jasmin common stock on December 31, 2013, was $20. Jasmin paid dividends of $0.90 per share during 2013. What is the return on equity for this corporation? a. 10.0 percent b. 23.3 percent c. 53.5 percent d. 5.0 percent ANS: A $15,000 ÷ $150,000 = 10.0 percent PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

77. The following information pertains to Jasmin Corporation. Assume that all balance sheet amounts represent both average and ending figures. Jasmin Corporation Partial Balance Sheet December 31, 2013 Liabilities and Stockholders' Equity Current liabilities Long-term liabilities Stockholders' equity Total liabilities and stockholders' equity

$ 60,000 90,000 150,000 $300,000

Jasmin Corporation Income Statement For the Year Ended December 31, 2013 Net sales Cost of goods sold Gross margin Operating expenses Income before income taxes Income taxes expense Net income

$80,000 45,000 $35,000 15,000 $20,000 5,000 $15,000

78. The following information pertains to Jasmin Corporation. Assume that all balance sheet amounts represent both average and ending figures. Jasmin Corporation Partial Balance Sheet December 31, 2013 Liabilities and Stockholders' Equity Current liabilities Long-term liabilities Stockholders' equity Total liabilities and stockholders' equity

$ 60,000 90,000 150,000 $300,000

Jasmin Corporation Income Statement For the Year Ended December 31, 2013 Net sales Cost of goods sold Gross margin Operating expenses Income before income taxes Income taxes expense Net income

$80,000 45,000 $35,000 15,000 $20,000 5,000 $15,000

Jasmin Corporation had 6,000 shares of common stock issued and outstanding. The market price of Jasmin common stock on December 31, 2013, was $20. Jasmin paid dividends of $1.55 per share during 2013. What is the dividends yield of this corporation? a. b. c. d.

9.30 percent 7.75 percent 4.65 percent 6.20 percent

a. b. c. d.

9.30 percent 7.75 percent 4.65 percent 6.20 percent

ANS: B $1.55 ÷ $20 = 7.75 percent PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

79. The following information pertains to Jasmin Corporation. Assume that all balance sheet amounts represent both average and ending figures. Jasmin Corporation Partial Balance Sheet December 31, 2013 Liabilities and Stockholders' Equity Current liabilities Long-term liabilities Stockholders' equity Total liabilities and stockholders' equity

$ 60,000 90,000 150,000 $300,000

Jasmin Corporation Income Statement For the Year Ended December 31, 2013 Net sales Cost of goods sold Gross margin Operating expenses Income before income taxes Income taxes expense Net income

$80,000 45,000 $35,000 15,000 $20,000 5,000 $15,000

Jasmin Corporation had 6,000 shares of common stock issued and outstanding. The market price of Jasmin common stock on December 31, 2013, was $20. Jasmin paid dividends of $0.90 per share during 2013. What is the price/earnings (P/E) ratio for this corporation? a. 6.2 times b. 7.2 times c. 8.2 times d. 9.7 times ANS: C Earnings per share: $15,000 ÷ 6,000 = $2.50 $20.50 ÷ $2.50 = 8.2 times PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 80. How would the collection of an account receivable affect the current ratio and the quick ratio, respectively? a. Increase in current ratio; increase in quick ratio b. No effect on current ratio; no effect on quick ratio c. No effect on current ratio; increase in quick ratio d. Decrease in current ratio; decrease in quick ratio

ANS: B PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 81. What is the effect of the payment of an account payable on the current ratio and the quick ratio, respectively? (Assume the current ratio was 2.3 times and the quick ratio was 2.1 times before this transaction.) a. Increase in current ratio; increase in quick ratio b. Decrease in current ratio; no effect on quick ratio c. Decrease in current ratio; decrease in quick ratio d. No effect on current ratio; no effect on quick ratio ANS: A PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 82. Assuming that the current ratio was 1.6 times and the quick ratio was 1.4 times, the entry to record the payment of a previously declared and recorded cash dividend will a. decrease the current ratio and the quick ratio. b. have no effect on the current ratio or the quick ratio. c. increase the current ratio and the quick ratio. d. increase the current ratio but have no effect on the quick ratio. ANS: C PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 83. A company with a current ratio of 2.4 times will see that ratio decrease when the company a. converts a short-term liability to a long-term liability. b. borrows cash by issuing a short-term note payable. c. declares a 10 percent stock dividend on its common stock. d. pays a large current liability. ANS: B PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 84. During the year, Dempsey Corporation's current ratio increased while its quick ratio decreased. Which of the following could help explain this situation? a. The sale of short-term investments during the year b. A decrease in accounts receivable during the year c. An increase in accounts payable during the year d. An increase in inventory levels during the year ANS: D PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

85. A company with $50,000 in current assets, $25,000 in quick assets, and $30,000 in current liabilities makes a payment of a $1,500 current debt. As a result of this transaction, the current ratio and quick ratio will a. both increase. b. both decrease. c. increase and decrease, respectively. d. remain the same and decrease, respectively. ANS: C PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis MATCHING Match each definition with the correct term below. a. The time that it takes to purchase inventory, sell it, and collect cash for it. b. The relationship of the more liquid current assets (cash, marketable securities or short-term investments, and receivables) to current liabilities. c. A technique for analyzing financial statements that uses percentages to show the relationship of the different parts to the total in a single statement. d. The substance of earnings and their sustainability into future accounting periods. e. All the techniques used to show important relationships in financial statements and to relate them to important financial objectives. f. A technique for analyzing financial statements that involves the computation of dollar amount changes and percentage changes from the previous to the current year. g. Large companies that have multiple segments and operate in more than one industry. h. Segments that are no longer a part of a company’s operations. i. A technique for analyzing financial statements in which meaningful relationships between components of the financial statements are shown. j. The measure of investors’ confidence in a company. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Financial performance measurement Diversified companies Quality of earnings Discontinued operations Horizontal analysis Ratio analysis Vertical analysis Operating cycle Price/earnings (P/E) ratio Quick ratio

1. ANS: E PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

OBJ: 1 LOC: Recall

2. ANS: G PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis 3. ANS: D PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Quality of earnings MSC: ACBSP-APC-23-Financial Statement Analysis 4. ANS: H PTS: 1 DIF: Easy OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Quality of earnings MSC: ACBSP-APC-23-Financial Statement Analysis 5. ANS: F PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis 6. ANS: I PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis 7. ANS: C PTS: 1 DIF: Easy OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis 8. ANS: A PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 9. ANS: J PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 10. ANS: B PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis SHORT ANSWER 1. Does the existence of conglomerates make financial performance evaluation easier or more difficult? Why? ANS: Conglomerates, or diversified companies, often operate in many unrelated industries. In addition, the conglomerate will normally report only on a consolidated basis. As a result, the use of industry norms becomes difficult because there may not be another conglomerate made up of the same group of industries. PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Reflective Thinking | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

LOC: Comprehension

2. For each of the performance objectives listed below, state the related financial objective term. To use debt effectively without jeopardizing the company’s future. To earn a satisfactory net income. To be able to pay bills when due and meet unexpected needs for cash. To use all of the company’s assets in a way that maximizes revenues while minimizing investment. e. To use current assets and current liabilities in a way that supports growth in revenues with minimum investment. a. b. c. d.

ANS: a. Financial risk b. Profitability c. Liquidity d. Total asset management e. Operating asset management PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis

LOC: Comprehension

3. Define quality of earnings and identify the factors that affect quality of earnings. ANS: Quality of earnings refers to the substance of a company’s earnings and the sustainability of those earnings in the future. Quality of earnings is affected by accounting methods, accounting estimates, and one-time items. PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Quality of earnings MSC: ACBSP-APC-23-Financial Statement Analysis 4. State whether each of the items below is an accounting method, an accounting estimate, or a one-time item. a. b. c. d. e. f. g. h. i.

Loss on sale of investments Length of useful life on long-term assets Straight-line versus accelerated depreciation Costs of restructuring FIFO versus LIFO Discontinued operations Percentage of net sales versus aging of accounts receivable Residual value of long-term assets Amortization periods

ANS: a. one-time item b. accounting estimate © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

c. accounting method d. one-time item e. accounting method f. one-time item g. accounting method h. accounting estimate i. accounting estimate PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Quality of earnings MSC: ACBSP-APC-23-Financial Statement Analysis 5. What is vertical analysis, and why is it useful in performing financial performance measurement? ANS: Vertical analysis will show what percentage a financial statement item is in relation to net revenues (in the case of the income statement) or to total assets or liabilities plus stockholders' equity (in the case of the balance sheet). A change in the percentages from one year to the next will be an indication to the financial analyst of the economic direction of the company. PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

LOC: Comprehension

6. What is horizontal analysis, and why is it useful in performing financial performance measurement? ANS: Horizontal analysis is the computation of dollar amount and percentage changes in the financial statements from one year to the next. Knowing how the individual accounts have changed, the analyst can make certain inferences about the economic direction of the company. PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

LOC: Comprehension

7. The following selected amounts were extracted from the financial statements of Flamingo Corporation.

Net sales Cost of goods sold Gross margin

Year 4

Year 3

Year 2

Year 1

$175,000 109,000 66,000

$170,000 104,500 65,500

$165,000 100,500 64,500

$150,000 93,000 57,000

Prepare a trend analysis for net sales, cost of goods sold, and gross margin. (Round answers to the nearest tenth of 1 percent.) Use Year 1 as the base year.

Year 4

Year 3

Year 2

Year 1

Year 4

Year 3

Year 2

Year 1

116.7 117.2 115.8

113.3 112.4 114.9

110.0 108.1 113.2

100.0 100.0 100.0

(In percentages) Net sales Cost of goods sold Gross margin ANS: (In percentages) Net sales* Cost of goods sold† Gross margin‡

*Year 1: 100 x ($150,000 ÷ $150,000) Year 2: 100 x ($165,000 ÷ $150,000) Year 3: 100 x ($170,000 ÷ $150,000) Year 4: 100 x ($175,000 ÷ $150,000) †

Year 1: 100 x ($93,000 ÷ $93,000) Year 2: 100 x ($100,500 ÷ $93,000) Year 3: 100 x ($104,500 ÷ $93,000) Year 4: 100 x ($109,000 ÷ $93,000) ‡

Year 1: 100 x ($57,000 ÷ $57,000) Year 2: 100 x ($64,500 ÷ $57,000) Year 3: 100 x ($65,500 ÷ $57,000) Year 4: 100 x ($66,000 ÷ $57,000) PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

LOC: Application

8. The following selected amounts were extracted from the financial statements of Bandera Corporation.

Net sales Cost of goods sold Gross margin

Year 4

Year 3

Year 2

Year 1

$342,000 206,000 138,000

$320,000 200,000 118,000

$308,000 194,000 132,000

$288,000 176,000 124,000

Prepare a trend analysis for net sales, cost of goods sold, and gross margin. (Round answers to the nearest tenth of 1 percent.) Use Year 1 as the base year.

Year 4

Year 3

Year 2

Year 1

Year 4

Year 3

Year 2

Year 1

118.8 117.0 111.3

111.1 113.6 95.2

106.9 110.2 106.5

100.0 100.0 100.0

(In percentages) Net sales Cost of goods sold Gross margin ANS: (In percentages) Net sales* Cost of goods sold† Gross margin‡

*Year 1: 100 x ($288,000 ÷ $288,000) Year 2: 100 x ($308,000 ÷ $288,000) Year 3: 100 x ($320,000 ÷ $288,000) Year 4: 100 x ($342,000 ÷ $288,000) †

Year 1: 100 x ($176,000 ÷ $176,000) Year 2: 100 x ($194,000 ÷ $176,000) Year 3: 100 x ($200,000 ÷ $176,000) Year 4: 100 x ($206,000 ÷ $176,000) ‡

Year 1: 100 x ($124,000 ÷ $124,000) Year 2: 100 x ($132,000 ÷ $124,000) Year 3: 100 x ($118,000 ÷ $124,000) Year 4: 100 x ($138,000 ÷ $124,000) PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

LOC: Application

9. Using the income statement below, develop a common-size statement by filling in the blanks provided. Show your work. Round to one decimal place.

Net sales Cost of goods sold Gross margin Operating expenses Income before income taxes Income taxes expense Net income

2013

$400,000 232,000 $168,000 92,000 $ 76,000 30,400 $ 45,600

_________ _________ _________ _________ _________ _________ _________

ANS: Net sales Cost of goods sold Gross margin Operating expenses Income before income taxes Income taxes expense Net income

2013 $400,000 232,000 $168,000 92,000 $ 76,000 30,400 $ 45,600

÷ ÷ ÷ ÷ ÷ ÷ ÷

$400,000 400,000 400,000 400,000 400,000 400,000 400,000

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

= = = = = = =

2013 100.0% 58.0 42.0% 23.0 19.0% 7.6 11.4%

LOC: Application

10. Using the income statement below, develop a common-size statement by filling in the blanks provided. Show your work. Round to one decimal place. 2013 2013 Net sales Cost of goods sold Gross margin Operating expenses Income before income taxes Income taxes expense Net income

$780,000 452,400 $327,600 156,000 $171,600 124,800 $ 46,800

_________ _________ _________ _________ _________ _________ _________

ANS: 2013 Net sales Cost of goods sold Gross margin Operating expenses Income before income taxes Income taxes expense Net income

$780,000 452,400 $327,600 156,000 $171,600 124,800 $ 46,800

÷ $780,000 ÷ 780,000 ÷ 780,000 ÷ 780,000 ÷ 780,000 ÷ 780,000 ÷ 780,000

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

= = = = = = =

2013 100.0% 58.0 42.0% 20.0 22.0% 16.0 6.0%

LOC: Application

11. Prepare a horizontal analysis by computing the amounts and percentage changes for the following balance sheet items; place your answers in the blanks provided. 2013

2012

Amount

Percentage

Current assets Property, plant, and equipment Total assets

$ 6,500 22,000 $28,500

$ 5,000 25,000 $30,000

Liabilities and Stockholders' Equity Liabilities Stockholders' equity Total liabilities and stockholders' equity

$ 5,500 23,000 $28,500

$10,000 20,000 $30,000

2013

2012

Amount

Percentage

Current assets Property, plant, and equipment Total assets

$ 6,500 22,000 $28,500

$ 5,000 25,000 $30,000

$1,500 (3,000) ($1,500)

30.0 (12.0) (5.0)

Liabilities and Stockholders' Equity Liabilities Stockholders' equity Total liabilities and stockholders' equity

$ 5,500 23,000 $28,500

$10,000 20,000 $30,000

($4,500) 3,000 ($1,500)

(45.0) 15.0 (5.0)

Assets

ANS: Assets

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

LOC: Application

12. Why is the quick ratio probably better than the current ratio as a measure of short-term liquidity? ANS: The current ratio includes all current assets in its numerator, including somewhat liquid or nonliquid items. The quick ratio is a better measure of short-term liquidity because it includes only those current assets that are highly liquid (cash, receivables, and short-term investments). PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Comprehension KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

13. Given the following information, calculate the payables turnover and days' payable. Round to two decimal places. Net sales Cost of goods sold Operating expenses Inventory increase Accounts payable, beginning Accounts payable, ending

$20,000,000 16,642,000 6,000,000 250,000 3,234,000 2,830,000

a. Payables turnover b. Days' payable ANS: a. 5.57 times {($16,642,000 + $250,000) ÷ [($3,234,000 + $2,830,000) ÷ 2]} b. 65.53 days (365 days ÷ 5.57 times) PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 14. The following data pertain to Bexar Corporation: Days' sales uncollected for 2013 Accounts receivable, 12/31/12 Accounts receivable, 12/31/13

