TEST BANK FOR Financial Accounting v. 2.0 Joe Ben Hoyle Skender. by StudyGuide

Chapter 1 What Is Financial Accounting, and Why Is It Important? Section 1 True/False Questions 1. Financial accounting is limited to analyzing the financial information conveyed through financial statements. False; Easy 2. The knowledge of financial accounting can assist people with decisions such as whether to extend credit to a business. True; Easy 3. Employees of a company would not have a reason to use the information provided by financial accounting. False; Easy 4.

Financial accounting should be used for assessing the financial health of large organizations only. False; Moderate

5. Financial accounting can be helpful for a job candidate who is assessing the financial future of a potential employer. True; Easy 6. Lenders might use the information produced by financial accounting when making loan decisions. True; Easy 7. Credit analysts prefer not to use information provided by financial accounting, as it is not accurate. False; Easy 8. Financial accounting is helpful to investment advisors. True; Easy 9. Financial accounting is more useful than managerial accounting. False; Easy 10. The decision to buy or rent equipment is an example of a decision aided by managerial accounting. True; Moderate

Hoyle, Financial Accounting 2.0

Multiple Choice Questions 11. Which of the following statements is true of financial accounting? a. It is used to make lease or purchase decisions. b. It is primarily used to make internal decisions of a business. c. It is used by external parties to make investment decisions. d. Managerial accounting is another name for financial accounting, e. The effectiveness of advertising can be judged using financial accounting. c; Moderate 12. The charge for using money over time, often associated with long-term loans, is known as: a. cash dividend. b.interest. c. preferred dividend. d.principal. e. distribution charge. b; Easy 13. Which of the following is a decision that would most likely involve managerial accounting information? a. Loaning money to another company b.Deciding whether to buy or rent equipment c. Investing in the stock of another company d.Deciding whether to extend credit to a potential customer e. Choosing which employer to work for based on future prospects b; Moderate 14. Which of the following decisions would be considered more of a managerial accounting decision than a financial accounting decision? a. Loaning money to Company X instead of Company Y b.Determining that Company J is more profitable than Company K c. Investing in the stock of Company T instead of Company U d.Deciding the price to be charged for a new product e. Deciding whether to extend credit to Company L d; Moderate

Hoyle, Financial Accounting 2.0

15. Who among the following are the users of managerial accounting information? a. Lender b.Competitors c. Government d.Third Party Investor e. Board of Directors e; Moderate 16. Who are the common users of financial and managerial accounting information? a. Government b.Managers c. Shareholders d.Competitors e. Customers b; Moderate 17. Which of the following is a common feature of financial and managerial accounting? a. Both have same objectives b.Both are reported at year end in the annual report c. Both are analyzed by external users while making investment decisions d.Both are used by the management in making decisions e. Both are prepared according to U.S. GAAP d; Moderate 18. Financial accounting rules require interest to be reported at a reasonable rate: a. at the beginning of the accounting period. b.when a floating rate is set by the creditor. c. when specified interest rate is higher than market rate. d.when specified interest rate is less than market rate. e. when interest rate is not specifically mentioned in the debt agreement. e; Moderate 19. Which of the following statements is true of financial accounting? a. Managerial accounting is a branch of financial accounting. b.Financial accounting reports are based on accounting principles. c. Financial accounting and managerial accounting have same objectives. d.Financial accounting information has no relevance for the employees of a company. e. Financial accounting is optional for companies. b; Moderate

Hoyle, Financial Accounting 2.0

20. The communication of financial information within an organization so that internal decisions can be made in an appropriate manner is known as: a. financial accounting. b.managerial accounting. c. cost analysis. d.tax accounting. e. information analysis. b; Moderate

Fill in the blanks 21. _____ accounting is the communication of information about a business so that its financial health can be assessed. Financial; Easy 22. The two types of accounting are _____ accounting and _____ accounting. financial, managerial; Easy 23. _____ is the communication of financial information for decision-making purposes. Accounting; Easy Short Answer Questions 24. Explain why non-accountants need an understanding of financial accounting. Financial accounting conveys information, which helps users make decisions about the financial health of an organization. Employees, prospective employees, loan officers, and investment counselors are just a few of the groups who could benefit from understanding financial accounting. Easy 25. Explain the difference between financial accounting and managerial accounting. Financial accounting provides information to external users to make decisions about that organization. Managerial accounting provides information for internal decision makers. Easy

Hoyle, Financial Accounting 2.0

Section 2 True/False Questions 26. To be considered an owner of a corporation, one must own at least five shares of the corporation’s stock. False; Easy 27. Stockholders of a corporation are granted all rights as specified by the state government or the stock certificate. True; Moderate 28. Stocks traded on a stock exchange will continually go up and down in value. True; Easy 29. Owners of business wishing to form a corporation must apply to the federal government for recognition as a legal entity. False; Hard 30. To have a business identified as a corporation, its owners must apply to the state government for incorporation. True; Easy 31. Stockholders in large corporations like The Coca Cola Company do not typically have a say in the day-to-day operations of the company. True; Easy 32. Management of a corporation votes to elect the Board of Directors to make the day-to-day decisions for the company. False; Easy 33. A company’s stock price is affected by its past profitability. True; Moderate 34. Investors hope to make money by investing in stock that will rise in price. True; Easy 35. Investors enjoy tax benefits if they sell their stock before they have held it for a year. False; Moderate 36. Dividends are required to be paid to stockholders on an annual basis. False; Easy

Hoyle, Financial Accounting 2.0 37. An individual who owns one or more shares of stock in a corporation is an owner of that corporation. True; Easy 38. Corporations do not exist as separate legal entities apart from their owners. False; Moderate 39. Federal laws prohibit one investor from owning the majority of shares in a corporation. False; Hard 40. Stock markets match up investors who wish to buy shares with those who wish to sell them. True; Easy 41. It is very difficult to buy or sell ownership shares of a corporation in a stock exchange. False; Moderate 42. An investor expecting a company’s stock price to rise believes that the company has a bright future. True; Easy 43. An investment in stock is considered virtually risk free. False; Moderate 44. The only way for stockholders to make money on their investment is when the stock price rises. False; Moderate Multiple Choice Questions 45. Which of the following has the authority to formally recognize a business as a separate legal entity? a. FASB b. State Government c. NASDAQ d. Board of Directors e. SEC b; Easy

Hoyle, Financial Accounting 2.0

46. NASDAQ refers to: a. National Association of Securities Dealers Automated Quotations. b. National Association of Stock Dealers Automated Quotations. c. National Association of Shares Dealers Automated Quotations. d. National Administration for Shares Dealers Automated Quotations. e. National Administration of Securities Dealers Automated Quotations. a; Easy 47. Legal process by which owners of an organization apply to a state government to have it identified as an entity legally separate from its owners is called: a. incorporation. b. registration. c. filling. d. stocking. e. attributing. a; Moderate 48. Which of the following is the largest stock exchange in the world? a. NASDAQ b. New York Stock Exchange c. London Stock Exchange d. Tokyo Stock Exchange e. Shanghai Stock Exchange b; Easy 49. An advantage of ownership in a sole proprietorship over ownership in a corporation is: a. separation of owner and business as legal entities. b. tax benefits. c. the ability to raise capital through issuance of stock. d. limited liability for debts. e. having a board of directors. b; Moderate 50. An advantage of ownership in a corporation over ownership in a partnership is: a. tax benefits. b. easy establishment. c. each stockholder has a say in the operation of the corporation. d. the ability to raise capital through issuance of stock. e. owner decides the amount of dividend to be distributed. d; Moderate

Hoyle, Financial Accounting 2.0

51. The group stockholders elected to oversee their corporation is _____. a. management b. the board of directors c. employees d. a stock exchange e. investors b; Easy 52. Who elects a corporation’s board of directors? a. Management b. Stockholders c. Employees d. Creditor e. Government b; Easy 53. Who hires the management of a corporation? a. Board of directors b. Stockholders c. Government d. Creditors e. SEC a; Easy 54. Who is involved in the day-to-day operations of a corporation? a. Board of directors b. Stockholders c. Government d. Creditors e. Management e; Easy 55. Which of the following statements is true of stock? a. A capital gain is recorded by the corporation when the stock prices increase over a year. b. The stock prices are expected to fall after a company declares dividend. c. The dividends to be distributed on stock is determined by stockholders. d. Investor should own 1% of total stock of a company to become a stockholder of the company. e. The value of stock traded on a stock exchange fluctuate based on the future prospects of an organization. e; Easy

Hoyle, Financial Accounting 2.0

56. One of the advantages of a sole proprietorship or a partnership over incorporation is: a. easy access to equity capital. b. easy access to debt capital. c. potential income tax benefits. d. limited liability. e. access to government funding during distress c; Moderate 57. Who makes the decision to pay dividends in a company? a. Employees b. Management c. Stockholders d. The Board of Directors e. Creditors d; Moderate 58. Dividend refers to a(n): a. reward for being an owner of a prospering business. b. reward for being a creditor of a prospering business. c. ownership right on a corporation. d. liability for holding shares of a corporation. e. tax benefit received for holding stocks for over twelve months. a; Easy

59. Which of the following benefits can a stockholder accrue from the ownership of capital shares? a. Cash Dividend b. Receipt of interest c. Decrease in stock price d. Increase in competitor’s stock price e. Increase in subsidiary’s stock price a; Easy 60. Kendra Jackson purchases 120 shares of Kingdom Corporation on May 30 for $36 per share. During July, Kingdom paid dividends of $4.00 per share. On October 19, Kendra is considering selling all of her shares, which are now selling for $40 per share. The value of Kendra’s investment on October 19 is _____. a. $5,280 b. $4,800 c. $4,320 d. $4,000 e. $5,000 a; Moderate ©2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

61. Jonathan purchases 100 shares of Carnival Corporation on July 1, 2013 for $20 per share. During September, Carnival distributed dividends of $5 per share. The market price of the stock was $28 per share as of December 31, 2013. Jonathan decided to sell the stock on December 31, 2014 when the stock price was $30 per share. Determine the capital gain to be reported by Jonathan in 2013. a. $0 b. $200 c. $800 d. $1,000 e. $1,500 d; Moderate 62. A company purchases shares on 1/1/13 for $150. During the year, quarterly dividends of $1.50 per share were declared and paid. The market price of the stock on 12/31/13 is $162. What is the investor's return for the year? a. 4% b. 8% c. 9% d. 11% e. 12% e; Moderate 63. Which of the following is a factor influencing the movement of a company’s stock price? a. The perceived quality of the company’s management b. The number of employees working in the company c. The death of a shareholder of the company d. The salary of the chief executive officer of the company e. The movement of a company’s stock which is not in the same industry a; Easy 64. The strategy of a corporation is approved by: a. an investor. b. a stockholder. c. a lender. d. the government. e. the board of directors. e; Moderate

Hoyle, Financial Accounting 2.0

65. The annual rate of return on stock: a. quantifies the financial benefit earned due to change in net income. b. quantifies the financial benefit due to change in cash position of a corporation. c. helps select from among multiple investment opportunities. d. compares the benefit due to change in stock price with dividend earned on stock. e. determines the income earned by holding a stock for less than a year. c; Moderate Fill in the blanks 66. In income taxes, the difference between the buy and sale price for stock held for over twelve months is a _____. long-term capital gain or loss; Moderate 67. A _____ is a reward for being an owner of a business that is prospering. dividend; Easy 68. A _____ is a type of organization legally separate from its owners. corporation; Easy 69. An individual must own at least _____ share(s) to be considered an owner in a corporation. one; Moderate 70. Stock is sold and bought on _____. stock exchanges or markets; Moderate Short Answer Questions 71. Why would a person or organization choose to become a stockholder in a corporation? Individuals and organizations invest in the stock of corporations to earn a return. In other words, they hope to see the value of their investment increase. This can be accomplished in two ways: 1) the stock price rises after the stock is purchased and/or 2) the corporation pays dividends to its stockholders. Easy

Hoyle, Financial Accounting 2.0

72. What is the role of the board of directors of a corporation? Not all the stockholders can be a part of the day-to-day operations of a corporation. Therefore, they elect the board of directors to oversee the management of the corporation. The board of directors selects the management of the company as well as determines the timing and amount of dividends. Moderate 73. Name three factors that influence a stock’s price. 1) The perceived quality of the company’s management 2) Historical trends in profitability 3) The viability of the industry in which it operates 4) The health of the economy as a whole Moderate Problems 74. Marjorie Reynolds recently received a bonus at work and has decided to invest it in the stock of either Fabulous Corporation or Terrific Corporation. Following information is provided:

Stock price, 1/1/13 Stock price, 12/31/13 Dividend per share during year

Fabulous Corp. $98 $103 $3

Terrific Corp. $76 $92 $0

a. Determine the value of each share of stock on December 31 as compared with January 1. Fabulous Corp: Terrific Corp:

$103 + $3 = $106 per share $92 + $0 = $92 per share

b. Determine the annual rate of return on the two stocks. Fabulous Corp: Terrific Corp:

($106 – $98)/$98 = 8.2% ($92 – $76)/$76 = 21.1%

Hoyle, Financial Accounting 2.0

c. Based on only your calculations above, in which stock would you recommend Marjorie invest? Based on only the annual rate of return, it appears that Terrific Corporation would be the better investment alternative as its rate of return of 21.1% far outpaces the rate of return of Fabulous Corporation at 8.2%. Moderate 75. Jacqueline Jackson is an investor in Ophelia Corporation. On February 4, 2018, she purchased 1,000 shares of stock at a price of $15 per share. On June 15, 2018, Ophelia distributed dividends of $3.00 per share. On December 31, 2018, Ophelia’s stock is selling for $18 per share. a) Determine the value of a share of Ophelia’s stock on December 31. $18 + $3 = $21 per share b) Determine the value of Ms. Jackson’s investment on December 31. $21 × 1,000 shares = $21,000 Moderate 76. Mark Ballows is an investment advisor at Young and Ballows. He is looking at the value of two stocks and is considering recommending to clients. Information about these two stocks is as follows:

Stock price, 1/1/13 Stock price, 12/31/13 Dividend per share during year

Parham Corp. $14 $18 $.50

Ontario Corp. $52 $60 $1.00

a. Determine the value of each share of stock on December 31 as compared with January 1. Parham Corp.: $18 + $.5 = $18.50 per share Ontario Corp.: $60 + $1 = $61 per share b. Determine the annual rate of return on the two stocks. Parham Corp.: ($18.50 – $14)/$14 = 32.1% Ontario Corp.: ($61 – $52)/$52 = 17.3% Moderate

Hoyle, Financial Accounting 2.0

Section 3 True/False Questions 77. Potential creditors are interested in the existing amount of debt of a company. True; Easy 78. Financial data includes information, which can be measured in both monetary and nonmonetary terms. False; Easy 79. The number of employees of a company is not considered as financial information. True; Moderate 80. The number of mp3 players in a company’s inventory is not financial information, but the fact that they have a value of $489,000 is considered financial information. True; Moderate 81. Verbal explanations of financial information are not permitted. False; Easy 82. Financial data is only beneficial to investors and potential investors. False; Easy 83. Financial data is measured in monetary terms. True; Easy 84. The fact that a company has a cash balance of $456,000 is financial information. True; Easy 85. Financial information can be accompanied by verbal explanations. True; Easy Multiple Choice Questions 86. A company’s creditors are those who: a. have invested in the company’s shares. b. have purchased the company’s inventory. c. have lent the company money. d. the company have lent money. e. are eligible to receive dividends declared by the company. c; Easy

Hoyle, Financial Accounting 2.0 87. Hank Dowell is a loan officer at Small Town Bank. He is reviewing Chessney Company for a loan. Which of the following is likely to be the most important in Hank’s decision whether to approve the loan for Chessney? a. Chessney has paid dividends to stockholders for the past two years b. Chessney’s stock price has risen over the past year c. Chessney has sufficient cash flow to pay interest d. Analysts predict that Chessney’s stock will continue to rise e. Chessney’s board of directors has indicated that the company will pay dividends again this year c; Moderate 88. Inventory refers to the: a. excess amount paid for an asset over its fair value. b. amount of net income reinvested by company for future operations. c. merchandise bought or manufactured for the purpose of selling. d. intangible assets of a business. e. revenue generated from investment. c; Easy 89. Investors use financial information to predict whether a: a. company has invested in buildings. b. company will pay salaries. c. company will recruit more employees. d. company’s stock price will increase e. company’s bond price will increase. d; Easy 90. Creditors use financial information to predict whether a: a. company will be able to pay dividends. b. company will be able to pay interest. c. company will be able to pay salaries. d. company will be able to issue additional shares.. e. company’s stock price will increase. b; Easy 91. Which of the following would be considered as financial information reported by a corporation? a. Buildings – $4,800,000 b. Goods sold last year – 5,000 units c. Investment – 500 shares of Coco Cola Inc. d. Number of employees – 800 e. Production rate – 5 units per hour a; Easy

Hoyle, Financial Accounting 2.0

92. Financial information reported by an organization consists of data that can be: a. explained verbally. b. explained in quantifiable terms. c. measured in monetary terms. d. measured in numerical terms. e. measured in percentage. c; Easy 93. Which of the following would be considered as verbal explanation for Bullox Corporation? a. Bullox has buildings worth $4,800,000 b. Bullox had sales last year of $15,699,000 c. Bullox owes James River Bank $800,000 d. Bullox owns 7,000 acres of land e. Bullox pays its employees $490,000 d; Easy 94. Saturn Corporation is facing a lawsuit for copyright infringement. The case is filled by Dealin Corporation. Determine which of the following estimates will be reported as financial information by Saturn Corporation. a. The market price of Saturn Corporation will drop in the current fiscal year. b. The case is expected to resolve in 2 years. c. The case is expected to be in favor of Dealin Corporation. d. The loss on lawsuit is expected to be $20,000. e. The company is expecting a 5% drop in sale after the lawsuit is resolved. d; Moderate 95. Which of the following statements provide rationale for investor’s preference to invest in capital stock rather than other forms of investment like real estate? a. The rate of return is fixed in capital market. b. The capital stock market is liquid. c. The price of capital stock is not as volatile as prices of real estate. d. The capital stocks generally provide a smaller rate of return than real estate. e. The price of capital stock is not affected by changes in the taxation policy. b; Moderate

Hoyle, Financial Accounting 2.0

Fill in the blanks 96. _____ explanations are included with financial information to clarify information. Verbal; Easy Short Answer Questions 97. Discuss how the assessment of a company’s financial information by a potential stockholder would differ from the assessment of a potential creditor. Potential stockholders are primarily interested in assessing 1) the likelihood of company’s stock price rise in the future and 2) the amount of cash dividends the company is likely to pay in the future. Potential creditors are more interested in the whether or not the company has sufficient cash flows to meet principle and interest payments. Moderate 98. Name at least three potential users of a company’s financial information and briefly explain how each user might use the information. Choose three: 1) Investors predict the fluctuations in stock price of a company and the amount of dividends it may pay in the future. 2) Creditors are interested in how much debt a company already has and whether it has sufficient cash flows to meet principle and interest obligations. 3) Current employees are interested in whether their employer will remain in business and how much will be available for pay hikes and bonuses. 4) Prospective employees would want to see the likelihood of a company to remain in business. 5) Suppliers and others extending credit are interested in how much a company currently owes and the likelihood they will be paid. Easy 99. Explain why verbal explanations are included with financial information. Verbal explanations are included to clarify or expand on the monetary information presented. For example, the potential loss on a lawsuit might be included in the financial statements. A verbal explanation about the lawsuit could be included to provide more information to users. Easy

Hoyle, Financial Accounting 2.0

Problems 100. Mark each of the following with an (F) to indicate if it is financial information or an (N) to indicate if it is non-financial information. a. _____ Building worth $5,000,000 b. _____ Number of employees = 900 c. _____ Inventory balance of $30,000 d. _____ Number of shares of stock = 840 e. _____ 11 locations around the city a. F b. N c. F d. N e. N Easy 101. Mark each of the following with an (F) to indicate if it is financial information or an (N) to indicate if it is non-financial information. a. _____ 3,000 vehicles in stock b. _____ 500 locations across the country c. _____ Cash balance of $560 d. _____ Owes $450,000 to the bank e. _____ Salaries for last year = $2,300,000 a. N b. N c. F d. F e. F Easy

Hoyle, Financial Accounting 2.0

Chapter 2 What Should Decision Makers Know in Order to Make Good Decisions about an Organization? Section 1 True/False Questions 1. Financial accounting can be compared to a portrait. True; Easy 2. Financial statements provide the form and structure for the conveyance of financial information that will create a likeness of the reporting organization. True; Moderate 3. The information reported in financial statements must be exact for an investor to make any decision. False; Easy 4. Investors and creditors do not need absolute accurate information to make decisions on a company. True; Easy 5. Financial information should be free of material misstatements True; Easy 6. A misstatement is deemed to be material if its presence impacts a decision. True; Moderate 7. Errors and frauds are the two types of misstatements. True; Easy 8. No material misstatements are allowed if financial statements are to be called fairly presented. True; Moderate 9. Materiality is relative to the size of an organization. True; Moderate 10. Fraud includes intent to deceive and is more troublesome to decision makers than a mere error. True; Easy 11. Size is the only consideration in determining whether a misstatement will have an impact on a decision maker’s actions or not.

Hoyle, Financial Accounting 2.0 False; Hard 12. Material misstatements prevent financial information from being fairly presented. True; Moderate Multiple Choice Questions 13. Which of the following is true of financial statements? a. Financial statements are distributed only to the employees of a company. b. Financial statements are limited to a representation of a company’s operation. c. Financial statements will create a likeness of the reporting organization. d. Financial statements provide employee details. e. Financial statements are exactly accurate. c; Easy 14. Which of the following is a factor pertaining to knowledge of information that will affect a decision made by a user from that information? a. Materiality b. Representation faithfulness c. Error d. Misstatement e. Fraud a; Moderate 15. Financial statements are a representation of an organization’s: a. frauds. b. operations. c. competitors. d. threats. e. work union. b, Moderate 16. Which of the following are the two types of misstatements? a. Materiality and fraud b. Fraud and errors c. Errors and mismatch d. Materiality and errors e. Fraud and issues b; Moderate

Hoyle, Financial Accounting 2.0

17. Which of the following is an intentional misstatement? a. Error b. Mistake c. Representational faithfulness d. Fraud e. Materiality d; Easy 18. Which of the following is an accidental misstatement? a. Error b. Materiality c. Representational faithfulness d. Irrelevance e. Fraud a; Easy 19. Which of the following factors is considered in judging if the misstatements are material? a. People responsible for the misstatement b. Profits made by the company c. Number of employees in the company d. Size and cause of the misstatement e. Competitor’s profits d; Moderate 20. Financial information is not fairly presented if it contains: a. verbal explanations b. intangible assets. c. material misstatement. d. contingent liability. e. assumptions. c; Easy 21. Which of the following is true of misstatement? a. A misstatement is of two types: inconsistency and inaccuracy. b. Misstatement always leads to liquidation of a company. c. Only the cause should be weighed in considering whether the misstatement is material or not. d. A misstatement is deemed to be material if it is so significant that its presence would impact a decision made by an interested party e. Financial information is said to be fairly presented, even though material misstatement exists. d; Moderate

Hoyle, Financial Accounting 2.0 22. The communication of an appropriate picture of an organization, which can serve as the basis for appropriate decisions is termed as: a. representational faithfulness. b. material misstatement. c. conservatism. d. principle of prudence. e. certainty. a; Easy 23. An error (made accidentally) or fraud (done intentionally) where reported figures or words actually differ from the underlying reality is called a(n): a. inconsistency. b. insincerity. c. misstatement. d. uncertainty. e. materiality. c; Easy 24. Which of the following statements is true of financial information? a. It should always be exactly accurate. b. It does not represent the likeliness of an organization, if it is not exact. c. It is free from uncertainties. d. It can be useful even if it is not exact. e. It almost always does contains material misstatements. d; Moderate 25. Financial information that contains no material misstatements in accordance with an accepted standard for financial reporting is termed as: a. free from uncertainty. b. fairly presented . c. fraudulent reporting. d. universal reporting. e. inconsistent. b; Easy 26. Quantitative reports and related verbal disclosures that convey monetary information as a basis for representing its financial health and future prospects are called: a. misstatements. b. supplemental statements. c. financial statements. d. statement of notes and disclosures. e. annexures. c; Easy ©2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0 27. A company constructs a building and reports the cost of construction at $400 million. Which of the following is a true statement? a. The company cannot spend more than $400 million on the building. b. The accountant would never let the amount of $400 million be reported if it were not right down to the penny. c. Reporting $400 million in the financial statement will lead to material misstatement. d. To be fairly presented, the true cost of the building cannot be materially different from $400 million. e. Investors will expect that $400 million was the exact cost of the building. d; Moderate Fill in the blanks 28. Financial information reported to decision makers should not contain _____ misstatements. material; Easy 29. The two types of misstatements are _____ and _____. errors and fraud; Easy 30. A misstatement is _____ if its presence would impact a decision made by an interested party. material; Moderate 31. The two factors that influence the materiality of a misstatement are the _____ and the _____ of the misstatement. size, cause; Easy Short Answer Questions 32. Explain the difference between a material and a non-material misstatement. A misstatement is material if a decision maker would make a different decision if the correct information had been reported. A non-material misstatement will not cause the user to make a different decision than if the correct information had been reported. Easy 33. Explain how financial accounting is like painting a portrait. The purpose of a portrait is to capture a person’s likeness; the purpose of financial accounting is to capture the likeness of an organization that can help decision makers. Just as portraits are not a perfect copy of a person, financial accounting does not purport to be exact. Easy

Hoyle, Financial Accounting 2.0 34. Name the two types of misstatements and explain how they differ. The two types of misstatements are errors and fraud. Errors are made accidentally, while fraud is done intentionally. Easy 35. Explain why decision makers do not expect financial information to be exact. Exactness with financial information is rarely possible. Users understand this. As long as no material misstatements exist, users can rely on the financial information to help them make decisions. Moderate Section 2 True/False Questions 36. Many of the events encountered everyday by an organization contains some degree of uncertainty. True; Easy 37. Salary Expense to be paid by a company would be an example of an uncertainty faced by a company. False; Easy 38. Accounting is the language of business. True; Easy 39. Effective communication requires set terminology and, structural rules and principles. True; Moderate 40. Financial accounting has its own terminology. True; Easy 41. It is important for non-accountants to understand the terminology of accounting if they wish to make financial decisions about a company. True; Easy

Hoyle, Financial Accounting 2.0

Multiple Choice Questions 42. Which of the following is an example of an uncertainty faced by an organization? a. Monthly rent expense paid on office building b. Cash balance reported on a bank statement c. Annual salary paid to an employee d. Current cash balance reported on a company’s financial statement e. Cash bonus to be paid to employees based on company’s stock price e; Easy 43. Which of the following statements is true of financial accounting? a. Exactness is the goal of financial accounting. b. Financial accounting information is free from uncertainties. c. Accounting is referred to as the “language of business”. d. Financial accounting doesn’t have its own set of terminology, making it difficult to interpret financial information. e. Financial accounting is limited to access the future prospects of an organization. c; Easy 44. Which of the following is a requirement for successful communication of financial information? a. Presence of exact numbers b. Nonexistence of uncertainties c. The structural rules must be understood by all parties involved. d. Receiver being a close-minded e. Nonexistence of defined set of terminology c; Easy 45. As accounting is a business language, which of the following guides the reporting process so that the resulting accounting information will be fairly presented and readily understood by all interested parties? a. Guidance document attached to financial statements b. Grammar rules c. Syntax and punctuation d. Structural rules and principles e. Decision-making process d; Moderate