25 $78,000 $82,000

Calculate the amount of net sales reported for 2013. Use 365 days per year. ANS: 365 ÷ Receivable turnover = 25 Receivable turnover = 14.6 14.6 = Net Sales ÷ [($82,000 + $78,000) ÷ 2] Net Sales = 14.6 x [($82,000 + $78,000) ÷ 2] = $1,168,000 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 15. The following information pertains to Briscoe Corporation: Profit margin for 2013 Total assets, 12/31/12 Total assets, 12/31/13 Net income, 2013

10.0% $860,000 $940,000 $92,000

Calculate the asset turnover ratio for 2013. Round your answer to two decimal places. ANS: Net income ÷ Net sales = Profit margin $92,000 ÷ Net sales = 10.0% Net sales = $920,000 Asset turnover = Net sales ÷ Average total assets Asset turnover = $920,000 ÷ [($940,000 + $860,000) ÷ 2] Asset turnover = 1.02 times PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 16. The following information pertains to Bailey Corporation: Profit margin for 2013 Total assets, 12/31/12 Total assets, 12/31/13 Net income, 2013

10.0% $430,000 $470,000 $ 30,000

Calculate the return on assets for 2013. Round your answer to two decimal places. ANS: Return on assets = Net income ÷ Average total assets Return on assets = $30,000 ÷ [($470,000 + $430,000) ÷ 2] Return on assets = 6.67% PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 17. For 2013, Black & White Corporation had average total assets of $300,000, net sales of $250,000, net income of $20,000, net cash flows from operating activities of $30,000, dividend payments of $15,000, purchases of plant assets of $70,000, and sales of plant assets of $30,000. Using this information, compute (a) cash flow yield, (b) cash flows to sales, (c) cash flows to assets, and (d) free cash flow. Round amounts to one decimal place. ANS: a. 1.5 times [$30,000 ÷ $20,000] b. 12 percent [$30,000 ÷ $250,000] c. 10 percent [$30,000 ÷ $300,000] d. ($25,000) [$30,000 – $15,000 – $70,000 + $30,000] PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis

18. For 2013, Castro Corporation had average total assets of $580,000, net sales of $480,000, net income of $30,000, net cash flows from operating activities of $40,000, dividend payments of $24,000, purchases of plant assets of $132,000, and sales of plant assets of $56,000. Using this information, compute (a) cash flow yield, (b) cash flows to sales, (c) cash flows to assets, and (d) free cash flow. Round amounts to one decimal place. ANS: a. 1.3 times [$40,000 ÷ $30,000] b. 8.3 percent [$40,000 ÷ $480,000] c. 6.9 percent [$40,000 ÷ $580,000] d. ($60,000) [$40,000 – $24,000 – $132,000 + $56,000] PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 19. a. Indicate the effect of a sale of merchandise on account (on credit) on each of the following items. Assume the selling price exceeds the cost of the inventory. Use "Increase," "Decrease," or "No effect" to express your answer for each, and place your answers in the spaces provided. Current ratio Quick ratio Inventory turnover Asset turnover b. Indicate the effect of a payment of an account payable on each of the following items. Assume that the first two ratios exceeded 1.0 before the transaction. Use "Increase," "Decrease," or "No effect" to express your answer for each, and place your answers in the spaces provided. Current ratio Quick ratio Return on equity Receivable turnover ANS: a. Current ratio Quick ratio Inventory turnover Asset turnover

Increase Increase Increase Increase

b Current ratio Quick ratio Return on equity Receivable turnover

Increase Increase No effect No effect

PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Analysis KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis PROBLEM 1. Lois Kent has owned and managed the operations of a small chain of sporting goods stores for the past two years. She has asked her administrative assistant to provide her with some annual reports of other companies that sell sporting goods as well as some published reports showing norms for the sporting goods industry so that Lois can compare the financial ratios of her company with those of other companies that sell sporting goods. Discuss the limitations of using comparisons with other companies and industry norms, which Lois needs to remember. ANS: Lois can learn some important things about her company by comparing her ratios to those of other companies, but she needs to remember the following limitations on such comparisons: 1. Some companies considered to be in her industry and included in the published norms may do more than just sell sporting goods. For example, some companies in the sporting goods industry may have development of new products or sales to professional teams as their mainstay of operations as opposed to sales through retail outlets. Thus, the financial ratios of these companies should not be used for comparison purposes. 2. Some companies that sell a large amount of sporting goods also sell other items. Wal-Mart and K-Mart would be examples of such companies that have a foothold in several industries. The ratios of companies like these would not be comparable to those of Lois's stores. 3. Companies in the same industry that differ significantly in size from that of Lois's company would have financial ratios that most likely should not be used for comparison purposes. Large companies have more liquid assets and greater buying power than a smaller company like Lois's. 4. Companies in the same industry may use different accounting methods than Lois does. The use of different methods for inventory costing and depreciation of assets, for example, would affect income statement and balance sheet amounts. Companies could appear to be different when perhaps they are very comparable. Lois could compare her ratios with these companies after recalculating their ratios using the same accounting methods that her company uses. PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Reflective Thinking | AICPA FN Decision Modeling LOC: Application KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis 2. Eva Gomez is considering investing money in the common stock of Casa Corporation. She has obtained the annual report of the company and calculated several financial ratios. Eva knows that her calculations are accurate, but does not know if the ratios indicate favorable or unfavorable things about the company. What three standards of comparison are available to Eva? What would each of the standards tell her about her ratios?

ANS: Three commonly used standards of comparison are rule-of-thumb measures, past performance of the company, and industry norms. Rule-of-thumb measures are overall standards not applicable to any specific industry. Eva could learn some of these from financial analysts or professors. These general standards would reveal any ratios that are significantly different from those of most other businesses. Eva could also investigate the past performance of the company. This would provide her with a history of company performance and indicate any positive or negative trends. The most informative of Eva's three options would be to compare her ratios with those of other companies in the same industry. This would tell her how well this company has performed relative to its competitors. She could find these from several published sources such as Dun & Bradstreet, The Wall Street Journal, Moody’s Investor Services, or Standard & Poor’s. PTS: 1 DIF: Moderate OBJ: 1 NAT: AACSB Reflective Thinking | AICPA FN Decision Modeling LOC: Application KEY: Financial performance measurement MSC: ACBSP-APC-23-Financial Statement Analysis 3. At the end of its first year of operations, Andrews Company calculated its depreciation expense using three different methods. Following are the calculations using these methods: Straight-line Double-declining balance Production

$45,000 78,000 62,000

Net income for Andrews Company using the straight-line method of depreciation is $92,000. Using this information, answer the following questions. calculate the following items: a. What would net income be using the double-declining balance method? b. What would net income be using the production method? ANS: a. $92,000 + $45,000 – $78,000 = $59,000 b. $92,000 + $45,000 – $62,000 = $75,000 PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Quality of earnings MSC: ACBSP-APC-23-Financial Statement Analysis 4. The following selected amounts were extracted from the financial statements of H225 Corporation.

Net sales Cost of goods sold Gross margin

Year 4

Year 3

Year 2

Year 1

$350,000 218,000 132,000

$340,000 209,000 131,000

$330,000 201,000 129,000

$300,000 186,000 114,000

Compute the following for net sales, cost of goods sold, and gross margin. (Round answers to the nearest tenth of 1 percent.) a. The percentage change from Year 1 to Year 2 © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

b. The percentage change from Year 2 to Year 3 c. The percentage change from Year 3 to Year 4 ANS: a. Net sales Cost goods sold Gross margin

b. Net sales Cost goods sold Gross margin

c. Net sales Cost goods sold Gross margin

10.0 percent increase [($330,000 - $300,000) ÷ $300,000] 8.1 percent increase [($201,000 - $186,000) ÷ $186,000] 13.2 percent increase [($129,000 - $114,000) ÷ $114,000] 3.0 percent increase [($340,000 - $330,000) ÷ $330,000] 4.0 percent increase [($209,000 - $201,000) ÷ $201,000] 1.6 percent increase [($131,000 - $129,000) ÷ $129,000] 2.9 percent increase [($350,000 - $340,000) ÷ $340,000] 4.3 percent increase [($218,000 - $209,000) ÷ $209,000] 0.8 percent increase [($132,000 - $131,000) ÷ $131,000]

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

LOC: Application

5. Prepare a trend analysis of the following data using 2011 as the base year. Place your answers in the chart provided. Comment on the trend.

Net sales Gross margin Net income

2013

2012

2011

$216,000 122,080 19,200

$220,000 117,600 21,600

$200,000 112,000 20,000

2013

2012

2011

Net sales Gross margin Net income

ANS: (In percentages) Net sales* Gross margin† Net income‡

2013 2012 2011 108 110 100 109 105 100 96 108 100

Comment: Year 2013 looks like the start of problems. Even though gross margin has improved, net income took a downturn. Quick action is needed to identify problems and take corrective action. *2011: 100 x ($200,000 ÷ $200,000) 2012: 100 x ($220,000 ÷ $200,000) 2013: 100 x ($216,000 ÷ $200,000) †

2011: 100 x ($112,000 ÷ $112,000) 2012: 100 x ($117,600 ÷ $112,000) 2013: 100 x ($122,080 ÷ $112,000) ‡

2011: 100 x ($20,000 ÷ $20,000) 2012: 100 x ($21,600 ÷ $20,000) 2013: 100 x ($19,200 ÷ $20,000) PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

LOC: Application

6. Prepare a trend analysis of the following data, using 2011 as the base year. Place your answers in the chart provided. Comment on the trend.

Net sales Net income

2013

2012

2011

$324,000 33,000

$330,000 31,800

$300,000 30,000

2013

2012

2011

Net sales Net income ANS: (In percentages) Net sales* Net income†

2013 2012 2011 108 110 100 110 106 100

Comment: Net income in relation to net sales is better in 2013 than in 2012, although net sales decreased in 2013. *2011: 100 x ($300,000 ÷ $300,000) 2012: 100 x ($330,000 ÷ $300,000) 2013: 100 x ($324,000 ÷ $300,000) †

2011: 100 x ($30,000 ÷ $30,000) 2012: 100 x ($31,800 ÷ $30,000) 2013: 100 x ($33,000 ÷ $30,000) PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

LOC: Application

7. Using the following information from an annual report, prepare a vertical analysis of the consolidated statement of earnings for the fiscal year ended June 30, 2013. (Round percentage answers to one decimal place.) June 30, 2013 Net sales Cost of sales Gross margin

(In millions) $23,724 16,642 $ 7,082

Selling, general, and administrative expenses Depreciation, amortization, and asset write-offs Total operating expenses

$ 5,486 556 $ 6,042

Income from operations Interest expense Interest and other income Earnings before income taxes

$ 1,040 (182) 22 $ 880

Income taxes Net earnings

322 558

June 30, 2013 (In millions)

% of Net Sales (In millions)

June 30, 2013 (In millions) $23,724 16,642 $ 7,082

% of Net Sales* (In millions) 100.0% 70.1 29.9%

Selling, general, and administrative expenses Depreciation, amortization and asset write-offs Total operating expenses

$ 5,486 556 $ 6,042

23.1% 2.3 25.5%

Income from operations Interest expense Interest and other income Earnings before income taxes

$ 1,040 (182) 22 $ 880

4.4% (0.8) 0.1 3.7%

Income taxes Net earnings

322 558

1.4 2.4%

Net sales Cost of sales Gross margin Selling, general, and administrative expenses Depreciation, amortization and asset write-offs Total operating expenses Income from operations Interest expense Interest and other income Earnings before income taxes Income taxes Net earnings ANS:

Net sales Cost of sales Gross margin

*Rounding has caused some calculations to not total precisely. PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

LOC: Application

8. Using the following information from an annual report, prepare a vertical analysis of the consolidated balance sheet at June 30, 2013. (Round percentage answers to one decimal place.) June 30, 2013 Cash and cash equivalents Accounts and other receivables Merchandise inventories Prepaid expenses and other current assets Total current assets

(In millions) $ 584 182 2,027 80 $2,873

Real estate, net Other, net Total property and equipment

$2,342 2,113 $4,455

Goodwill, net Other assets Total assets

Short-term borrowings Accounts payable Accrued expenses and other current liabilities Income taxes payable Total current liabilities

Long-term debt Deferred income taxes Other liabilities Total liabilities

$1,230 362 243 $4,673

Common stock Additional paid-in capital Retained earnings Foreign currency translation adjustments Treasury shares, at cost Total stockholders' equity Total liabilities and stockholders' equity

374 651 $8,353 278 1,617 836 107 $2,838

30 453 4,757 (137) (1,423) $3,680 $8,353

June 30, 2013 (In millions)

% of Total Assets (In millions)

Cash and cash equivalents Accounts and other receivables Merchandise inventories Prepaid expenses and other current assets Total current assets Real estate, net Other, net Total property and equipment Goodwill, net Other assets Total assets % of Equities Short-term borrowings Accounts payable Accrued expenses and other current liabilities Income taxes payable Total current liabilities Long-term debt Deferred income taxes Other liabilities Total liabilities Common stock Additional paid-in capital Retained earnings Foreign currency translation adjustments Treasury shares, at cost Total stockholders' equity Total liabilities and stockholders' equity

ANS:

Cash and cash equivalents Accounts and other receivables Merchandise inventories Prepaid expenses and other current assets Total current assets

June 30, 2013 % of Total Assets* (In millions) (In millions) $ 584 7.0% 182 2.2 2,027 24.3 80 1.0 $2,873 34.4%

Real estate, net Other, net Total property and equipment

$2,342 2,113 $4,455

28.0% 25.3 53.3%

Goodwill, net Other assets Total assets

4.5% 7.8 100.0%

Short-term borrowings Accounts payable Accrued expenses and other current liabilities Income taxes payable Total current liabilities

278 1,617 836 107 $2,838

% of Equities 3.3% 19.4 10.0 1.3 34.0%

Long-term debt Deferred income taxes Other liabilities Total liabilities

$1,230 362 243 $4,673

14.7% 4.3 2.9 55.9%

30 453 4,757 (137) (1,423) $3,680

0.4% 5.4 56.9 (1.6) (17.0) 44.1%

$8,353

100.0%

Common stock Additional paid-in capital Retained earnings Foreign currency translation adjustments Treasury shares, at cost Total stockholders' equity Total liabilities and stockholders' equity

374 651 $8,353

LOC: Application

9. Using the following information from an annual report, prepare a horizontal analysis of the consolidated statements of earnings. (Round percentage answers to one decimal place.) (In millions except per share data) Net sales Cost of sales Gross margin

6/30/2013 $11,862 8,321 $ 3,541

$ 2,743 $ 2,443 278 255 $ 3,021 $ 2,698 0 294 $ 3,021 $ 2,992 $ 520 ($ 13)

Interest expense Interest and other income Earnings (loss) before income taxes

6/30/2012 $11,170 8,191 $ 2,979

(91) 11 440

(102) 9 106)

Income taxes Net earnings (loss)

161 279

26 132)

Basic earnings (loss) per share

1.14

0.50)

(In millions except per share data) Net sales Cost of sales Gross margin

Increase (Decrease) 6/30/2013 6/30/2012 Amount Percentage

Selling, general, and administrative expenses Depreciation, amortization, and asset write-offs Total operating expenses Other charges Total operating expenses and other charges Income (loss) from operations Interest expense Interest and other income Earnings (loss) before income taxes Income taxes Net earnings (loss) Basic earnings (loss) per share

ANS:

(In millions except per share data) Net sales Cost of sales Gross margin Selling, general, and administrative expenses Depreciation, amortization, and asset write-offs Total operating expenses Other charges Total operating expenses and other charges Income (loss) from operations

Interest expense Interest and other income Earnings (loss) before income taxes

Increase (Decrease) 6/30/2013 6/30/2012 Amount Percentage $11,862 $11,170 $692 6.2% 8,321 8,191 130 1.6 $ 3,541 $ 2,979 $562 18.9 $ 2,743 $ 2,443 278 255

$300 23

12.3 9.0

$ 3,021 $ 2,698 0 294 $ 3,021 $ 2,992 $ 520 ($ 13)

$323 (294) $ 29 $533

12.0 (100.0) 1.0 4,100.0

(91) 11 440 ($

(11) 2 $546

(10.8) 22.2 515.1

Income taxes

(102) 9 106)

161

Net earnings (loss)

279 ($

26 132)

Basic earnings (loss) per share

1.14 ($

0.50)

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

135

519.2

$411

311.4

$1.64

328.0

LOC: Application

10. Using the following information reported in an annual report, prepare a horizontal analysis of the consolidated balance sheets. (Round percentage answers to one decimal place.) (In millions) Cash and cash equivalents Accounts and other receivables Merchandise inventories Prepaid expenses and other current assets Total current assets

6/30/2013 6/30/2012 $ 584 $ 410 182 204 2,027 1,902 80 81 $2,873 $2,597

Real estate, net Other, net Total property and equipment

$2,342 2,113 $4,455

$2,354 1,872 $4,226

Goodwill, net Other assets Total assets

374 651 $8,353

Short-term borrowings Accounts payable Accrued expenses and other current liabilities Income taxes payable Total current liabilities

278 1,617 836 107 $2,838

Long-term debt Deferred income taxes Other liabilities Total liabilities

$1,230 362 243 $4,673

$1,222 333 229 $4,275

Common stock Additional paid-in capital Retained earnings Foreign currency translation adjustments Treasury shares, at cost Total stockholders' equity Total liabilities and stockholders' equity

30 453 4,757 (137) (1,423) $3,680 $8,353

347 729 $7,899 156 1,415 696 224 $2,491

30 459 4,478 (100) (1,243) $3,624 $7,899

(In millions) Cash and cash equivalents Accounts and other receivables Merchandise inventories Prepaid expenses and other current assets Total current assets

6/30/2013

6/30/2012

Increase (Decrease) Amount Percentage

Real estate, net Other, net Total property and equipment Goodwill, net Other assets Total assets Short-term borrowings Accounts payable Accrued expenses and other current liabilities Income taxes payable Total current liabilities Long-term debt Deferred income taxes Other liabilities Total liabilities Common stock Additional paid-in capital Retained earnings Foreign currency translation adjustments Treasury shares, at cost Total stockholders' equity Total liabilities and stockholders' equity

ANS: (In millions) Cash and cash equivalents Accounts and other receivables Merchandise inventories Prepaid expenses and other current assets Total current assets

Increase (Decrease) 6/30/3013 6/30/2012 Amount Percentage $ 584 $ 410 $174 42.4 182 204 (22) (10.8) 2,027 1,902 125 6.6 80 81 (1) (1.2) $2,873 $2,597 $276 10.6

Real estate, net Other, net Total property and equipment

$2,342 2,113 $4,455

$2,354 1,872 $4,226

$(12) 241 $229

(0.5) 12.9 5.4

Goodwill, net Other assets Total assets

374 651 $8,353

347 729 $7,899

$ 27 (78) $454

7.8 (10.7) 5.7

Short-term borrowings Accounts payable Accrued expenses and other current liabilities Income taxes payable Total current liabilities

278 1,617 836 107 $2,838

156 1,415 696 224 $2,491

$122 202 140 (117) $347

78.2 14.3 20.1 (52.2) 13.9

Long-term debt Deferred income taxes Other liabilities Total liabilities

$1,230 362 243 $4,673

$1,222 333 229 $4,275

8 29 14 $398

0.7 8.7 6.1 9.3

30 459 4,478 (100) (1,243) $3,624

0 (6) 279 37 180 $ 56

0.0 (1.3) 6.2 37.0 14.5 1.5

$454

5.7

Common stock Additional paid-in capital Retained earnings Foreign currency translation adjustments Treasury shares, at cost Total stockholders' equity Total liabilities and stockholders' equity

30 453 4,757 (137) (1,423) $3,680 $8,353

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

$7,899

LOC: Application

11. The following selected amounts were extracted from the financial statements of Clay Corporation. (Round all answers below to one decimal place.) Year 4 Net sales Gross margin Net income

Year 3

$1,440,000 928,000 226,000

Year 2

$1,380,000 896,000 222,000

$1,320,000 872,000 216,000

Year 1 $1,200,000 800,000 200,000

a. Prepare a trend analysis for net sales, gross margin, and net income using Year 1 as the base year. Year 4

Year 3

Year 2

Year 1

(In percentages) Net sales Gross margin Net income b. For net sales, gross margin, and net income: 1. Calculate the percentage change from Year 1 to Year 2. 2. Calculate the percentage change from Year 2 to Year 3. c. For each of the four years, compute the percentage relationship of gross margin to net sales and the relationship of net income to net sales. Year 4

Year 3

Year 2

Year 1

Gross margin to net sales Net income to net sales d. Identify which requirement(s) above involve(s): 1. Horizontal analysis 2. Vertical analysis Round all answers to the nearest tenth of 1 percent. ANS: a. (In percentages) Net sales* Gross margin† Net income‡

Year 4

Year 3

Year 2

Year 1

120.0 116.0 113.0

115.0 112.0 111.0

110.0 109.0 108.0

100.0 100.0 100.0

*Year 1: 100 x ($1,200,000 ÷ $1,200,000) Year 2: 100 x ($1,320,000 ÷ $1,200,000) Year 3: 100 x ($1,380,000 ÷ $1,200,000) Year 4: 100 x ($1,440,000 ÷ $1,200,000) †

Year 1: 100 x ($800,000 ÷ $800,000)

Year 2: 100 x ($872,000 ÷ $800,000) Year 3: 100 x ($896,000 ÷ $800,000) Year 4: 100 x ($928,000 ÷ $800,000) ‡

Year 1: 100 x ($200,000 ÷ $200,000) Year 2: 100 x ($216,000 ÷ $200,000) Year 3: 100 x ($222,000 ÷ $200,000) Year 4: 100 x ($226,000 ÷ $200,000) b. 1. Net sales Gross margin Net income

10.0 percent [($1,320,000 - $1,200,000) $1,200,000] 9.0 percent [($872,000 - $800,000) $800,000] 8.0 percent [($216,000 - $200,000) $200,000]

2. Net sales Gross margin Net income

4.5 percent [($1,380,000 - $1,320,000) $1,320,000] 2.8 percent [($896,000 - $872,000) $872,000] 2.8 percent [($222,000 - $216,000) $216,000]

Gross margin to net sales* Net income to net sales†

Year 4

Year 3

Year 2

Year 1

64.4% 15.7%

64.9% 16.1%

66.1% 16.4%

66.7% 16.7%

*Year 1: $800,000 ÷ $1,200,000 Year 2: $872,000 ÷ $1,320,000 Year 3: $896,000 ÷ $1,380,000 Year 4: $928,000 ÷ $1,440,000 †

Year 1: $200,000 ÷ $1,200,000 Year 2: $216,000 ÷ $1,320,000 Year 3: $222,000 ÷ $1,380,000 Year 4: $226,000 ÷ $1,440,000 d. 1. Requirements a and b 2. Requirement c PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis

LOC: Analysis

12. Contrast the circumstances where horizontal analysis would be an effective analysis tool with those where common-sized analysis would be more useful. ANS: Horizontal analysis reveals meaningful information about changes in a particular line item on a financial statement. It compares an account or account group balance to some past balance. As an example, if a company's salaries expense is 8 percent higher this year than last year, it can be compared to an industry average. Horizontal analysis can also determine if a significant increase in advertising expense has created a significant increase in sales. Common-sized, or vertical, analysis reveals the proportional size of accounts or account groups when compared to the same account. For example, every line item on an income statement can be expressed as a percentage of net revenues. This informs the analyst how each dollar of revenue is allocated through operations. Calculations such as this are often presented in the form of a pie chart, with each piece representing portions of some common whole. PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Reflective Thinking | AICPA FN Decision Modeling LOC: Critical Thinking KEY: Tools and techniques of financial analysis MSC: ACBSP-APC-23-Financial Statement Analysis 13. From the following information, compute the ratios indicated and place the proper numbers in the spaces provided. Assume the average for the year is the same as the ending balances for the balance sheet accounts. Round percentages to one decimal place, and show your work. Westwood Corporation Balance Sheet December 31, 2013 Assets Cash Marketable securities Accounts receivable (net) Inventory Prepaid expenses Property, plant, and equipment Total assets

$ 15,000 10,000 20,000 30,000 8,000 117,000 $200,000

Liabilities and Stockholders' Equity Current liabilities Long-term liabilities Stockholders' equity Total liabilities and stockholders' equity

$ 30,000 50,000 120,000 $200,000

Westwood Corporation Income Statement For the Year Ended December 31, 2013 Net sales Cost of goods sold Gross margin Operating expenses Selling and administrative expenses Interest expense Income taxes expense Net income

$160,000 120,000 $ 40,000 $ 16,000 8,000 4,000

28,000 $ 12,000

Westwood had 4,000 shares of common stock issued and outstanding. The market price of common stock at year end was $15.00 per share. Dividends paid in 2013 were $0.60 per share. Current ratio Quick ratio Receivable turnover Days' sales uncollected Inventory turnover Profit margin Dividends yield

Asset turnover Return on assets Return on equity Debt to equity ratio Interest coverage ratio Days' inventory on hand Price/earnings (P/E) ratio

ANS: Current ratio ($83,000* ÷ $30,000) Quick ratio ($45,000* ÷ $30,000) Receivable turnover ($160,000 ÷ $20,000) Days' sales uncollected (365 ÷ 8) Inventory turnover ($120,000 ÷ $30,000) Profit margin ($12,000 ÷ $160,000) Dividends yield ($0.60 ÷ $15.00)

2.8 times 1.5 times 8.0 times 45.6 days

4.0 times 7.5% 4.0%

Asset turnover ($160,000 ÷ $200,000)

0.8 times

Return on assets ($12,000 ÷ $200,000) 6.0% Return on equity ($12,000 ÷ $120,000) 10.0% Debt to equity ratio ($80,000* ÷ $120,000) 0.7 times Interest coverage ratio ($12,000 + $4,000 + $8,000) ÷ $8,000 3.0 times Days' inventory on hand (365 ÷ 4.0) 91.3 days Price/earnings (P/E) ratio ($15 ÷ $3*) 5.0 times

*Extra Calculations: Current Assets: $15,000 + $10,000 + $20,000 + $30,000 + $8,000 = $83,000 Quick Assets: $15,000 + $10,000 + $20,000 = $45,000 Total Debt: $30,000 + $50,000 = $80,000 Earnings per Share: $12,000 ÷ 4,000 = $3 © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 14. Financial statements for Boston Corporation are presented below. Boston Corporation Comparative Balance Sheet December 31 Assets Cash Accounts receivable (net) Inventory Property, plant, and equipment (net) Total assets

2013 $

120,000 135,000 270,000 750,000 $1,275,000

Liabilities and Stockholders' Equity Accounts payable $ 152,000 Accrued liabilities 12,000 Bonds payable, 10 percent 160,000 Common stock, $10 par 500,000 Retained earnings 451,000 Total liabilities and stockholders' equity $1,275,000

2012 $ 110,000 95,000 240,000 800,000 $1,245,000

208,000 16,000 160,000 500,000 361,000 $1,245,000

Boston Corporation Income Statement For the Year Ended December 31, 2013 Net sales Cost of goods sold Gross margin Operating expenses Depreciation expense Interest expense Other expenses Income before income taxes Income taxes expense Net income

$1,200,000 700,000 $ 500,000 $ 70,000 10,000 260,000

340,000 $ 160,000 40,000 $ 120,000

Payables turnover Days' inventory on hand Interest coverage ratio Return on equity

ANS: Current ratio ($525,000* ÷ $164,000*) 3.20 times Receivable turnover ($1,200,000 ÷ $115,000*)

10.43 times

Inventory turnover ($700,000 ÷ $255,000*) 2.75 times Asset turnover ($1,200,000 ÷ $1,260,000*) 0.95 times

Payables turnover [($700,000 + $30,000) ÷ $180,000*] Days' inventory on hand (365 ÷ 2.75) Interest coverage ratio [($160,000 + $10,000) ÷ $10,000] Return on equity ($120,000 ÷ $906,000*)

4.06 times 132.73 days

17.0 times 13.25%

*Additional Calculations: Current assets: $120,000 + $135,000 + $270,000 = $525,000 Current liabilities: $152,000 + $12,000 = $164,000 Average accounts receivable: ($135,000 + $95,000) ÷ 2 = $115,000 Average inventory: ($270,000 + $240,000) ÷ 2 = $255,000 Average total assets: ($1,275,000 + $1,245,000) ÷ 2 = $1,260,000 Average accounts payable: ($152,000 + $208,000) ÷ 2 = $180,000 Average stockholders’ equity: ($500,000 + $451,000 + $500,000 + $361,000) ÷ 2 = $906,000 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 15. Financial statements for Cancun Corporation are presented below. Cancun Corporation Comparative Balance Sheet December 31 Assets Cash Accounts receivable (net) Inventory Property, plant, and equipment (net) Total assets

2013 $ 120,000 135,000 270,000 750,000 $1,275,000

2012 $ 110,000 95,000 240,000 800,000 $1,245,000

208,000 16,000 160,000 500,000 361,000 $1,245,000

Cancun Corporation Income Statement For the Year Ended December 31, 2013 Net sales Cost of goods sold Gross margin Operating expenses Depreciation expense Interest expense Other expenses Income before income taxes Income taxes expense Net income

$1,200,000 700,000 $ 500,000 $ 70,000 10,000 260,000

340,000 $ 160,000 40,000 $ 120,000

Note: Dividends of $0.60 per share were declared and paid during 2013. The market price of the stock on December 31, 2013 was $18.00 per share. Compute the following for 2013 and place your answers in the spaces provided. Round answers to two decimal places. Show your work. Quick ratio Days' sales uncollected Profit margin Return on assets ANS: Quick ratio ($255,000* ÷ $164,000*) Days' sales uncollected (365 ÷ 10.43*) Profit margin ($120,000 ÷ $1,200,000) Return on assets ($120,000 ÷ $1,260,000*)

Days' payable Debt to equity ratio Price/earnings (P/E) ratio Dividends yield

1.55 times 35 days 10.0% 9.52%

Days' payable (365 ÷ 4.06*) Debt to equity ratio ($324,000* ÷ $951,000*) Price/earnings (P/E) ratio ($18.00 ÷ $2.40*) Dividends yield ($0.60 ÷ $18)

89.90 days 0.34 times 7.5 times 3.33%

*Additional Calculations: Quick assets: $120,000 + $135,000 = $255,000 Current liabilities: $152,000 + $12,000 = $164,000 Receivable turnover: $1,200,000 ÷ [($135,000 + $95,000) ÷ 2] = 10.43 Average total assets: ($1,275,000 + $1,245,000) ÷ 2 = $1,260,000 Days’ payable: ($700,000 + $30,000) ÷ [($152,000 + $208,000) ÷ 2] = 4.06 Total debt: $152,000 + $12,000 + $160,000 = $324,000 Total stockholders’ equity: $500,000 + $451,000 = $951,000 Earnings per share: $120,000 ÷ ($500,000 ÷ $10) = $2.40 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

16. Use the following information to calculate the ratios requested below. Round answers to one decimal place. Show your work. Average inventory Average total assets Cost of goods sold Income taxes expense Interest expense Net income Net sales Market price, December 31, on 2,000 shares Return on assets Price/earnings (P/E) ratio

$ 6,000 80,000 21,000 3,600 2,000 4,800 40,000 $36/share

Inventory turnover Interest coverage ratio

ANS: Return on assets ($4,800 ÷ $80,000)

6.0%

Price/earnings (P/E) ratio ($36 ÷ ($4,800 ÷ 2,000))

15 times

Inventory turnover ($21,000 ÷ $6,000) 3.5 times Interest coverage ratio [($4,800 + $3,600 + $2,000) ÷ $2,000] 5.2 times

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 17. Use the following information to calculate the ratios requested below. Round answers to one decimal place. Show your work. Average inventory Average total assets Cost of goods sold Income taxes expense Interest expense Net income Net sales Market price, December 31, on 2,000 shares Return on assets Price/earnings (P/E) ratio

$ 4,500 50,000 15,750 2,700 1,500 3,200 30,000 $48/share

Inventory turnover Interest coverage ratio

ANS: Return on assets ($3,200 ÷ $50,000)

6.4%

Price/earnings (P/E) ratio ($48 ÷ ($3,200 ÷ 2,000))

30 times

Inventory turnover ($15,750 ÷ $4,500) 3.5 times Interest coverage ratio [($3,200 + $2,700 + $1,500) ÷ $1,500] 4.9 times

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 18. Use the following information to calculate the ratios requested below. Round answers to one decimal place. Show your work. Average total assets Current assets, December 31 Current liabilities, December 31 Dividends paid Stockholder’s equity, December 31 Net sales Total liabilities, December 31 Market price, December 31, on 2,000 shares Dividends yield Current ratio ANS: Dividends yield [($7,000 ÷ 2,000) ÷ $70] Current ratio ($32,000 ÷ $10,000)

$112,500 32,000 10,000 7,000 62,500 270,000 50,000 $70/share

Debt to equity ratio Asset turnover

Debt to equity ratio ($50,000 ÷ $62,500) Asset turnover ($270,000 ÷ $112,500)

5.0% 3.2 times

0.8 times 2.4 times

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 19. Use the following information to calculate the ratios requested below. Round answers to one decimal place. Show your work. Average total assets Current assets, December 31 Current liabilities, December 31 Dividends paid Stockholder’s equity, December 31 Net sales Total liabilities, December 31 Market price, December 31, on 2,500 shares Dividends yield Current ratio

$ 256,500 72,000 22,500 15,750 150,000 637,500 105,000 $150/share

Debt to equity ratio Asset turnover

ANS: Dividends yield [($15,750 ÷ 2,500) ÷ $150] Current ratio ($72,000 ÷ $22,500)

4.2% 3.2 times

Debt to equity ratio ($105,000 ÷ $150,000) Asset turnover ($637,500 ÷ $256,500)

0.7 times 2.5 times

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Application KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis 20. After each of the following transactions is a ratio. Mark an X in the appropriate space to indicate the effect of the transaction on the ratio. Transaction

Ratio Increase

Effect Decrease

None

a. Declaration of cash dividend. Quick ratio b. Paid an account payable. Current ratio c. Wrote off an account receivable. Receivable turnover d. Collected an account receivable. Return on assets e. Sold merchandise on account. Current ratio f. Recorded utilities expense. Profit margin g. Converted bonds into stock. Debt to equity ratio h. Sold merchandise on account. Inventory turnover i. Paid previously declared dividend. Dividends yield j. Purchased treasury stock. Return on equity ANS: Transaction

Ratio Increase

a. Declaration of cash dividend. Quick ratio b. Paid an account payable. Current ratio* c. Wrote off an account receivable. Receivable turnover d. Collected an account receivable. Return on assets e. Sold merchandise on account. Current ratio f. Recorded utilities expense. Profit margin g. Converted bonds into stock. Debt to equity ratio h. Sold merchandise on account. Inventory turnover i. Paid previously declared dividend. Dividends yield j. Purchased treasury stock. Return on equity

Effect Decrease X X

None

X X X X X X X X

*Depends on whether the current ratio is assumed to be greater or less than 1. PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement LOC: Critical Thinking KEY: Ratio analysis MSC: ACBSP-APC-23-Financial Statement Analysis © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 14 - Investments TRUE/FALSE 1. Gains and losses on the sale of investments appear as adjustments within the financing activities section of the statement of cash flows. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Gains and losses on investments MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 1 LOC: Recall

2. Another term for short-term investments is marketable securities. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Short-term investments MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 1 LOC: Recall

3. Investments with a maturity of less than ninety days are generally classified as cash equivalents. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Short-term investments MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 1 LOC: Recall

4. As long as an investment can be sold within a short period of time, it must be classified as a current asset. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Short-term investments MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 1 LOC: Recall

5. Available-for-sale securities may only be classified as short-term investments. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Short-term investments MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 1 LOC: Recall

6. A noninfluential and noncontrolling investment is defined as ownership of less than 10 percent of the stock of another company. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Noninfluential and noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 1 LOC: Recall

7. An influential but noncontrolling investment is defined as ownership of more than 50 percent of the stock of another company. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Influential but noncontrolling interest MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 1 LOC: Recall

8. A controlling investment is defined as ownership of 100 percent of the stock of another company. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Controlling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 1 LOC: Recall

9. Detailed information about a company's investments is never disclosed in the notes to the financial statements. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Classification of investments MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 1 LOC: Recall

10. Insider trading is considered unethical, but it is not illegal in the United States. ANS: F PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA BB Legal LOC: Recall MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 1 KEY: Professional ethics

11. An individual can be prosecuted by the SEC for insider trading whether or not that individual is employed by the company involved. ANS: T PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA BB Legal LOC: Recall MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 1 KEY: Professional ethics

12. Investments are valued on the balance sheet at the original purchase price, even if the price has changed since the date of purchase. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Classification of investments MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 1 LOC: Comprehension

13. If a long-term investment suffers a permanent decline in value, a loss only has to be recorded if the investment is sold. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Gains and losses on investments MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 1 LOC: Comprehension

14. Held-to-maturity securities are always debt securities, and never equity securities. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Held-to-maturity securities MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 1 LOC: Comprehension

15. Unrealized gains and losses on trading securities appear on the balance sheet. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Trading securities MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 2 LOC: Recall

16. Trading securities are valued on the balance sheet at market value. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Trading securities MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 2 LOC: Recall

17. Unrealized gains and losses on available-for-sale securities are reported on the balance sheet. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Available-for-sale securities MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 2 LOC: Recall

18. The account Allowance to Adjust Short-Term Investments to Market appears as a contra account on the income statement. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Short-term investments MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 2 LOC: Recall

19. Unless there is evidence to the contrary, an investor owning 35 percent of the stock of an investee is assumed to have significant influence. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Influential but noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 3 LOC: Recall

20. An ownership interest of greater than 50 percent is required for an investor to have accounting control over an investee. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Controlling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 3 LOC: Recall

21. The equity method usually is the most appropriate method for accounting for investments of more than a 20 percent interest of another company’s stock. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Influential but noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 3 LOC: Recall

22. Under the equity method of accounting for a stock investment, a proportionate share of the investee's income is recorded on the investor's records. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Influential but noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 3 LOC: Recall

23. When the cost-adjusted-to-market method is used to account for an investment in stock, dividends received are accounted for as an increase to dividend income. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Noninfluential and noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 3 LOC: Recall

24. For available-for-sale securities, the Unrealized Loss on Long-Term Investments account appears on the income statement. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Available-for-sale securities MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 3 LOC: Recall

25. Using the cost-adjusted-to-market method of accounting for a long-term investment in stock, the journal entry to record the receipt of dividends involves a debit to Dividend Income. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Noninfluential and noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 3 LOC: Recall

26. The Allowance to Adjust Long-Term Investments to Market account is placed in the asset section of the balance sheet. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Noninfluential and noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 3 LOC: Recall

27. When the equity method is used to account for an investment in stock, dividends received by the investor decrease the investment account. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Influential but noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 3 LOC: Recall

28. It is possible that an investor with less than a 50 percent ownership interest may qualify for accounting recognition of control and appropriately prepare consolidated financial statements. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Controlling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 3 LOC: Recall

29. When the cost of available-for-sale securities exceeds market value, the Allowance to Adjust Long-Term Investments to Market decreases Long-Term Investments on the balance sheet. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Long-term investments MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 3 LOC: Comprehension

30. It is not possible for one company to influence the operating policies of another company unless it owns more than a 50 percent interest in that company. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Controlling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 3 LOC: Comprehension

31. At any given balance sheet date, the balance of the Realized Gain on Long-Term Investments account is equal in amount to the balance of the Allowance to Adjust Long-Term Investments to Market account. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Noninfluential and noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 3 LOC: Comprehension

32. The cost-adjusted-to-market method of accounting for investments allows for a departure from cost when the market value of the investment falls below or rises above cost. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Noninfluential and noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 3 LOC: Comprehension

33. When the market value of available-for-sale securities exceeds cost, an unrealized loss appears in stockholders' equity as an addition. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Short-term investments MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 3 LOC: Comprehension

34. Dividends received on investments are accounted for in the same way under the cost-adjusted-to-market and the equity methods. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Long-term investments in equity securities MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 3 LOC: Comprehension

35. When the equity method is used to account for an investment in stock, the investor will report its share of the investee's annual earnings as income in proportion to how much the investee distributes in the form of dividends. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Influential but noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 3 LOC: Comprehension

36. With few exceptions, all subsidiaries in which the parent company owns a controlling interest (more than 50 percent) must be consolidated with the parent company for financial reporting purposes. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Recall

37. In preparing consolidated financial statements, intercompany receivables and payables are never eliminated because they represent amounts due to or receivable from parties outside the consolidated entity. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Recall

38. When a parent company and a 100 percent owned subsidiary company are consolidated using the purchase method, only the stockholders' equity of the parent company remains. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Recall

39. Elimination entries appear only in the worksheets used to prepare the consolidated financial statements and not in the consolidated journal or the consolidated ledger. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Recall

40. Goodwill is the amount by which specific assets of a subsidiary are undervalued. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Recall

41. A minority interest represents the holdings of stockholders, other than the parent company, who own more than 50 percent of the voting stock of a subsidiary. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Recall

42. Minority interest may be found in the asset section of a consolidated balance sheet. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Recall

43. A Goodwill from Consolidation account may rise when a parent acquires a subsidiary company's common stock at a price that is less than the stock's book value. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Recall

44. When a parent company pays less than book value for an investment in a subsidiary, the excess of book value over the cost of the investment should be used to lower the carrying value of the subsidiary's long-term assets (other than long-term marketable securities) in preparing the consolidated financial statements. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Recall

45. Only the intercompany transactions resulting in revenues require elimination entries in the preparation of a consolidated income statement. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated income statement MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Recall

46. Only sales to outsiders and purchases from outsiders are reflected in a consolidated income statement because all intercompany transactions are eliminated in preparing the consolidated statement. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Recall

47. The financial information of a foreign subsidiary should be included in the consolidated statements of the parent. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Restatement of foreign subsidiary financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Recall

48. The reporting currency is defined as the currency in which the consolidated financial statements are presented. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Restatement of foreign subsidiary financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Recall

49. The financial statements of a foreign subsidiary are never restated in terms of the reporting currency before consolidation takes place. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Restatement of foreign subsidiary financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Recall

50. If a parent company has four subsidiaries, there are five separate legal entities represented in this group. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Comprehension

51. The elimination of the investment in the subsidiary company is made against the investment account, common stock, and retained earnings of the subsidiary company. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Comprehension

52. Eliminations are important because they avoid double counting when consolidated financial statements are prepared. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Comprehension

53. If a parent company pays more than book value for a 100 percent owned subsidiary, goodwill could arise on the consolidated financial statements. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Comprehension

54. A company may pay more than book value for a subsidiary because the assets of the subsidiary are undervalued on its balance sheet. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Comprehension

55. An eliminating entry is required both when a subsidiary owes a parent company and when the parent owes the subsidiary. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Comprehension

56. Although the preparation of a consolidated balance sheet requires elimination entries, a consolidated income statement may always be prepared without any elimination entries. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated income statement MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Comprehension

57. U.S. Treasury bills are considered debt securities. ANS: T PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Investments in debt securities MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 5 LOC: Recall

58. Held-to-maturity securities are valued on the balance sheet at fair value. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Held-to-maturity securities MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 5 LOC: Recall

59. Held-to-maturity securities that will mature within one year are classified on the balance sheet as long-term investments and are valued at cost adjusted for the effects of interest. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Held-to-maturity securities MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 5 LOC: Recall

60. Most long-term bond investments are classified as held-to-maturity securities. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Long-term investments in bonds MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 5 LOC: Recall

61. Long-term bond investments that are classified as available-for-sale must be valued on the balance sheet at cost. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Long-term investments in bonds MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 5 LOC: Recall

62. All the interest income on U.S. Treasury bills is recorded at maturity. ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Held-to-maturity securities MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 5 LOC: Comprehension

63. When a company holds U.S. Treasury bills, it would debit Interest Income and credit Short-Term Investments at the end of the accounting period (assuming it is prior to the T-bills' maturity). ANS: F PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Held-to-maturity securities MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 5 LOC: Comprehension

64. When bonds are purchased between interest dates, the buyer must pay (in addition to the bonds' cost) the amount of interest that has accrued since the last interest payment date. ANS: T PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Long-term investments in bonds MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 5 LOC: Comprehension

MULTIPLE CHOICE 1. The cash amounts of purchases and sales of investments appear in which section of the statement of cash flows? a. Operating activities b. Investing activities c. Financing activities d. Noncash investing and financing activities ANS: B PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Classification of investments MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 1 LOC: Recall

2. Which of the following is not a category of investments? a. Held-to-maturity securities b. Trading securities c. Collateral securities d. Available-for-sale securities ANS: C PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Classification of investments MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 1 LOC: Recall

3. Which of the following categories of investments are debt, but not equity, securities? a. Trading securities b. Held-to-maturity securities c. Available-for-sale securities d. Both trading and available-for-sale securities ANS: B PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Held-to-maturity securities MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 1 LOC: Recall

4. Which of the following categories of investments can be both debt and equity securities? a. Available-for-sale securities b. Trading securities c. Held-to-maturity securities d. Both available-for-sale and trading securities ANS: D PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Trading securities | Available-for-sale securities MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 1 LOC: Recall

5. Which is the only type of investment that is always classified as short-term? a. Trading securities b. Held-to-maturity securities c. Available-for-sale securities d. Equity securities ANS: A PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Trading securities MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 1 LOC: Recall

6. Which type of investment, if any, could be classified as short- or long-term, as well as debt or equity? a. Available-for-sale securities b. Trading securities c. Held-to-maturity securities d. None of these are correct. ANS: A PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Available-for-sale securities MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 1 LOC: Recall

7. Significant influence is defined as owning what percent of the stock of another company? a. 15 to 60 percent b. More than 50 percent c. 20 to 50 percent d. 75 percent

ANS: C PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Influential but noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 1 LOC: Recall