Hoyle, Financial Accounting 2.0

46. Which of the following is one of the major challenges faced by an accountant? a. Deciding which accounting standard to follow b. Determining if a transaction is affecting asset, liability, revenue or expense c. Setting structural rules and principles for reporting d. Reporting events in the face of uncertainty e. Developing terminologies for financial accounting d; Easy 47. Accounting is sometimes referred to as the language of business because: a. it overstates profit and understates loss made by the company. b. it give the details of employees working in a company. c. it communicates a portrait of financial health of an organization. d. it has less terminologies. e. it uses generally accepted accounting standards. c; Easy

Fill in the blanks 48. _____ is sometimes referred to as the language of business. Accounting; Easy 49. Almost every Organization faces _____ like lawsuits when presenting financial information. uncertainties; Easy Short Answer Questions 50. Explain how accounting is like a language. Accounting is the language that allows organizations to communicate their financial health and future prospects to decision makers using words and numbers. Like other languages, accounting has a set terminology and structural rules and principles, which allow for effective communication. Easy

Hoyle, Financial Accounting 2.0

51. Explain how knowledge of the language of accounting will benefit a non-accountant. Financial accounting conveys information, which helps users make decisions about the financial health of an organization. Those who evaluate loan applications, buy capital stock, grant credit, make employment decisions, and provide investment advice need to speak the language of accounting just as accountants do. The more such individuals know about financial accounting terminology, rules, and principles, the more likely it is that they will arrive at appropriate decisions. Easy 52. Name three uncertainties faced by businesses trying to present their financial information. Uncertainties faced by organization are: 1) Lawsuits 2) Sales of merchandise on credit 3) Promises to pay employee bonus based on future earnings Easy

Section 3 True/False Questions 53. If both the accountant and the decision maker understand U.S. GAAP, financial statements should be conveyed successfully. True; Easy 54. Accounting principles evolve quickly as the nature of business changes and new reporting issues, problems, and resolutions arise. True; Easy 55. U.S. companies grow and prosper by convincing investors and creditors to contribute money to them. True; Moderate 56. Investors and creditors want to assess the risks and rewards before providing financing for a company. True; Easy 57. U.S. GAAP is primarily created by the Securities and Exchange Commission. False; Moderate

Hoyle, Financial Accounting 2.0

58. A change in U.S. GAAP can take years, as changes are never made without proper consideration. True; Easy 59. The FASB is the only creator of U.S. GAAP. False; Easy 60. The United States has not yet adopted IFRS for financial reporting. True; Moderate 61. IFRS is more rules based, while U.S. GAAP is more principles based. False; Hard Multiple Choice Questions 62. GAAP stands for: a. Generally Accepted Accounting Principles. b. Generally Applied Accounting Principles. c. Generally Accepted Accounting Procedures. d. Governmentally Applied Accounting Procedures. e. Governmentally Accepted Accounting Procedures. a; Easy 63. The FASB stands for: a. Federal Accounting Standards Board. b. Foreign Average Standards Business. c. Federal Accounting Securities Business. d. Financial Accounting Securities Board. e. Financial Accounting Standards Board. e; Easy 64. The group primarily responsible for setting accounting standards in the United States is the: a. American Institute of Certified Public Accountants (AICPA) b. Securities and Exchange Commission (SEC) c. Standing Interpretations Committee (SIC) d. International Accounting Standards Board (IASB) e. Financial Accounting Standards Board (FASB) e; Easy

Hoyle, Financial Accounting 2.0

65. Which of the following is true of U.S. GAAP? a. U.S. GAAP is principles-based set of standards. . b. U.S. GAAP is primarily created by the International Accounting Standards Board. c. U.S GAAP is currently not used by any countries in U.S. d. A company in Georgia and a company in Virginia are both subject to the rules of U.S. GAAP. e. U.S. GAAP has been in existence since World War I. d; Moderate 66. International Financial Reporting Standards (IFRS) are produced by the: a. Standing Interpretations Committee (SIC). b. International Accounting Standards Board (IASB). c. Financial Accounting Standards Board (FASB). d. Securities and Exchange Commission (SEC). e. Public Company Accounting Oversight Board (PCAOB). b; Easy 67. Which of the following is true of IFRS? a. IFRS are applied to most of financial information presented within the United States. b. IFRS is rules-based set of standards. c. The Financial Accounting Standards Board (FASB) has held the authority to develop IFRS since 1973. d. IFRS is more based on principles. e. IFRS is entirely different from standards set by U.S. GAAP. d; Moderate 68. A few companies in the U.S. do not favor switching financial reporting from U.S. GAAP to IFRS. Which of the following is a possible reason for this? a. The switching will cost the companies lot of money. b. Switching would make it difficult to raise capital around the world. c. IFRS allows the preparers of financial information more judgment in applying general rules, which leads to inconsistency. d. IFRS are very rules-based set of standards that is difficult to navigate. e. Consolidated bookkeeping is a very complex task. a; Moderate 69. Which of the following is an importance of accounting standards? a. It helps in making financial reporting free from uncertainties. b. It helps in projecting a loss-incurring company as a profit-making company.. c. It helps in evaluating the financial health and future prospects of an organization. d. It helps in reporting the financial information with exactness. e. It helps in covering the material misstatements made unintentionally. c; Easy ©2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0 70. The Financial Accounting Standards Board (FASB) is: a. a governmental organization. b. in charge of the creation of IFRS. c. an independent group supported by the U.S. government, various accounting organizations, and many private businesses. d. responsible for amending present accounting rules, but doesn’t have the right to pass new rules. e. against the switching of financial reporting from U.S GAAP to IFRS in United States. c; Moderate 71. Which of the following statement is true of U.S. GAAP? a. The IASB issues U.S. GAAP. b. Investors and creditors would be just as likely to contribute money to companies even if U.S. GAAP did not exist. c. U.S. GAAP can also be called as International Financial Reporting Standards. d. Without U.S. GAAP, investors and creditors would encounter significant difficulties in evaluating the financial health and future prospects of an organization. e. U.S. GAAP has limited the development and expansion of thousands of businesses. d; Easy 72. Which of the following is a true statement? a. U.S. GAAP enables decision makers to obtain information needed to reduce the risk of investment. b. The Financial Accounting Standards Board (FASB) has held the authority to develop IFRS since 1973. c. IFRS is used only by the countries with capitalist economy. d. Changes to U.S. GAAP are made without proper changes. e. U.S. GAAP is used only by governmental organizations. a; Easy 73. IFRS is more principles based, whereas, U.S. GAAP is more: a. ethics based. b. rules based. c. codes based. d. ideologies based. e. philosophies based. b; Easy

Hoyle, Financial Accounting 2.0 Fill in the blanks 74. The _____ is primarily responsible for creating U.S. GAAP. FASB; Easy 75. _____allows businesses in Oregon and Mississippi to account for financial information in the same manner. U.S. GAAP; Easy 76. To grow, U.S. companies must convince _____ and _____ to contribute money voluntarily. creditors and investors; Easy 77. The United States is considering switching from U.S. GAAP to ________. IFRS; Moderate Short Answer Questions 78. Explain the role of the Financial Accounting Standards Board. The Financial Accounting Standards Board is an independent body that has been tasked with creating accounting standards for businesses in the United States. It has been in existence since 1973. When an accounting issue arises about which companies need guidance, FASB steps in to study the issues and alternatives. After a period of study, the board might pass new rules or make amendments to previous ones. FASB is methodical in its deliberations and the entire process can take years. Changes to U.S. GAAP are never made without proper consideration. Moderate 79. Explain the importance of U.S. GAAP to businesses in the United States. Businesses in the United States must convince outside investors and creditors to invest or loan them money if they wish to operate and grow. Obviously, this entails risk on the part of the investor or creditor. Decision makers must believe that they are using reliable data to make reasonable estimations of future stock prices, cash dividends, and cash flows. Without rules for financial reporting, this analysis would be difficult, if not impossible. U.S. GAAP enables outside parties to obtain the financial information they need to reduce their perceived risk to acceptable levels. It provides rules for financial reporting. If investors and creditors understand these rules, they can analyze a company’s financial statements to help them determine whether they should invest in a particular company or not. The U.S. economy would not be what it is today without GAAP. Moderate

Hoyle, Financial Accounting 2.0 Section 4 True/False Questions 80. An asset is a probable future economic benefit owned or controlled by an organization. True; Easy 81. Inventory is an example of an asset. True; Easy 82. Liabilities are amounts contributed by owners. False; Moderate 83. Notes due to banks are an example of a liability. True; Easy 84. A retained earnings is an example of an asset. False; Easy 85. Sale of office building by a textile manufacturing company is considered as revenue. False; Easy 86. Revenue is a measure of the financial impact on an organization that results from a sale. True; Easy 87. The balance of total net assets is also known as equity. True; Moderate 88. An expense is an inflow of net assets. False; Easy 89. Salaries paid to employees are an example of an expense. True; Easy Multiple Choice Questions 90. Probable future sacrifice of economic benefits arising from present obligations is termed as a(n): a. revenue. b. expense. c. net asset. d. asset. e. liability. e; Easy

Hoyle, Financial Accounting 2.0 91. Which of the following is true of revenue? a. It is a probable future economic benefit owned or controlled by an organization. b. Unearned revenue and investments are examples of revenue. c. It is the lifeblood of any organization. d. It reflects decrease in net assets. e. It is opposite of liability. c; Easy 92. Which of the following is true of an expense? a. It is a probable future sacrifice of economic benefits arising from present obligation. b. Note payable and outstanding expenses are examples of expense. c. It reflects decrease in net assets. d. It is incurred in hopes of generating assets. e. It is the lifeblood of any organization. c; Easy 93. Unearned revenue and outstanding expense are examples of a(n): a. asset. b. liability. c. revenue. d. expense. e. Owners’ equity. b; Easy 94. Which of the following is an example of an expense? a. Building b. Debt c. Salaries d. Sales e. Cash c; Easy 95. Which of the following is an example of an asset? a. Note payable b. Inventory c. Sales d. Retained earnings e. Unearned revenue b; Easy

Hoyle, Financial Accounting 2.0

96. Sales is an example of a(n): a. revenue. b. asset. c. expense. d. misstatement. e. liability. a; Easy 97. Equipment is an example of a(n): a. liability. b. expense. c. error. d. revenue. e. asset. e; Easy 98. Net asset is calculated by subtracting: a. current liabilities from current assets. b. total liabilities from total assets. c. current assets from current liabilities. d. current assets from total assets. e. expenses from revenue. b; Easy 99. Vistas Wind Systems pays salaries to its employees at the end of each month. At the end of February, the company paid $3,000 towards salaries expenses. Out of $3,000, $1,200 is for the month of February and $1,800 is for the month of March. Which of the following statements is true? a. $3,000 will be reported as expense for the month. b. $1,800 will be reported as expense for the month. c. $3,000 will be reported as asset for the month. d. $1,200 will be reported as expense and $1,800 will be reported as asset for the month. e. $1800 will be reported as expense and $1,200 will be reported as a liability for the month. d; Hard

Hoyle, Financial Accounting 2.0

100. In the year 2016, Double Design Corporation purchased equipment costing $5,000 for cash. Which of the following statements is true of this transaction? a. The company will report an expense of $5,000. b. The company’s net asset will increase by $5,000. c. The company’s net asset would have decreased had the equipment been purchased on account. d. The company will report a liability of $5,000. e. The company’s net asset will not change because of this transaction. e; Moderate 101. Roberto’s Autos sells used cars and trucks. Roberto pays a monthly rental for the building in which his salespeople operate. The company owns the land on which the cars and building sit. Roberto makes most of his sales on credit. Last month, sales amounted to $45,000. Roberto pays salaries to his employees and pays to advertise his business. Which of the following is an asset owned by Roberto? a. Tax paid on land b. Advertising c. Rent expense d. Credit sales e. Amounts owed by customers e; Easy 102. Haley’s Hair Salon specializes in cuts and color for all hair types. Haley also sells beauty products. Last week, Haley borrowed $10,000 from the bank to buy new equipment for the salon. Which of the following is a true statement? a. If Haley sells the equipment, the amount realized from the sale will be reported as revenue. b. The amount borrowed from bank will increase the amount of owners’ equity. c. The $10,000 received from the bank is revenue for Haley. d. The beauty products Haley has in stock are an expense to her. e. Haley earns revenue by cutting hair. e; Moderate Fill in the blanks 103. A(n) _____ is an amount owed to another party. liability; Easy 104. A(n) _____ is a decrease in net assets to generate revenue. expense; Easy 105. A(n) _____ is a future economic benefit owned or controlled by a company. asset; Easy ©2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0 Short Answer Questions 106. Fill in each of the following with a (A) if it is an asset, a (L) if it is a liability, a (R) if it is revenue, and a (E) if it is an expense. a. Building__ A___ b. Bank note_ L____ c. Sale of services_ R____ d. Equipment__ A___ e. Insurance expense__ E____ f. Cash_ A____ g. Inventory__ A____ h. Sale of goods__ R____ Moderate 107. Explain the terms asset, liability, revenue, and expense. Asset: A probable future economic benefit owned or controlled by the reporting company, such as inventory, land, or equipment. Liability: A probable future economic sacrifice or, in simple terms, a debt. Revenue: A measure of the inflow or increase in net assets generated by the sales made by a business. It is a reflection of the amounts brought in by the sales process during a specified period of time. Expense: A measure of the outflow or reduction in net assets caused by a business’s attempt to generate revenue. Easy 108. Give two examples for each of the following: asset, liability, revenue, expenses. Asset: Cash and Building Liability: Note Payable and Outstanding expenses Revenue: Sale of goods and sale of services Expense: Rent expense and Salary expense Easy

Hoyle, Financial Accounting 2.0

Chapter 3 How is Financial Information Delivered to Decision Makers Such as Investors and Creditors? Section 1 True/False Questions 1. Financial statements provide a formal structure for conveying financial information to decision makers. True; Easy 2. Financial statements can be issued only once a year. False; Easy 3. The statement of cash flows is one of the financial statements produced by companies. True; Easy 4. The statement of assets is one of the financial statements produced by companies. False; Easy 5. Dividends paid are reported on the income statement. False; Moderate 6. A gain is an increase in net assets created by an occurrence central to an organization’s activities. False; Easy 7. If a clothing store sells equipment for an amount less than its carrying value on the date of sale, the store should report a loss on sale rather than an expense. True; Easy 8. A realtor sells a piece of land for an amount more than its original cost. The realtor should report this as a gain rather than revenue. False; Moderate 9. On June 1, Ronald purchased inventory worth $2,000 on account from Kelly Corporation. On June 12, the company sold the entire inventory for $3,500.On June 22, Ronald paid Kelly the total amount due. The cost of goods sold expense for this sale should be recognized on June 22 False; Easy 10. Gross profit is the difference between a company’s revenues and total expenses. False; Easy

Hoyle, Financial Accounting 2.0 11. Income tax expenses are expected to help an organization in generating additional revenue in the future. False; Easy 12. Tax expense is typically shown at the bottom of the income statement. True; Easy 13. Max Book Store buys inventory and a piece of land. When the company sells both, on the income statement, it will report cost of goods sold in connection with the inventory but not in connection with the land. True; Moderate Multiple Choice Questions 14. Which of the following is a financial statement produced by companies? a. Assessment sheet b. Statement of cash flows c. Statement of gross Income d. Expense statement e. Tax statement b; Easy 15. Which of the following statements is also called the statement of financial position? a. Income statement b. Statement of retained earnings c. Balance sheet d. Statement of cash flows e. Profitability statement c; Easy 16. Which of the following is an account found on the income statement? a. Dividends Paid b. Gains c. Equipment d. Retained Earnings e. Goodwill b; Easy 17. Cost of sales refers to the cost of the merchandise that: a. company purchased during the period. b. customers returned during the period. c. company have at the end of the period. d. customers purchased during the period. e. company have at the beginning of the period. d; Easy

Hoyle, Financial Accounting 2.0 18. The difference between a company’s sales and cost of goods sold is referred to as the: a. gross profit. b. net income. c. retained earnings. d. gain on sale. e. operating profit. a; Easy 19. A company’s gross profit percentage is its gross profit divided by its: a. net sales. b. cost of goods sold. c. net income. d. total expenses. e. total assets. a; Easy 20. Shields Corporation purchases 5 flashlights for $5 each and sells them to customers for $9 each. What is Shield’s total gross profit? a. $4 b. $20 c. $25 d. $45 e. $5 b; Moderate 21. A gain created by an occurrence that is outside a company’s primary or central operations is reported on the: a. income statement. b. statement of retained earnings. c. balance sheet. d. statement of working capital. e. cost sheet. a; Easy 22. Which of the following financial statements classify business activities into operating, investing, and financing activities? a. Income statement b. Trial balance c. Balance sheet d. Statement of cash flows e. Profitability statement d; Easy 23. Traylor Beauty Supply is in the business of selling hair care and other beauty products. It recently sold an old piece of equipment to Shaw Company for an amount more than what it had originally paid. Traylor should record a(an) _____ on the sale of the equipment.

Hoyle, Financial Accounting 2.0 a. revenue b. expense c. gain d. loss e. gross profit c; Moderate 24. Jenkins Corporation made sales of $900 during the month of October. Cost of goods sold for the month was $540. What was Jenkins gross profit percentage for the month? a. 40% b. 45% c. 50% d. 55% e. 60% a; Moderate 25. Robin Company reported cost of goods sold of $12,000 for the year. If the markup percentage was 25 percent, what was the revenue for the year? Assume a tax rate of 10 percent. a. $9,600 b. $10,000 c. $14,400 d. $16,000 e. $18,500 d; Moderate 26. Elenor Corporation sold goods that originally cost $605,000 for $1,100,000. What is Elenor’s gross profit? a. $605,000 b. $1,100,00 c. $495,000 d. $1,705,000 e. $-0c; Easy 27. For the year 2014, Thompson, Inc. reported cost of goods sold of $2,300. Revenue during the same period was $4,200. Thompson’s accountant mistakenly recorded cost of goods sold as $3,200 instead of $2,300. Which of the following statements is true? a. Thompson’s gross profit would be overstated. b. Thompson’s net income would be understated. c. Thompson’s retained earnings would be overstated. d. Thompson’s reported expenses would be understated. e. Thompson’s revenues would be understated. b; Hard 28. On which financial statement should income tax expense be reported?

Hoyle, Financial Accounting 2.0 a. Statement of cash flows b. Balance sheet c. Statement of retained earnings d. Income statement e. Statement of working capital d; Easy 29. Which of the following statements is true of income tax expense? a. It is reported at the top of income statement. b. It is reported in the statement of retained earnings. c. It is incurred to generate revenue. d. It is recognized only on payment of cash. e. It is caused by a company’s revenues. e; Moderate Fill in the blanks 30. Revenues, expenses, gains and _____ are found on the income statement. losses; Easy 31. _____ is an expense that reflects the cost of all inventory items acquired by customers. Cost of goods sold; Easy 32. A _____ is a decrease in net assets from an event incidental to the company’s business. loss; Moderate 33. A _____ is an increase in net assets from an event incidental to the company’s business. gain; Moderate Short Answer Questions 34. Compare and contrast revenue and gain. Both revenues and gains are an increase in the net assets for a company. The difference is in the manner in which they are earned. Revenue results from a sale of inventory or service —an event central to the organization’s operations. Gain results from an event which is incidental to the company’s operations. Moderate

Problems

Hoyle, Financial Accounting 2.0 35. Determine the missing balance. Gross Profit $45,600 Sales 99,000 Advertising Expense 6,700 Rent Expense 9,800 Cost of Goods Sold ? $53,400; Moderate 36. Determine the missing balance. Insurance Expense Rent Expense Sales Net Income Cost of Goods Sold

$ 340,000 970,000 ? 270,000 1,900,000

$3,480,000; Moderate 37. Adonis, Inc. sells exercise equipment. The owners of Adonis want to know if they made a net income or a net loss for the year ended December 31, 2017. Given the following account balances, prepare an income statement for this company. Sales Revenue Salaries Expense Cost of Goods Sold Income Tax Expense Loss on Sale of Building Advertising Expense

$6,100 500 3,200 600 100 590

Hoyle, Financial Accounting 2.0

Adonis, Inc. Income Statement for Year Ended December 31, 2017 Sales Revenue Expenses: Cost of Goods Sold Salaries Advertising Expense Total Expenses

$6,100 $3,200 500 590 (4,290)

Operating income Other Gains And Losses: Loss on Sale of Building

1,810

Income Before Income Taxes Income Tax Expense

1,710 (600)

Net Income

$1,110

(100)

Moderate 38. Coffee Break, Inc. sells premium coffee beans. 1.

Given the following account balances, prepare an income statement for Coffee Bean, Inc. for the year ended December 31, 2013.

Cost of Goods Sold Income Tax Expense Rent Expense Gain on Sale of Land Sales Revenue Insurance Expense Salaries Expense

$290,200 59,300 89,000 2,000 710,100 12,000 123,200

Coffee Bean, Inc. Income Statement for Year Ended December 31, 2013 Sales Revenue Expenses: Cost of Goods Sold Salaries Rent Insurance Total Expenses Operating Income Other Gains and Losses: Gain on Sale of Land Income Before Income Taxes Income Tax Expense Net Income

$710,100 $290,200 123,200 89,000 12,000

(514,400) 195,700 2,000 197,700 (59,300) $138,400

Hoyle, Financial Accounting 2.0

2. Calculate the gross profit for Coffee Bean, Inc. Gross Profit = Sales Revenue – Cost of Goods Sold Gross Profit = $710,100 – $290,200 Gross Profit = $419,900 3.

Calculate the gross profit percentage for Coffee Bean, Inc.

Gross Profit Percentage =

Gross Profit Sales Revenue

Gross Profit Percentage =

$419,900 $710,100

Gross Profit Percentage = Hard

59%

Section 2 True/False Questions 39. A cost that has already helped a company generate revenues in the past should be classified as an expense. True; Easy 40. Conservatism exists to protect the users of financial statements from information that is too optimistic. True; Easy 41. Dividends paid are reported on the income statement. False; Easy 42. Dividends paid are distributions of income made to owners. True; Easy 43. Dividends payments usually reduce the size of the company and—possibly—its future profitability. True; Easy 44. An investor can predict stock prices by just evaluating the net income reported by the corporation. False; Easy

Hoyle, Financial Accounting 2.0 45. Conservatism holds that whenever an accountant faces two or more equally likely possibilities, the one that makes the reporting company look worse should be selected. True; Easy 46. Reporting a past benefit rather than a future benefit has a detrimental impact on the company’s appearance to a decision maker. True; Easy Multiple Choice Questions 47. Which of the following states that if a company faces two equally likely possibilities, the one which makes the company look worse should be chosen? a. Matching principle b. Practice of conservatism c. Materiality convention d. Principle of consistency e. Principle of continuity b; Easy 48. Which of the following best represents the practice of conservatism? a. A company’s accountants try to make sure that its expenses are reported in the same period as the revenues they helped generate. b. A company needs a loan, so it makes accounting choices that allow the company to look as good as possible. c. An accountant is unsure if a cost should be reported as an expense or an asset. Even though it is most likely an asset, the accountant reports it as an expense. d. An accountant purposefully understates a company’s revenues to make the company’s financial position look worse. e. A company is faced with a cost that could be reported as an expense or an asset. Both choices face equally likely possibilities, so the company reports the cost as an expense. e; Moderate 49. The practice of conservatism while preparing financial statements usually results in: a. lower net income. b. lower expense. c. higher dividends. d. higher stockholders’ equity. e. lower liabilities. a; Easy

Hoyle, Financial Accounting 2.0

50. Which of the following is reported on the income statement? a. Dividends Paid b. Salaries Expense c. Prepaid Insurance d. Supplies e. Bank Overdraft b; Easy 51. Which of the following is reported as an asset? a. Insurance expense paid for next year b. Income tax paid for the current year c. Salaries paid for the current year d. Dividends paid during the year e. Rent paid for last year a; Easy 52. A cost which is expected to help in generation of additional revenue in the future is classified as a(an): a. expense. b. asset. c. liability. d. retained earnings. e. gain. b; Easy 53. A company makes cash payment for ads which will run over the next three months. The amount paid for advertising should be reported as a(an): a. expense. b. dividend. c. loss. d. asset. e. liability. d; Easy 54. A dividend is a reward paid by a corporation to: a. its creditors. b. the government. c. its board of directors. d. the owners of its capital stock. e. the suppliers of its inventory. d; Easy

Hoyle, Financial Accounting 2.0

55. Which of the following statements is true of dividends paid? a. It is paid by a corporation to its creditors. b. It is a cost incurred to generate revenue. c. It is reported on the income statement. d. It increases the size of the company. e. It decreases the retained earnings balance. e; Easy 56. Which of the following statements is true of net income? a. It reflects the growth in an organization’s net assets during a period resulting from all revenues, expenses, gains, and losses. b. It represents the total dividend distributed to the shareholder’s, both in the form of cash and stock. c. It is also known as income before income tax. d. It is equal to the total amount of cash received less total cash payments made during a period. e. It is used to determine the amount of interest to be paid during a period. a; Easy Fill in the blanks 57. _____ are not included in the computation of net income because they reflect a sharing of profits with owners and not a cost incurred to generate revenue. Dividends paid; Easy 58. _____ is a cost that helped a business generate revenue in the past. Expense; Easy

Short Answer Questions 59. Explain why accounting adheres to the principle of conservatism. Accountants know that the financial statements they produce will be relied on by decision makers, especially for monetary decisions. These decision makers face potential losses that can be substantial. Thus, accountants believe that decision makers are best protected by reporting the least optimistic financial picture of a company rather than the most optimistic. When two possibilities exist which are equally likely, the one which makes the company look worse is chosen. Hard

Hoyle, Financial Accounting 2.0

60. Explain why dividends are not reported on the income statement. Dividends are not expenses. They are a distribution of earnings to a company’s owners. These distributions do not generate revenue for the company, so they are not expenses. An income statement reports revenues, expenses, gains and losses, thus dividends are not included. Moderate Problems 61. You are an accountant for Right Way Enterprises. Determine if the following should be classified as an expense or an asset. The financial statements are being prepared as of December 31, 2017. a) On December 31, 2017, Right Way paid $2,000 for insurance to cover the company for the next year. Asset b) On December 31, 2017, Right way purchased $500 in supplies to be used in January, next year. Asset c) On September 9, 2017, Right Way paid its rent for the last quarter of 2017. Expense Moderate Section 3 True/False Questions 62. The balance in retained earnings is the net income of a period plus dividends paid to stockholders during that period. False; Easy 63. A company can increase its net assets by earning income. True; Easy 64. Retained earnings is the amount of external investment in a business. False; Easy 65. Retained earnings figure indicates the amount of the net assets that came from the operations over the life of the organization. True; Easy

Hoyle, Financial Accounting 2.0

66. A business can increase its net assets by receiving contributions from investors who become owners through the acquisition of capital stock. True; Easy 67. Capital stock indicates the amount received in contributions from stockholders to obtain an ownership interest. True; Easy 68. The net assets of a company are its assets less its liabilities. True; Moderate 69. A company’s total assets increase every time its stock is bought and sold on an exchange. False; Easy 70. Exchanges between investors on a stock exchange do not affect a business’s net assets or its financial reporting. True; Easy 71. A company starts the year with net assets of $300,000 and ends with net assets of $430,000. For that year, the company’s stockholders’ equity increased by $130,000. True; Moderate Multiple Choice Questions 72. Which of the following statements is true of net assets? a. Net assets of a corporation is the excess of its current assets over its current liabilities. b. Net assets indicate the amount generated from investing activities of the business. c. Net assets is equal to the balance of retained earnings account. d. Net assets of a corporation is the excess of its assets over its liabilities. e. Net assets of a corporation increases when its stock is traded on a stock exchange. d; Easy 73. Which of the following terms indicate the balance of a company’s net income earned over time less the dividends it has distributed? a. Retained Earnings b. Assets c. Cash d. Gross Profit e. Capital Stock a; Easy