8. A controlling investment is defined as owning what percent of the stock of another company? a. More than 50 percent b. 100 percent c. More than 75 percent d. 75 percent ANS: A PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Controlling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 1 LOC: Recall

9. All of the following are indications of significant influence over another company except a. exchange of managerial personnel. b. representation on the board of directors. c. technological dependency between the two companies. d. ownership of all of the other company's debt securities. ANS: D PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Influential but noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 1 LOC: Recall

10. In the United States, insider trading is considered a. unethical, but not illegal. b. neither unethical nor illegal. c. both unethical and illegal. d. illegal, but not unethical. ANS: C PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA BB Legal LOC: Recall MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 1 KEY: Professional ethics

11. All of the following are conditions that could affect the valuation of investments on the balance sheet except a. changes in the general purchasing power of the dollar. b. changes in the operations of investee companies. c. changes in the market value or fair value of the investments. d. changes caused by the passage of time. ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Valuation of investments MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 1 LOC: Comprehension

12. Short-term available-for-sale securities are valued on the balance sheet at a. market value. b. cost, adjusted for the effects of interest. c. cost. d. lower of cost or market. ANS: A PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Available-for-sale securities MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 2 LOC: Recall

13. Trading securities are valued on the balance sheet at a. lower of cost or market. b. cost. c. market value. d. cost, adjusted for the effects of interest. ANS: C PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Trading securities MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 2 LOC: Recall

14. Which of the following statements is true about investments categorized as trading securities? a. They are valued on the balance sheet at cost. b. They can consist of debt, but not equity, securities. c. They are purchased to be held to maturity. d. Changes in market value are reflected in net income. ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Trading securities MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 2 LOC: Comprehension

15. The year-end adjusting entry to reflect an increase in the value of trading securities includes a a. credit to Unrealized Gain on Short-Term Investments. b. credit to Short-Term Investments. c. credit to Allowance to Adjust Short-Term Investments to Market. d. credit to Realized Gain on Investments. ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Trading securities MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 2 LOC: Comprehension

16. Stock categorized as trading securities is purchased for $144,000. At year end, when the market value of the stock is $126,000, the adjusting entry that would be recorded is: a. Allowance to Adjust Short-Term Investments to Market Unrealized Loss on Investments

18,000

b. Unrealized Loss on Short-Term Investments Allowance to Adjust Short-Term Investments to Market

18,000

c. Allowance to Adjust Short-Term Investments to Market Short-Term Investments

18,000

d. Realized Loss on Investments Short-Term Investments

18,000

ANS: B $144,000 – $126,000 = $18,000 unrealized loss PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement KEY: Trading securities MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

17. The ability of an investing company to affect the operating and financial policies of another company, even though the investor holds less than 50 percent of the voting stock, is known as a. significant influence. b. control. c. minority interest. d. noninfluential control. ANS: A PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Influential but noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 3 LOC: Recall

18. The cost-adjusted-to-market method of accounting for investments is used when the investment is a. controlling. b. influential and noncontrolling. c. noninfluential and controlling. d. noninfluential and noncontrolling. ANS: D PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Noninfluential and noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 3 LOC: Recall

19. For available-for-sale equity securities, the Unrealized Loss on Long-Term Investments account should be reported as a(n) a. realized loss item on the income statement. b. prior period adjustment. c. separate item in the stockholders' equity section of the balance sheet. d. extraordinary item on the income statement. ANS: C PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Noninfluential and noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 3 LOC: Recall

20. The equity method generally should be used to account for an investment in stock when the level of ownership is a. between 20 and 50 percent. b. 10 percent or more. c. less than 20 percent. d. between 10 and 40 percent. ANS: A PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Influential but noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 3 LOC: Recall

21. When the cost-adjusted-to-market method is used to account for a long-term investment in stock of another company, the carrying value of the investment is directly affected by a. the dividend distributions of the investee. b. the earnings and dividend distributions of the investee. c. the earnings of the investee. d. neither the earnings nor the dividends of the investee. ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Noninfluential and noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 3 LOC: Comprehension

22. Under the cost-adjusted-to-market method of accounting for an investment, a. Dividend Income is credited when dividends are received. b. the investment account is credited when dividends are received. c. the investment account is credited when the investee reports a net income. d. Investment Income is credited when the invested reports a net income. ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Noninfluential and noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 3 LOC: Comprehension

23. A credit balance in the account Allowance to Adjust Long-Term Investments to Market is disclosed in the financial statements as a a. regular account in the stockholders' equity section of the balance sheet. b. contra account to Long-Term Investments. c. note to the financial statements. d. current asset. ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Noninfluential and noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 3 LOC: Comprehension

24. When the equity method is used to account for a long-term investment in stock of another company, the carrying value of the investment is affected by a. declines in the market value of the stock. b. the earnings and dividends of the investee. c. an excess of market price over cost. © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

d. neither the earnings nor the dividends of the investee. ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Influential but noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 3 LOC: Comprehension

25. All of the following are ways one corporation could affect the operating and financial policies of another corporation except a. analysis of data regarding profitability. b. material transactions between the companies. c. representation on the board of directors. d. exchange of managerial personnel. ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Influential but noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 3 LOC: Comprehension

26. Clay Corporation owns a 40 percent interest in the stock of Gilmer Corporation. During 2013, Gilmer pays $25,000 in dividends to Clay and reports $107,000 in net income. Clay Corporation's investment in Gilmer will increase Clay’s income before income taxes by a. $17,800. b. $42,800. c. $52,800. d. $32,800. ANS: B ($107,000 x .4) = $42,800 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Influential but noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

27. Rapp Corporation has invested in the stock of two other corporations, Hart Corporation and Hilker Corporation. Rapp does not own a controlling interest or exercise significant influence over either corporation. Rapp's accountant is preparing financial statements and has compiled the following information: Stock name

No. of shares

Cost

Market

Hart Hilker

1,000 500

$23,000 $27,500

$24,000 $25,500

What should be the balance in the Allowance to Adjust Long-Term Investments to Market account, based on the above information? a. $1,000 credit b. $2,000 debit c. $2,000 credit d. $1,000 debit ANS: A © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

($23,000 + $27,500) – ($24,000 + $25,500) = $1,000 credit PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Noninfluential and noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

28. Wirt Corporation owns 25 percent of the voting stock of Wood Corporation and accounts for the investment using the equity method. Wood reports a net loss of $20,000. Wirt Corporation's entry to record its share of loss is: a. Cash

5,000 Investment in Wood Corporation

5,000

b. Loss on Investments Investment in Wood Corporation

20,000

c. Loss, Wood Corporation Investment Investment in Wood Corporation

5,000

d. Cash

5,000

20,000

5,000

Loss, Wood Corporation Investment

5,000

ANS: C $20,000 x .25 = $5,000 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Influential but noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

29. Mucura Enterprises has a credit balance of $40,000 in its Allowance to Adjust Long-Term Investments to Market account before adjustment. Its investment portfolio has a total cost of $250,000 and a market value of $225,000. The year-end adjustment entry that would be recorded in the books of Mucura Enterprises is: a. Long-Term Investments Allowance to Adjust Long-Term Investments to Market

15,000

b. Allowance to Adjust Long-Term Investments to Market Unrealized Loss on Long-Term Investments

15,000

c. Allowance to Adjust Long-Term Investments to Market Long-Term Investments

25,000

d. Unrealized Loss on Long-Term Investments Long-Term Investments

25,000

15,000

25,000

ANS: B $250,000 – $225,000 = $25,000 $40,000 – $25,000 = $15,000 © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Noninfluential and noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

30. Wetzel Company has a credit balance of $88,000 in its Allowance to Adjust Long-Term Investments to Market account at the end of the year, before adjustment. Its investment portfolio has a total cost of $600,000 and a market value of $528,000 at December 31, a balance sheet date. The year-end adjustment entry that would be recorded in the books of Wetzel Company is: a. Long-Term Investments Realized Gain on Long-Term Investments

16,000

b. Allowance to Adjust Long-Term Investments to Market Unrealized Loss on Long-Term Investments

16,000

c. Unrealized Loss on Long-Term Investments Allowance to Adjust Long-Term Investments to Market

16,000

d. Long-Term Investments Allowance to Adjust Long-Term Investments to Market

16,000

ANS: B $600,000 – $528,000 = $72,000 $88,000 – $72,000 = $16,000 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Noninfluential and noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

31. Flubber Corporation owns 40 percent of the voting stock of Rhim Corporation and accounts for the investment using the equity method; Rhim Corporation reports a net loss of $30,000. Flubber Corporation's entry to record the share of loss is: a. Loss, Rhim Corporation Investment Investment in Rhim Corporation

12,000 12,000

b. Loss, Rhim Corporation Investment 12,000 Loss, Rhim Corporation Investment

12,000

c. Investment in Rhim Corporation Cash

30,000 30,000

d. Investment in Rhim Corporation Cash

12,000 12,000

ANS: A $30,000 x .4 = $12,000

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Influential but noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

32. Use this information to answer the following question. These facts concern the long-term stock investments of Webster Corporation: June 1, 2012

Dec. 31, 2012 April 1, 2013 July 1, 2013 Dec. 31, 2013

Paid cash for the following long-term investments: 5,000 shares Wayne Corporation common stock (representing 5 percent of outstanding stock) at $40 per share; 3,000 shares Upshur Corporation common stock (representing 3 percent of outstanding stock) at $24 per share. Quoted market prices at year end: Wayne common stock, $35; Upshur common stock, $27. A change in policy required the sale of 1,000 shares of Wayne Corporation common stock at $38. Received a cash dividend from Upshur Corporation equal to $.30 per share. Quoted market prices at year end: Wayne common stock, $39; Upshur common stock, $22.

The entry to record the purchase of the Wayne Corporation common stock is: a. Long-Term Investments Cash

272,000

b. Long-Term Investments Cash

120,000

c. Long-Term Investments Cash

72,000

d. Long-Term Investments Cash

200,000

272,000

120,000

72,000

200,000

ANS: D 5,000 x $40 = $200,000 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Noninfluential and noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

33. Use this information to answer the following question. These facts concern the long-term stock investments of Webster Corporation: June 1, 2012

Dec. 31, 2012 April 1, 2013 July 1, 2013 Dec. 31, 2013

The entry to set up the Allowance to Adjust Long-Term Investments to Market in 2012 is: a. Long-Term Investments Realized Loss

16,000

b. Realized Loss Long-Term Investments

16,000

c. Allowance to Adjust Long-Term Investments to Market Long-Term Investments

16,000

d. Unrealized Loss on Long-Term Investments Allowance to Adjust Long-Term Investments to Market

16,000

ANS: D Total cost on Webster’s books: (5,000 x $40) + (3,000 x $24) = $272,000 Total cost per market: (5,000 x $35) + (3,000 x $27) = $256,000 Allowance to Adjust Long-Term Investments to Market: $272,000 – $256,000 = $16,000 credit PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Noninfluential and noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

34. Use this information to answer the following question. These facts concern the long-term stock investments of Webster Corporation: June 1, 2012

Dec. 31, 2012 April 1, 2013 July 1, 2013

Dec. 31, 2013

Quoted market prices at year end: Wayne common stock, $39; Upshur common stock, $22.

The entry to record the sale of 1,000 shares of Wayne Corporation common stock is: a. Long-Term Investments Cash

38,000 38,000

b. Long-Term Investments 38,000 Allowance to Adjust Long- Term Investments to Market

38,000

c. Allowance to Adjust Long -Term Investments to Market 38,000 Cash

38,000

d. Cash Loss on Sale of Investments Long-Term Investments

40,000

38,000 2,000

ANS: D 1,000 x $38 = $38,000 sale price 1,000 x $40 = $40,000 cost $40,000 – $38,000 = $2,000 loss PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Noninfluential and noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

35. Use this information to answer the following question. These facts concern the long-term stock investments of Webster Corporation: June 1, 2012

Dec. 31, 2012 April 1, 2013 July 1, 2013 Dec. 31, 2013

The entry to record the receipt of the cash dividend from Upshur Corporation is: a. Investment in Upshur Corporation Cash

900

b. Cash

900

Dividend Income

900

c. Dividend Income Cash

900

d. Cash

900 Investment in Upshur Corporation

900

ANS: B 3000 x .30 = $900 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Noninfluential and noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

36. Use this information to answer the following question. These facts concern the long-term stock investments of Webster Corporation: June 1, 2012

Dec. 31, 2012 April 1, 2013 July 1, 2013 Dec. 31, 2013

The entry to adjust the Allowance to Adjust Long-Term Investments to Market in 2013 is: a. Unrealized Loss on Long-Term Investments 6,000 Allowance to Adjust Long Term Investment to Market

6,000

b. Allowance to Adjust Long Term Investment to Market 10,000 Unrealized Loss on Long-Term Investments c. Unrealized Loss on Long-Term Investments 10,000 Allowance to Adjust Long Term Investment to Market d. Allowance to Adjust Long Term Investment to Market Unrealized Loss on Long-Term Investments

10,000

6,000 6,000

ANS: D Allowance to Adjust Long-Term Investments to Market in 2012: Total cost on Webster’s books: (5,000 x $40) + (3,000 x $24) = $272,000 Total cost per market: (5,000 x $35) + (3,000 x $27) = $256,000 Allowance to Adjust Long-Term Investments to Market: $272,000 – $256,000 = $16,000 credit Allowance to Adjust Long-Term Investments to Market in 2013: Total cost on Webster’s books: (4,000 x $40) + (3,000 x $24) = $232,000 Total cost per market: (4,000 x $39) + (3,000 x $22) = $222,000 Allowance to Adjust Long-Term Investments to Market: $232,000 – $222,000 = $10,000 credit Adjustment to Allowance: $16,000 – $10,000 = $6,000 debit PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Noninfluential and noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

37. Tyler Corporation holds 1,900 shares of Tucker Corporation common stock as its sole long-term investment. Tyler does not have significant influence or control over Tucker. The stock was purchased during 2012 at a price of $120 per share. On December 31, 2012, the market price of Tucker’s stock was $108 per share. On December 31, 2013, the market price of Tucker’s stock was $136 per share. What should be reported as the carrying value of the investment on Tyler’s December 31, 2012, and December 31, 2013, balance sheets, respectively? a. $228,000; $228,000 b. $205,200; $228,000 c. $205,200; $205,200 d. $205,200; $258,400 ANS: D December 31, 2012: 1,900 x $108 = $205,200 December 31, 2013: 1,900 x $136 = $258,400 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Noninfluential and noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

38. Roane Company often invests in the stock of other companies for long-term purposes. None of the stocks currently held by Roane qualify for use of the equity method. The following amounts relate to Roane’s long-term portfolio of marketable equity securities.

Total cost Total market

Dec. 31, 2012 $560,000 460,000

Dec. 31, 2013 $660,000 584,000

Based on the above information, the adjusting entry on December 31, 2013 is: a. Allowance to Adjust Long Term Investment to Market Unrealized Loss on Long-Term Investments

76,000

b. Allowance to Adjust Long Term Investment to Market Unrealized Loss on Long-Term Investments

24,000

76,000

24,000

c. Unrealized Loss on Long-Term Investments Allowance to Adjust Long Term Investment to Market

76,000

d. Unrealized Loss on Long-Term Investments Allowance to Adjust Long Term Investment to Market

24,000

76,000

24,000

ANS: B Allowance at December 31, 2012: $560,000 – $460,000 = $100,000 credit Allowance at December 31, 2013: $660,000 – $584,000 = $76,000 credit Adjustment needed: $100,000 – $76,000 = $24,000 debit PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Noninfluential and noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

39. Orlov Corporation purchased 8,000 shares of Matsey Corporation common stock for $40 per share on January 1, 2012. Matsey reported net income of $120,000 for 2012 and paid dividends of $42,000 during 2012. As of December 31, 2012, the market value of Matsey Corporation common stock was $40 per share. Assuming the shares owned by Orlov represent 10 percent of the total outstanding stock of Matsey, the entry to record the receipt of dividend income in Orlov Corporation’s books is: a. Cash

8,000 Dividend Income

b. Cash

8,000 4,000

Dividend Income c. Cash

4,000 4,200

Dividend Income d. Cash

4,200 12,000

Dividend Income

12,000

ANS: C $42,000 x .1 = $4,200 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Noninfluential and noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

40. Orlov Corporation purchased 22,000 shares of Matsey Corporation common stock for $40 per share on January 1, 2012. Matsey reported net income of $120,000 for 2012 and paid dividends of $45,000 during 2012. As of December 31, 2012, the market value of Matsey Corporation common stock was $39 per share. Assuming the shares owned by Orlov represent 10 percent of the total outstanding stock of Matsey, the year end adjustment entry in Orlov Corporation’s books is: a. Cash

22,000 Dividend Income

22,000

b. Cash

22,000 Long-Term Investments

22,000

c. Unrealized Loss on Long-term Investments Allowance to Adjust Long-Term Investments to Market

22,000 22,000

d. Loss on Long-Term Investments 22,000 Allowance to Adjust Long-Term Investments to Market

22,000

ANS: C 22,000 x ($40 – $39) = $22,000 credit PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Noninfluential and noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

41. Orlov Corporation purchased 8,000 shares of Matsey Corporation common stock for $40 per share on January 1, 2012. Matsey reported net income of $110,000 for 2012 and paid dividends of $45,000 during 2012. As of December 31, 2012, the market value of Matsey Corporation common stock was $40 per share. Assuming the shares owned by Orlov represent 30 percent of the total outstanding stock of Matsey, the entry to record the recognition of income by Orlov Corporation is: a. Cash

33,000 Dividend Income

33,000

b. Investment in Matsey Corporation Income, Matsey Corporation Investment

110,000

c. Investment in Matsey Corporation Income, Matsey Corporation Investment

33,000

d. Investment in Orloy Corporation Cash

33,000

110,000

33,000

ANS: C $110,000 x .3 = $33,000 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Influential but noncontrolling interest MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

42. Orlov Corporation purchased 8,500 shares of Matsey Corporation common stock for $40 per share on January 1, 2012. Matsey reported net income of $120,000 for 2012 and paid dividends of $45,000 during 2012. As of December 31, 2012, the market value of Matsey Corporation common stock was $40 per share. Assuming the shares owned by Orlov represent 30 percent of the total outstanding stock of Matsey, Orlov Corporation should report the long-term investment on December 31, 2012, at a carrying value of a. $362,500. b. $376,000. c. $353,500. d. $340,000. ANS: A (8,500 x $40) + ($120,000 x .3) – ($45,000 x .3) = $362,500 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Influential but noncontrolling interest MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

43. Summers Corporation purchased 15,000 shares of Ritchie Corporation common stock for $60 per share on January 2, 2012. Ritchie Corporation reported net income of $1,500,000 for 2012 and paid dividends of $300,000 during 2012. Ritchie has a total of 50,000 shares of common stock outstanding. The entry that would be recorded to recognize the income is: a. Cash

90,000 Dividend Income

90,000

b. Investment in Ritchie Corporation Income, Ritchie Corporation Investment

450,000

c. Dividend Income Cash

450,000

d. Investment in Ritchie Corporation Cash

450,000

ANS: B 15,000 ÷ 50,000 = 30% Ritchie stock owned by Summers $1,500,000 x .30 = $450,000 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Influential but noncontrolling interest MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

44. Summers Corporation purchased 15,000 shares of Ritchie Corporation common stock for $60 per share on January 2, 2012. Ritchie Corporation reported net income of $1,500,000 for 2012 and paid dividends of $300,000 during 2012. Ritchie has a total of 50,000 shares of common stock outstanding. The entry that would be recorded to recognize the receipt of cash dividend is: a. Cash

90,000 Dividend Income

90,000

b. Income, Ritchie Corporation Investment Cash

90,000

c. Cash

90,000

Income, Ritchie Corporation Investment d. Cash

90,000 90,000

Investment in Ritchie Corporation

90,000

ANS: D 15,000 ÷ 50,000 = 30% Ritchie stock owned by Summers $300,000 x .30 = $90,000 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Influential but noncontrolling interest MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

45. When a corporation owns more than 50 percent of the voting stock in another corporation, it usually should report its investment by using (the) a. equity method. b. cost adjusted to market method. c. book value method. d. consolidated financial statements. ANS: D PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Recall

46. Consolidated financial statements are useful because a. they treat parent and subsidiary firms as one combined company that gives investors a clear financial picture of the entire entity. b. minority shareholders need the consolidated information to make good investment decisions. c. they are much less detailed than the statements for the individual companies. d. the parent and subsidiaries constitute a single legal entity, and the financial statements should reflect that fact. ANS: A PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Recall

47. Which of the following entries would not require an eliminating entry when one is preparing consolidated financial statements? a. Amount owed by subsidiary to parent b. Investment in subsidiary c. Amount owed by parent to subsidiary d. Sale to customer ANS: D PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Recall

48. Which of the following is a true statement regarding elimination entries necessary for the preparation of consolidated financial statements? a. The entries appear only on the consolidated work sheet. b. The entries contain either debits or credits, but not both. c. The entries are made only for intercompany receivables, payables, and expenses. d. The entries are recorded in the consolidated general journal but not posted to the consolidated general ledger. ANS: A PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Recall

49. Minority interest is reported as a(n) a. current liability on the consolidated balance sheet. b. asset on the consolidated balance sheet. c. revenue item on the consolidated income statement. d. separate item between liabilities and stockholders' equity on the consolidated balance sheet. ANS: D PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Recall

50. In preparing consolidated financial statements, all of the following commonly require elimination entries except a(n) a. intercompany payable. b. receivable from a nonaffiliated company. c. intercompany sale. d. intercompany investment. ANS: B PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Recall

51. Eliminations appear on the books of a. the subsidiary company only. b. neither the parent company nor the subsidiary company. c. both the parent company and the subsidiary company. d. the parent company only. ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Comprehension

52. When a parent has borrowed cash from the subsidiary company, the related receivable and payable are eliminated in preparing a consolidated balance sheet so that a. stockholders' equity will not be understated. b. stockholders' equity will not be overstated. c. assets and liabilities will not be understated. d. assets and liabilities will not be overstated. ANS: D PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Comprehension

53. When a parent company owns 100 percent of the outstanding stock of a subsidiary, Goodwill from Consolidation will appear on the consolidated balance sheet when the a. cost of the parent's investment exceeds the book value and the fair value of the investee's net identifiable assets. b. cost of the parent's investment exceeds the book value of the parent's net assets. c. book value of the parent's net assets exceeds the fair value of the parent's net assets. d. fair value of the investee's net identifiable assets exceeds the cost of the parent's investment. ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Comprehension

54. Amelia Corporation purchases 60 percent of the voting stock of Bath Corporation for $96,000. Bath has common stock of $50,000 and retained earnings of $70,000. Based solely on the above facts, the consolidated balance sheet would include a. goodwill of $8,400. b. investment in Bath of $96,000. c. minority interest of $72,000. d. minority interest of $48,000. ANS: D Minority interest: ($50,000 + $70,000) x .4 = $48,000 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

55. Isber Corporation purchases 80 percent of the voting stock of Bossart Corporation for $175,000. At the date of acquisition, the fair market value of Bossart's identifiable net assets was equal to their book value. Bossart has common stock of $80,000 and retained earnings of $120,000. The elimination entry necessary to prepare a consolidated balance sheet for this date is: a. Common Stock(Bossart) Retained Earnings(Bossart) Investment in Bossart Corporation(Isber)

80,000 120,000

b. Common Stock(Bossart) Retained Earnings(Bossart) Goodwill Investment in Bossart Corporation(Isber) Minority Interest

80,000 120,000 15,000 175,000 40,000

c. Common Stock(Bossart) Retained Earnings(Bossart) Investment in Bossart Corporation(Isber) Minority Interest

80,000 120,000 160,000 40,000

d. Common Stock(Bossart) Retained Earnings(Bossart) Investment in Bossart Corporation(Isber) Gain on consolidation

80,000 120,000 160,000 40,000

200,000

ANS: B PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Application

56. Bland Corporation purchases 75 percent of the stock of Carroll Corporation for $726,000. Sikora has contributed capital of $400,000 and retained earnings of $568,000. The consolidated financial statements will contain a. minority interest and negative goodwill. b. neither minority interest nor goodwill. c. goodwill but not minority interest. d. minority interest but not goodwill. ANS: D ($400,000 + $568,000) x .75 = $726,000 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

57. Platek Company buys 100 percent of the stock of Brendel Company for $180,000. Brendel Company has contributed capital of $105,000 and retained earnings of $75,000. The consolidated financial statements would contain a. minority interest and goodwill. b. minority interest but not goodwill. c. goodwill but not minority interest. d. neither minority interest nor goodwill. ANS: D $105,000 + $75,000 = $180,000 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

58. Craig Company buys 70 percent of the stock of Essex Company for $182,000. Essex Company has contributed capital of $140,000 and retained earnings of $120,000. The consolidated financial statements would contain a. goodwill but not minority interest. b. neither minority interest nor goodwill. c. minority interest and goodwill. d. minority interest but not goodwill. ANS: D ($140,000 + $120,000) x .70 = $182,000 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

59. On January 1, 2013, Walker Corporation has the following stockholders' equity accounts: Common Stock, $10 par $300,000 Retained Earnings 900,000 The fair market value of Walker's net identifiable assets on this date was equal to their book value. On January 1, 2013, Rau Corporation acquired 100 percent of the common stock of Walker Corporation for $1,320,000 cash. The elimination entry necessary to prepare a consolidated balance sheet for this date is: a. Common Stock(Walker) Retained Earnings(Walker) Goodwill Investment in Walker Corporation(Rau)

300,000 900,000 120,000

b. Common Stock(Walker) Retained Earnings(Walker) Loss from Consolidation Investment in Walker Corporation (Rau)

300,000 900,000 120,000

c. Common Stock(Walker) Retained Earnings(Walker) Investment in Walker Corporation (Rau)

300,000 900,000

d. Common Stock(Walker) Retained Earnings(Walker) Gain from Consolidation Investment in Walker Corporation (Rau)

300,000 900,000 120,000

1,320,000

1,200,000

ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

1,320,000 OBJ: 4 LOC: Application

60. Giles Company buys 100 percent of the outstanding stock of Henrico Company for $1,300,000. Henrico Company has contributed capital of $840,000 and retained earnings of $360,000. The fair market value of Henrico’s identifiable net assets was equal to their book value on the date of acquisition. The consolidated financial statements would contain a. neither minority interest nor goodwill. b. goodwill but not minority interest. c. minority interest but not goodwill. d. minority interest and goodwill. ANS: B $840,000 + $360,000 = $1,200,000; goodwill of $100,000 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

61. Perri Company buys 80 percent of the stock of McGrath Company for $150,000. McGrath Company has contributed capital of $100,000 and retained earnings of $60,000. The eliminating entry that would appear on the work sheet for consolidating the balance sheets of two companies is: a. Common Stock(McGrath) Retained Earnings(McGrath) Goodwill Investment in McGrath Company(Perri) Minority Interest

100,000 60,000 22,000

b. Common Stock(McGrath) Retained Earnings(McGrath) Investment in McGrath Company(Perri)

100,000 60,000

c. Common Stock(McGrath) Retained Earnings(McGrath) Investment in McGrath Company(Perri) Minority Interest

100,000 60,000

d. Common Stock(McGrath) Retained Earnings(McGrath) Goodwill Investment in McGrath Company(Perri)

100,000 60,000 22,000

150,000 32,000

160,000

150,000 10,000

ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

182,000 OBJ: 4 LOC: Application

62. Loudoun Company and Nelson Company have separate incomes of $77,000 and $85,000, respectively. They had intercompany purchases and sales of $30,000 and intercompany interest of $3,000. Consolidated net income would be a. $129,000. b. $162,000. c. $74,000. d. $47,000. ANS: B $77,000 + $85,000 = $162,000 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated income statement MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

63. Coll Company (the parent company) manufactured a product at a cost of $150 and sold it to Obman Company, a subsidiary of Coll, for $200. Obman Company sold the product to its customer for $284. As a result of these transactions, how much gross profit will appear on a consolidated income statement? a. $134 b. $84 c. $234 © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

d. $0 ANS: A $284 – $150 = $134 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated income statement MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

64. Page Company and Orange Company have separate incomes of $280,000 and $480,000, respectively. They had intercompany purchases and sales of $80,000 and intercompany interest of $4,000. Consolidated net income is a. $844,000. b. $760,000. c. $676,000. d. $284,000. ANS: B $280,000 + $480,000 = $760,000 PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated income statement MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

65. Blau Corporation invests $302,500 in Hills Corporation, buying 80 percent of the voting stock. Hills pays Blau $20,000 in cash dividends and earns a net income of $130,000 during 2013. On the consolidated balance sheet, the balance in the investments account representing Blau's interest in Hills will be a. $432,500. b. $412,500. c. $0 . d. $302,500. ANS: C PTS: 1 DIF: Challenging NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 4 LOC: Analysis

66. Held-to-maturity securities are valued on the balance sheet at a. original cost. b. fair value. c. maturity value. d. cost, adjusted for the effects of interest. ANS: D PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Investments in debt securities MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 5 LOC: Recall

67. Available-for-sale debt securities are valued on the balance sheet at a. cost, adjusted for the effects of interest. b. maturity value. c. fair value. d. original cost. ANS: C PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Available-for-sale securities MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 5 LOC: Recall

68. When the accounting period ends before U.S. Treasury bills are scheduled to mature, the investor's adjusting entry would include a a. debit to Short-Term Investments. b. credit to Cash. c. debit to Interest Income. d. credit to Short-Term Investments. ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Short-term investments MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 5 LOC: Comprehension

69. A short-term investment in a U.S. Treasury bill costs $48,800 and will mature six months later at $50,000. Management intends to hold the investment until it matures. The entry to record the initial investment is: a. Short – Term Investments Cash

50,000

b. Cash

48,800

50,000

Short – Term Investments

48,800

c. Short – Term Investments Cash

48,800

d. Cash

50,000 Short – Term Investments Interest Income

48,800

48,800 1,200

ANS: C PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Short-term investments MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 5 LOC: Application

70. A short-term investment in a U.S. Treasury bill costs $48,400 and will mature in six months at $50,000. Management intends to hold the investment until it matures. The entry to record receipt of cash at maturity is: (No prior entries were made to recognize revenue.) a. Cash

50,000 Short – Term Investments Interest Income

b. Cash

48,400 1,600 50,000

Short – Term Investments c. Cash

50,000 48,400

Short – Term Investments d. Cash

48,400 50,000

Short – Term Investments Gain on Sale of Investments ANS: A PTS: 1 DIF: Moderate NAT: AACSB Analytic | AICPA FN Measurement KEY: Short-term investments MSC: ACBSP-APC-21-Corporate Investments Accounting

48,400 1,600 OBJ: 5 LOC: Application

SHORT ANSWER 1. Write the term that matches each description below. A. Ownership of more than 50 percent of another company's voting stock B. Debt and equity investments that may or may not be held short- or long-term C. Debt investments that will be kept for the long run D. Ownership of less than 20 percent of another company's voting stock E. Illegally using unreleased company knowledge for personal gain F. Ownership of 20 to 50 percent of another company's voting stock G. Debt and equity investments that will be sold shortly after purchase H. Another term for short-term investments ANS: A. Control B. Available-for-sale-securities C. Held-to-maturity securities D. Noninfluential and noncontrolling E. Insider trading F. Significant influence or influential but noncontrolling investment G. Trading securities H. Marketable securities PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Investments MSC: ACBSP-APC-21-Corporate Investments Accounting © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

2. Investments are initially recorded in accounting records using the cost principle. However, after the purchase, the value on the balance sheet may be adjusted due to subsequent conditions. List three such subsequent conditions. ANS: 1. Changes in the market value of the investments. 2. Changes caused by the passage of time (as in amortization). 3. Changes in the operations of the investee companies. PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement LOC: Recall KEY: Investments MSC: ACBSP-APC-21-Corporate Investments Accounting 3. Distinguish between the financial statement presentation of unrealized gains and losses related to trading securities and the financial statement presentation of unrealized gains and losses related to available-for-sale securities. ANS: Unrealized gains and losses on trading securities appear on the income statement. However, unrealized gains and losses on available-for-sale securities appear as other comprehensive income on the statement of stockholders’ equity and as a separate item in the stockholders’ equity section of the balance sheet. PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement KEY: Trading securities | Available-for-sale securities MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Comprehension

4. Discuss the financial statement presentation of the account Allowance to Adjust Short-Term Investments to Market, distinguishing between the effect of a debit balance and the effect of a credit balance in the account. ANS: When Allowance to Adjust Short-Term Investments to Market has a debit balance, it is added to the associated investment account on the asset side of the balance sheet. However, when it has a credit balance, it is deducted from the associated account. PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement KEY: Short-term investments MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Comprehension

5. On November 28, 2012, Barbour Company purchased 20,000 shares of Cabell Corporation stock for $720,000. Barbour’s management intends to hold the shares for a short period of time. On December 31, 2012, the price of Cabell stock was $30 per share. Finally, on January 19, 2013, Barbour sells all 20,000 shares for $750,000. In the journal provided below, prepare Barbour’s entries for November 28, December 31, and January 19. (Omit explanations).