Hoyle, Financial Accounting 2.0

74. Which of the following statements is true of retained earnings? a. The retained earnings statement is also referred to as the statement of operations. b. The retained earnings balance is expected to rise when a company reports a net loss. c. The retained earnings balance includes the amount of dividend paid during the life of the organization. d. The retained earnings balance reflects the amount of the profits retained in a business throughout its existence. e. The retained earnings balance reflects the total amount of net income earned during the life of the organization. d; Easy 75. Which of the following terms indicates the amount invested in a corporation by individuals or groups in order to attain ownership interests? a. Retained Earnings b. Assets c. Contributed Capital d. Bonds e. Dividends c; Easy 76. Which of the following would result in an increase in the net asset of a corporation? a. Paying high dividends b. Selling assets below book value c. Trading its share in stock exchanges d. Receiving contributions from owners e. Issuing bonds at premium d; Easy 77. Gillford Company has been in business for two years. During the first year, it earned net income of $45,000 and paid dividends of $10,000. During year two, the company had earnings of $56,000 and paid dividends of $12,000. What is the balance in Gillford’s retained earnings at the end of year two? a. $101,000 b. $44,000 c. $79,000 d. $35,000 e. $22.000 c; Moderate

Hoyle, Financial Accounting 2.0

78. Telly Brand Company reported net income of $76,500 for the year 2014. Retained earnings had a beginning balance of $780,400 and an ending balance of $816,200. Calculate the dividends paid during the period. a. $40,700 b. $35,800 c. $112,300 d. $76,500 e. $780,400 a; Moderate 79. A company earns revenue of $90,000 and incurs expenses of $50,000 each year. In addition, the company pays a dividend of $10,000 each year. If the company started its operations at the beginning of 2015, what would be the balance in the retained earnings account on 12/31/2019? a. $30,000 b. $40,000 c. $200,000 d. $150,000 e. $120,000 d; Moderate 80. On January 1, 2014, Linux Inc. was started with owners’ contribution of $500,000. During the year, the company earned net income of $100,000 and paid $12,000 of cash dividend. During 2015, the company earned $120,000 and paid $15,000 of cash dividend. What is total stockholders’ equity at the end of 2015? a. $747,000 b. $693,000 c. $588,000 d. $527,000 e. $307,000 b; Moderate 81. Lincoln Corporation started the year with $509,000 in retained earnings. During the year, Lincoln earned net income of $34,000 and paid dividends of $13,000. Determine the ending balance in Lincoln’s retained earnings account. a. $488,000 b. $462,000 c. $530,000 d. $556,000 e. $496,000 c; Easy

Hoyle, Financial Accounting 2.0

82. Which of the following reflects the amount invested in the business by individuals and groups to become owners? a. Retained Earnings b. Dividends c. Accounts Receivable d. Common Stock e. Net Income d; Easy 83. Which of the following events increases the net assets of a corporation in the current period? a. Receiving cash for services which are yet to be performed. b. Issuance of ownership shares to a stockholder c. Issuance of bonds above market interest rate d. Distributing the entire net income as dividends e. Raising a loan to purchase equipment b; Moderate 84. Which of the following accounts shows the difference between the lifelong earnings of a company and its payments to owners? a. Retained Earnings b. Dividends c. Liabilities d. Common Stock e. Net Income a; Easy 85. Which of the following statements is true about trading of shares on a stock exchange? a. Exchange of shares on stock exchange creates inflow of assets reported by a capital stock account. b. A company records a gain when its stockholders sell their shares for a profit. c. A company receives a fixed amount of money every time its shares are sold on a stock exchange. d. Purchase and sale of shares on stock exchange normally occur directly between investors and the company. e. Exchanges between investors using a stock exchange do not affect a business’s financial reporting. e; Easy

Hoyle, Financial Accounting 2.0

Fill in the blanks 86. Amounts contributed by a company’s owners are termed as _____. capital stock or common stock; Easy 87. _____ is a measure of the profits left in a business throughout its existence to create growth. Retained earnings; Easy Short Answer Questions 88. Why doesn’t a company show an increase in net assets every time its stock is bought or sold on an exchange? Only the initial issuance of shares to owners increases a company’s net assets. Subsequent exchanges between owners result in the fortunes of the owners changing, but not the company itself. Moderate 89. Explain the two ways a company can increase its net assets. A company can increase its net assets by generating resources from owners, operations or both. An increase in net assets generated internally from operations is shown in the retained earnings account. An increase in net assets generated externally from contributions by owners is capital or common stock. Moderate Problems 90. Foster Company had the following account balances on 12/31/2015. Prepare a Statement of Retained Earnings for Foster. Retained Earnings, 1/1/2015 $33,400 Net Income 5,900 Dividends 600 Foster Company Statement of Retained Earnings for Year Ended December 31, 2015 Retained Earnings Balance, January 1, 2015 $33,400 Net Income Reported for 2015 $5,900 Dividends Distributed During 2015 600 Net Income Less Dividends for 2015 5,300 Retained Earnings Balance, December 31, 2015 Easy

$38,700

Hoyle, Financial Accounting 2.0 91. Oscar Company had the following account balances on 12/31/12. Prepare a Statement of Retained Earnings for Oscar. Dividends Retained Earnings, 1/1/12 Net Income

$ 600,000 13,504,000 2,859,000

Oscar Company Statement of Retained Earnings for Year Ended December 31, 2012 Retained Earnings Balance, January 1, 2012 $13,504,000 Net Income Reported for 2012 $2,859,000 Dividends Distributed During 2012 600,000 Net Income Less Dividends for 2012 2,259,000 Retained Earnings Balance, December 31, 2012 Easy

$15,763,000

Section 4 True/False Questions 92. The primary purpose of a balance sheet is to report an organization’s revenues and expenses at a particular point in time. False; Easy 93. Assets are classified as current and noncurrent on the balance sheet. True; Easy 94. The balance sheet is designed to show a company’s financial position at a particular point in time. True; Easy 95. All of the financial statements released by a company report events occurring over a period of time. False; Moderate 96. According to the accounting equation, assets = liabilities + stockholders’ equity. True; Easy 97. The accounting equation balances because all assets have a source. True; Moderate 98. The balance sheet must always balance because no assets are held without source. True; Easy

Hoyle, Financial Accounting 2.0

99. The cash flow statement is divided into three parts: cash flows from operating, investing, and financing activities. True; Easy 100. Cash flows from financing activities primarily deal with noncurrent liabilities and equity accounts. True; Moderate 101. Borrowing money from a bank is classified as an investing activity on the statement of cash flows. False; Easy 102. Purchasing inventory is classified as an operating activity on the statement of cash flows. True; Easy 103. Inflow of cash from sales is an example of a financing activity on the statement of cash flows. False; Moderate 104. A company has a current ratio of 3:1. The company pays off a $20,000 accounts payable. This will result in an increase in current ratio. True; Hard Multiple Choice Questions 105. Which of the following correctly reports the accounting equation? a. Assets = Liabilities – Stockholders’ Equity b. Assets – Retained Earnings = Stockholders’ Equity c. Assets = Stockholders’ Equity + Liabilities d. Liabilities = Assets + Stockholders’ Equity e. Capital Stock = Assets – Liabilities c; Easy 106. Which of the following shows a company’s assets and liabilities at a given point in time? a. Income statement b. Statement of retained earnings c. Balance sheet d. Notes to financial statements e. Statement of cash flows c; Easy

Hoyle, Financial Accounting 2.0

107. In which order should assets be listed on the balance sheet? a. Liquidity b. Occurrence c. Alphabetic order d. Highest to lowest e. Lowest to highest a; Easy 108. Which of the following statements is true of operating activities? a. It relates to cash flows that arose in connection with the central activity of the organization. b. It relates to either a liability or a stockholders’ equity balance. c. It relates to asset transaction other than one related to the primary activities of the organization. d. It reports the cash collected from sale of equipment. e. It primarily deals with noncurrent assets. a; Moderate 109. Which of the following sections of the statement of cash flows report cash flows created by events that are separate from the central or daily operations of the business and involve an asset? a. Operating activities b. Investing activities c. Financing activities d. Sourcing activities e. Ancillary activities b; Moderate 110. In a statement of cash flows, paying salaries to employees for the year is classified as a(n): a. operating activities. b. investing activities. c. financing activities. d. sourcing activities. e. ancillary activities. a; Moderate 111. Which of the following would be classified as an investing activity? a. Purchasing equipment b. Paying for advertising c. Buying inventory d. Issuing common stock e. Selling a service a; Moderate

Hoyle, Financial Accounting 2.0 112. Which of the following is an operating activity? a. Purchasing land b. Paying taxes c. Issuing common stock d. Paying dividends e. Borrowing money from a bank b; Moderate 113. Which of the following is a financing activity? a. Paid rent on office building b. Paid salaries to employees c. Paid for insurance d. Paid dividends to shareholders e. Paid taxes to the government d; Moderate 114. The difference between the current assets and current liabilities equals: a. current ratio. b. working capital. c. retained earnings. d. net assets. e. stockholders’ equity. b; Easy 115. The current ratio and working capital are measures of a company’s: a. profitability. b. leverage. c. liquidity. d. turnover. e. operational efficiency. c; Moderate 116. Orlando, Inc. reports the following: assets, $40,000; liabilities, $20,000; and retained earnings, $15,000. What is the balance of capital stock? a. $20,000 b. $60,000 c. $45,000 d. $5,000 e. $35,000 d; Moderate

Hoyle, Financial Accounting 2.0

117. At the end of 2014, Sideview Inc. reported total assets of $698,000 and capital stock of $265,000. It also reported retained earnings at $178,000. Determine the total liabilities as of December 31, 2014. a. $433,000 b. $611,000 c. $255,000 d. $520,000 e. $785,000 c; Easy 118. On December 31, 2019, Richie Corporation had total assets of $35,000, of which $14,000 were current. It also had $18,000 in liabilities, of which $7,000 were current. Which of the following correctly identifies Richie’s current ratio and working capital? Current Ratio a. 2 to 1 b. 1.94 to 1 c. 2 to 1 d. 5 to 1 e. 1.94 to 1 c; Moderate

Working Capital $17,000 $17,000 $7,000 $28,000 $7,000

119. Subtle Inc. has a current ratio of 3:1 and working capital of $400,000. During the year, it paid $15,000 towards salaries expense. The company pays off a $25,000 rent payable at the end of the year. Assuming no other changes after these payments, what will be Subtle’s new current ratio? a. 3.50 to 1 b. 3.59 to 1 c. 3.03 to 1 d. 3.29 to 1 e. 3.20 to 1 e; Hard 120. A company has a current ratio of 3:1 (three to one) and working capital of $200,000. The company pays off a $12,000 salary payable that had been recorded two weeks earlier. Assuming no other changes, after these payments, which of the following would be true? Current Ratio Working Capital a. Higher than 3:1 Higher than $200,000 b. Lower than 3:1 Higher than $200,000 c. Exactly 3:1 Exactly $200,000 d. Higher than 3:1 Exactly $200,000 e. Lower than 3:1 Lower than $200,000 d; Hard

Hoyle, Financial Accounting 2.0

Fill in the blanks 121. The current ratio is calculated by dividing current assets by _____. current liabilities; Easy 122. The _____ is divided into three activities: operating, investing, and financing. statement of cash flows; Easy 123. Nonoperating activities that affect either a liability or a stockholders’ equity account are reported under the _____ section of the statement of cash flow. financing; Easy 124. Nonoperating activities that affect an asset account are reported under the _____ section of the statement of cash flow. investing; Easy Short Answer Questions 125. Explain why the accounting equation must always balance. The accounting equation must balance because assets must have a source. If a business or other organization has an increase in its total assets, that change can only be caused by (a) an increase in liabilities, such as money being borrowed, (b) an increase in capital stock, such as additional money being contributed by stockholders, or (c) an increase created by operations, such as a sale that generates a rise in net income. No other increases occur. Moderate Problems 126. Christmas Town sells all things for Christmas: ornaments, stockings, lights, and more. The owners of Christmas Town would like to know what assets, liabilities, and stockholders’ equity they have on December 31, 2011. Given the following account balances, prepare a balance sheet for Christmas Town. Retained Earnings Accounts Payable Inventory Accounts Receivable Building Cash Note Payable Capital Stock

$ 215,400 78,900 57,900 35,600 369,400 10,400 150,000 29,000

Hoyle, Financial Accounting 2.0

Christmas Town Balance Sheet, December 31, 2011 Assets Current Assets Cash Accounts Receivable Inventory Total Current Assets Noncurrent Assets Building Total Noncurrent Assets Total Assets

$10,400 35,600 57,600 $103,900 369,400 369,400 $473,300

Liabilities and Stockholders’ Equity Liabilities Current Liabilities Accounts Payable Total Current Liabilities

$78,900

Noncurrent Liabilities Note Payable 150,000 Total Noncurrent Liabilities Total Liabilities Stockholders’ Equity Capital Stock $29,000 Retained Earnings 215,400 Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity Moderate

$78,900

150,000 $228,900

$244,400 $473,300

127. Use the following abbreviations to indicate on which statement you would find each item below. Some items may appear on more than one statement. Include all abbreviations that would apply. IS – Income Statement SRE – Statement of Retained Earnings BS – Balance Sheet a) __ __ Capital Stock b) _ ___ Retained Earnings c) _ ___ Net Income d) _ ___ Equipment e) _ ___ Inventory f) _ ___ Loss on Sale of Equipment

Hoyle, Financial Accounting 2.0 g) _ ___ Cash h) _ ___ Income Tax Expense a. BS b. BS, SRE c. IS, SRE d. BS e. BS f. IS g. BS h. IS Easy 128. Hikers and Bikers sells all sorts of outdoor gear. The owners of Hikers and Bikers would like to know what assets, liabilities, and stockholders’ equity they have. Given the following account balances, prepare a balance sheet for this company on 12/31/10. Capital Stock Inventory Equipment Retained Earnings Note Payable Accounts Payable Accounts Receivable Cash

$2,450 910 19,045 8,450 8,700 1,400 500 545

Hoyle, Financial Accounting 2.0

Hikers and Bikers Balance Sheet, December 31, 2010 Assets Current Assets Cash Accounts Receivable Inventory Total Current Assets Noncurrent Assets Equipment Total Noncurrent Assets Total Assets Liabilities and Stockholders’ Equity

$545 500 910 $1,955 19,045

Liabilities Current Liabilities Accounts Payable $1,400 Total Current Liabilities Noncurrent Liabilities Note Payable 8,700 Total Noncurrent Liabilities Total Liabilities Stockholders’ Equity Capital Stock $2,450 Retained Earnings 8,450 Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity

19,045 $21,000

$ 1,400

8,700 $10,100

$10,900 $21,000

Moderate 129. The following information relates to Farmer’s Restaurant for the year 2016. Prepare a statement of cash flow for Farmer’s Restaurant. Cash balance, 1/1/2016 Cash collected from customers Cash received from sale of stock Cash paid for land Cash paid for income taxes Cash received from bank loan Cash paid for dividends Cash paid for salaries Cash paid for purchases of inventory

$152,000 895,000 147,000 54,000 142,000 123,000 52,000 200,000 457,000

Hoyle, Financial Accounting 2.0

Farmer’s Restaurant Statement of Cash Flows for Year Ended December 31, 2016 Cash Flows from Operating Activities Cash Collected from Customers $895,000 Cash Paid for Inventory (457,000) Cash Paid for Salaries (200,000) Cash Paid for Income Taxes (142,000) Total Cash Inflow from Operating Activities $96,000 Cash Flows from Investing Activities Cash Paid for Purchase of Land Total Cash Outflow from Investing Activities

(54,000)

Cash Flows from Financing Activities Cash Paid to Owners as Dividends Cash Received from Bank Loan Cash Received from Sale of Stock Total Cash Inflow from Financing Activities

(52,000) 123,000 147,000

(54,000)

218,000

Increase in Cash

260,000

Cash Balance—January 1, 2016 Cash Balance—December 31, 2016 Hard

152,000 $412,000

130. Buster’s Bookseller features all the latest titles and a great coffee shop. Like any small business owner, Buster is very concerned about the company’s cash flows. He has hired you to prepare a statement of cash flows for him. Using the following balances, prepare a statement of cash flows for the quarter ended March 31, 2014. Cash paid for salaries Cash received from bank loan Cash paid for advertising Cash collected from customers Cash paid for equipment Cash paid for income taxes Cash paid for purchases of inventory Cash paid for rent Cash balance, 1/1/2014

$35,000 26,300 4,500 95,000 8,900 5,200 43,000 15,000 87,000

Hoyle, Financial Accounting 2.0 Buster’s Bookseller Statement of Cash Flows for Quarter Ended March 31, 2014 Cash Flows from Operating Activities Cash Collected from Customers Cash Paid for Inventory Cash Paid for Salaries Cash Paid for Rent Cash Paid for Advertising Cash Paid for Income Taxes Total Cash Outflow from Operating Activities

$95,000 (43,000) (35,000) (15,000) (4,500) (5,200)

Cash Flows from Investing Activities Cash Paid for Purchase of Equipment Total Cash Outflow from Investing Activities

(8,900)

Cash Flows from Financing Activities Cash Received from Bank Loan Total Cash Inflow from Financing Activities

26,300

Increase in Cash

($7,700)

(8,900)

26,300 9,700

Cash Balance—January 1, 2014 Cash Balance—March 31, 2014 Hard

87,000 $96,700

Hoyle, Financial Accounting 2.0

131. Collin’s Clocks and Watches ended 12/31/16 with the following balance sheet. Using this balance sheet, determine Collin’s current ratio and working capital. Collin’s Clocks and Watches Balance Sheet, December 31, 2016 Assets Current Assets Cash $4,800 Accounts Receivable 9,000 Inventory 17,800 Total Current Assets $31,600 Noncurrent Assets Building 200,000 Equipment 98,500 Total Noncurrent Assets 298,500 Total Assets $330,100 Liabilities and Stockholders’ Equity Liabilities Current Liabilities Accounts Payable Salaries Payable Income Tax Payable Total Current Liabilities Noncurrent Liabilities Note Payable Total Noncurrent Liabilities Total Liabilities Stockholders’ Equity Capital Stock Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity

$9,100 2,200 8,600 $19,900 178,700 178,700 $198,600 $82,450 49,050 $131,500 $330,100

Current Ratio = $31,600÷$19,900 Current Ratio = 1.59 Working Capital = $31,600 − $19,900 Working Capital = $11,700 Easy

Hoyle, Financial Accounting 2.0

Chapter 4 How Does an Organization Accumulate and Organize the Information Necessary to Create Financial Statements? Section 1 True/False Questions 1. A transaction is any event that has an immediate financial impact on a company.

True; Easy 2. The term accounts payable indicates amounts a company owes to its suppliers.

True; Easy 3. Accrued expenses refer to expenses that have already been paid for with cash.

False; Easy 4. A company borrows money from bank. Both assets and liabilities increase as a result of

this transaction. True; Easy 5. To record payment of salary, for which no accrual has been made previously, salary

payable should be increased. False; Easy Multiple Choice Questions 6. Purchase of inventory on account will result in:

a. increase in cash. b. decrease in inventory. c. increase in accounts payable. d. decrease in cash. e. decrease in accounts receivable. c; Easy 7.

Borrowing money from a bank will result in: a. increase in cash. b. decrease in notes payable. c. decrease in accounts receivable. d. decrease in investments. e. increase in equipment. a; Easy

8. Boston Company pays salaries of $2,000 to employees. No accrual has been made for

this amount. Which of the following is true of this transaction?

Hoyle, Financial Accounting 2.0 a. Cash increases by $2,000; Salaries Payable decreases by $2,000 b. Cash decreases by $2,000; Salaries Expense decreases by $2,000 c. Salaries Expense increases by $2,000; Salaries Payable decreases by $2,000 d. Salaries Expense increases by $2,000; Cash decreases by $2,000 e. Cash decreases by $2,000; Salaries Payable increases by $2,000 d; Easy 9. Joey Corporation borrows $500,000 from its bank, to purchase inventory and equipment.

Which of the following statements is true of this transaction? a. Cash will decrease by $500,000. b. Note payable will increase by $500,000. c. Inventory will decrease by $500,000. d. The amount of total assets will remain unchanged. e. Liabilities will decrease. b; Moderate 10. When Inventory is purchased on account:

a. Cash increases and Accounts Payable decreases. b. Inventory increases and Cash decreases. c. Inventory decreases and Accounts Payable increases. d. Cash decreases and Accounts Payable decreases. e. Inventory increases and Accounts Payable increases. e; Easy 11. Short-term liabilities to pay for goods and services that have been acquired on credit is

known as: a. accounts payable. b. unearned revenue. c. revenue payable. d. retained earnings. e. outstanding goods. a; Easy 12. Coastal Corporation pays salaries of $30,000 to its employees. No accrual has been made

for this amount. What is the financial impact of this transaction? Increase Decrease a. Salary Expense Cash b. Salary Expense Salary Payable c. Salary Payable Salary Expense d. Cash Salary Payable e. Prepaid Salary Cash a; Easy

Fill in the blanks

Hoyle, Financial Accounting 2.0 13. A company borrows money from a bank. The two accounts affected by this transaction

are _____ and _____. cash, note payable 14. A company pays salaries to employees. No previous accrual has been made. The two

accounts affected by this transaction are _____ and _____. cash, salaries expense Short Answer Questions 15. Expert Corporations borrowed $300,000 from bank. What is the financial impact of this

transaction? Cash (asset) increases by $300,000 Note Payable (liability) increases by $300,000 Easy 16. Ronald Company purchased $9,000 of inventory on account. What is the financial impact

of this transaction? Inventory (asset) increases by $9,000 Accounts Payable (liability) increases by $9,000 Easy Section 2 True/False Questions 17. At least two accounts must be impacted by every financial transaction.

True; Easy 18. At most two accounts can be impacted by a financial transaction.

False; Easy 19. A perpetual inventory system is one in which an ongoing record of inventory is kept.

True; Easy 20. Mark Corporation issues ownership shares to new shareholders for $100,000 cash.

Capital stock will decrease by $100,000 as a result of this transaction. False; Easy 21. Dexter Company made a payment on an earlier purchase. Dexter’s accountant should

reduce accounts payable to record this transaction. True; Easy 22. When a company prepays for rent or advertising, it is considered a liability.

Hoyle, Financial Accounting 2.0 False; Easy Multiple Choice Questions 23. When a company pays for inventory previously purchased on account, the balance of:

a. Cash will increase. b. Inventory will decrease. c. Accounts Payable will increase. d. Inventory will increase. e. Accounts Payable will decrease. e; Easy 24. When inventory is sold on account, Sales Revenue increases and:

a. Cash increases. b. Accounts Receivable decreases. c. Profit decreases. d. Cash decreases. e. Accounts Receivable increases. e; Easy 25. Martin Company purchased a sewing machine that cost $53,000 by paying $23,000 cash

and signing a note for the remainder. What is the financial impact of this transaction? a. Note Payable decreases by $53,000. b. Machine increases by $23,000. c. Note Payable increases by $30,000. d. Cash will decrease by $53,000. e. Machine increases by $30,000. c; Easy 26. Flanders Company sells capital stock of $4,500. Which of the following correctly

identifies the accounts and their movements for this transaction? a. Cash increases by $4,500; Capital Stock decreases by $4,500. b. Cash decreases by $4,500; Capital Stock decreases by $4,500. c. Cash increases by $4,500; Note Payable increases by $4,500. d. Cash increases by $4,500; Capital Stock increases by $4,500. e. Capital Stock decreases by $4,500; Note Payable increases by $4,500. d; Easy

Hoyle, Financial Accounting 2.0

27. Which of the following accounts is affected when inventory is sold on account? Assume

the company uses a perpetual inventory system. a. Accounts Payable b. Unearned Revenue c. Gain on Sale d. Cost of Goods Sold e. Cash d; Moderate 28. A company paying salaries to its employees that was previously recorded as a liability

would involve: a. increase in Salaries Payable. b. increase in Salaries Expense. c. increase in Cash. d. decrease in Cash. e. decrease in Salaries Expense. d; Easy 29. During the year, Cinci Corporation collected $15,000 of its accounts receivable. In

recording this transaction, Cinci’s bookkeeper increased both cash and accounts receivable by $15,000. Accounts receivable balance at the beginning of the year was $88,000. This will result in: a. overstatement of assets. b. understatement of liabilities. c. understatement of Cash. d. understatement of Accounts Receivable. e. a balanced accounting equation. a; Moderate 30. Kylie Company pays $4,500 for insurance for the next 6 months. Which of the following

is true of this transaction? a. Prepaid Insurance will increase. b. Insurance Expense will increase. c. Both assets and liabilities are impacted by this transaction. d. Cash will increase. e. Cash will not be affected. a; Easy 31. If a company collects its accounts receivables, then its:

a. Cash increases and Accounts Payable decreases. b. Inventory increases and Cash decreases, c. Cash increases and Accounts Receivable decreases. d. Cash decreases and Accounts Receivable decreases. e. Inventory increases and Accounts Receivable increases. c; Easy

Hoyle, Financial Accounting 2.0

Fill in the blanks 32. At least _____ accounts must be impacted by every transaction.

two; Easy 33. Spice Garden Corporation received cash on accounts receivable. The two accounts

impacted by this transaction are _____ and _____. cash, accounts receivable Short Answer Questions 34. On June 17, 2014, Eastern Company purchased inventory for $25,000 on account. On

June 25, the company sold the inventory for $32,000 cash. List the accounts affected by the sale of inventory. Also, mention the amount of change in each affected account. Part 1—Sales for Cash Accounts Receivable (asset) increases by $32,000 Sales (revenue) increases by $32,000 Part 2—Inventory acquired by Customer Cost of Goods Sold (expense) increases by $25,000 Inventory (asset) decreases by $25,000 35. Horizon Company pays its employees salary of $80,000 for work performed during the

last month. What is the financial effect of this transaction if: (i) previous accrual had been made (ii) previous accrual had not been made? (i) Salary Payable (liability) decreases by $80,000 Cash (asset) decreases by $80,000 (ii)Salary Expense (expense) increases by $80,000 Cash (asset) decreases by $80,000 Section 3 True/False Questions 36. The basic rule of double-entry bookkeeping is that debits must always equal credits for

every transaction. True; Easy 37. The left side of a T-account is the debit side.

True; Easy

Hoyle, Financial Accounting 2.0

38. An increase in an expense is recorded with a credit.

False; Easy 39. An increase in a liability is recorded with a credit.

True; Easy 40. An increase in an asset is recorded with a debit.

True; Easy 41. A decrease in retained earnings is recorded with a credit.

False; Easy 42. If a company incurs a loss, the Loss account should be debited.

True; Easy 43. T-accounts maintain a monetary balance for each of accounts reported by an

organization. True; Easy 44. Only small organizations use the double-entry bookkeeping system.