General Journal Date

Page 1 Post. Ref.

Description

Debit

Credit

ANS: General Journal

Page 1 Post. Ref.

Date Description Nov. 28 Short-Term Investments Cash Dec.

Jan.

Debit 720,000

Credit 720,000

31 Unrealized Loss on Short-Term Investments Allowance to Adjust Short-Term Investments to Market

120,000

19 Cash Short-Term Investments Realized Gain on Investments

750,000

PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement KEY: Short term investments MSC: ACBSP-APC-21-Corporate Investments Accounting

120,000

720,000 30,000

LOC: Application

6. When a company receives a dividend from its investee, what will be the effect on the financial statements of the investing company if it uses the equity method? ANS: There will be no effect on the income statement. Cash, however, will be increased by the same amount that the Investment account is decreased. Therefore, total assets and equities will remain the same. PTS: 1

DIF: Moderate

OBJ: 3

NAT: AACSB Analytic | AICPA FN Measurement KEY: Noninfluential and noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Comprehension

7. The following transactions and information pertain to Langston Corporation for 2013. Prepare entries in journal form, without explanations, to record these transactions. May

Sept. Dec.

1 31

Purchased 1,000 shares of Granger Corporation's common stock at $180 per share (representing 5 percent of Granger's total outstanding stock) as a long-term investment. Received a cash dividend of $6.00 per share from Granger. End of Langston’s accounting year. Granger's market price per share is $168. General Journal

Date

Page 1 Post. Ref.

Description

Debit

Credit

ANS: General Journal Post. Ref.

Date Description May 1 Long-Term Investments Cash Sept.

Dec.

PTS: 1

Page 1 Debit 180,000

180,000

1 Cash Dividend Income

6,000

31 Unrealized Loss on Long-Term Investments Allowance to Adjust Long-Term Investments to Market

12,000

DIF: Moderate

Credit

6,000

12,000

OBJ: 3

NAT: AACSB Analytic | AICPA FN Measurement KEY: Noninfluential and noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

8. On January 1, Chapin Corporation purchased, as long-term investments, 10 percent of the voting stock of Paxton Corporation for $75,000 and 25 percent of the voting stock of Colb Corporation for $150,000. During the year, Paxton Corporation had earnings of $40,000 and paid dividends of $15,000 on October 15, and Colb Corporation had earnings of $20,000 and paid dividends of $12,000 on November 10. The market value of neither investment declined nor rose during the year. Prepare journal entries without explanations to record this information as appropriate in Chapin Corporation's general journal. General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal Date Description Jan. 1 Long-Term Investments Investment in Colb Corporation Cash Oct.

Nov.

Dec.

Page 1 Post. Ref.

Debit 75,000 150,000

Credit

225,000

15 Cash Dividend Income

1,500

10 Cash Investment in Colb Corporation

3,000

31 Investment in Colb Corporation Income, Colb Corporation Investment

5,000

1,500

3,000

5,000

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Noninfluential and noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

9. On January 1, 2013, Preston Corporation purchased 5,000 shares of Nicholas Corporation common stock for $120 per share. Preston’s investment represents 30 percent of the total outstanding shares of Nicholas. During 2010, Nicholas paid total dividends of $200,000. Preston appropriately used the equity method to account for this investment and accordingly reported the investment at a carrying value of $780,000 on December 31, 2013. Compute the amount of earnings reported by Nicholas Corporation for 2013. ANS: $800,000 [5,000  $120 = $600,000 – $200,000  0.3 = $540,000; $780,000 – $540,000 = $240,000 ÷ 0.3] PTS: 1 DIF: Challenging OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Influential but noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Analysis

10. Briefly explain, what are the consolidated financial statements, and how is the consolidation accomplished? ANS: Consolidated financial statements are the combined statements of a parent company and its subsidiaries. All material intercompany balances and transactions are eliminated to produce the consolidated statements. PTS: 1 DIF: Easy OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Recall

11. When are eliminating entries made, where are they entered, and why are they needed? ANS: Consolidation eliminations are made when consolidated financial statements are prepared. Appearing only on the consolidation work sheet, they eliminate the parent's investment in the subsidiary as well as intercompany items. The objective is to portray the parent and subsidiary as one consolidated entity as of the reporting date. PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Comprehension

12. At the beginning of the current year, Morris Corporation acquired 100 percent of the common stock of Nash Corporation for $200,000. Nash's stockholders' equity included common stock for $125,000 and retained earnings of $75,000. Prepare the eliminating entry in journal form that would appear on the work sheet for consolidating the balance sheets of the two entities as of the acquisition date. (Omit explanations.) General Journal Date

Page 1 Post. Ref.

Description

Debit

Credit

ANS: General Journal Date

Page 1

Description Common Stock (Nash) Retained Earnings (Nash) Investment in Nash Corporation (Morris)

Post. Ref.

Debit 125,000 75,000

Credit

200,000

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

13. On January 1, 2012, Clark Corporation acquired 90 percent of the common stock of Dot Corporation for $513,000. Dot’s stockholders' equity on this date consisted of common stock of $300,000 and retained earnings of $270,000. Prepare the eliminating entry in journal form that would appear on the work sheet for consolidating the balance sheets of the two entities as of the acquisition date. (Omit explanations.) General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal Date

Description Common Stock (Dot) Retained Earnings (Dot) Investment in Dot Corporation (Clark) Minority Interest

Page 1 Post. Ref.

Debit 300,000 270,000

Credit

513,000 57,000

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

14. On January 1, 2013, Hilary Corporation acquired 100 percent of the common stock of Gooden Corporation for $3,250,000. At the date of acquisition, Gooden Corporation reported total assets of $4,200,000, liabilities of $1,200,000, common stock of $2,200,000, and retained earnings of $800,000 on its balance sheet. An appraisal on the acquisition date showed that the fair value of Gooden's net identifiable assets was equal to their book value. Prepare the eliminating entry in journal form that would appear on the work sheet for consolidating the balance sheets of the two companies as of the acquisition date. (Omit explanations.) General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal Date

Description Common Stock (Gooden) Retained Earnings (Gooden) Goodwill Investment in Gooden Corporation (Hilary)

Page 1 Post. Ref.

Debit 2,200,000 800,000 250,000

Credit

3,250,000

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

15. Barker Company purchased 100 percent of Coll Company for $130,000. The balance sheets for the two companies are provided below. Complete the work sheet by providing the figures for the Eliminations columns and the Consolidated Balance Sheet column.

Accounts Cash Investment in Coll Company Plant and equipment Total assets Liabilities Common stock Retained earnings Total liabilities and stockholders' equity

Balance Sheet, Barker Balance Sheet, Company Coll Company 60,000 130,000

30,000 —

240,000

135,000

430,000 180,000 150,000 100,000

165,000 35,000 90,000 40,000

430,000

165,000

Eliminations Debit Credit

Consolidated Balance Sheet

ANS:

Accounts

Balance Sheet, Barker Company

Balance Sheet, Coll Company

Eliminations Debit Credit

Consolidated Balance Sheet

Cash Investment in Coll Company Plant and equipment Total assets Liabilities Common stock

60,000 130,000

30,000 —

240,000

135,000

375,000

430,000 180,000 150,000

165,000 35,000 90,000

465,000 215,000 150,000

Retained earnings Total liabilities and stockholders' equity

100,000

40,000

430,000

165,000

(1) 130,000

(1) 90,000 (1) 40,000 130,000

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

90,000 —

100,000 130,000

465,000

LOC: Application

16. Ming Company purchased 100 percent of Savran Company for $94,000. Of the excess of cost over book value, $15,000 was attributed to Savran's undervalued plant and equipment. The rest was attributed to the general strength of the company. Complete the following work sheet by providing the figures for the Eliminations columns and the Consolidated Balance Sheet column.

Accounts

Balance Sheet, Ming Balance Sheet, Company Savran Company

Consolidated Balance Sheet Eliminations Debit

Cash Investment in Savran Company Plant and equipment Goodwill Total assets Liabilities Common stock Retained earnings Total liabilities and stockholders' equity

56,000 94,000

24,000 —

160,000

64,000

— 310,000 108,000 96,000 106,000

— 88,000 26,000 40,000 22,000

310,000

88,000

Credit

ANS:

Accounts

Balance Sheet, Ming Company

Balance Sheet, Savran Company

Eliminations Debit

Cash Investment in Savran Company Plant and equipment Goodwill

56,000 94,000

24,000 —

160,000

64,000

—

Total assets Liabilities Common stock

310,000 108,000 96,000

88,000 26,000 40,000

Retained earnings Total liabilities and stockholders' equity

106,000

22,000

310,000

88,000

Credit (1) 94,000

(1) 15,000 (1) 17,000

(1) 40,000 (1) 22,000 94,000

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

Consolidated Balance Sheet 80,000 — 239,000 17,000 336,000 134,000 96,000 106,000

94,000

336,000

LOC: Application

17. Rosche Company purchased 75 percent of Grubbs Company for $78,000. Complete the following work sheet by providing the figures for the Eliminations columns and the Consolidated Balance Sheet column. Balance Sheet, Rosche Company Accounts

Balance Sheet, Grubbs Company

Eliminations Debit

Cash Investment in Grubbs Company Plant and equipment Total assets Liabilities Common stock Retained earnings Minority interest Total liabilities and stockholders' equity

36,000 78,000

20,000 —

222,000

108,000

336,000 92,000 120,000 124,000

128,000 24,000 84,000 20,000

— 336,000

— 128,000

Consolidated Balance Sheet

Credit

ANS:

Accounts

Balance Sheet, Rosche Company

Balance Sheet, Grubbs Company

Eliminations Debit

Cash Investment in Grubbs Company Plant and equipment

Consolidated Balance Sheet

Credit

36,000 78,000

20,000 —

222,000

108,000

330,000

Total assets Liabilities Common stock

336,000 92,000 120,000

128,000 24,000 84,000

386,000 116,000 120,000

Retained earnings Minority interest

124,000

20,000

—

Total liabilities and stockholders' equity

336,000

128,000

(1) 78,000

(1) 84,000 (1) 20,000

104,000

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

56,000 —

124,000 (1) 26,000 104,000

26,000 386,000

LOC: Application

18. Burr Company purchased 70 percent of Oswald Company for $71,400. Complete the following work sheet by providing the figures for the Eliminations columns and the Consolidated Balance Sheet column.

Accounts Cash Investment in Oswald Company Plant and equipment Total assets Liabilities Common stock Retained earnings Minority interest Total liabilities and stockholders' equity

Balance Sheet, Burr Company

Balance Sheet, Oswald Company

40,800 71,400

18,000 —

228,000 340,200 92,000 120,000 128,200

108,000 126,000 24,000 72,000 30,000

— 340,200

— 126,000

Eliminations Debit Credit

Consolidated Balance Sheet

ANS:

Accounts

Balance Balance Sheet, Sheet, Oswald Burr Company Company

Consolidated Balance Sheet Eliminations Debit

Cash Investment in Oswald Company Plant and equipment Total assets Liabilities Common stock Retained earnings Minority interest Total liabilities and stockholders' equity

Credit

40,800 71,400

18,000 —

228,000

108,000

336,000

340,200 92,000 120,000 128,200

126,000 24,000 72,000 (1) 30,000 (1)

394,800 116,000 120,000 128,200

— 340,200

— 126,000

(1)

71,400

72,000 30,000 (1) 102,000

30,600 102,000

58,800 —

30,600 394,800

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

19. Scott Company owns 100 percent of the stock of Roanoke Company. The separate income statements for the two companies for the year ended December 31, 2013, are provided below. Scott Company sold a product to Roanoke Company for $56,000, and Roanoke Company sold it to a customer for $80,000. Roanoke paid Scott $6,000 interest on a loan from Roanoke. Complete the work sheet by providing the amounts for the Eliminations columns and the Consolidated Income Statement column.

Accounts

Income Statement, Scott Company

Income Statement, Roanoke Company

Eliminations Debit

Sales Other revenues Total revenues Cost of goods sold

520,000 74,000 594,000 234,000

280,000 16,000 296,000 170,000

Other expenses Total costs and expenses Net income

180,000 414,000

46,000 216,000

180,000

80,000

Consolidated Income Statement

Credit

ANS:

Accounts

Income Statement, Scott Company

Income Statement, Roanoke Company

Eliminations Debit

Sales

520,000

280,000

Other revenues

74,000

16,000

Total revenues Cost of goods sold Other expenses

594,000 234,000 180,000

296,000 170,000 46,000

Total costs and expenses Net income

414,000

216,000

180,000

80,000

PTS: 1

DIF: Moderate

Consolidated Income Statement

Credit

(1) 56,000 (2) 6,000

744,000 84,000

(1)

56,000 (2) 6,000

828,000 348,000 220,000 568,000

62,000

260,000

OBJ: 4

NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

20. In the journal provided, prepare the entries for the transactions described below. (Omit explanations.) May

Sept.

Purchased 120-day Treasury bills for $78,000. This investment will be held to maturity. Treasury bills matured; $80,000 received. (No prior entries were made to recognize revenue.) General Journal

Date

Page 1 Post. Ref.

Description

Debit

Credit

ANS: General Journal Date Description May 5 Short-Term Investments Cash Sept.

Page 1 Post. Ref.