False; Easy Multiple Choice Questions 45. Which of the following is the correct order of the steps followed by accounting systems?

a. Analyze, Report, Record, and Adjust b. Report, Record, Adjust, and Analyze c. Analyze, Record, Adjust, and Report d. Record, Analyze, Adjust, and Report e. Adjust, Report, Analyze, and Record c; Moderate 46. Which of the following accounts increases with a debit?

a. Dividends Paid b. Revenue c. Retained earnings d. Gain e. Capital Stock a; Easy

Hoyle, Financial Accounting 2.0

47. Which of the following accounts increases with a credit?

a. Dividends Paid b. Asset c. Retained Earnings d. Loss e. Expense c; Easy 48. Which of the following accounts decreases with a debit?

a. Asset b. Liability c. Expense d. Dividends Paid e. Loss b; Easy 49. Which of the following accounts decreases with a credit?

a. Expense b. Capital Stock c. Gain d. Retained Earnings e. Revenues a; Easy 50. Johnson Corporation received cash on a customer’s account. The journal entry to record

this transaction would involve: a. a debit to asset and a credit to liability. b. a debit to liability and a credit to asset. c. a debit to liability and a credit to expense. d. a debit to asset and a credit to asset. e. a debit to revenue and a credit to asset. d; Easy 51. Recording the purchase of inventory on account would involve:

a. a debit to expense and a credit to asset. b. a debit to asset and a credit to asset. c. a debit to asset and a credit to liability d. a debit to liability and a credit to asset. e. a debit to liability and a credit to liability c; Easy

Hoyle, Financial Accounting 2.0

52. Which of the following maintains the monetary balance for each of the accounts reported

by an organization with a left (debit) side and a right (credit) side used to show increases and decreases? a. Journal b. T-account c. Trial balance d. Balance sheet e. Income statement b; Easy 53. Jackson Corporation issued capital stock for cash. To record this, the company’s

accountant debited cash and credited capital stock account. Which of the following statements is true of this transaction? a. Capital Stock is correctly stated. b. Capital Stock is understated. c. Cash is overstated. d. Cash is understated. e. Investments are understated. a; Moderate 54. Shaw Company distributes dividends to its shareholders. To record this:

a. Cash should be debited. b. Capital Stock should be credited. c. Dividends Paid should be debited. d. Capital Stock should be debited. e. Retained Earnings should be credited. c; Easy 55. Ignite Solutions Corporation paid for a purchase previously made on account. To record

this, the company’s accountant debited cash and credited accounts payable account. Which of the following statements is true? a. Accounts Receivable is understated. b. Cash is overstated. c. Accounts Payable is correctly stated. d. Cash is correctly stated. e. Accounts Payable is understated. b; Moderate

Hoyle, Financial Accounting 2.0

56. Which of the following is true of T-accounts?

a. It maintains the monetary balance for each of the accounts reported by an organization. b. The left side of a T-account is the credit side. c. Each company has one T-account. d. The right side of a T-account is the debit side. e. The rules for posting in T-accounts are same for all assets and liabilities. a; Easy Fill in the blanks 57. A mechanical process documented by Fra Luca Bartolomeo de Pacioli that facilitates the

gathering and reporting of financial information is called _____. double-entry bookkeeping; Easy 58. Every balance reported by a company is maintained in a separate _____.

T-account; Easy 59. The basic rule of double-entry bookkeeping says that _____ must always equal _____ for

every transaction. debits, credits; Easy Short Answer Questions 60. Explain the basic rules for making use of debits and credits.

Based on the original Venetian model, the balance for each account is monitored in a form known as a T-account. This structure provides room for recording on both the left side (known as the debit side) and the right side (the credit side). For expenses and losses, assets, and dividends paid, debits indicate an increase and credits indicate a decrease. They are grouped together because they all refer to costs. For liabilities, capital stock, revenues and gains, and retained earnings, credits reflect an increase and debits reflect a decrease. They are grouped together because they all indicate sources of funding. Easy 61. List the four steps followed in the accounting process.

i. Analyze ii. Record iii. Adjust iv. Report Easy

Hoyle, Financial Accounting 2.0

Section 4 True/False Questions 62. A list of journal entries should be maintained in the ledger.

False; Easy 63. Purchase of inventory on account should be recorded with a debit to Inventory and a

credit to Accounts Payable. True; Easy 64. Borrowing money from the bank will decrease a company’s liabilities.

False; Easy 65. Under U.S. GAAP, accrual accounting provides formal guidance of the timing of

recognition of revenues and expenses. True; Easy 66. The revenue recognition principle states that revenue is recognized when cash is

collected. False; Easy 67. At the end of the month, Andrew Company paid salaries to its employees. No previous

accrual had been made. The accountant made the correct journal entry, but made the same entry twice. This resulted in overstatement of expenses. True; Moderate 68. The matching principle states that when two outcomes are equally possible, the one that

makes the company look financially strong should be reported. False; Moderate 69. Atlas Corporation pays salaries to its employees. No previous entry has been made. To

record the payment of salaries, Atlas should debit salaries expense and credit cash. True; Easy 70. Sale of inventory results in debiting an expense account known as Cost of Goods Sold.

True; Moderate 71. A journal entry is an indication of the accounts and balances affected by a single

transaction. True; Easy 72. A current listing of all account balances found in the ledger is known as a trial balance.

True; Easy

Hoyle, Financial Accounting 2.0 Multiple Choice Questions 73. Purchase of inventory on account will involve:

a. a credit to Cash. b. a credit to Inventory. c. a credit to Accounts Payable. d. a debit to Accounts Receivable. e. a debit to Cash. c; Easy 74. Which of the following governs the timing of revenue and expense recognition?

a. Accrual accounting b. Conservatism c. Entity principle d. Ledger e. Double-entry bookkeeping system a; Easy 75. Which of the following accounts should be credited to record money borrowed from a

bank? a. Notes Payable b. Cash c. Retained Earnings d. Capital Stock e. Accounts Receivable a; Easy 76. Which of the following says that expenses should be reported in the same period with the

revenues they help generate? a. Double entry bookkeeping b. The conservatism principle c. The revenue recognition principle d. The matching principle e. The Periodic principle d; Easy

Hoyle, Financial Accounting 2.0

77. Lionel Corporation purchases inventory on account for $900. Which of the following is

the journal entry recorded for this transaction? a. Inventory 900 Cash 900 b. Accounts Payable 900 Cash 900 c. Cash 900 Inventory 900 d. Accounts Payable 900 Inventory 900 e. Inventory 900 Accounts Payable 900 e; Easy 78. Ashley Company purchased equipment for cash, but did not journalize the transaction.

Which of the following statements is true? a. Cash will be understated. b. Equipment will be overstated. c. Total assets will be understated. d. Total liabilities will be overstated. e. Total assets will be correctly stated. e; Moderate 79. Rocker, Inc. takes a loan from Tri City Bank, to purchase inventory. The two accounts

involved in this transaction are: a. Cash and Note payable. b. Accounts Receivable and Cash. c. Inventory and Cash. d. Accounts Receivable and inventory. e. Cash and Unearned Revenue. a; Moderate 80. Saturn Corporation sold inventory costing $32,000 for $45,000 cash. Which of the

following statements is true of this transaction? a. Saturn will record a gain on sale of $13,000. b. Inventory decreases by $45,000. c. Cost of goods sold increases by $32,000. d. Cash increases by $32,000. e. Sale of Merchandise increases by $32,000. c; Moderate

Hoyle, Financial Accounting 2.0

81. Global Cleaning Services Company pays its employees salary of $60,000 for work

performed during the last month. No entry has been recorded previously. However, the company’s accountant made an entry assuming an accrual entry was made previously. Which of the following statements is true? a. Prepaid Expense is overstated. b. Salary Expense is correctly stated. c. Cash is overstated by $60,000. d. Salary Expense is overstated by $60,000. e. Salary Payable is understated by $60,000. e; Moderate 82. The two components of accrual accounting are:

a. the monetary unit concept and the entity concept. b. the revenue realization principle and the matching principle. c. the periodicity principle and the continuity principle. d. the historical cost concept and the principle of prudence. e. the lower-of-cost-or-market and the principle of full disclosure. b; Moderate 83. On August 6, Pacific Corporation buys inventory for $4,000 on account. The company

pays for the inventory on August 16. On August 22, the inventory is sold for $5,500 on account. Pacific pays for the inventory on September 5. Under accrual accounting, on which day should revenue be recognized? a. August 6 b. August 16 c. August 22 d. September 5 e. March 31 c; Moderate 84. Which of the following transactions would have no effect on the amount of total assets?

a. Issuing capital stock b. Distributing dividends to shareholders c. Receiving cash from customers before delivering the services d. Paying salary to employees e. Acquiring assets for cash e; Moderate

Hoyle, Financial Accounting 2.0

85. Kendall Corporation purchased inventory for $400 and later sold it to United Company

for $900. Which of the following accounts would be debited for $400 when the inventory is sold? a. Cost of Goods Sold b. Sales Revenue c. Inventory d. Accounts Receivable e. Cash a; Moderate 86. Georgia Company sells inventory to Triton Corporation for $400,000. The inventory

originally cost Georgia $280,000. How much gross profit did Georgia make on this sale? a. $400,000 b. $120,000 c. $280,000 d. $220,000 e. $0 b; Easy 87. Flanders Company paid its employees $5,000 for the last two weeks of work. No

previous accrual had been made. The journal entry made to record the payment will be: a. Salaries Payable $5,000 Cash $5,000 b. Cash $5,000 Salaries Payable $5,000 c. Salaries Expense $5,000 Cash $5,000 d. Cash $5,000 Salaries Expense $5,000 e. Salaries Expense $5,000 Salaries Payable $5,000 c; Easy

Fill in the blanks 88. The _____ principle states that revenue can only be recognized when it has been

substantially earned. revenue realization; moderate 89. _____ refers to the rules established by U.S. GAAP to standardize the timing of the

recognition of revenues and expenses. Accrual accounting; easy

Hoyle, Financial Accounting 2.0 90. The _____ principle states that expenses should be reported in the same period as the

revenues they help generate. matching; easy Problems 91. Phillips Company engaged in the following transactions during the month of March.

Prepare journal entries for each transaction. a. Phillips borrowed $560,000 from Ellington Bank. Cash 560,000 Note Payable 560,000 b. Phillips purchased $239,000 worth of inventory from Jackson Corporation on account. Inventory 239,000 Accounts Payable 239,000 c. Phillips sold the entire inventory purchased in transaction b for $500,000 on account. Accounts Receivable 500,000 Sales 500,000 Cost of Goods Sold 239,000 Inventory 239,000 d. Phillips paid salaries to its employees of $109,000. No previous accrual had been made for salaries. Salaries Expense 109,000 Cash 109,000 Moderate Short Answer Questions 92. Explain the purpose of journal entry.

The effects produced on various accounts by a transaction should be entered into an accounting system as quickly as possible so that information is not lost and mistakes have less time to occur. After each event is analyzed, the financial changes caused by a transaction are initially recorded as a journal entry. A list of a company’s journal entries is maintained in a journal (also referred to as a general journal), which is one of the most important components within any accounting system. The journal is a financial diary for a company. It provides a history of the impact of all financial events, recorded as they took place. Moderate

Hoyle, Financial Accounting 2.0

93. Explain the concept of accrual accounting, including information about the revenue

recognition principle and the matching principle. Accrual accounting serves as the basis for the timing of recognition of revenues and expenses. It is comprised of two distinct elements: the revenue realization principle and the matching principle. The revenue realization principle says that revenue is properly recognized at the point that (1) the earnings process needed to generate the revenue is substantially complete and (2) the amount eventually to be received can be reasonably estimated. The matching principle states that expenses are recognized in the same time period as the revenue they help to create. Moderate Section 5 True/False Questions 94. Debits and credits will not be equal when a transaction involves more than two accounts.

False; Easy 95. Alto Corporation paid for the rental of its offices for the next four months. This

transaction has no overall effect on Alto’s assets. True; Moderate 96. Jason Company declared and paid dividends by the end of the year. To record this,

Jason’s accountant should debit Dividends Paid and credit Cash. True; Easy 97. Unearned revenue is a revenue account.

False; Easy 98. When a company is paid in advance to do work at a later date, both its assets and

liabilities increase. True; Moderate 99. Garson Corporation received a $4,900 on a customer’s account. To record this, Garson

should debit Cash and credit Accounts Payable. False; Easy 100. Accrual accounting states that revenue cannot be recognized until it is earned, even if

cash is received. True; Easy 101. Tyson’s Grocery sells a piece of old equipment for $700, but it was listed on Tyson’s

books for $900. Tyson’s should report an expense of $200. False; Easy

Hoyle, Financial Accounting 2.0

102. A company purchases a plot of land for cash. To record this, Cash should be debited and

Land should be credited. False; Easy 103. Isis Corporation issues capital stock for cash. Isis’ liabilities are not affected by this

transaction. True; Moderate 104. Orion Inc. made cash payment on its rent payable. To record this, Orion should debit

rent payable and credit rent expense. False; Easy 105. During the posting process, debits and credits from journal entries are recorded in the

ledger. True; Easy Multiple Choice Questions 106. Island Corporation pays for the rent. If an entry is already passed to record the accrual,

which of the following accounts should be debited to record the payment of rent? a. Cash b. Rent Expense c. Rent Payable d. Unearned Revenue e. Accounts Receivable c; Easy 107. Allen Company received payment from a customer for a previous purchase of

merchandise. To record this, Allen’s accountant debited Accounts Receivable and credited Cash. Which of the following statements is true? a. Cash is overstated. b. Accounts Receivable is understated. c. Sales Revenue is overstated. d. Total assets are correctly stated. e. Total liabilities are overstated. d; Moderate 108. Venus Solutions Inc. issues ownership shares to new stockholders for $180,000 cash.

Which of the following statements is true of this transaction? a. Stockholders’ equity and assets remain unaffected. b. Unearned Revenue increases by $180,000. c. Common Stock decreases by $180,000. d. Assets decreases by $180,000. e. Liabilities are not affected. e; Moderate

Hoyle, Financial Accounting 2.0

109. On August 16, 2014, Seventh Heaven Company received cash from a customer for

services to be performed in October. What are the accounts affected by this transaction? a. Cash and Service Revenue b. Cash and Unearned Revenue c. Prepaid Expense and Cash d. Accounts Receivable and Revenue e. Cash and Accounts Receivable b; Moderate 110. Ulysses Company purchases a truck for $6,000, paying $2,000 cash and signing a note

payable for the remaining amount. Which of the following is true of this transaction? a. Total assets will increase by $6,000. b. Total liabilities will decrease by $4,000. c. Assets and liabilities will increase by $4,000. d. Total liabilities will increase by $6,000. e. Assets and liabilities will decrease by $6,000. c; Moderate 111. Harry Bakery sells land for $110,000, which was bought for $90,000. Which of the

following statements is true? a. Harry will debit Cost of Goods Sold for $90,000. b. Harry will credit Gain on Sale of Land $20,000. c. Harry will debit Revenues for $90,000. d. Harry will credit Cash for $110,000. e. Harry will debit Land for $90,000. b; Moderate 112. Harry and Claire Inc. sells a piece of land which originally cost $300 for $500 cash.

Which journal entry correctly captures this transaction? a. Land 500 Cash 500 b. Cash 500 Land 300 Revenue 200 c. Cash 500 Land 300 Gain on Sale of Land 200 d. Cash 500 Land 500 e. Cash 300 Land 300 c; Easy

Hoyle, Financial Accounting 2.0

113. What type of account is unearned revenue?

a. Liability b. Asset c. Expense d. Revenue e. Equity a; Easy 114. If a company pays for inventory previously acquired on account::

a. Cost of Goods Sold should be credited. b. Unearned Revenue should be debited. c. Inventory should be credited. d. Cash should be debited. e. Accounts Payable should be debited. e; Easy 115. A company declares and pays dividends at the end of the year. Which of the following

accounts will be credited to record this transaction? a. Dividends Paid b. Capital Stock c. Retained Earnings d. Cash e. Note Payable d; Easy 116. A debit or credit is added to the specific T-account in a process known as:

a. exchanging. b. accruing. c. journaling. d. updating. e. posting. e; Easy 117. Lacey Company paid for the next two months of advertising. The journal entry to record

this transaction is: a. Advertising Payable Cash b. Prepaid Advertising Cash c. Advertising Expense Cash d. Prepaid Advertising Advertising Expense e. Advertising Expense Advertising Payable

Hoyle, Financial Accounting 2.0 b; Easy 118. Which of the following accounts should be debited when a company collects on

accounts from customers? a. Accounts Payable b. Accounts Receivable c. Cash d. Revenue e. Retained Earnings c; Easy 119. In October, Janus Corporation received a payment in advance from a customer for work

to be performed in November. To record this, Janus’ accountant debited Cash and credited Revenue. Which of the following is true? a. Revenue is understated b. Assets are overstated c. Liabilities are understated d. Cash is understated e. Unearned revenue is overstated c; Moderate 120. Landon Company purchased a building for $789,000 cash. Which of the following is

the journal entry recorded by Landon? a. Building 789,000 Cash 789,000 b. Cash 789,000 Note Payable 789,000 c. Cash 789,000 Building 789,000 d. Note Payable 789,000 Building 789,000 e. Building 789,000 Note Payable 789,000 a; Easy 121. Which of the following accounts is credited to record issuance of capital stock?

a. Cash b. Notes Payable c. Accounts Payable d. Capital Stock e. Accounts Receivable d; Easy

Hoyle, Financial Accounting 2.0

Fill in the blanks 122. _____ shows the amounts for which customers have paid, but the company has not yet

done the work. Unearned revenue; Easy 123. A company pays for a previous purchase of merchandise. The two accounts involved in this transaction are _____ and _____. cash, accounts payable; Easy 124. A company pays for a previous purchase of inventory. To record this, _____ should be

debited and _____ should be credited. accounts payable, cash; Easy 125. To record issuance of capital stock _____ should be debited.

cash; Easy 126. _____ is the process of adding each individual debit and credit to the specific T-account

being altered. Posting; Easy Problems 127. Corinthian Company engaged in the following transactions during the month of May.

Prepare a journal entry for each transaction. a. Corinthian sold stock to its owners for $60,900. Cash 60,900 Capital Stock 60,900 b. Corinthian paid $450,000 for inventory it had previously purchased. Accounts Payable 450,000 Cash 450,000 c. Corinthian collected $290,000 of its accounts receivable. Cash 290,000 Accounts Receivable 290,000 d. Corinthian purchased equipment for $45,000 cash. Equipment 45,000 Cash 45,000 Moderate

Hoyle, Financial Accounting 2.0

128. Indus Company engaged in the following transactions during the month of October.

Prepare journal entries for each transaction. a. Indus sold a building that had originally cost $343,000 for $678,000 cash. Cash 678,000 Building 343,000 Gain on Sale of Building 335,000 b. Indus declared and paid dividends in the amount of $4,680. Dividends Paid 4,680 Cash 4,680 c. Indus paid for rent in the amount of $78,000. Rent expense had previously been recorded. Rent Payable 78,000 Cash 78,000 d. Indus purchased a car for $5,000 cash and signing a note payable of $12,000 for the remainder. Car 17,000 Cash 5,000 Note Payable 12,000 Moderate 129. During the month of January, Kaiser Corporation had the following transactions. For

each transaction, prepare journal entries. a. Kaiser paid for advertising for the month of February in the amount of $900. Prepaid Advertising 900 Cash 900 b. Kaiser’s customers paid the company $5,900 for work Kaiser will perform during February and March. Cash 5,900 Unearned Revenue 5,900 c. Kaiser collected $5,000 from customers on their accounts. Cash 5,000 Accounts Receivable 5,000 d. Kaiser purchased a piece of land for $90,000, paying $30,000 cash and signing a note payable for the remainder. Land 90,000 Cash 30,000 Note Payable 60,000 Moderate

Hoyle, Financial Accounting 2.0

130. Yanci Company had the following transactions during April. 1) Provide a journal entry

for each transaction. 2) Prepare T-accounts for each account used. a. Yanci purchased a piece of land for $8,000 cash. Land 8,000 Cash 8,000 b. Yanci distributed dividends of $500. Dividends Paid 500 Cash 500 c. Yanci sold the piece of land purchased in transaction (a) for $9,000. Cash 9,000 Land 8,000 Gain on Sale of Land 1,000 Cash 9,000 8,000 500 500

Land 8,000 8,000

-0-

Dividends Paid 500

Gain on Sale of Land 1,000

500

1,000

Moderate 131. The following transactions pertain to Klein Corporation for the month of June. 1)

Provide journal entries for each transaction. 2) Prepare T-accounts for each account used. 3) Prepare a trial balance for Klein assuming that no previous account balances exist. a. Klein sold capital stock for $760,000. Cash 760,000 Capital Stock 760,000 b. Klein paid for insurance of $45,000 in advance. Prepaid Insurance 45,000 Cash 45,000 c. Klein purchased a piece of equipment for $56,000. Equipment 56,000 Cash 56,000 d. Klein distributed dividends of $7,000. Dividends Paid 7,000 Cash 7,000

Cash 760,000 45,000 56,000 7,000 652,000

Equipment 56,000

Dividends Paid 7,000

56,000

7,000

Hoyle, Financial Accounting 2.0

Prepaid Insurance 45,000

Capital Stock 760,000

45,000

760,000

Klein Corporation Trial Balance

Cash Equipment Dividends Paid Prepaid Insurance Capital Stock Total

Debit $652,000 56,000 7,000

Credit

45,000 $760,000 $760,000

$760,000

Moderate

Hoyle, Financial Accounting 2.0

Chapter 5 Why Is Financial Information Adjusted Prior to the Production of Financial Statements? Section 1 True/False Questions 1. Adjusting entries are the result of physical events or transactions that occurred during a period. False; Easy 2. Account balances can change because of the passage of time. True; Easy 3. Increase or decrease in accounts like rent, salary, and interest are caused by the passage of time. True; Easy 4. Any expense that grows gradually over time but has not yet been paid is known as an accrued expense. True; Easy 5. The word “accrue” means to adjust. False; Easy 6. Companies can use computers to automatically make adjusting entries prior to preparing the financial statements. True; Easy 7. A company owes for utilities, but has not made an adjusting entry to reflect that. As a result, expense will be understated. True; Easy 8. Tryor Corporation owes for advertising which has already been run. When Tryor’s accountant makes an adjusting entry to reflect this, advertising payable will be debited. False; Easy 9. Income taxes are typically an accrued expense. True; Easy

Hoyle, Financial Accounting 2.0

10. Which of the following transactions will require an adjusting entry at the end of the year? a. Sold equipment for cash $20,000, making a gain of $2,000 b. Purchased goods partly in cash and partly on credit c. Received $12,000 rent for 6 months, including 2 months of the forthcoming year d. Declared and paid $5,000 cash dividends e. Paid $1,000 cash as freight expense c; Easy 11. A company owes for past rent and no previous accrual has been made. Which of the following is the correct adjusting entry for the company to make? a. Rent Expense Rent Payable b. Rent Payable Cash c. Rent Payable Rent Expense d. Rent Expense Cash e. Cash Rent Expense a; Easy 12. Unearned revenue is also referred as: a. accrued revenue. b. deferred revenue. c. adjusted revenue. d. incidental revenue. e. contingent revenue. b; Easy 13. Prepaid insurance is an example of: a. accrued expense. b. deferred expense. c. adjusted expense. d. incidental expense. e. contingent expense. b; Easy 14. An accrued expense is an expense which: a. has been incurred but not paid. b. has been paid but not incurred. c. has been incurred and paid. d. will be incurred and paid in the future. e. is incidental to company’s operation. a; Easy ©2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

15. Accrued revenue is reported as a(n): a. asset on the balance sheet. b. liability on the balance sheet. c. expense on the income statement. d. income on the income statement. e. deduction in the statement of retained earnings. a; Easy 16. A journal entry where rent payable is credited is an example of a(n): a. prepaid expense. b. accrued expense. c. unearned revenue. d. accrued revenue. e. deferred expense. b; Easy 17. An expense which grows gradually over time is known as a(n): a. adjustment expense. b. timely expense. c. prepaid expense. d. growth expense. e. accrued expense. e; Easy 18. Which of the following will be reported on the balance sheet as an asset? a. Prepaid Expense b. Salaries Payable c. Deferred Revenue d. Common Stock e. Dividends a; Easy 19. A company receives $5,000 in advance for services to be provided next year. The company records this receipt as normal revenue instead of deferred revenue. Which of the following statements is true about the account balance at the end of the year? a. Retained Earnings are understated b. Liabilities are understated c. Net Income is understated d. Revenue is understated e. Assets are understated b; Moderate 20. While making adjusting entries, the accountant of Kite Inc. recorded an accrued rent expense as debit to prepaid rent and credit to rent expense. Determine the effect of this error on the financial statements. ©2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0 a. Total expense is overstated. b. Total revenue is overstated. c. Assets are understated. d. Liabilities are understated. e. Retained earnings are understated. d; Moderate 21. A company pays its workers $2,000 salary per month on the first day of the following month. At the end of December, Year One, the company failed to make an adjusted entry for the accrued liability. The accountant thought that the adjusting entry had been made and, so, when the payment was made, it was recorded as if the proper adjusting entry had been made. Which of the following statements is true? a. At the end of Year One, the company’s retained earnings are understated. b. At the end of Year One, the company’s expense is overstated. c. At the end of Year Two, the company’s net income is understated. d. At the end of Year Two, the company’s retained earnings are overstated. e. At the end of Year Two, the company’s liabilities are overstated. d; Hard Fill in the blanks 22. _____ are journal entries made to increase or decrease an account balance due to the passage of time. Adjusting entries; Moderate 23. Supplies is an asset account which is slowly depleted because of _____ rather than time. usage; Moderate 24. A(n) _____ expense is one which grows over time. accrued; Easy 25. A company owes for taxes it has previously incurred, but no journal entry has been made. The two accounts involved in this adjustment are _____ and _____. tax expense, tax payable; Easy

Hoyle, Financial Accounting 2.0

Short Answer Questions 26. Explain why adjusting entries are necessary. Some account balances increase or decrease because of the passage of time. The impact can be so gradual that producing individual journal entries is not reasonable. Unless an accounting system is programmed to record tiny incremental changes, none of these financial effects is captured as they occur. Prior to producing financial statements, accountants must search for any changes that have not yet been recognized. Adjusting entries are then recorded. Without these adjustments, the financial statements would not be presented fairly. Easy Section 2 True/False Questions 27. If expenses paid in advance are initially recorded as prepaid expenses, an adjusting entry is made to reclassify it to expense as time passes to satisfy the matching principle. True; Easy 28. Prepaid expenses are classified as a liability on the balance sheet. False; Easy 29. Adjustments to prepaid expenses are necessary because they are gradually used up as time passes. True; Easy 30. Revenue is recognized when the earning process is deemed to be substantially complete, even though cash is not yet received. True; Moderate 31. Tyler Company prepaid for six months’ rent at the beginning of the month. When making the adjustment for the month end, Tyler can debit either rent expense or prepaid rent, depending on how the company recorded the original entry. True; Moderate 32. Accrued revenue is classified as a liability on the balance sheet. False; Easy 33. The revenue realization process says that revenue can be recognized if the earnings process is at least 50% complete. False; Easy

Hoyle, Financial Accounting 2.0 34. A company pays $4,000 on October 1, 2013 to rent a building for the next four months. On that date, the company debited rent expense and credited cash for $4,000. The adjusting entry made on December 31, 2013 will include a $1,000 credit to rent expense. True; Moderate 35. United Company recorded for rent paid in advance by debiting prepaid rent and crediting cash. When making the adjusting entry, United’s accountant debited rent expense and credited cash. As a result, United’s expenses are overstated. False; Moderate 36. Revenue is not recognized until cash is received. False; Easy 37. Prepaid advertising is reported as an expense on the income statement. False; Easy 38. Adjustment entry for accrued revenue is made to reduce revenue account’s balance to zero at the end of an accounting period so that a new measurement for the subsequent period can begin. False; Easy Multiple Choice Questions 39. Highlander Corporation paid $600 for insurance at the beginning of December. The payment covered the months of December, January, and February. What would be the balance in the prepaid insurance account at the end of December if Highlander’s accountant makes the correct adjusting entry? a. $200 b. $400 c. $100 d. $600 e. $300 b; Moderate