2 Cash Short-Term Investments Interest Income

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement KEY: Investments in debt securities MSC: ACBSP-APC-21-Corporate Investments Accounting

Debit 78,000

Credit 78,000

80,000 78,000 2,000

LOC: Application

21. In the journal provided, prepare the entries for the transactions described below. (Omit explanations.) Mar.

June

Purchased 90-day Treasury bills for $23,700. This investment will be held to maturity. Treasury bills matured; $24,000 received. (No prior entries were made to recognize revenue.) General Journal

Date

Page 1 Post. Ref.

Description

Debit

Credit

ANS: General Journal Date Description Mar. 17 Short-Term Investments Cash June

Page 1 Post. Ref.

15 Cash Short-Term Investments Interest Income

PTS: 1 DIF: Moderate OBJ: 5 NAT: AACSB Analytic | AICPA FN Measurement KEY: Investments in debt securities MSC: ACBSP-APC-21-Corporate Investments Accounting

Debit 23,700

Credit 23,700

24,000 23,700 300

LOC: Application

MATCHING Match each definition with the correct term below. a. Debt or equity securities bought and held principally for the purpose of being sold in the near term. b. The method of accounting for the ownership of more than 20 percent of another company’s voting stock. c. Debt or equity securities that do not meet the criteria for either trading or held-to-maturity securities. d. A single set of financial statements for both the parent company and the subsidiary company. e. Companies that have expanded by establishing or buying foreign subsidiaries. f. The method of recording available-for-sale securities that initially records securities at cost and thereafter periodically adjusts for changes in market value by using an allowance account. g. The currency in which the consolidated financial statements are presented. h. Debt securities that management intends to hold until their maturity date. i. The investing company in a parent-subsidiary relationship. j. Making use of inside information for personal gain. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Trading securities Available-for-sale securities Held-to-maturity securities Insider trading Cost-adjusted-to-market method Equity method Parent company Multinational or transnational companies Reporting currency Consolidated financial statements

1. ANS: A PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Trading securities MSC: ACBSP-APC-21-Corporate Investments Accounting 2. ANS: C PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Available-for-sale securities MSC: ACBSP-APC-21-Corporate Investments Accounting 3. ANS: H PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Held-to-maturity securities MSC: ACBSP-APC-21-Corporate Investments Accounting 4. ANS: J PTS: 1 DIF: Easy NAT: AACSB Ethics | AICPA BB Legal LOC: Recall MSC: ACBSP-APC-21-Corporate Investments Accounting 5. ANS: F PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Noninfluential and noncontrolling investment

OBJ: 1 LOC: Recall

OBJ: 1 KEY: Professional ethics OBJ: 3 LOC: Recall

10.

MSC: ACBSP-APC-21-Corporate Investments Accounting ANS: B PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Influential but noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting ANS: I PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Controlling investment MSC: ACBSP-APC-21-Corporate Investments Accounting ANS: E PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting ANS: G PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting ANS: D PTS: 1 DIF: Easy NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

OBJ: 3 LOC: Recall

OBJ: 4 LOC: Recall

PROBLEM 1. Define the following classifications of investments: A. Short-term investments B. Long-term investments C. Trading securities D. Available-for-sale securities E. Held-to-maturity securities ANS: A. Investments that have a maturity of more than 90 days but are intended to be held only until cash is needed for current operations, also called marketable securities. B. Investments that are intended to be held for more than one year. C. Debt or equity securities bought and held principally for the purpose of being sold in the near term. D. Debt or equity securities that do not meet the criteria for either trading or held-to-maturity securities. They may be short-term or long-term. E. Debt securities that management intends to hold until their maturity date. PTS: 1 DIF: Easy OBJ: 1 NAT: AACSB Analytic | AICPA FN Measurement KEY: Classification of investments MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Recall

2. On November 19, 2012, Lassen Company purchased 30,000 shares of JCN Corporation stock for $480,000, and 10,000 shares of Canoga Corporation stock for $250,000. Lassen's management intends to hold all 40,000 shares for a short period of time. On December 31, 2012, the price of JCN's stock was $13 per share, and the price of the Canoga stock was $30 per share. Finally, on January 27, 2013, Lassen sold all 10,000 shares of Canoga stock for $320,000. In the journal provided below, prepare Lassen's entries for November 19, December 31, and January 27. General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal Date Description 2012 Nov. 19 Short-Term Investments ($480,000 + $250,000) Cash Dec.

2013 Jan.

Page 1 Post. Ref.

Debit

Credit

730,000 730,000

31 Unrealized Loss on Short-Term Investments [((30,000 x $13) – $480,000) + ((10,000 x $30) – $250,000)] Allowance to Adjust Short-Term Investments to Market

40,000

27 Cash Short-Term Investments Realized Gain on Sale of Investments

320,000

40,000

250,000 70,000

PTS: 1 DIF: Moderate OBJ: 2 NAT: AACSB Analytic | AICPA FN Measurement KEY: Short-term investments MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

3. Using the journal provided, enter the following transactions for LaPana Corporation for 2012 and 2013. Please provide all explanations. 2012 Aug.

Oct.

Nov.

Dec.

31 2013 Mar. Apr. Sept. Dec.

1 14 22 31

Purchased 1,000 shares of Casper Corporation stock for $30,000. These securities were purchased primarily for trading purposes. Purchased 4,000 shares of Tally Corporation stock for $68,000. These securities were purchased primarily for trading purposes. Invested $98,000 in 120-day U.S. Treasury bills that have a maturity value of $100,000. The market value of the Casper Corporation shares is $31,000, and the market value of the Tally Corporation stock is $63,000. A year-end adjustment is made. A year-end adjustment is made for accrued interest on the Treasury bills.

Received maturity value of U.S. Treasury bills in cash. Sold all 1,000 shares of Casper Corporation stock for $30,800. Received dividends of $1 per share from Tally Corporation. The market value of the Tally Corporation shares is $70,000. A year-end adjustment is made.

General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal Date Description 2012 Aug. 13 Short-Term Investments Cash Purchased securities for trading Oct.

Nov.

Dec.

2013 Mar.

Apr.

Sept.

Page 1 Post. Ref.

Debit

Credit

30,000 30,000

5 Short-Term Investments Cash Purchased securities for trading

68,000

1 Short-Term Investments Cash Purchased 120-day U.S. Treasury bills

98,000

31 Unrealized Loss on Investments Allowance to Adjust Short-term Investments to Market Recognized unrealized loss on trading portfolio

4,000

31 Short-Term Investments Interest Income Recognized accrued interest on U.S. Treasury bills

1,000

1 Cash Short-Term Investments Interest Income Receipt of cash upon maturity of U.S. Treasury bills

100,000

14 Cash Short-Term Investments Realized Gain on Investments To record sale of Casper Corporation stock

30,800

22 Cash Dividend Income To record dividends received on Tally Corporation stock

4,000

68,000

98,000

4,000

1,000

99,000 1,000

30,000 800

4,000

Dec.

31 Allowance to Adjust Short-Term Investments to Market Unrealized Gain on Investments Recognized unrealized gain on trading securities

PTS: 1 DIF: Moderate OBJ: 2 | 3 | 5 NAT: AACSB Analytic | AICPA FN Measurement KEY: Short-term investments MSC: ACBSP-APC-21-Corporate Investments Accounting

6,000 6,000

LOC: Application

4. The following transactions and information pertain to Lazar Corporation for 2012 and 2013. 2012 May

Sept. 1 Dec. 31

Purchased 3,000 shares of Ross Corporation common stock at $20 per share (representing 5 percent of Ross's total outstanding stock) as a long-term investment. Received a cash dividend from Ross equal to $.60 per share. Market value of Ross stock at year end was $18 per share.

2013 Sept. 1 Nov. 1 Dec. 31

Received a cash dividend from Ross equal to $.50 per share. Sold 400 shares of Ross at $19 per share. Market value of Ross stock at year end was $17 per share.

Prepare entries in journal form, without explanations, to record the above. Lazar's accounting year ends December 31. General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal Date Description 2012 May 1 Long-Term Investments Cash Sept.

Dec.

2013 Sept.

Nov.

Dec.

Page 1 Post. Ref.

Debit 60,000

60,000

1 Cash Dividend Income

1,800

31 Unrealized Loss on Long-Term Investments Allowance to Adjust Long-Term Investments to Market

6,000

1 Cash Dividend Income

1,500

1 Cash Loss on Sale of Investments Long-Term Investments

7,600 400

31 Unrealized Loss on Long-Term Investments Allowance to Adjust Long-Term Investments to Market (2,600  $20) = $52,000; (2,600  $17) = $44,200; $52,000 – $44,200 = $7,800; $7,800 – $6,000 = $1,800

1,800

PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Long-term investments in equity securities MSC: ACBSP-APC-21-Corporate Investments Accounting

Credit

1,800

6,000

1,500

8,000

1,800

LOC: Application

5. The following transactions and information pertain to Yates Corporation for 2012 and 2013. 2012 May

Sept. 1 Dec. 31

Purchased 3,000 shares of Templin Corporation common stock at $32 per share representing 2 percent of Templin's total outstanding stock) as a long-term investment. Received a cash dividend from Templin equal to $1.40 per share. Market value of Templin stock at year end was $24 per share.

2013 Sept. 1 Nov. 1 Dec. 31

Received a cash dividend from Templin equal to $1.40 per share. Sold 300 shares of Templin at $26 per share. Market value of Templin stock at year end was $22 per share.

Prepare entries in journal form, without explanations, to record the above. Yates's accounting year ends December 31. General Journal Date

Description

Page 1 Post. Ref.

Debit

Credit

ANS: General Journal Date Description 2012 May 1 Long-Term Investments Cash Sept.

Dec.

Page 1 Post. Ref.

Debit

Credit

96,000 96,000

1 Cash Dividend Income

4,200

31 Unrealized Loss on Long-Term Investments

24,000

4,200

Allowance to Adjust Long-Term Investments to Market 2013 Sept.

Nov.

Dec.

24,000

1 Cash Dividend Income

4,200

1 Cash Loss on Sale of Investments Long-Term Investments

7,800 1,800

31 Unrealized Loss on Long-Term Investments

3,000

4,200

9,600

Allowance to Adjust Long-Term Investments to Market (2,700  $32) = $86,400; (2,700  $22) = $59,400; $86,400 – $59,400 = $27,000; $27,000 – $24,000 = $3,000 PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Long-term investments in equity securities MSC: ACBSP-APC-21-Corporate Investments Accounting

3,000

LOC: Application

6. Raleigh Corporation purchased 3,000 shares of Mingo Corporation common stock for $160 per share on January 1, 2012, as a long-term investment. Mingo reported net income of $140,000 and $180,000 for 2012 and 2013, respectively, and paid dividends of $50,000 and $60,000 during 2012 and 2013, respectively. Mingo has a total of 10,000 shares outstanding. Compute the following amounts. a. Amount of investment income recognized by Raleigh Corporation during 2012 b. Balance of Investment in Mingo Corporation account at end of 2012 © 2012 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

c. Amount of investment income recognized by Raleigh Corporation during 2013 d. Balance of Investment in Mingo Corporation account at end of 2013 ANS: a. $42,000 (140,000  0.3) b. $507,000 [(3,000  $160) + ($140,000  0.3) – ($50,000  0.3)] c. $54,000 ($180,000  0.3) d. $543,000 [507,000 + ($180,000  0.3) – ($60,000  0.3)] PTS: 1 DIF: Moderate OBJ: 3 NAT: AACSB Analytic | AICPA FN Measurement KEY: Influential but noncontrolling investment MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Application

7. The stockholders' equity section of Ernesto Corporation's balance sheet appeared as follows on December 31, 2013: Common Stock Retained Earnings Total Stockholders’ Equity

$150,000 75,000 $225,000

Prepare entries in journal form to eliminate Brody's investment in Ernesto and Ernesto's stockholders' equity used in preparing the consolidated balance sheet under each of the following assumptions. (Omit explanations.) a. Brody purchased 100 percent of Ernesto for $225,000. b. Brody purchased 100 percent of Ernesto for $250,000. The excess did not apply to any particular asset. c. Brody purchased 80 percent of Ernesto for $180,000.

Date

General Journal Description

Post. Ref.

Debit

Page 1 Credit

ANS: General Journal Date

Description a. Common Stock (Ernesto) Retained Earnings (Ernesto) Investment in Ernesto Corporation (Brody)

Page 1 Post. Ref.

Debit Credit 150,000 75,000 225,000

b. Common Stock (Ernesto) Retained Earnings (Ernesto) Goodwill Investment in Ernesto Corporation (Brody)

150,000 75,000 25,000

c. Common Stock (Ernesto) Retained Earnings (Ernesto) Investment in Ernesto Corporation (Brody) Minority Interest

150,000 75,000

PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

250,000

180,000 45,000

LOC: Application

8. Stafford Company owns 100 percent of the stock of Tazewell Company. The separate income statements for the two companies for the year ended December 31, 2013, are as follows:

Sales Cost of goods sold Gross margin Operating expenses, including rent Rental revenue Income taxes expense Net income

Stafford Company $1,600,000 1,300,000 $300,000 (172,000) $ 112,000 (88,000) $ 152,000

Tazewell Company $1,000,000 792,000 $208,000 (96,000) — (44,000) $ 68,000

Stafford Company sold merchandise to Tazewell Company for $240,000, which in turn was sold by Tazewell Company to its customers. Tazewell Company paid rentals of $36,000 to Stafford Company on a long-term lease. Using the partially completed form that follows, prepare a consolidated income statement for the year ended December 31, 2013. Stafford Company Consolidated Income Statement For the Year Ended December 31, 2013 Sales Cost of goods sold Gross margin Operating expenses Rental revenue Income taxes expense Net income ANS: Stafford Company Consolidated Income Statement For the Year Ended December 31, 2013 Sales Cost of goods sold Gross margin Operating expenses Rental revenue Income taxes expense Net income PTS: 1 DIF: Moderate OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

$2,360,000 1,852,000 $ 508,000 (232,000) 76,000 (132,000) $ 220,000

LOC: Application

9. Nate Lobell is the president and sole owner of Gal's Pal Apparel, Inc. Gal's Pal has two wholly owned subsidiaries with which it occasionally transacts business. Nate has been trying to get the consolidated net income of Gal's Pal above the $1,000,000 mark so that he can qualify for a line of credit with his bank. This year Gal's Pal is on track to earn approximately $700,000 after all costs and expenses. Likewise, each subsidiary should have roughly $200,000 in net earnings by year end. Approximately 20 percent of the net earnings of Gal's Pal will come as a result of sales to the subsidiaries, which in turn sold the items to customers for a similar amount of profit. Nate is elated to learn that the expected total earnings of the three companies added together will exceed his $1,000,000 goal. Assuming the businesses finish the year as expected, discuss the result of Nate's request for a line of credit. ANS: Unfortunately, Nate will not make his $1,000,000 net income goal for the year if things keep going the way they are at present. Because 20 percent of the parent company's net earnings are a result of selling to the subsidiaries, they cannot be counted as both earnings of the parent and earnings of the subsidiary. Eliminating 20 percent of the parent's earnings will bring the earnings down to $560,000 [700,000 – ($700,000  0.2) = $560,000]. When this amount is added to the earnings of the subsidiaries, the total falls short of the $1,000,000 level established by Nate's bank. PTS: 1 DIF: Challenging OBJ: 4 NAT: AACSB Analytic | AICPA FN Measurement KEY: Consolidated financial statements MSC: ACBSP-APC-21-Corporate Investments Accounting

LOC: Critical Thinking