Hoyle, Financial Accounting 2.0

40. On December 1, Rob Corporation paid $500 rent for the month in advance. This was recorded with a debit to prepaid rent and credit to cash for $500. What adjusting entry does Rob needs to make on December 31? a. Rent Expense 500 Cash 500 b. Prepaid Rent 500 Accrued Rent 500 c. Rent Expense 500 Prepaid Rent 500 d. Prepaid Rent 500 Cash 500 e. Accrued Rent 500 Cash 500 c; Easy 41. On December 1, Dennis Corporation paid $800 rent for the month of December, and January. This was recorded with a debit to rent expense and credit to cash for $800. What adjusting entry does Dennis needs to make on December 31? a. Prepaid Rent 800 Cash 800 b. Prepaid Rent 400 Rent Expense 400 c. Rent Expense 400 Prepaid Rent 400 d. Rent Expense 400 Cash 400 e. Rent Expense 800 Accrued Rent 800 b; Easy 42. On November 1, 2013 Venus Corporation received $20,000 in advance from a client for a work yet to be performed. On December 31, 2013 one-fifth of the work was substantially completed. What entry should Venus Corporation make on December 31, 2013? a. Unearned Revenue 4,000 Sale of Services 4,000 b. Cash 20,000 Unearned Revenue 20,000 c. Cash 4,000 Sale of Services 4,000 d. Unearned Revenue 20,000 Sale of Services 20,000 e. Sale of Services 16,000 Unearned Revenue 16,000 a; Easy

Hoyle, Financial Accounting 2.0 43. Perkins Corporation paid $30,000 for advertising for the months of June, July, and August at the beginning of June. Perkin’s accountant forgot to make an adjusting entry at the end of June. Which of the following is true, assuming original entry was made to prepaid rent? a. Prepaid advertising is overstated by $20,000. b. Expenses are understated by $30,000. c. Liabilities are understated by $20,000. d. Net income is overstated by $20,000. e. Retained earnings are overstated by $10,000. e; Moderate 44. On November 1, Year One, a company spends $9,000 for something that will help them generate revenue each month over the subsequent (following) six months. The company’s accountant immediately recorded the $9,000 as an expense and no adjusting entry was made on December 31, Year One. Which of the following statements is true? a. At the end of Year One, net income is overstated. b. At the end of Year Two, net income is overstated. c. At the end of Year One, retained earnings is correctly stated. d. At the end of Year Two, retained earnings is understated. e. At the end of Year One, assets are overstated. b; Hard 45. On November 1, 2013 Alpha Corporation agreed to provide services to Delta Company for $9,000. On December 31, 2013 two-third of the work was substantially completed. What entry should Alpha Corporation make on December 31, 2013? a. Sale of Services 3,000 Accrued Revenue 3,000 b. Unearned Revenue 3,000 Sale of Services 3,000 c. Cash 6,000 Sale of Services 6,000 d. Accounts Receivable 6,000 Sale of Services 6,000 e. Accounts Receivable 9,000 Sale of Services 9,000 d; Easy 46. Harris Company performs a service over time. Revenue is earned each day the service is performed, but no entry is made until the end of the month. What is the correct adjusting entry for Harris to make? a. Accounts Receivable Service Revenue b. Unearned Revenue Cash c. Unearned Revenue Service Revenue ©2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0 d. Accounts Receivable Prepaid Revenue e. Service Revenue Accounts Receivable a; Easy 47. Chris Company prepays insurance for the month of February and records it by debiting prepaid insurance and crediting cash. At the end of February, Chris’ accountant debits rent expense and credits cash. Which of the following statements is true? a. Assets are overstated b. Net Income is overstated c. Expenses are understated d. Assets are understated e. Prepaid Insurance is overstated e; Moderate 48. A prepaid expense: a. has been incurred but not yet paid. b. has been paid but has not been incurred. c. has been paid and incurred. d. has not been paid, but will be incurred in the future. e. has been neither incurred or paid. b; Easy 49. On November 1, Year One, a company is paid $12,000 in advance to do a job for a customer. The job has ten separate steps. The first four steps were completed in Year One and the remaining six steps were completed in Year Two. The accountant mistakenly believed that this was just one big job and recorded it in that fashion. However, each of the ten steps was really an individual job and should have been accounted for in that way. Which of the following statements is true? a. At the end of Year One, the company’s retained earnings are understated. b. At the end of Year One, the company’s liabilities are understated. c. At the end of Year Two, the company’s retained earnings are overstated. d. At the end of Year Two, the company’s net income is understated. e. At the end of Year Two, the company’s assets are overstated. a; Hard 50. Axom Corporation earns revenue over time by performing the same service daily. It will not be paid until the service is done, but each daily service is considered a separate job. If financial statements are prepared in the middle of the service time, what should Axom credit? a. Cash b. Accounts Receivable c. Cost of Goods Sold d. Sales of Service e. Deferred Revenue ©2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0 d; Easy 51. Rent expense was debited to record for rent paid in advance. Which of the following accounts will be debited to record the adjusting entry for this transaction? a. Cash b. Prepaid Rent c. Rent Expense d. Accounts Receivable e. Accounts Payable b; Moderate 52. Solomon Corporation earns revenue over time. What is the correct name for this account? a. Unearned Revenue b. Prepaid Revenue c. Adjusted Revenue d. Accrued Revenue e. Growth Revenue d; Easy Fill in the blanks 53. The revenue recognition principle states that the earnings process must be _____ complete before revenue can be recorded. substantially; Moderate 54. A(n) _____ expense is one which is paid in advance of incurring it. prepaid; Easy Problems 55. Determine if the following transactions require an adjustment or not. If an adjusting entry is required, give the correct entry. a) Jackson and Sons paid $500 in advance for one month’s insurance at the beginning of November. It is now November 30. Assume that prepaid insurance was originally debited. Insurance Expense Prepaid Insurance

500 500

Hoyle, Financial Accounting 2.0

b) Petsitters, Inc. agreed to pet sit for Irma Peabody at a rate of $20 per day for a month. It is now the end of the first week, and financial statements are being prepared by Petsitters. Irma agreed that she would pay Petsitters for each day they worked even if they quit before the end of the month. Accounts Receivable Sales of Services

140 140

c) Petsitters, Inc. agreed to pet sit for Irma Peabody at a rate of $20 per day for a month. It is now the end of the first week, and financial statements are being prepared by Petsitters. Petsitters agreed that if it did not complete the entire month, it would not be paid. No entry is required. d) Delight Restaurant owes rent for the month of March in the amount of $32,000. It is now the end of March. Rent Expense Rent Payable Moderate

32,000 32,000

56. Determine if the following adjusting entries are a(n): AE Accrued Expense PE Prepaid Expense AR Accrued Revenue a) _ ____ Lionel Corporation paid $45,000 in advance for rent. b) _ ____Charlotte Company owes $67,000 for utilities for the past month. c) _ ____Shanice Booksellers owes its employees $2,300 for the work they have done over the past two weeks. d) __ ___Fabulous Lawncare, Inc., cut several lawns for which it has not been paid. e) __ ___Worther’s Grocery and Pharmacy paid The Daily Gazette $60 in advance for ads which are yet to be released. a) PE b) AE c) AE d) AR e) PE Easy ©2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

57. Make the correct adjusting entry for each of the following: a. Kristian Brothers paid $240,000 for advertising in advance for the months of June, July, August, and September. It is now September 30. Assume that adjustments were made for the previous three months and the prepaid advertising was originally debited. Advertising Expense 60,000 Prepaid Advertising

60,000

b. Fitzburg and Associates agreed to perform a daily service for a customer at a rate of $50 per day. Fitzburg will be paid for any days it completes. At this point, Fitzburg has performed the service for 10 days. Accounts Receivable Sales of Services

500 500

c. Johnson and Cartwright owes $35,000 for January’s utilities. Utilities Expense Utilities Payable

35,000 35,000

Easy

Short Answer Questions 58. How can an accountant determine appropriate revenue recognition when a job covers a period of time? Accountants must search for credible evidence as to the true nature of the events they encounter. It can be difficult to determine if a job should be broken up into its smaller pieces for revenue recognition or whether it should be seen as one large job. One technique that accountants can use is to determine when pay can be demanded. If it can be demanded when only part of the time has passed, it may be appropriate to recognize separate jobs. If pay will be delivered only if all parts of the job are completed, then it may be appropriate to look at it as one job. Easy

Hoyle, Financial Accounting 2.0

Section 3 True/False Questions 59. A customer prepays Atlanta Company for a service. Once Atlanta performs that service, it should debit cash and credit revenue. False; Easy 60. An adjusted trial balance should be prepared after posting of all adjusting entries. True; Easy 61. Prepaid expense accounts are temporary accounts, and should be closed into retained earnings. False; Moderate 62. After closing all revenues, expenses, gains, and losses into retained earnings, the net of the debits and credits should equal net income. True; Moderate 63. Carmichael Industries received payments in advance for a work yet to be performed. Carmichael’s accountant debited revenue and credited unearned revenue. As a result, Carmichael’s assets will be understated. True; Easy 64. The statement of cash flows is the only financial statement which does not report ending ledger balances. True; Hard 65. Notes to financial statements are optional. False; Moderate 66. The two accounts affected by any adjusting entry are permanent accounts. False; Moderate 67. Closing entries bring the balance of temporary accounts back to zero. True; Easy 68. Assets, liabilities, and common stock are all examples of temporary accountants. False; Easy 69. Temporary accounts are closed into retained earnings. True; Easy 70. Temporary accounts are closed into cash at the end of the reporting cycle. False; Easy ©2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

71. After closing temporary accounts, the resulting single figure should be equal to the retained earnings balance. False; Moderate 72. Liabilities, common stock, and retained earnings are not closed at the end of the reporting cycle. True; Easy 73. Revenues and expenses have a balance of zero at the beginning of each reporting cycle. True; Easy Multiple Choice Questions 74. Which of the following accounts would be closed at the end of the reporting cycle? a. Unearned Revenue b. Cash c. Retained Earnings d. Sales Revenue e. Supplies d; Easy 75. After the temporary accounts are closed at year’s end, the resulting single figure will be equal to: a. net income reported for the year. b. beginning retained earning balance of the forthcoming year. c. ending retained earning balance of the current year. d. total cash flow for the current year. e. beginning stockholder’s equity balance of the forthcoming year. a; Easy

76. Ryland Publishers collected $3,500 in cash from customers for future subscriptions. Which entry should Ryland make on the date the cash is received? a. Unearned Revenue 3,500 Revenue 3,500 b. Cash 3,500 Revenue 3,500 c. Revenue 3,500 Unearned Revenue 3,500 d. Cash 3,500 Unearned Revenue 3,500 e. Unearned Revenue 3,500 Cash 3,500 d; Easy

Hoyle, Financial Accounting 2.0 77. Which of the following is a permanent account? a. Retained Earnings b. Revenue c. Salaries Expense d. Dividends e. Gain on Sale of Building a; Easy 78. Which of the following is prepared after the preparation of balance sheet? a. Closing entries b. Adjusting entries c. Adjusted trial balance d. Statement of retained earnings e. Ledger accounts a; Easy 79. When customers pay in advance for a work yet to be performed, the company performing the work records a(an): a. prepaid revenue. b. prepaid expense. c. accrued expense. d. accrued revenue. e. unearned revenue. e; Easy 80. Harris’ customers paid $560 in advance of Harris performing any work. Harris’ accountant debited cash and credited revenue when the cash was received. Which of the following statements is true? a. Harris’ net income is understated. b. Harris’ retained earnings are overstated. c. Harris’ cash is understated. d. Harris’ liabilities are overstated. e. Harris’ capital stock is understated. b; Moderate 81. Which of the following is true of closing entries? a. It is prepared to record the increase or decrease in accounts caused by usage or passage of time. b. It effectively moves the balance of assets, liabilities, and stockholders’ equity into retained earnings. c. It is prepared for revenues, expenses, gains, losses, and dividends paid d. It is prepared prior to preparation of financial statements. e. It is optional to prepare closing entries under GAAP. c; Easy

Hoyle, Financial Accounting 2.0 82. Which of the following accounts require adjusting entries? a. Accounts Receivable b. Cash c. Inventory d. Unearned Revenue e. Accounts Payable d; Easy 83. Which of the following statements is prepared for a particular date? a. Income statement b. Statement of retained earnings c. Statement of cash flows d. Balance sheet e. General journal d; Easy 84. Which of the following statements is true about financial statements? a. Dividends paid are shown as a reduction on the income statement. b. Assets reported on the balance sheet may or may not have a source. c. Income statement is prepared for a particular date. d. The total of assets is equal to the total of liabilities. e. There is no T-account for ending retained earnings balance. e; Moderate 85. Which of the following does not have a T-account? a. Dividends Paid b. Net Income c. Cost of Goods Sold d. Unearned Revenue e. Common Stock b; Easy 86. Which of the following statements is true about temporary accounts? a. They include changes over the life of the business. b. They must all be returned to a zero balance after annual financial statements are produced. c. The beginning balance of these accounts is equal to the ending figures reported on the previous year balance sheet. d. The various amounts in these accounts are transferred to capital stock account at the end of the year. e. Temporary accounts include assets, liabilities, capital stock and retained earnings. b; Moderate

Hoyle, Financial Accounting 2.0

87. After the closing entries are made for temporary accounts, the balance of these accounts are moved to: a. retained earnings b. common stock c. assets d. liabilities e. net income a; Easy 88. Which of the following is a temporary account? a. Cash b. Retained Earnings c. Accounts Payable d. Inventory e. Dividends e; Easy 89. Which of the following accounts is closed at the end of the reporting cycle? a. Revenue b. Assets c. Liabilities d. Retained Earnings e. Common Stock a; Moderate 90. On December 1, Year One, a company receives $10,000 in advance for work it will perform in January, Year Two. The company accountant immediately recorded the $10,000 as revenue and no adjusting entry was made on December 31, Year One. Which of the following statements is true of this transaction? a. At the end of Year One, liabilities are overstated b. At the end of Year One, net income is overstated c. At the end of Year One, retained earnings is correctly stated d. At the end of Year Two, net income is overstated e. At the end of Year Two, retained earnings is understated b; Hard 91. Leonardo Corporation received $450 in cash from customers on December 1 in advance of performing a work. By December 31, Leonardo had earned $250 of the amount. What is the balance in unearned revenue on December 31? a. $250 b. $200 c. $0 d. $450 e. $700 b; Easy ©2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

92. Which of the following are prepared to bring the balance in the temporary accounts back to zero? a. Adjusting entries b. Finishing entries c. Closing entries d. Netting entries e. Totaling entries c; Easy Fill in the blanks 93. _____, liabilities, retained earnings, and capital stock are not closed at the end of the reporting cycle. Assets; Easy 94. Accountants prepare a(n) _____ to help accountants find any missing adjustments prior to the financial statements being produced. adjusted trial balance; Moderate Problems 95. Grinaldi Industries prepays for advertising with the firm of Smith and Presley. On June 1, Grinaldi paid $36,000 for ads to run evenly during June, July and August. a. Record the entry Grinaldi would make on June 1. Prepaid Advertising Cash

36,000 36,000

b. Record the entry Grinaldi would make on June 31. Advertising Expense 12,000 Prepaid Advertising

12,000

Easy

Hoyle, Financial Accounting 2.0

96. Grinaldi Industries prepays for advertising with the firm of Smith and Presley. On June 1, Grinaldi paid $36,000 for ads to run in June, July, and August. c. Record the entry Smith and Presley would make on June 1. Cash

36,000 Unearned Revenue

36,000

d. Record the entry Smith and Presley would make on June 31. Unearned Revenue Revenue

12,000 12,000

Easy 97. Determine if the following adjusting entries are a(n): AE Accrued Expense PE Prepaid Expense AR Accrued Revenue UR Unearned Revenue a) ____ Reynolds, Inc. receives $4,000 in payments from customers in advance of doing the work. b) ___ _ Tammy and Hope Jewelers pays $6,000 for their June rent on June 30. c) ___ _ Tammy and Hope Jewelers pays $6,000 for their June rent on June 1. d) ___ _ Harold Dogsitters agrees to dogsit for a client at a price of $15 per day. Each day is a separate job. a) UR b) AE c) PE d) AR Easy 98. Determine if the following transactions require an adjusting entry or not. If so, please provide the correct entry. If not, please state “no entry required.” a. The Rhode Island Red Birds football team received $1,500,000 in cash for advance ticket sales in February 2012. By December 2012, the season had ended. Unearned Revenue Revenue

1,500,000 1,500,000

b. Fox and Company owes its employees $34,000 at the end of September, but no accrual has been made. Salaries Expense Salaries Payable

34,000

34,000 19

Hoyle, Financial Accounting 2.0

c. Oscar Corporation made an advance payment of $9,000 to a local company for advertising that would run during October. It is now October 31, and the advertising has run. Assume an original entry was made for prepaid advertising. Advertising Expense 9,000 Prepaid Advertising

9,000

Easy 99. Prior to any adjustments, K and K had the following trial balance: K and K Trial Balance—December 31 Account Debit Balance Cash $ 500 Inventory 2,500 Prepaid Rent 300 Accounts Payable Unearned Revenue Capital Stock Retained Earnings, 12/1 Revenue Totals $3,300

Credit Balance

$ 700 200 1,000 800 600 $3,300

a. Prepare adjusting entries for the following on December 31: i. On December 1, K and K prepaid $300 for rent for the month of December. Rent Expense 300 Prepaid Rent ii.

300

K and K owe $100 to employees. Salaries Expense Salaries Payable

100 100

iii. K and K was paid $200 on December 1 to perform work during December and January. Half of the work has been completed and that part of the work is viewed as being substantially complete. Unearned Revenue Revenue

100 100

Hoyle, Financial Accounting 2.0

b. Prepare an adjusted trial balance for K and K on December 31. K and K Final Trial Balance—December 31 Account Debit Balance Cash $ 500 Inventory 2,500 Accounts Payable Salaries Payable Unearned Revenue Capital Stock Retained Earnings, 12/1 Revenue Rent Expense 300 Salaries Expense 100 Totals $3,400 Moderate

Credit Balance

$ 700 100 100 1,000 800 700

$3,400

100. Determine if the following transactions require an adjusting entry or not. If so, please provide the correct entry. If not, please state “no entry required.” a. Fallon Industries receives its utilities bill for February in the amount of $325,000. Utilities Expense Utilities Payable

325,000 325,000

b. On March 1, Khrystie Kitchen Supplies paid $2,000 in advance for insurance for the months of March and April. It is now March 31.

Insurance Expense Prepaid Insurance

1,000 1,000

c. Happy Adults daycare agreed to take care of an elderly woman in her daughter’s home for the week at a price of $100 per day. Happy Adults agreed that they would not be paid if they did not complete the full week. It is now day four. No entry required Moderate

Hoyle, Financial Accounting 2.0

Chapter 6 Why Should Decision Makers Trust Financial Statements? Section 1 True/False Questions 1. Financial statements are prepared by a company’s management. True; Easy 2. “Cooking the books” refers to producing fraudulent financial statements. True; Easy 3. The United States is a capitalistic economy, thus businesses need to raise money from outside individuals if they want to grow. True; Easy 4. Companies in the U.S. should file Form 10-Q once in a year. False; Easy 5. The SEC is a private organization. False; Moderate 6. The SEC was established by the Securities Act of 1933. False; Moderate 7. U.S. companies whose stock trades on public exchanges are the only organizations under the jurisdiction of the SEC. False; Moderate 8. The EDGAR system allows the public to access the financial statements of publicly traded companies. True; Easy 9. Companies that do not issue stock on public exchanges are required to comply with state laws. True; Easy 10. State laws known as “gray sky laws” govern the form and distribution of financial information of non-public companies. False; Easy 11. Legally, the SEC has the ability to establish accounting rules for all companies under its jurisdiction. True; Easy ©2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0 12. The FASB is a governmental association under the authority of the SEC. False; Moderate 13. The FASB produces accounting rules to be applied by all for-profit and not-for-profit organizations in the U.S. True; Easy 14. The FASB is the only organization which sets accounting standards. False; Easy 15. The Emerging Issues Task Force (EITF) reports to the SEC. False; Moderate 16. The EITF helps in appling U.S. GAAP to newly emerging situations. True; Easy 17. The SEC occasionally issues guidelines to ensure that adequate information is being disclosed to the public through its own rules and interpretive releases. True; Easy Multiple Choice Questions 18. The SEC refers to: a. Shareholders and Emerging Investors Commission. b. Securities and Employer Corporation. c. Securities and Exchange Corporation. d. Shares and Exchange Commission. e. Securities and Exchange Commission. e; Easy 19. Which of the following organizations has the primarily authority for producing GAAP in the U.S.? a. The IASB b. The FASB c. The EITF d. The AICPA e. The EDGAR b; Easy

Hoyle, Financial Accounting 2.0

20. Which of the following is the name for state laws, which govern financial reporting? a. U.S. GAAP b. FASB Accounting Standards Codification c. Blue Sky Laws d. Securities and Exchange Act e. EDGAR c; Easy 21. Which of the following is the U.S. organization, which has ultimate responsibility for the availability of complete and reliable information about every organization that issues publicly traded securities? a. The SEC b. The EDGAR c. The FASB d. The EITF e. The AICPA a; Easy 22. Which of the following is the system, which allows investors to access financial information about publicly traded companies? a. FASB Accounting Standards Codification b. EITF c. U.S. GAAP d. EDGAR e. Securities and Exchange Act d; Easy 23. Which of the following, released by the FASB, is the single source for U.S. GAAP? a. The EDGAR b. FASB Accounting Standards Codification c. FASB’s Securities Exchange Act d. FASB’s Blue Sky Laws e. The SEC b; Easy 24. Which of the following organizations was created in 1984 to assist FASB? a. The PCAOB b. The SEC c. The AICPA d. The IASB e. The EITF e; Easy

Hoyle, Financial Accounting 2.0

25. Which of the following organizations produces accounting standards for state and local governments in the U.S.? a. The SEC b. The EITF c. The GASB d. The FASB e. The IASB c; Easy 26. International Financial Reporting Standards (IFRS) are set by: a. the SEC. b. the GASB. c. the FASB. d. the IASB. e. the PCAOB. d; Easy 27. Which of the following is a reason for the SEC to let the FASB produce U.S. GAAP? a. The FASB is a government organization; therefore, there is no abdication of an important responsibility by the federal government. b. The FASB is formed under the same guidelines as IASB. c. The SEC and FASB were established by the Securities Exchange Act of 1934. d. The members of the FASB are also the members of the SEC; therefore, there is no argument between the two organizations. e. The members of the FASB can be trusted to study each reporting issue meticulously before arriving at a reasoned resolution. e; Moderate 28. Which of the following describes the "blue sky laws"? a. The financial information reported by publicly traded companies must conform to U.S. GAAP. b. The form and distribution of financial information of companies that do not issue securities to the public must conform to state laws. c. The financial reports must be prepared using the guidelines produced by the IASB. d. The new financial reporting guidelines produced with the joint efforts of the IASB and the FASB should be applied by companies that do not issue shares to the public. e. The state and local governments should follow accounting standards produced by the Governmental Accounting Standards Board. b; Moderate

Hoyle, Financial Accounting 2.0

29. Which of the following organizations examines new problems when they initially arise in hopes of coming to quick agreement as to an appropriate method of reporting based on existing U.S. GAAP? a. The SEC b. The IASB c. The EITF d. The PCAOB e. The GASB c; Easy 30. Foreign companies, whose securities are traded publicly within the United States fall under the jurisdiction of the: a. SEC. b. EITF. c. GASB. d. PCAOB. e. AICPA. a; Easy 31. The SEC has delegated the development of authoritative accounting principles to the: a. IASB. b. AICPA. c. FASB. d. EDGAR. e. EIFT. c; Easy 32. Which of the following Forms must be submitted each year that includes financial statements as well as a substantial amount of additional data ? a. Form 10-K b. Form 10-Q c. Form 10-AD d. Form 10-BC e. Form 15-QA a; Easy 33. The conclusions rendered by the EITF are considered to be authoritative until the: a. SEC provides its own formal guidance. b. EDGAR provides its own formal guidance. c. AICPA provides its own formal guidance. d. FASB provides its own formal guidance. e. IASB provides its own formal guidance. d; Easy

Hoyle, Financial Accounting 2.0 34. Which two organizations are coming together to form a single set of global standards over the next few years? a. The PCAOB and the EIFT b. The AICPA and the FASB c. The IASB and the GASB d. The EDGAR and the EIFT e. The IASB and the FASB e; Easy Fill in the blanks 35. The organization created by the FASB to assist with applying U.S. GAAP to new situations is the _____. EITF; Easy 36. Companies that do not issue even a minimum amount of securities to the public normally are required to comply with state laws often referred to as_____. blue sky laws; Easy 37. The _____ is charged with setting U.S. GAAP for for-profit and not-for-profit organizations. FASB; Easy 38. The _____ serves as the single source of authoritative nongovernmental U.S. GAAP. FASB Accounting Standards Codification; Moderate 39. The system through which the public can access financial information about all U.S. companies is _____. EDGAR; Easy Short Answer Questions 40. Discuss the three major players in the setting of U.S. GAAP. The three major players are the Securities and Exchange Commission, the Financial Accounting Standards Board, and the Emerging Issues Task Force. The SEC has the ultimate authority to set accounting standards, which was granted by the U.S. Congress in the Securities Exchange Act of 1934. The SEC has delegated responsibility of creating authoritative accounting principles to the FASB. The EITF was created by the FASB in 1984 to apply U.S. GAAP to new situations. Easy

Hoyle, Financial Accounting 2.0

41. Explain why a system is needed to ensure the production of fairly presented financial statements. In a capitalist economy, the businesses must get the capital they need to grow through outside sources. Investors and creditors know that financial statements produced by companies are going to be overly optimistic or fraudulent unless a system exists to help ensure fairly presented statements. They will not be willing to give companies the money they need without such a system. Moderate 42. Companies that sell securities on exchanges and companies that don’t are subject to different financial reporting rules. Discuss how these differ. Companies that sell securities on public exchanges are subject to federal laws and come under the jurisdiction of the SEC. Companies that are not publicly traded are subject to state laws for financial reporting known as “blue sky laws.” Moderate 43. List the four largest CPA firms operating internationally. a. Deloitte Touche Tohmatsu, b. Ernst & Young c. KPMG d. PricewaterhouseCoopers Easy Section 2 True/False Questions 44. The SEC visits the headquarters of every company under its authority. False; Easy 45. Auditors are hired by the SEC to perform detailed examinations of the financial statements of public companies. False: Moderate 46. Auditors provide a written report, which is attached to financial statements. True; Easy 47. The auditor’s report can be viewed only by a company’s management. False; Easy 48. Only companies under the jurisdiction of the SEC may get an audit. False; Easy ©2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

49. Companies that have an audit may be able to borrow money at lower interest rates. True; Easy 50. The FASB is a government organization. False; Moderate 51. The SEC prohibits public accounting firms from offering any services except audits. False; Easy 52. The FASB oversees the work of auditors of publicly traded companies. False; Easy 53. The U.S. Congress through the Sarbanes-Oxley Act of 2002 created the PCAOB. True; Easy 54. The PCAOB was created in response to accounting scandals. True; Easy 55. The PCAOB has authority over the audits of non-publicly traded companies. False; Moderate 56. The Auditing Standards Board oversees the audits of companies, which do not sell securities on public exchanges. True; Easy 57. The auditing standards board was established to assist the FASB. False; Easy 58. The SEC has power to enforce securities law and punish those who break them. True; Easy 59. The U.S. Congress in response to the major accounting scandals passed the SarbanesOxley Act. True; Easy 60. Corporate officials who produce fraudulent financial statements can be fired, but cannot be fined or put in jail. False; Easy 61. The auditor’s report is a legal requirement for statements provided to the SEC. True; Easy 62. The PCAOB holds no authority on the audit performed on financial statements of an organization issuing publicly traded securities. False; Easy ©2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

63. Auditors are hired by the SEC. False; Easy Multiple Choice Questions 64. The PCAOB refers to: a. Public Company Accounting Oversight Board. b. Private Company Accounting Organization Bill. c. Public Corporation Accounting Outlook Board. d. Public Commission for Accounting for Over and Short Bills. e. Private Commission for Availability of Balance Sheet. a; Easy 65. A detailed examination of a company’s financial statements is called a(n): a. certification. b. test. c. audit. d. report. e. opinion. c; Easy 66. Which of the following is true of the EITF? a. It was founded in 1973. b. It is a part of the PCAOB. c. It determines the majority of U.S. GAAP. d. It was created by the U.S. Congress. e. It was created to assist the FASB. e; Easy 67. The Big Four Public Accounting Firms includes: a. Grant Thornton b. Arthur Andersen c. BDO Seidman d. PricewaterhouseCoopers e. McGladrey & Pullen d; Moderate 68. Which of the following is true of the SEC? a. It was established under the Sarbanes-Oxley Act of 2002. b. It has authority over the IASB. c. It has power to enforce securities laws. d. It has the power to set IFRS. e. It was created in 1984. c; Easy

Hoyle, Financial Accounting 2.0 69. Which of the following is true of a CPA? a. A person having 20 years of experience in accounting field will be called a CPA. b. A CPA who is an independent auditor of a company prepares financial statements of that company. c. The ASB is a national professional organization of CPAs. d. Organizations operated by CPAs are termed as public accounting firms. e. All independent auditing firms are government organizations. d; Easy 70. The organization which regulates audits of publicly traded companies is the: a. EITF. b. PCAOB. c. AICPA. d. ASB. e. SEC. b; Easy 71. The organization that regulates the audits of companies which don’t issue securities to the public is the: a. FASB. b. PCAOB. c. EITF. d. SEC. e. ASB. e; Easy 72. The ASB is a technical committee within the: a. FASB. b. SEC. c. AICPA. d. EITF. e. PCAOB. c; Easy 73. The PCAOB was created by the: a. Sarbanes-Oxley Act of 2002. b. Securities Act of 1933. c. Securities Exchange Act of 1934. d. blue sky laws. e. AICPA. a; Easy

Hoyle, Financial Accounting 2.0

74. The PCAOB is underneath the authority of the: a. AICPA. b. ASB. c. FASB. d. SEC. e. FASB. d; Easy 75. Which of the following organizations has the power to enforce securities laws? a. The FASB b. The PCAOB c. The SEC d. The AICPA e. The ASB c; Easy 76. An auditor's report is required by the SEC to: a. determine the cash available at the end of the year. b. determine the amount of tax expense for the year. c. assess the profitability of a company. d. obtain an expert opinion about the integrity of the reporting process. e. identify activities which led to change in total assets during the year. d; Easy 77. Which of the following is a common feature of PCAOB and ASB? a. Both has the power to enforce securities laws and punish companies and individuals who break them. b. Both are technical committees within the American Institute of Certified Public Accountants (AICPA). c. Both were established through the Sarbanes-Oxley Act of 2002. d. Both establish rules for performing an audit. e. Both provide a report stating whether sufficient supporting evidence was obtained. d; Moderate 78. The role of the Securities and Exchange Commission (SEC) includes: a. use innovative and cost-effective tools to improve audit quality and reduce the risk of auditing failures in the U.S. b. ensuring that the reporting process is working as intended by the government. c. taking disciplinary action if the auditor fails to act appropriately. d. issuing statements audited by an independent firm to enhance credibility of a company. e. providing a report giving reasonable assurance that the financial statements are presented fairly. b; Moderate

Hoyle, Financial Accounting 2.0 79. Which of the following is the national professional organization of CPAs in U.S.? a. The AICPA b. The SEC c. The FASB d. The EDGAR e. The PCAOB a; Easy 80. The CPA designation is a license that allows a person: a. to resolve relatively simple issues related to accounting. b. to act as an agent of the SEC and regulate the financial reports filed by companies. c. to provide auditing and other accounting services to the public. d. to restrict companies from issuing shares. e. to evaluate the financial report of a company and report discrepancies to IRS. c; Easy Fill in the blanks 81. The _____ oversees the audits of companies, that sell stock to the public. PCAOB; Easy 82. The _____ has the power to punish companies that break securities laws. SEC; Easy 83. Audits of companies that do not sell stock to the public are governed by the _____. ASB; Easy 84. The ASB is a technical committee within the _____. AICPA; Easy 85. Independent accounting firms must be operated by _____. CPAs; Moderate 86. The SEC requires companies to obtain a(n) _____ by a public accounting firm. audit; Easy 87. The PCAOB was created by the _____. Sarbanes-Oxley Act of 2002; Easy Problems 88. Match the following organizations to their descriptions. __b.___ AICPA a. Determines auditing standards for auditors of non-publicly traded companies

Hoyle, Financial Accounting 2.0 __f.___PCAOB

b. Professional organization of CPAs

__a.___ASB c. Created by the Securities Exchange Act of 1934 to protect investors __d.___FASB __c.___SEC

d. Creates U.S. GAAP e. Helps FASB by applying U.S. GAAP to new situations

__e.___EITF f. Determines auditing standards for auditors of publicly traded companies Easy Section 3 True/False Questions 89. Financial statements are prepared by auditors. False; Easy 90. Auditors have to “test” account balances to provide reasonable assurance. True; Easy 91. When auditors perform audit procedures, they are trying to determine that all account balances are exactly right. False; Easy 92. Auditors provide absolute assurance of financial statements. False; Easy 93. A reason why auditors provide only reasonable assurance of financial statements is that many amounts on the financial statements are estimates. True; Easy 94. Informed decision makers should understand that auditors provide only reasonable assurance that financial statements are fairly presented. True; Easy Multiple Choice Questions 95. What type of assurance do auditors provide that financial statements are fairly presented? a. Reasonable b. Absolute c. Probable d. Perfect e. Possible a; Easy

Hoyle, Financial Accounting 2.0 96. Which of the following is a reason that reasonable assurance by an auditor is adequate? a. Financial statements’ amounts are based on material evidence. b. The FASB has determined that reasonable assurance is adequate. c. Informed decision makers understand that reasonable assurance is all that is provided. d. A CPA from the auditing firm always sits at the client location. e. Organizations provide all invoices to auditors to aid them uncover any problem. c; Moderate 97. Which of the following is a way an auditor might test a company’s accounts receivable balance? a. Add individual account balances and deduct gross profit to ensure that they total to the balance sheet number. b. Examine cash receipts to determine that unrecorded payments were not collected prior to the end of the year. c. Use last year estimates to confirm the amount they owe. d. Examine purchase invoices to match to the amounts the company says it owes. e. Examine sales documents to determine if amounts sold equal the amount listed as payables. b; Moderate 98. Which of the following factors lead auditors to provide only reasonable assurance? a. Ambiguous U.S.GAAP guidelines b. Use of estimates c. Different financial year and calendar year end d. Separation of accounting and custody of assets e. Change in total assets by more than 10% b; Easy 99. Since auditors can never be completely certain that they have not been victimized by an elaborate camouflage scheme perpetrated by management: a. they provide a reasonable assurance. b. they directly report to SEC for any discrepancies in the accounts. c. they hire a third party CPA to re-examine the financial reports. d. they compare the financial reports with last year reports to check for changes. e. they prepare the financial statements. b; Easy 100. Who has to hold the burden of proof of financial statements of the reporting company? a. The company b. The auditor c. The creditor d. The shareholder e. The EITF a; Easy

Hoyle, Financial Accounting 2.0

Fill in the blanks 101. _____ examine available evidence to determine if financial statements are fairly presented. Auditors; Easy Short Answer Questions 102. Provide three reasons why auditors provide only reasonable assurance that financial statements are fairly presented according to U.S. GAAP. Choose three: 1) Many figures on the financial statements are estimations. There is no way to determine in advance if they are correct. 2) Organizations have many transactions during a period. Auditors cannot be expected to uncover every problem or issue with an account since they cannot test 100% of transactions. 3) An auditor is not at the company throughout the year. Therefore, if management wants to hide or mislead, they can sometimes be successful. 4) Informed decision makers understand that auditors provide reasonable assurance. Moderate 103. Explain why a company is responsible for the preparation of financial statements and not the auditing firm. The financial statements are the representation of a company. In preparing these statements, company accountants should document the steps taken to arrive at each balance and the work performed to determine the appropriate method of reporting according to U.S. GAAP. Thus, the burden of proof is on that organization and its officials. The independent auditors only examine the available evidence to ascertain whether reliance on the reported information should be advised. Moderate

Hoyle, Financial Accounting 2.0

104. Explain why an auditor’s report is important to creditors and investors. The independent auditor’s report is attached to the financial statements of a company. If the auditor after assessing the financial statements concludes that sufficient evidence has been obtained to reduce the risk of a material misstatement in the financial statements to an acceptably low level, an audit report is issued with that opinion. Assuming no problems were encountered, reasonable assurance is provided by the independent auditor to decision makers that the statements are presented fairly and, thus, contain no material misstatements according to U.S. GAAP. Upon reading this opinion, investors and creditors should feel confident relying on the information provided by those statements to make their financial decisions about the reporting organization. Easy Section 4 True/False Questions 105. Well-designed internal control systems should reduce the risk of material misstatements in a company’s financial statements. True; Easy 106. An example of internal control would be requiring two employee signatures on a check over a certain amount. True; Easy 107. Internal controls are systems set up by an auditor to help them better perform the audit. False; Easy 108. Internal controls have no bearing on the amount of audit procedures an auditor must perform. False; Easy 109. An auditor’s assessment of a company’s internal control should be made at the end of the audit. False; Moderate

Hoyle, Financial Accounting 2.0

Multiple Choice Questions 110. Redundancies added to a system to ensure that it functions properly are known as: a. audit procedures. b. internal controls. c. evidence. d. safeguards. e. confirmations. b; Easy 111. Which of the following would be an example of an internal control? a. Requiring only the CEO of a company to sign on checks b. Encouraging credit sales c. Requiring authorization for purchases d. Discouraging the use of checks. e. Sending confirmations to customers to test accounts receivable c; Easy 112. Based on a company’s internal control and the effectiveness of its procedures at the beginning of an independent audit: a. the auditor determines the amount of evidence needed to substantiate that each account balance is presented fairly. b. the auditor prepares the audit report to be attached with the financial statements. c. the company determines the changes needed to be implemented in the internal control system before the audit starts. d. the company ensures that these systems accomplish their stated objectives. e. the auditor decides the internal control systems to be applied in the next period. a; Easy 113. Who is responsible for the development of effective internal control systems in a company? a. The auditor b. The management c. The stockholders d. The creditors e. The government b; Easy 114. Which of the following is a result of a well-designed internal control in a company? a. A qualified opinion of the auditor b. Low level of credibility c. Increase in time and money spent on auditing d. Less audit testing e. Increase in the likelihood of a material misstatement d; Easy ©2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

115. A company has a rule that requires two designated employees to sign any check for over $10,000. This is an example of: a. bank reconciliation. b. EITF report. c. internal control. d. U.S. GAAP. e. SEC guideline. c; Easy Short Answer Questions 116. Explain how internal controls can reduce the amount of audit procedures an auditor would need to perform. As one of the preliminary step in an audit examination, the auditor gains an understanding of the internal control procedures included within each system that relates to the financial statement amounts. The auditor then makes an evaluation of the effectiveness of those policies and procedures. In cases where internal control is both well designed and appears to be functioning as intended, a reduction is possible in the amount of audit testing that is needed. There is less risk involved; the likelihood of a material misstatement is reduced by the company’s own internal control. Easy 117. Explain with an example how audit testing is reduced with the presence of a welldesigned and maintained internal control in a company. The auditing firm performs extensive testing of the balances and disclosures that are reported. As one of the preliminary steps in an audit examination, the auditor makes an evaluation of the effectiveness of internal control policies and procedures. To illustrate, assume that a company claims to hold accounts receivable totaling $12 million. The auditor plans to confirm 100 of the individual balances directly with the customers to substantiate the separate amounts listed in the accounting records. The internal controls are evaluated by the independent CPA and judged to be excellent. As a result of this assessment, the auditor might opt to confirm only 30 or 40 individual accounts rather than the 100 that had originally been planned. Because of the quality of internal control in the receivable area, less audit testing is necessary. Both time and money are saved. Moderate

Hoyle, Financial Accounting 2.0 Section 5 True/False Questions 118. Auditor’s report is attached to the financial statements of a company, which can be accessed by any user. True; Easy 119. The auditor’s report should be addressed to the SEC. False; Easy 120. Auditors are paid by the PCAOB. False; Easy 121. The first paragraph of the auditor’s report should include information as to which financial statements the report applies. True; Easy 122. The first paragraph of the auditor’s report should include information about the audit work performed. False; Moderate 123. The second paragraph of the auditor’s report should state that level of assurance given by the auditor. True; Moderate 124. The auditor will often include a report on internal control in the auditor’s report on the financial statements. True; Easy 125. One instance where an auditor might issue an opinion other than unqualified is when the auditor is not able to obtain sufficient evidence. True; Easy 126. A qualified opinion indicates that no problems, worthy of note, were found during the audit. False; Easy

Hoyle, Financial Accounting 2.0

Multiple Choice Questions 127. Who takes the responsibility for the information provided on the financial statements of a company? a. The company’s auditor b. The company’s management c. The SEC d. The AICPA e. The PCAOB b; Easy 128. Which of the following paragraphs of the auditor’s report would be used to discover which financial statements were audited? a. Scope b. Explanatory c. Control d. Opinion e. Introductory e; Easy 129. To whom is the Auditor’s Report addressed? a. The board of directors and management b. Creditors and investors c. Creditors and management d. The board of directors and creditors e. The board of directors and stockholders e; Easy 130. Which of the following paragraphs is included in the audit report when the auditor wishes to draw the reader’s attention to an issue? a. Explanatory b. Scope c. Control d. Opinion e. Introductory a; Easy 131. Formal opinion issued by an independent auditor to communicate whether or not financial statements are fairly presented is known as: a. accounting report b. taxing report. c. audit report. d. opinion report. e. presentation report. c; Easy ©2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

132. Which of the following paragraphs of the audit report explains the audit work performed by the auditor? a. Introductory b. Scope c. Opinion d. Explanatory e. Control b; Easy 133. Which of the following paragraphs of the audit report explains the assessment of accounting principles that were applied? a. Introductory b. Scope c. Opinion d. Explanatory e. Control b; Easy 134. The responsibility of the management for the financial statements and the responsibility of the independent auditor for providing an opinion on those statements are clearly delineated in the: a. scope paragraph of audit report. b. introductory paragraph of audit report. c. opinion paragraph of audit report. d. explanatory paragraph of audit report. e. control paragraph of audit report. b; Easy 135. Which of the following is a paragraph found in a typical auditor’s report? a. Tools Used for analysis b. Review c. Explanatory d. Audit e. Conclusion c; Easy 136. Who pays auditor’s remuneration? a. The PCAOB b. The SEC c. The AICPA d. The reporting company e. The group of investors and creditors d; Easy

Hoyle, Financial Accounting 2.0

137. A qualified report is produced by an auditor when: a. the financial statements are presented fairly. b. material misstatements are present according to U.S. GAAP. c. a well-designed internal control system is implemented in the reporting company. d. the financial statements are prepared applying IFRS. e. the reporting company issue publicly traded securities. b; Easy 138. Which of the following is described in the scope paragraph of the audit report? a. The auditor's opinion about the company’s internal control b. It spells out the purpose of the audit by referring to the standards created by the AICPA c. It identifies the specific financial statements to which the report relates d. The auditor’s opinion of the financial statements e. The steps taken to assess significant estimations used in creating the statements e; Easy 139. An assessment of internal control is required when an audit is performed on a company that is subject to the rules of the: a. PCAOB. b. AICPA. c. ASB. d. EIFT. e. EDGAR. a; Easy 140. Which of the following indicates that the auditor did not find any problems worth noting? a. Qualified opinion b. Unqualified opinion c. Restricted opinion d. Unrestricted opinion e. Positive opinion b; Easy

Hoyle, Financial Accounting 2.0

Fill in the blanks 141. _____ opinion informs readers that attached financial statements are presented fairly. Unqualified; Easy 142. If a new accounting standard is being applied in the financial statements, an auditor will usually note this in the _____ paragraph on the auditor’s report. explanatory; Moderate 143. The explanatory paragraph includes the auditor’s assessment concerning a company’s _____. internal control; Easy Short Answer Questions 144. Explain the two reasons why an auditor may issue an opinion other than unqualified. There are two reasons for an auditor to issue an opinion other than unqualified. They are as follows: 1) The auditor was not able to obtain sufficient evidence during the audit to justify an unqualified opinion. The numbers on the financial statements may be fairly presented according to U.S. GAAP, but evidence was not available to allow the auditor to make that assertion with reasonable assurance. 2) The auditor discovered the existence of a material misstatement in the financial statements. If management refuses to fix the problem, the auditor must draw reader’s attention to it. Moderate 145. Explain why the auditor’s report is addressed to the board of directors and the shareholders. An audit is not performed for the direct benefit of the reporting company or its management, but for any person or group studying the financial statements for decision-making purposes. The salutation stresses that those external users (rather than the company itself) are the primary beneficiaries of the work carried out by the independent auditor. Easy

Hoyle, Financial Accounting 2.0

146. Describe the information presented in the scope paragraph of the audit report. The scope paragraph provides information to explain the audit work. It spells out the purpose of the audit by referring to the standards created by the PCAOB. Its sentence clearly sets out the goal of an audit engagement and the level of assurance given by the auditor. No reader should expect absolute assurance. It also describes in general terms the steps taken by the auditor such as the following: • Examining evidence on a test basis to support reported amounts and disclosures • Assessing the accounting principles that were applied • Assessing significant estimations used in creating the statements • Evaluating overall presentation Moderate

Hoyle, Financial Accounting 2.0

Chapter 7 In Financial Reporting, What Information Is Conveyed about Receivables? Section 1 True/False Questions 1. The goal of financial accounting is to convert a loss-incurring company into a profitearning company. False; Easy 2. The ability to understand the meaning of amounts and disclosures reported by an organization is possible by mastering the terminology, rules, and principles of financial accounting. True; Easy 3. To support the reported doubtful accounts balance, company officials must obtain sufficient evidence asserting the fair presentation of the amount reported. True; Easy 4. Accounts receivables are created when sales are made for cash. False; Easy 5. The estimated amount of cash sales to be made by a company in a specific period is called the net realizable value of its accounts receivable. False; Easy 6. The balance of accounts receivable after deducting the estimated amount of doubtful accounts that is reported on the balance sheet is called "accounts receivable, net of allowance for doubtful accounts." True; Moderate 7. Quinton Company has a $9,000,000 accounts receivable balance of which it only expects to collect $7,800,000. Therefore, the net realizable value of Quinton’s receivables must be $7,800,000. True; Easy 8. The net realizable value of accounts receivable will be greater than the ending balance of accounts receivable. False; Moderate 9. It is mandatory that the figures reported in financial accounting are accurate. False; Moderate

Hoyle, Financial Accounting 2.0

Multiple Choice Questions 10. The net realizable value of accounts receivable is the: a. difference between the ending accounts receivable balance and the allowance for doubtful accounts. b. difference between the total sales made and the bad debt expense. c. total of credit sales made during the period. d. sum of the beginning accounts receivables balance and the bad debt expense. e. sum of the beginning accounts receivable balance and the allowance for doubtful accounts. a; Moderate 11. Which of the following is a factor to be considered in determining the net realizable value of accounts receivable? a. The current financial position of a company b. The amount of profit earned by a company c. The cumulative balance of bad debts d. The amount of cash sales made during the period e. The amount of sales made by a competing company c; Moderate 12.

Which of the following is a goal of financial accounting? a. To fairly present a portrait of an organization b. To portray profits of an organization in such a way so as to reduce taxes c. To help an organization earn profits d. To cover-up losses incurred by the organization e. To signify the importance of nonmonetary transactions a; Easy

13.

Which of the following titles reports the amount of revenue generated by credit sales that are owed to an organization by its customers? a. Accounts payable b. Accounts receivable c. Prepaid expense d. Bad debt expense e. Common stock b; Easy

14.

Which of the following accounts reported on a balance sheet is merely an estimate? a. Buildings b. Equipment c. Accounts payable d. Allowance for doubtful accounts e. Common stock d; Moderate

Hoyle, Financial Accounting 2.0 15.

Which of the following is the difference between the ending accounts receivable balance and its reported net value? a. bad debt expense b. loss on sale c. allowance for doubtful accounts d. depreciation on accounts receivable e. gain on sale c; Easy

16.

Which of the following transactions increases the balance of accounts receivable? a. Paying rent in advance b. Selling goods for cash c. Paying salaries to employees d. Purchasing inventory on account e. Selling goods on account e; Easy

17.

Which of the following is a possible reason for the presence of estimated values in a set of financial statement? a. To create statements that are based on historical cost b. Because of the biases involved c. To evade taxes d. Because of the lack of appropriate records e. Because of the uncertainties involved e; Easy

18.

Which of the following will be reported on the balance sheet of a company? a. Difference between the allowance for doubtful accounts and bad debt expense b. Bad debt expense c. Difference between the total accounts receivable and bad debt expense d. Difference between the total accounts receivable and allowance for doubtful accounts e. Sum of bad debt expense and allowance for doubtful accounts d; Easy

Fill in the blanks 19.

Accounts receivables are shown at their _____ in the balance sheet of a company. net realizable value; Easy

20.

_____ sales generate accounts receivables. Credit; Easy

Hoyle, Financial Accounting 2.0

Short Answer Questions 21. Mention the factors to be considered when determining the net realizable value appropriate for the reporting of accounts receivable. Considerable investigation and analysis goes into arriving at financial statement figures. To determine the net realizable value appropriate for accounts receivable, company officials normally consider relevant factors such as: • • • • • • •

Historical experience of the company in collecting its receivables Efficiency of the company’s credit verification policy Current economic conditions Industry averages and trends Current percentage of overdue accounts Efficiency of company’s collection procedure Changes in the economy

Hard 22.

What is the rationale for reporting accounts receivable at its net realizable value?

In general, net realizable value is the amount of cash that is expected to be generated by an asset after any costs necessary to obtain the cash are removed. As related to accounts receivable, net realizable value is the amount an organization estimates it will ultimately collect from its customers. No one will ever be able to predict the exact amount of cash to be received from total accounts receivable. In order to recognize losses that will be discovered in the future, company will estimate the bad debt expenses that it expects to incur as a result of current receivables. That amount will be subtracted from the total accounts receivable to arrive at net realizable value. Moderate 23.

Jackson Inc. has total accounts receivable of $1,250,000. The ending balance of allowance for doubtful accounts for the current period was $60,000. What is the amount of accounts receivable shown on the balance sheet and why?

Jackson Inc. reports accounts receivable at its net realizable value. Net realizable value = Total Accounts Receivable – Allowance for Doubtful Debts Net realizable value = $1,250,000 − $60,000 = $1,190,000 Rationale: Most companies do not collect all of their accounts receivable. In order to provide for future losses, companies will estimate the bad debt expenses for the period and deduct ©2012 Flat World Knowledge, Inc. 4

Hoyle, Financial Accounting 2.0 the amount from total accounts receivable, which results in reporting the net realizable value. Easy Section 2 True /False Questions 24. Most companies maintain two separate T-accounts to report accounts receivable due to the uncertainty involved. True; Easy 25. Contra accounts always increase the reported value of the other account with which they are associated. False; Easy 26. Bad debt expense for the period is always reported on the income statement. True; Easy 27. The balance in allowance for doubtful accounts reflects the accurate amount that will eventually have to be written off as uncollectible. False; Easy 28. An estimation of uncollectible accounts must be made to conform to the matching principle. True; Easy 29. Reduction of the net assets of a company that is caused by an attempt to generate revenue is called an expense. True; Moderate 30. The inherent uncertainty as to the amount of cash that will actually be received from credit sales affects the physical recording process. True; Moderate 31. A similarity between accounts receivable and allowances for doubtful accounts is that both accounts increase with a credit. False; Easy Multiple Choice Questions 32. An accounts receivable T-account monitors the: a. credit sales of a company. b. cash sales of a company. c. cash purchases of a company. d. credit purchases of a company. e. bad debt expense of a company. a; Easy ©2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

33. The allowance for doubtful accounts is an example of what type of an account? a. contra-equity b. contra-liability c. contra-asset d. liability e. asset c; Easy 34. Bad debt expense is estimated and recorded in the period corresponding to the sale in which it was incurred because of which one of the following principles? a. economic entity principle b. going concern principle c. historical cost principle d. full disclosure principle e. matching principle e; Easy 35. The net realizable value of accounts receivable reduces with a(n): a. increase in cash sales. b. decrease in cash sales. c. increase in credit sales. d. decrease in allowance for doubtful accounts. e. collection of an account receivable e; Easy 36. Companies maintain two separate accounts for recording accounts receivables: a. Due to the uncertainties involved. b. Due to the amount of cash sales that are made. c. Due to the decrease in value of receivables. d. Due to the decrease in accounting costs. e. Due to the increase in credit sales. a; Easy 37. Which of the following is an appropriate adjusting entry for recording bad debt expense? a. Bad Debt Expense. Accounts Receivable b. Accounts Receivable Allowance for Doubtful Accounts c. Allowance for Doubtful Accounts Bad Debt Expense d. Allowance for Doubtful Accounts Accounts Receivable e. Bad Debt Expense Allowance for Doubtful Accounts e; Easy

Hoyle, Financial Accounting 2.0

38. Which are the two accounts netted to derive at the net realizable value of accounts receivable? a. Accounts receivable and bad debt expense b. Accounts receivable and allowance for doubtful accounts c. Allowance for doubtful accounts and accounts payable d. Allowance for doubtful accounts and bad debt expense e. Bad debt expense and accounts payable b; Easy 39. Which of the following is a contra account? a. Accounts receivable b. Bad debt expense c. Allowance for doubtful accounts d. Accounts payable e. Sales c; Easy 40. Which of the following accounts is reported in the income statement? a. Allowance for doubtful accounts b. Prepaid expense c. Salary payable d. Prepaid rent e. Bad debt expense e; Easy 41. Which of the following is true of a contra account? a. A contra account increases the value of another related account. b. A contra account is used only for definite amounts. c. A contra account eliminates uncertainties. d. A contra account is netted with another account to calculate the reported value. e. A contra account is shown on the income statement. d; Moderate 42. Which of the following is true of the accounts receivable account? a. Accounts receivable is a contra asset account. b. Accounts receivable is ignored in calculating working capital. c. Accounts receivable is reported at its net realizable value. d. Accounts receivable is shown on the income statement. e. Accounts receivable is a long-term asset. c; Easy 43. Which of the following is true about the allowance for doubtful accounts? a. It is a liability account. b. It is a contra account. c. It is an equity account. d. It is netted with accounts payable to determine its net realizable value. e. It is reported on the income statement. b; Easy ©2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

Fill in the blanks 44.

An offset to an account that reduces the reported balance to a net amount is called a _____ account. contra; Easy

45. _____ expense is an estimated expense incurred from making credit sales to customers who will never pay. Bad debt; Easy 46.

The accounts receivable account increases with a debit. The allowance for doubtful accounts increases with a _____. credit; Easy

Short Answer Questions 47. Briefly explain the importance of maintaining two separate t-accounts for accounts receivables. Companies maintain two separate T-accounts for accounts receivable (accounts receivable and allowance for doubtful accounts) because of the uncertainty involved. The purpose of two t-accounts is mentioned below: • •

An accounts receivable T-account monitors the total due from all of a company’s customers. An allowance for doubtful accounts reflects the estimated amount that will eventually have to be written off as uncollectible.

These two accounts are netted to determine the net realizable value of the accounts receivables, the amount expected to be collected, which is reported on the balance sheet. Moderate 48.

What is the reason for recognizing bad debt expense in the year sales are being made?

The timing of expense recognition according to accrual accounting is based on the matching principle. Where possible, expenses are recorded in the same period as the revenues they helped generate. Thus, every company should handle uncollectible accounts in the same manner. The expected expense is the result of making sales to customers who ultimately will never pay. Because the revenue was reported at the time of sale, the related expense must also be recognized in the same period even though the amount must be estimated. Moderate

Hoyle, Financial Accounting 2.0

49.

TicToc Inc. is a clock manufacturing company. It sells clocks for a total of $500,000 in Year Eight. The company estimates that $10,000 of the sales made will prove to be uncollectible. Produce the necessary journal entries to record sale transaction and to recognize bad debt expense for Year Eight.

Journal entry to record sales: Accounts Receivable Sales

500,000

Journal entry to recognize bad debt expense: Bad Debt Expense Allowance for Doubtful Debts

10,000

500,000

10,000

Easy Section 3 True/False Questions 50. When an account is proven uncollectible, accounts receivable should be credited in order to write off the balance. True; Easy 51. No additional expense is recognized when an account is written off as uncollectible. True; Easy 52. The accounts receivable balance increases when allowances for doubtful accounts is credited. False; Moderate 53. An account written off is no longer viewed as an asset, therefore efforts made to recover the money owed are stopped. False; Easy 54. If a company collects an amount from a customer whose account had previously been written off, it should reinstate the account before recording the collection. True; Easy 55. Top Hill Corporation had a credit balance of $2,000 in its allowance for doubtful accounts at the beginning of the current period. During the year, the company wrote off $2,900 in uncollectible accounts. At the end of the period, before adjustment, its allowance for doubtful accounts will have a $900 credit balance. False; Moderate 56. According to U.S. GAAP, any differences discovered between actual amounts and originally reported amounts should be handled retroactively. False; Moderate ©2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0 Multiple Choice Questions 57. Global World Inc. sells its product at $2,000 per unit. In the current period, 500 units were sold (of which 100 units were sold for cash). What is the amount of revenue reported by the company for the period? a. $200,000 b. $600,000 c. $800,000 d. $1,000,000 e. $1,200,000 d; Easy 58. Corner Grocery Corporation sells its product at $65 per unit. In the previous period, it sold 850 units on credit and another 50 units for cash. It estimated that 10% of its accounts receivable would prove uncollectible. What is the net realizable value of accounts receivable? a. $52,000 b. $52,975 c. $49,400 d. $52,650 e. $49,725 e; Moderate 59. High World Inc. made sales of $100,000 in the month of January in Year Three. Company officials estimated that $10,000 would prove uncollectible. In February, a $2,000 balance proves to be uncollectible and is written off. What is the balance of allowance of doubtful debts at the end of February? a. $12,000 b. $92,000 c. $90,000 d. $8,000 e. $10,000 d; Moderate 60. A journal entry made to write off a specific account as uncollectible includes: a. a debit to Accounts Receivable. b. a debit to Allowance for Doubtful Accounts. c. a credit to Accounts Payable. d. a credit to Bad Debt Expense. e. a debit to Cash. b; Easy

Hoyle, Financial Accounting 2.0

61. Henderson Corporation collected an account of $5,600 that had been previously written off. Henderson’s accountant debited accounts receivable and credited allowance for doubtful accounts for $5,600 to reinstate the account. What is the next entry the accountant should make? a. Cash 5,600 Bad debt expense 5,600 b. Cash 5,600 Accounts Receivable 5,600 c. Accounts Receivable 5,600 Bad debt expense 5,600 d. Cash 5,600 Allowance for doubtful accounts 5,600 e. No additional entry is needed b; Easy 62. A journal entry to reinstate an account previously thought to be worthless includes: a. a debit to Accounts Receivable. b. a debit to Allowance for Doubtful Accounts. c. a credit to Accounts Receivable. d. a credit to Bad Debt Expense. e. a debit to Cash. a; Easy 63. Swing Inc. had a credit balance of $6,500 in its allowance for doubtful accounts and $40,000 balance in its accounts receivable at the beginning of the period. During the year, the company made credit sales of $320,000 and made cash collections of $310,000. Also during the year, the company wrote off uncollectible accounts of $5,000. Which of the following is a true statement? a. Accounts receivable has an ending debit balance of $50,000. b. Allowance for doubtful accounts has an ending credit balance of $5,000. c. Accounts receivable has an ending debit balance of $320,000. d. Allowance for doubtful accounts has an ending credit balance of $1,500. e. Allowance for doubtful accounts has an ending debit balance of $1,500. d; Moderate 64. At the beginning of the current year, Saturn Inc. had a credit balance of $4,500 in its allowance for doubtful accounts. During the year, Saturn wrote off $4,800 of uncollectible accounts. Also during the year, an account worth $500 of these written off accounts was collected. Which of the following correctly indicates the ending balance in the allowance for doubtful accounts? a. $300 debit b. $500 credit c. $200 credit d. $200 debit e. $300 credit c; Moderate

Hoyle, Financial Accounting 2.0 65. Jupiter Corporation had $8,500 balance in accounts receivable at the beginning of the current year. The beginning balance of allowance for doubtful accounts was $2,000. Early in January, $500 worth of receivable were written off as uncollectible. What is the net realizable value of accounts receivable, after the write off? a. $8,000 b. $6,500 c. $1,500 d. $7,000 e. $6,000 b; Moderate 66. Johnson Inc. collected $6,000 that had previously been written off. Which of the following is the entry to reinstate the account? a. Bad debt expense 6,000 Cash 6,000 b. Cash 6,000 Accounts Receivable 6,000 c. Accounts Receivable 6,000 Bad debt expense 6,000 d. Cash 6,000 Bad debt expense 6,000 e. Accounts Receivable 6,000 Allowance for Doubtful Accounts 6,000 e; Moderate Fill in the blanks 67. A debit balance in the allowance for doubtful accounts indicates a previous _____. underestimation; Easy 68. When collecting a written-off account, the account must be _____ before the entry to record its collection is made. reinstated; Moderate Short Answers Questions 69. Describe the steps involved in recording doubtful accounts. The two basic steps in recording doubtful accounts are as follows: •

•

An adjusting entry is to be created to record estimated bad debts for the current period. The entry recognizes the expense in the same period as the sales revenue. It increases the allowance for doubtful accounts (to reduce the reported receivable balance to its anticipated net realizable value). Later, when a specific account is deemed uncollectible, that account is removed from both accounts receivable and the allowance for doubtful accounts.

Hoyle, Financial Accounting 2.0 70. Sun Corporation sold $85,000 of goods on credit in January Year Two. Company officials anticipated that $10,000 will eventually prove uncollectible. In March Year Two, $2,000 of the accounts were discovered to be uncollectible and written off. Present the journal entry or adjusting entry to record the following: a. Sales transactions b. Recognition of bad debt expense c. Write off of bad debts Entry to record the sales transactions: Accounts Receivable Sales

85,000

Entry to record the bad debt expense: Bad Debt Expense Allowance for Doubtful Accounts

10,000

Entry to write off the uncollectible account: Allowance for Doubtful Accounts Accounts Receivable

2,000

85,000

10,000

2,000

Moderate 71. What is the rationale for not handling any differences between estimated amounts that are originally reported and the eventually discovered actual amount retroactively? There are several practical reasons for the accountants’ unwillingness to adjust previously reported estimates unless they were clearly fraudulent or not made in good faith: •

•

Most decision makers are well aware that many reported figures represent estimates. Hence, discrepancies are expected and should be taken into consideration when making decisions based on numbers presented in a set of financial statements. Financial statements contain numerous estimates and nearly all will prove to be inaccurate to some degree. If exactness were required, correcting each of these previously reported figures would become virtually a never-ending task for a company and its accountants. At least theoretically, half of the differences between actual and anticipated results should make the reporting company look better and half make it look worse. If so, the corrections needed to rectify all previous estimation errors will tend to offset and have little overall impact on a company’s reported income and financial condition. Because an extended period of time often exists between issuing statements and determining actual balances, most parties will have already used the original information to make their decisions. Knowing the exact number now does not allow them to undo those prior actions.

Hoyle, Financial Accounting 2.0 Thus, no change is made in financial figures that have already been released whenever a reasonable estimate proves to be wrong. However, differences that arise should be taken into consideration in creating current and subsequent statements. Hard Section 4 True/False Questions 72. The percentage of sales method computes doubtful accounts expense by anticipating the percentage of sales that will eventually fail to be collected. True; Easy 73. The percentage of sales method is referred to as a balance sheet approach to estimating a company’s bad debt expense. False; Easy 74. When using the percentage of sales method, the bad debt expense will be the same as the balance reported as the allowance for doubtful accounts. False; Moderate 75. The percentage of receivables method is identified as an income statement approach to estimating a company’s bad debt expense. False; Easy 76. The percentage of receivables method estimates the ending balance of the allowance for doubtful accounts. True; Easy 77. Maintaining a subsidiary ledger allows companies to keep better control over individual customer balances. True; Easy 78. The aging method categorizes all receivable balances by age before computing the allowance for doubtful accounts. True; Easy Multiple Choice Questions 79. Under the percentage of sales method, which of the following is estimated first? a. bad debt expense b. opening balance of the allowance for doubtful accounts c. closing balance of the allowance for doubtful accounts d. total credit sales e. net realizable value a; Easy

Hoyle, Financial Accounting 2.0

80. The percentage of sales method is identified as an income statement approach because: a. the estimated bad debt expense will decrease the reported net realizable value. b. the estimated bad debt expense is recorded in the income statement. c. the estimated ending allowance for doubtful accounts is recorded in the income statement. d. the estimated allowance for doubtful accounts increase the income of a company. e. the estimated net realizable value is recorded in the income statement. b; Moderate 81. When using the percentage of sales method, an adjusting entry to record the estimated amount will include: a. a debit to Accounts Receivable. b. a credit to Accounts Receivable. c. a debit to Bad Debt Expense. d. a credit to Bad Debt Expense. e. a debit to Allowance for Doubtful Accounts. c; Moderate 82. Star World Inc. generated $500,000 in credit sales. The company uses the percentage of sales method to estimate uncollectible accounts. The ending accounts receivable balance is $150,000. It was determined that 9% of credit sales will be uncollectible. Allowance for doubtful accounts holds a current balance of $10,000. The entry to record the above expense will include: a. a debit to Bad Debt Expense for $45,000. b. a credit to Bad Debt Expense for $45,000. c. a debit to Allowance for Doubtful Accounts for $45,000. d. a credit to Allowance for Doubtful Accounts for $10,000. e. a debit to Bad Debt Expense for $10,000. a; Moderate 83. Which of the following is a method of estimating the bad debt expense to be reported on the income statement? a. Aging of receivables method b. Percentage of sales method c. Aging of bad debts method d. Percentage of credit method e. Percentage of allowance method b; Easy 84. A company keeps track of its individual accounts receivable balances in its: a. income statement. b. trial balance. c. general ledger. d. subsidiary ledger. e. balance sheet. d; Easy

Hoyle, Financial Accounting 2.0 85. Moon World Inc. generated $500,000 in credit sales. The company uses the percentage of sales method to estimate uncollectible accounts. The ending accounts receivable balance is $100,000. It was determined that 9% of revenue generated by credit sales is uncollectible. Allowance for doubtful accounts currently holds a credit balance of $10,000. What will be the ending balance of Allowance for Doubtful Accounts after recording bad debt expense? a. $45,000 b. $55,000 c. $35,000 d. $445,000 e. $455,000 b; Moderate 86. Hill View Corporation has the following information: i) It is estimated that 10% of ending accounts receivable is most likely to prove uncollectible. ii) The current year ending balance of accounts receivable is $1,000,000. iii) Allowance for Doubtful Accounts ended the current year with a $20,000 credit balance. Calculate the value of bad debts expense recorded in the books of Hill View Corporation (assume Hill View Corporation uses the percentage of receivables method to estimate its uncollectible accounts) for the current year. a. $100,000 b. $20,000 c. $120,000 d. $80,000 e. $102,000 d; Moderate 87. Marlin Corporation uses the percentage of receivables method to estimate its uncollectible accounts. Marlin’s ending accounts receivable amounted to $50,000 while the balance of the allowance for doubtful accounts was $3,000 (credit balance). Marlin estimates that 8% of receivables will never be collected. What is the bad debt expense of Marlin Corporation? a. $600 b. $400 c. $1,000 d. $1,600 e. $1,400 c; Moderate

Hoyle, Financial Accounting 2.0

88. Bronx Corporation uses the percentage of receivables method to estimate uncollectible accounts. Bronx’s ending accounts receivable amounted to $60,000 and the current balance of allowance for doubtful accounts was a $5,000 debit balance. Bronx estimates that 10% of receivables will never be collected. What is the ending balance of Allowance for doubtful accounts of Bronx Corporation? a. $5,000 b. $6,000 c. $1,000 d. $11,000 e. $4,500 b; Moderate 89. Jones Corporation uses the percentage of sales method to estimate its uncollectible accounts. Jones has an ending balance of accounts receivable of $6,000. The allowance for doubtful accounts showed a balance of $1,000 in the beginning of the period. During the year, a total of $900 in accounts was written off as uncollectible. The company made credit sales of $80,000 in the current period. Company officials estimate that 5% of sales will prove to be uncollectible. What is the bad debt expense of the company for the period? a. $4,000 b. $3,000 c. $1,000 d. $5,000 e. $7,000 a; Moderate 90. Cortez Corporation uses the percentage of sales method to estimate its uncollectible accounts. Cortez has an ending balance of accounts receivable of $10,000. The allowance for doubtful accounts showed a balance of $1,000 in the beginning of the period. During the year, a total of $300 in accounts was written off as uncollectible. The company made credit sales of $100,000 in the current period. It estimates that 5% of sales will prove to be uncollectible. What is the ending balance of allowance for doubtful accounts of the company for the current period? a. $4,300 b. $5,700 c. $700 d. $5,000 e. $6,300 b; Moderate Fill in the blanks 91. The _____ method is known as a balance sheet approach for estimating bad debts. percentage of receivables; Easy 92. The _____ method specifically estimates the bad debt expenses for the period. percentage of sales; Easy ©2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0 93. A _____ is a group of individual accounts whose sum totals and, therefore explains a general ledger account balance. subsidiary ledger; Moderate Short answer questions 94.

Write a note to explain the two different approaches for predicting the amount of a company’s uncollectible accounts.

A company has an option of selecting between two different approaches when predicting and reporting the amount of its uncollectible accounts. • •

Percentage of sales method Percentage of receivables method (or the aging method which is a variation)

Percentage of sales method: This approach computes doubtful accounts by anticipating the percentage of sales (or credit sales) that will eventually fail to be collected. The percentage of sales method is sometimes referred to as an income statement approach because the only number being estimated (bad debt expense) appears on the income statement. The predicted amount is reported as bad debt expense and as an increase in the allowance for doubtful accounts. Percentage of receivables method: In this approach, the proper balance for the allowance for doubtful accounts is determined based on the percentage of ending accounts receivable presumed to be uncollectible. This method is labeled a balance sheet approach because the only figure being estimated is found on the balance sheet. The increase in the allowance account that is needed to establish this estimated balance is the bad debt expense figure for the period. Hard 95.

SanTina Corporation made total sales of $480,000 in the current period. Of that total, $30,000 were cash sales. The company estimated that 6% of credit sales will eventually prove to be worthless. Starting the year, SanTina had a credit balance of $20,000 in allowance for doubtful account. During the period, $16,000 in accounts were judged to be uncollectible. The ending balance of receivables was $200,000. The company uses the percentage of sales method to estimate bad debt expense. Create the appropriate adjusting entry to record bad debt expense. Also, determine the reported balances for bad debt expense and the allowance for doubtful accounts.

Hoyle, Financial Accounting 2.0

Adjusting entry to record bad debt expense: Bad Debt Expense 27,000 Allowance for Doubtful Accounts

27,000

Preparation of T-accounts: Bad Debt Expense Beginning Balance 0 Expense 27,000 Adjustment Ending Balance

27,000

Allowance for Doubtful Accounts Bad Accounts Beginning Balance 16,000 Expense adjustment Ending balance

20,000 27,000 31,000

Hard

96.

Hagand Corporation made total sales of $440,000 in current period. Of that total, $60,000 were cash sales. The company estimated that 12% of ending receivables would prove to be worthless. Hagand started the year with a credit balance of $30,000 in allowance for doubtful account. During the year, $32,000 in accounts were written off as uncollectible The ending balance of receivables was $290,000. The company uses the percentage of receivables method to estimate bad debts. Determine the ending account balances for both bad debt expense and the allowance for doubtful accounts. Create the appropriate adjusting entry to record the bad debt expense for the period.

Calculation of ending balance of allowance for doubtful accounts: $290,000 ×12% = $34,800 Preparation of T-accounts: Allowance for Doubtful Accounts Bad Accounts Beginning Balance 32,000 Expense adjustment Ending balance

30,000 36,800 34,800

Hoyle, Financial Accounting 2.0

Bad Debt Expense Beginning Balance 0 Expense 36,800 Adjustment Ending Balance 36,800

Adjusting entry to record bad debt expense (to bring allowance up to proper $34,800 figure). Bad Debt Expense 36,800 Allowance for Doubtful Accounts

36,800

Hard Section 5 True /False Questions 97.

The basic problem with reporting foreign currency balances is that exchange rates are constantly in flux. True; Easy

98.

Notes receivable, unlike accounts receivable, is a monetary liability. False; Easy

99.

Foreign currency transactions are reported in financial statements in the currency in which they are traded. False; Easy

100. All foreign exchange transactions result in creation of monetary assets or liabilities. False; Easy 101. When the amount reported for monetary assets and liabilities changes due to changes in the foreign exchange rate, a gain or loss is recognized. True; Easy Multiple Choice Questions 102. On a balance sheet, a monetary asset or liability denominated in a foreign currency should be reported at: a. the exchange rate on the original transaction date. b. the expected exchange rate on the date of payment. c. the exchange rate on the balance sheet date. d. the average exchange rate for the year. e. the exchange rate at the beginning of the year. c; Easy ©2012 Flat World Knowledge, Inc. 20

Hoyle, Financial Accounting 2.0

103. Sparta Inc., a retail company, located in U.S. sold products on account for 440,000 rupees on November 30 to Global Inc., an Indian company. The amount will be paid in 60 days. On the date of sale, one dollar was equal to 50 rupees. On December 31, when Sparta prepares its financial statements, the exchange rate is 45 rupees to $1. At what amount should the account receivable be recorded on November 30? a. $8,800 b. $440,000 c. $9,778 d. $22,000,000 e. $40,000 a; Moderate 104. Ogden Inc., a retail company, located in U.S. sold products on account for 440,000 rupees on November 30 to International Inc., an Indian company. On the date of sale, one dollar was equal to 50 rupees. The amount will be paid in 60 days. On December 31, when Ogden prepares its financial statements, the exchange rate is 45 rupees to $1. At what amount should the account receivable be reported on the balance sheet dated December 31? a. $8,800 b. $440,000 c. $9,778 d. $22,000,000 e. $40,000 c; Moderate 105. Page Inc., an American company, sold its products on account for 500,000 rupees on November 30 to Delta International Inc., an Indian company. On the date of sale, one dollar was equal to 51 rupees. The amount will be paid in 60 days. On December 31, when Page prepares its financial statements, the exchange rate is 49 rupees to $1. What should be the gain or loss reported in the financial statements of Page Inc. because of foreign currency transaction? a. $400 gain b. $400 loss c. $2,000 loss d. $2,000 gain e. No gain or loss is recognized a; Moderate 106. Which of the following is a monetary asset? a. Equipment b. Goodwill c. Plant and equipment d. Accounts receivable e. Copyrights d; Easy

Hoyle, Financial Accounting 2.0

107. Which of the following would be reported at the current exchange rate on the balance sheet if it were denominated in a foreign currency? a. Building b. Equipment c. Accounts payable d. Furniture and fixtures e. Goodwill c; Easy 108. Which of the following is true of a foreign currency transaction? a. Foreign currency transactions are very rare. b. The problem with reporting foreign currency balances is that exchange rates fluctuate. c. Accounts receivables are shown at the exchange rate on the date of the original transaction. d. Gains on foreign currency transactions are not recognized as they are never realized. e. Accounts receivables denominated in foreign currency will be reported in the foreign currency. b; Moderate 109. Amounts currently held by an organization as cash in addition to amounts that provide future receipts or payments of a specified amount of cash are known as _____. a. cash assets and liabilities b. nonmonetary assets and liabilities c. monetary assets and liabilities d. fixed assets e. long-term liabilities c; Easy 110. A company has transactions denominated in a foreign currency. On the balance sheet, any foreign currency asset or liability other than monetary assets and liabilities should be reported at: a. the exchange rate on the original transaction date. b. the expected exchange rate on the date of payment. c. the exchange rate on the balance sheet date. d. the average exchange rate for the year. e. the exchange rate at the beginning of the year. a; Easy

Hoyle, Financial Accounting 2.0

111. Max International located in New York, sold its product to Source National located in Mexico for 500,000 pesos on May 2, Year Four. On the date of sale, the exchange rate was 10 pesos for 1 dollar. Max International prepared its financial statements on December 31, Year Four. On that date, the exchange rate is 11 pesos for one dollar. What is the amount recorded on the date of sale? a. $50,000 b. $45,500 c. $45,000 d. $4,500 e. $250 a; Moderate 112. Blue-Kart Inc. is an American company having operations all over the world. The company made sales to an Indian company for 500,000 rupees. On the transaction date, one Indian rupee was equal to $0.02. However, on the date that the company is producing financial statements, one Indian rupee was equal to $0.0195. An entry to record the sales transaction will include a debit to Accounts Receivable for: a. $5,000. b. $10,000. c. $500,000. d. $490,000. e. $495,000. b; Moderate 113. Parmelee Inc. located in Wyoming, sold its product to Santa Luzia located in Brazil for 50,000 reals on August 26, Year Two. The money will be collected in Year Three. On the date of sale, 2 reals could be exchanged for 1 dollar. Parmelee prepared its balance sheet on December 31, Year Two. On the balance sheet date, 1.75 reals could be exchanged for one dollar. What is the exchange gain or loss recorded for Year Two? a. $3,571 loss b. $3,571 gain c. $250 loss d. $250 gain e. $28,571 gain b; Moderate Fill in the blanks 114. Amounts currently held by an organization as cash in addition to amounts that will provide future receipts or payments of a specified amount of cash are known as _____. monetary assets and liabilities; Easy 115. Monetary assets and liabilities denominated in a foreign currency must be reported at the current exchange rate as of the _____date. balance sheet; Easy

Hoyle, Financial Accounting 2.0

Short Answer Questions 116. Star King Inc. sold its product to an Indian company for 250,000 rupees. On the date of transaction, 50 rupees were equal to one dollar. On the date of preparation of its financial statements, 40 rupees were equal to one dollar. Prepare a journal entry to record the transaction and create an adjusting entry at the end of the period to record any gain/loss on the change in the exchange rate. Journal Entry to record exchange transaction: Accounts Receivable Sales

5,000 5,000

Adjusting entry--Remeasurement of 250,000 rupees receivable: Accounts Receivables Gain on Value of Foreign Currency Receivable

1,250 1,250

Moderate 117. What are monetary assets and liabilities? How are monetary assets and liabilities that are denominated in a foreign currency reported in the financial statements of a company? Amounts currently held by an organization as cash in addition to amounts that will provide future receipts or payments of a specified amount of cash are known as monetary assets or liabilities. Monetary assets and liabilities denominated in a foreign currency will be reported at the current exchange rate as of the balance sheet date. All other balances continue to be shown at the exchange rate in effect on the date of the original transaction. Changes in the reported value are reported as gains or losses. All organizations adhering to U.S. GAAP must follow this approach. Both the individuals who produce financial statements as well as the outside decision makers who use them should understand that this rule must be applied. Moderate 118. What is the reason for reporting monetary assets and liabilities at the current exchange rate? Monetary assets and liabilities are amounts currently held as cash or that will require a future transfer of a specified amount of cash. As these balances reflect current or future cash amounts, the current exchange rate is always viewed as the most relevant. Cash, receivables, and payables denominated in a foreign currency must be adjusted for reporting purposes whenever exchange rates fluctuate. All other account balances (equipment, sales, rent expense, dividends, and the like) reflect historical events and not ©2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0 future cash flows. Thus, they retain the rate that was appropriate at the time of the original transaction and no further changes are needed. Easy Section 6 True /False Questions 119. The current ratio is the difference between current assets and current liabilities. False; Easy 120. The older a receivable becomes, the more likely it is to prove worthless. True; Easy 121. Receivable turnover measures the speed at which an organization collects its accounts receivable. True; Moderate 122. Current assets are the assets held in a business for more than a year. False; Easy 123. The current ratio reflects a company’s ability to pay its debts. True; Easy 124. The age of a company’s receivables is calculated by dividing the receivable balance by the average sales per day. True; Easy 125. The difference between current assets and current liabilities is known as the working capital held by a company. True; Easy 126. One way to shorten the time required to collect receivables is to offer a discount if the customer pays quickly. True; Easy 127.

A lower current ratio is always favorable to an organization. False; Easy

Hoyle, Financial Accounting 2.0

Multiple Choice Questions 128. The age of a company’s receivables is determined by dividing the receivable balance by the: a. average sales made per day. b. sales returns and allowance per day. c. purchases per day. d. bad debt expenses of the period. e. allowance for doubtful accounts. a; Moderate 129. a. b. c. d. e.

Which of the following is true of the current ratio? The current ratio has current assets in its denominator. The current ratio is one indication of the financial health of a company. The current ratio estimates the bad debt expense of a period. A low current ratio is beneficial to a company The current ratio determines the average number of days that a company waits to collect its accounts. b; Easy

130. Receivable turnover is the ratio between: a. sales for the period and average receivables. b. average assets and sales for the period. c. sales for the period and average payables. d. average bad debts and sales per day. e. average receivables and sales per day. a; Easy 131. Seashore Inc. sold $250,000 worth of goods in January Year Three. The beginning balance of accounts receivable was $45,000 and the balance on January 31, Year Three amounted to $20,000. Based on these values, determine the receivable turnover ratio for Seashore Inc. for January Year Three. a. 0.13 times b. 5.56 times c. 7.69 times d. 8.00 times e. 14.29 times c; Hard

Hoyle, Financial Accounting 2.0

132. Wild Cart Inc. made sales of $730,000 during Year Two. Cash of $720,000 was collected and no accounts were written off as uncollectible. The beginning balance of accounts receivable was $20,000. Calculate the age of receivables of Wild Cart Inc. at the end of Year Two. a. 15 days b. 24.3 days c. 36.5 days d. 10 days e. 12.5 days a; Moderate 133. Welch Inc. made sales of $840,000 during Year Four. The beginning balance of accounts receivable was $20,000 and the balance at the end of the period was $38,000. Calculate the receivables turnover ratio of Welch Inc. for Year Four. a. 22.54 times b. 24.76 times c. 25.50 times d. 28.97 times e. 29.44 times d; Moderate 134. Which of the following is true of the receivables turnover ratio? a. The lower the receivables turnover ratio, the faster collections are received. b. Cash sales influence the receivables turnover ratio. c. It is used along with the working capital to determine the current ratio. d. It is dependent on the age of receivables. e. It measures the speed of a company’s collections of accounts receivables. e; Moderate 135. Which of the following is true of the age of receivables? a. Credit sales are always used as a substitute for total sales, when calculating the age of receivables. b. The beginning balance of accounts receivable is used in calculating the age of receivables. c. The reported balance of receivables is the denominator in this calculation. d. The resulting figure shows how long, on average, that a company takes to collect its receivables. e. The higher the age of receivables the better the company’s financial health. d; Moderate 136. Which of the following is a normal procedure that a company might use to reduce the time taken for collection of accounts receivables? a. Maintain less inventory b. Delay sending invoices to the customers c. Raise the prices of products d. Tighten the credit policy e. Delete a product line d; Moderate ©2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

137. Which of the following is an indicator of short-term liquidity? a. Dividends payout ratio b. Gross margin ratio c. Debt to equity ratio d. Receivable turnover ratio e. Current ratio e; Easy Fill in the blanks 138. The difference between current assets and current liabilities amounts to the company’s _____. working capital; easy 139. _____ is the ability to pay debts as they come due. Liquidity; Moderate 140. ______ often is used as a substitute for credit sales when computing the age of receivables. Total sales; Easy 141. Offering a cash discount if a customer pays quickly can help increase the _____. receivables turnover; Moderate Short Answer Questions 142.

Following is information from the balance sheet of International Systems Ltd.

Accounts Receivable Cash Notes receivable (short-term) Inventory Goodwill Investments Retained Earnings Accounts Payable Notes Payable (short-term)

$200,000 50,000 250,000 100,000 100,000 300,000 250,000 150,000 200,000

What is the working capital and current ratio of International Systems Ltd? Calculation of working capital: Working capital = Current assets − Current Liabilities Working Capital = ($200,000 + $50,000 + $250,000 + $100,000) − ($150,000 + $200,000) Working Capital = $600,000 − $350,000 Working Capital = $250,000 ©2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0 Calculation of Current ratio: Current ratio = Current Assets / Current Liabilities Current ratio = $600,000 / $350,000 Current ratio = 1.71 times Moderate 143. What are some strategies frequently used by company officials to shorten the time between sales being made and cash collected? Company officials use a number of strategies to shorten the time between sales being made and cash collected. Here are several: •

Require a tighter review of credit worthiness before selling to a customer on credit. If sales on account are only made to individuals and companies with significant financial strength, the quantity of delayed payments should decline.

•

Work to make the company’s own accounting system more efficient so that sales invoices are sent to customers in a timely manner. If the billing system is not well designed and effectively operated, that process can be unnecessarily slow.

•

Offer cash discounts as an incentive for customers to pay quickly.

•

Send out second bills more quickly. Customers often need reminding that a debt is due. An invoice marked “late” or “overdue” will often push the recipient into action.

•

Instigate a more aggressive collection policy for accounts that are not paid on time. Companies can use numerous strategies to “encourage” payment and begin applying these steps at an earlier point in time.

Hard 144. Velvet Corporation made sales of $500,000 in Year Four. All were on credit. The cash collected during the year was $460,000 and no accounts were written off as uncollectible. The beginning balance of accounts receivable was $80,000. Calculate the age of receivables and the receivable turnover ratio. Ending accounts receivable: Ending accounts receivable = Beginning receivables plus credit sales less cash collections Ending accounts receivable = $80,000 + $500,000 - $460,000 Ending accounts receivable = $120,000 Calculation of the age of receivables: Age of receivables = receivables / sales per day ©2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0 Age of receivables = $120,000 / ($500,000 / 365) Age of receivables = 87.6 days Calculation of receivable turnover ratio: Receivable turnover ratio = Sales / average receivables Receivable turnover ratio = $500,000 / {($120,000 + $80,000)/2} Receivable turnover ratio = 5.00 times Moderate

Hoyle, Financial Accounting 2.0

Chapter 8 How Does a Company Gather Information about Its Inventory? Section 1 True/False Questions 1. Under U.S. GAAP, all assets reported on the balance sheet reflect their net realizable value.

False; Easy 2. The cost of inventory is limited to its purchase price and assembly cost.

False; Easy 3. The concept of “cost,” when dealing with the acquisition of inventory includes all normal

and necessary amounts to get the items into the condition and position to be sold. True; Easy 4. The process of expensing the costs is termed as capitalization.

False; Easy 5. Absolute Company purchases a piece of inventory with full knowledge that it is damaged and

spends $500 for fixing it. The $500 should be capitalized to the inventory account. True; Moderate 6. Companies often offer purchase discounts to encourage quick payments.

True; Easy 7. Froufrou Corporation receives an invoice with terms 3/15, n/30 on it. This indicates that if

Froufrou pays within 3 days, it will receive a discount of 15 percent. False; Easy 8. Costs that are incurred on an asset and provide future value are recorded as an expense.

False; Moderate 9. Any amount spent by a company to transport inventory from seller’s location to its

warehouse is added to the cost of inventory. True; Easy

Hoyle, Financial Accounting 2.0

Multiple Choice Questions 10. Walton Books purchased inventory for $4,500. Walton pays $230 to have the inventory

shipped to its place of business and pays another $120 to set up the inventory. Walton purchased the inventory knowing that some of the books needed to be rebound. This cost an additional $45. After Walton sold the inventory, it spent $110 to ship it to customers. What is the total amount capitalized to the inventory account by Walton Books? a. $4,500 b. $4,730 c. $4,850 d. $5,005 e. $4,895 e; Moderate 11. The process of adding cost to an asset account is termed as:

a. conservatism. b. matching. c. capitalization. d. revenue recognition. e. consistency. c; Easy 12. Tim-Tom Corporation receives an invoice stating that the company will receive 1 percent

discount if it pays within ten days. If the company is unable to pay within ten days, Tim-Tom has to pay the full amount within 35 days from invoice date. Which of the following clearly indicates the above terms on the invoice received by Tim-Tom? a. 2/10 n/45 b. 1/10 n/35 c. 10/1 n/35 d. 10/2 n/35 e. 35/10 n/1 b; Easy 13. Phillips Company purchased five tables for $200 each on May 5. The terms listed on the

invoice Phillips received were 3/10 n/30. Phillips paid the invoice on May 14. How much did Phillips pay on that date? a. $1,000 b. $970 c. $900 d. $850 e. $1,030 b; Easy

Hoyle, Financial Accounting 2.0

14. Oliver Company purchases inventory costing $34 on September 14. The company spends $5

to transfer the inventory to its store and an additional $8 to set it up. One of Oliver’s employees accidentally dented an item that had to be fixed at a cost of $3. What would be the amount of inventory purchase? a. $34 b. $39 c. $42 d. $47 e. $50 d; Easy 15. Which of the following is a reason for the complication in accounting for inventory?

a. Reporting is less standardized when compared to accounts receivable. b. It involves recording a huge number of transactions. c. Market price of inventory fluctuates very rapidly. d. Inventory can be stolen by staff of a company. e. It involves preparation of number of T-accounts. a; Moderate 16. Drive-in Inc. is a dealer in automobiles. The company bought 10 cars for $10,000 each. It

spent $1,000 for transporting cars from the place of manufacturer to the place of sale. The company spent $260 for repairing two of the cars that were damaged due to the negligence of employees. Determine the amount to be capitalized by Drive-in Inc. a. $101,600 b. $100,400 c. $100,000 d. $101,400 e. $101,000 e; Moderate 17. Which of the following is true of cash discount?

a. It is mandatory for sellers to offer cash discount. b. Sellers incur loss by offering cash discount. c. It simplifies the accounting for inventory. d. It is different from sales discount. e. Offering cash discount encourages speedy payment. e; Easy

Hoyle, Financial Accounting 2.0

18. Zenith Inc. received an invoice of $4,600 with terms 2/15, n/45. What is the interest rate per

year? a. 24.83% b. 2.41% c. 24.33% d. 61.22% e. 30.61% a; Hard 19. Coffee-cup Corporation received an invoice on May 2, 2012, stating the discount terms as

2/10, n/30. The company settled the invoice amount by paying $1,470 on May 10, 2012. What is the amount of discount received by Coffee-cup Corporation? a. $29.4 b. $147 c. $30 d. $150 e. $50 c; Easy Fill in the blanks 20. _____ are offered by a company to its customers to encourage quick payments.

Cash discounts; Easy 21. In accounting for inventory acquisition, cost include all normal and necessary amounts

incurred to get the item into _____. condition and position to be sold; Moderate 22. _____ is a current asset bought or manufactured for the purpose of selling in order to

generate revenue. Inventory; Moderate Problems 23. Rowan Corporation purchased 900 phones for $20 each. It cost Rowan $1,200 to have the

phones shipped to its showroom and another $400 to set up a sample of the phones in an attractive way. Determine the amount in Rowan’s inventory account after these events. Inventory balance = (900 × $20) + $1,200 + $400 = $19,600 Moderate

Hoyle, Financial Accounting 2.0

24. Leslie Beauty Products purchased 600 flat irons for $30 each from Ronald Corporation,

paying shipping and set up costs of $200 total. Leslie received an invoice from Ronald with terms 2/10 n/30 and took advantage of the discount. What is the balance in the inventory account based on these transactions? Amount paid on invoice = (600 × $30) × (1 – .02) = $17,640 Inventory balance = $17,640 + $200 = $17,840 Moderate 25. Haralson’s Cars purchased 3 cars costing $30,000 each. Haralson paid transportation of

$1,000 to ship the cars from manufacturer’s location to its showroom. One of Haralson’s employees accidentally scratched the paint on one of the cars and it cost Haralson $500 to repair it. Determine the value in the inventory account. Inventory balance = (3 × $30,000) + $1,000 = $91,000 Moderate Section 2 True/False Questions 26. A perpetual inventory system provides an ongoing record of all inventory items present, both

in total and individually. True; Easy 27. When a periodic system is in use, all additions and reductions are monitored in the inventory

T-account. False; Easy 28. Companies using a perpetual inventory system maintain a subsidiary ledger, showing data

about the individual items on hand. True; Easy 29. In a perpetual system, the inventory account is credited when inventory is purchased.

False; Easy 30. One of the factors that are impacted by the choice to use a perpetual or periodic system is the

information available on a daily basis. True; Easy 31. Riley Industries uses a perpetual inventory system. On December 2, 2012, an accountant of

Riley debited accounts payable and credited inventory for the purchases made. As a result, assets will be understated. True; Easy

Hoyle, Financial Accounting 2.0 32. A company uses a perpetual inventory system and the gross method of recording purchase

discounts. The inventory account is credited when the company takes advantage of the discount. True; Easy 33. Under periodic inventory system, all costs associated with inventory are recorded in one T-

account. False; Easy 34. Under periodic inventory system, the cost of transporting inventory is an increase to the

inventory account. False; Easy 35. A company uses the periodic inventory system and the gross method of recording purchase

discounts. When the company takes advantage of the discount, purchase discounts is credited. True; Easy Multiple Choice Questions 36. Which of the following is true of a periodic inventory system?

a. It keeps an ongoing record of a company’s inventory. b. Inventory balance found in the general ledger account at any point in time is identical to the merchandise physically on hand. c. It relies on bar coding and computer scanning. d. It requires maintaining subsidiary ledgers showing data about specific items on hand. e. Inventory amounts are unknown both in total and individually. e; Easy 37. When a perpetual inventory system is in use, all additions and reductions are monitored in

the _____ T-account. a. inventory b. purchases c. accounts payable d. perpetual purchases e. assembly of inventory a; Easy 38. Under a periodic inventory system, cost incurred to bring the inventory from manufacturer to

buyer’s warehouse should be recorded with a debit to: a. inventory. b. accounts payable. c. transportation-in. d. purchase discounts. e. assembly of inventory. c; Easy

Hoyle, Financial Accounting 2.0

39. Where is the cost of an individual item of inventory found in a perpetual inventory system?

a. General journal b. General ledger c. Subsidiary ledger d. Trial balance e. Adjusted trial balance c; Easy 40. Which of the following is the journal entry made by a company using perpetual inventory

system to record the purchase of inventory? a. Accounts Payable Inventory b. Purchases Inventory c. Purchases Accounts Payable d. Inventory Purchases e. Inventory Accounts Payable e; Easy 41. Austin Outfitters purchased inventory in the amount of $200. When Austin paid its bill, it

took advantage of a 2 percent discount. Which journal entry would Austin make if it uses a periodic system? a. Accounts Payable 4 Inventory 4 b. Accounts Payable 200 Purchases 196 Purchases Discount 4 c. Accounts Payable 200 Cash 200 d. Accounts Payable 200 Cash 196 Purchases Discount 4 e. Accounts Payable 200 Cash 196 Inventory 4 d; Moderate

Hoyle, Financial Accounting 2.0

42. Kingdom Company uses a periodic inventory system. Kingdom purchased $129,000

inventory from Cross Corporation. Kingdom’s accountant accidentally debited accounts payable and credited purchases. Which of the following statements is true? a. Kingdom’s assets are overstated. b. Kingdom’s net income is correctly stated. c. Kingdom’s liabilities are understated. d. Kingdom’s retained earnings are understated. e. Kingdom’s net income is understated. c; Moderate 43. Under periodic inventory system, purchase of inventory is recorded with a debit to:

a. inventory. b. purchases. c. purchase payable. d. accounts payable. e. cash. b; Easy 44. Winner Company purchased inventory and incurred cost of transporting goods to its

warehouse. The company uses a perpetual inventory system. Which of the following is the journal entry that the company would make to record transportation cost? a. Inventory Cash b. Purchases Cash c. Cash Inventory d. Transportation-in Cash e. Transportation-in Purchases a; Easy 45. On May 2, 2012, Salience Group Inc. purchased inventory of $1,500 on terms 1/15, n/35.

However, company paid cash on May 20, 2012. The company uses perpetual inventory system and net method of reporting discounts. Which of the following is true of Salience Group? a. The company will record additional purchases of $15. b. The company will record expense of $15 as it did not avail discount. c. The company will record profit of $15 as it availed discount. d. The company will ignore $15 as it is using net method of reporting discounts. e. The company will debit inventory account for $15. b; Moderate

Hoyle, Financial Accounting 2.0 46. Moneybag Inc. purchased inventory of $85,000 on October 22, 2012 and incurred

transportation cost of $500 for transporting materials to the warehouse and $100 for assembling the materials at stores. In addition, the company incurred $25 for repairs that was due to employee negligence. The company sold some of its inventory on November 1, 2012.It incurred $1,000 on transporting materials from the warehouse to the buyer’s location and $30 for assembling the goods at buyer’s location. The company also allowed a cash discount of $15. Which of the following costs will be included in inventory account if the company is using perpetual inventory system? a. Transportation cost incurred on transporting materials to the warehouse b. Transportation cost incurred on transporting materials to the buyer’s location c. Assembling cost incurred on assembling the goods at buyer’s location d. Discount allowed on the sales made e. Repair expenses a; Moderate 47. Font Inc. had beginning inventory balance of $5,000. During the year, it purchased inventory

of $81,000. The company sold inventory for $100,000 and had a markup of 25 percent on sales price. What is the ending inventory balance of Font? a. $8,250 b. $6,000 c. $11,000 d. $16,000 e. $14,000 c; Moderate 48. Moss Inc. is a dealer in art supplies. On February 10, 2013, Moss purchased $600 worth of

watercolors and received the invoice on February 11, 2013 with terms 2/10 n/35. Moss uses a perpetual inventory system and the gross method of recording purchase discounts. The entry to record the payment made by Moss on February 15, 2013 would include: a. a debit to account receivable. b. a credit to inventory. c. a debit to cash. d. a credit to purchase discount. e. a credit to accounts payable. b; Easy 49. Toss Inc. purchased inventory of $600 on March 9, 2013 and received the invoice on March

10, 2013 with terms 1/8, n/45. Toss uses a periodic inventory system. The entry to record the payment made by Toss on March 15, 2013 would include: a. a debit to account receivable. b. a credit to inventory. c. a debit to cash. d. a credit to purchase discount. e. a credit to accounts payable. d; Easy

Hoyle, Financial Accounting 2.0 50. Which of the following is true of perpetual inventory system?

a. The implementation of perpetual inventory system incurs less cost. b. Transportation cost is debited to purchases account. c. Inventory amounts are unknown both in total and individually. d. Ending inventory is determined by a physical count. e. It is designed to maintain updated figures for inventory. e; Easy 51. On May 26, 2012, Pearl Corporation purchased inventory of $75,000 on terms of 1/10, n/30

and incurred transportation cost of $500. Pearl made payment on June 1, 2012. If Pearl uses periodic inventory system, which of the following will be the journal entry made by the company to record the payment made on invoice? a. Accounts Payable 75,000 Cash 74,250 Purchase Discount 750 b. Accounts Payable 75,000 Cash 74,250 Inventory 750 c. Accounts Payable 74,250 Purchase Discount 750 Cash 75,000 d. Accounts Payable 75,000 Cash 75,000 e. Accounts Payable 74,250 Inventory 750 Cash 75,000 a; Moderate Fill in the blanks 52. A _____ inventory system maintains an ongoing record of inventory.

perpetual; Easy 53. A _____ inventory system is usually cheaper to operate, but provides less information on an

ongoing basis. periodic; Easy 54. In a perpetual system, _____ and _____ are credited when a purchase discount is taken

advantage of, assuming the company uses the gross method of reporting discount. cash, inventory; Moderate 55. In a periodic system, _____ and _____ are credited when a purchase discount is taken

advantage of, assuming the company uses the gross method of reporting discount. cash, purchases discount; Easy

Hoyle, Financial Accounting 2.0 Short Answer Questions 56. Discuss how the choice between using a periodic and a perpetual inventory system influences

a company’s operations. The choice between a perpetual and periodic system impacts the information available to company officials on a daily basis. It also affects the journal entries to be made and cost required to operate the accounting system. A perpetual system provides more information on a daily basis, but it is costly to operate. A periodic system provides less day-to-day information, but is less expensive to operate than a perpetual system. Moderate Problems 57. On May 26, 2012, Earl Corporation purchased inventory of $75,000 on terms of 1/10, n/30

and incurred transportation cost of $500. Earl made payment on June 1, 2012. Pass the journal entries for Earl Corporation assuming that the company uses perpetual inventory system and gross method to record discount. a.

Record the purchase of inventory. Inventory 75,000 Accounts Payable

75,000

Record the transportation costs. Inventory 500 Cash

500

Record the payment of the invoice. Accounts payable 75,000 Cash Inventory

74,250 750

Easy 58. Christmas Castle sells all types of Christmas decorations. On November 1, 2017, Christmas

Castle purchased 500 ornaments from a supplier for $900. It spent $50 transporting the ornaments to its store and an additional $15 for setting up the ornaments around the store for shoppers to see. On November 15, 2017, Christmas Castle received an invoice with the terms 1/10 n/30 and paid the invoice on November 23, 2017. Christmas Castle uses a periodic inventory system and the gross method of recording purchase discounts. a. Record the purchase of inventory. Purchases of Inventory Accounts Payable

900 900

Hoyle, Financial Accounting 2.0

b. Record the transportation costs. Transportation-in Cash

50 50

c. Record the set-up costs. Assembly of Inventory Cash

15 15

d. Record the payment of the invoice. Accounts Payable 900 Cash Purchases Discount

891 9

Moderate 59. Christmas Castle sells all types of Christmas decorations. On November 1, 2017, Christmas

Castle purchased 500 ornaments from a supplier for $900. It spent $50 transporting the ornaments to its store and an additional $15 for setting up the ornaments around the store for shoppers to see. On November 15, 2017, Christmas Castle received an invoice with the terms 1/10 n/30 and paid the invoice on November 23, 2017. Christmas Castle uses a perpetual inventory system and the gross method of recording purchase discounts. a. Record the purchase of inventory. Inventory Accounts Payable

900 900

b. Record the transportation costs. Inventory Cash

50 50

c. Record the set-up costs. Inventory Cash

15 15

d. Record the payment of the invoice. Accounts Payable Cash Inventory

900 891 9

Moderate

Hoyle, Financial Accounting 2.0

Section 3 True/False Questions 60. FOB shipping point indicates that the inventory belongs to the buyer as soon as it leaves the

seller’s warehouse. True; Easy 61. Incase inventory is damaged during shipment; the FOB point identifies the party who bears

the loss. True; Easy 62. An inventory shipment was made FOB destination and during the shipment, the inventory

was stolen. In this situation, the buyer bears the loss. False; Easy 63. In a perpetual inventory system, cost of goods sold is recorded when the sale is made.

True; Easy 64. In a periodic inventory system, cost of goods sold is recorded just before financial statements

are produced. True; Easy 65. Under perpetual inventory system, the reclassification of an item from inventory to expense

occurs at the time of each sale. True; Easy 66. Cost of goods sold reported on the income statement will be higher under a perpetual system

than under a periodic system. False; Easy 67. In a periodic system, cost of goods sold is found by adding ending inventory to the purchases

and then subtracting beginning inventory. False; Easy 68. In a periodic system, cost of goods sold is unknown until the preparation of financial

statements. True; Easy 69. Alex Inc. purchases inventory on terms of FOB destination. This implies that Alex has to

bear all shipping costs for inventory purchased. False; Easy

Hoyle, Financial Accounting 2.0

70. In a periodic inventory system, purchases are calculated at the end of the period before

financial statements are produced. False; Easy Multiple Choice Questions 71. In general, the designation FOB shipping point indicates that:

a. buyer will pay shipping costs. b. seller will record the inventory after payment is received. c. buyer and seller will split the cost of shipping equally. d. seller is responsible for any damages or losses in transit. e. seller holds the legal title of shipped goods until the goods reaches the buyer. a; Easy 72. In general, the designation FOB destination indicates that:

a. b. c. d.

buyer will pay shipping costs. buyer will record the inventory after payment is made. seller is responsible for any damages or losses in transit. buyer receives the legal title of shipped goods even before the goods reaches its final destination. e. buyer is responsible for any damages or losses in transit. c; Easy 73. Batman Inc. sold inventory to Housie Corporation on December 26, 2012. Inventory is

shipped FOB shipping point on December 27, 2012, and arrives at the buyer's warehouse on January 2, 2013. Batman Inc. records for the sale and Housie Corporation records for the purchase of inventory in their 2012 financial statements. Which of the following statements is true of the above transaction? a. Assets of Batsman are understated. b. Assets of Housie are understated. c. Assets of Batsman are overstated. d. Assets of Housie are overstated. e. Assets of Housie are correctly stated. e; Moderate 74. Under periodic inventory system, cost of goods sold are:

a. recorded when the purchases are made. b. recorded when the sales are made. c. recorded at current market price. d. recorded before preparing financial statements. e. recorded when payment is received. d; Easy

Hoyle, Financial Accounting 2.0 75. Marcus Company had a beginning inventory of $390. During the year, the company

purchased inventory of $2,900 and made sales for $3,500. Selling cost amounted to $250. The ending inventory balance was $450. What is the cost of goods sold of Marcus Company? a. $2,840 b. $3,090 c. $2,250 d. $2,750 e. $4,700 a; Moderate 76. Allison Corporation sold inventory having original cost of $28 for $50. This was recorded

with a debit to cost of goods sold and credit to inventory for $50. Allison uses a perpetual inventory system. Which of the following is true of this transaction? a. Sales revenue will be overstated. b. Net income will be understated. c. Retained earnings will be overstated. d. Cost of goods sold will be understated. e. Inventory will be overstated. b; Moderate 77. Flame Group entered into a contract with Fire Inc. on November 1, 2012, to purchase

inventory of $75,000 with the designation “FOB destination.” The goods were dispatched on November 13, 2012 and it reached Flame on November 24, 2012. Flame Group made the payment on November 30, 2012. Flame group sold the inventory on November 26, 2012. On which date the legal title of inventory is transferred to Flame group? a. November 1, 2012 b. November 13, 2012 c. November 24, 2012 d. November 26, 2012 e. November 30, 2012 c; Moderate 78. Which of the following is one of the entries made by a company using a perpetual inventory

system for selling its inventory on credit? a. Purchases Accounts Payable b. Cost of Goods Sold Inventory c. Sales Accounts Receivable d. Inventory Cost of Goods Sold e. Inventory Sales b; Easy

Hoyle, Financial Accounting 2.0 79. Which of the following is an entry made by a company using a periodic inventory system on

selling its inventory on credit? a. Accounts Receivable Sales b. Cost of Goods Sold Inventory c. Sales Accounts Receivable d. Purchases Accounts Payable e. Inventory Sales a; Easy 80. Opera Corporation began the year with $8,000 in inventory. During the year, Opera

purchased $23,000 in inventory. An end of the year count showed $6,000 in inventory. What is Opera cost of goods sold for the year? a. $8,000 b. $21,000 c. $23,000 d. $15,000 e. $25,000 e; Moderate 81. Alice Corporation began the year with $200,000 in inventory. The company reported cost of

goods sold of $903,000 for the year. An end of the year count showed $210,000 in inventory.. How much inventory was purchased during the year? a. $893,000 b. $903,000 c. $913,000 d. $703,000 e. $693,000 c; Moderate 82. Henderson Inc. purchased inventory from Hollis Company. Henderson’s purchasing

department was made aware of the need for the inventory on May 25, and the order was placed on May 27. Hollis told Henderson that the inventory was out of stock and would not be available to ship until June 16. The inventory was actually shipped on June 17 and Henderson received it on June 19. If the terms of the sale were FOB destination, on which of the following dates should Henderson record the inventory? a. May 25 b. May 27 c. June 12 d. June 16 e. June 19 e; Easy

Hoyle, Financial Accounting 2.0

83. Kites Inc. placed an order for inventory on December 24, 2015. Inventory was shipped from

the supplier on December 26, 2015 and arrived at Kites’ warehouse on January 3, 2016. The terms of the shipment were FOB shipping point. The company uses a periodic system, and the inventory was not included in the end of the year count. Kites accountant recorded the purchases by debiting purchases and crediting accounts payable on January 3, 2016. Which of the following is true of Kites’ financial statements? a. Liabilities for 2015 are understated. b. Purchases for 2015 are overstated. c. Retained earnings for 2016 are understated. d. Net income for 2016 is understated. e. Ending inventory for 2015 is overstated. a; Hard 84. Red Click Inc. had a beginning inventory balance of $200,000. During the year, the company

purchased $903,000 of inventory. Sales for the period amounted to $980,000. The ending inventory count showed $210,000 in inventory.. What is the gross profit of Red Click for the year? a. $67,000 b. $77,000 c. $87,000 d. $123,000 e. $297,000 c; Easy Fill in the blanks 85. _____ indicates that legal title to shipped goods passes to the buyer at the time of shipment

so that the buyer is responsible for transportation costs and any losses in transit. FOB shipping point; Easy 86. _____ indicates that legal title to shipped goods passes to the buyer when they arrive at the

final destination so that the seller is responsible for transportation costs and any losses in transit. FOB destination; Easy 87. Cost of goods sold is calculated as beginning inventory plus _____ less ending inventory.

purchases; Easy 88. In a periodic inventory system, a _____ is necessary before cost of goods sold is calculated.

physical count or physical inventory; Easy

Hoyle, Financial Accounting 2.0

Short Answer Questions 89. List three reasons why designating an FOB point is important.

The FOB point is important for three reasons: 1) The FOB point indicates when legal title of the inventory passes from seller to buyer. 2) The company that holds legal title to merchandise during the trip from seller to buyer normally incurs the transportation cost. 3) Any losses or damages that occur in route affect the party holding legal title. The owner bears the cost of damages during the physical conveyance of property. Moderate Problems 90. Lionel Company uses a periodic inventory system. Lionel began the month of April with

$110 in inventory. On April 5, Lionel ordered $500 inventory from Igloo Corporation. The inventory was shipped on April 8, FOB shipping point, and arrived at Lionel’s warehouse on April 15. On April 20, Lionel sold the inventory for $700. At the end of the month, Lionel’s inventory count showed $180 left in inventory. a.

On which date should Lionel record the purchase of the inventory? April 8

b. Record the purchase of the inventory. Purchases Accounts Payable

500 500

c. Record the sale of the inventory. Accounts Receivable Sales

700 700

d. Determine cost of goods sold for the month. $110 + $500 – $180 = $430 e. Determine Lionel’s gross profit for April. $700 – $430 = $270 Moderate

Hoyle, Financial Accounting 2.0 91. Gavin Corporation uses a perpetual inventory system. On May 11, Gavin sold inventory that

originally cost $239,000 for $500,000. Make any necessary journal entries. Accounts Receivable 500,000 Sales Cost of Goods Sold Inventory Moderate

500,000

239,000 239,000

Section 4 True/False Questions 92. The cost of an inventory and its current market value are likely to differ.

True; Easy 93. A company purchased an inventory for $40 and expects to sell it for $77. Thus, inventory

should be reported at $77. False; Easy 94. Conservatism prohibits the writing up of inventory values.

True; Easy 95. Inventory is reported at the lower of cost or market.

True; Easy 96. A gain is recognized immediately if the value of inventory rises above cost.

False; Easy 97. If the market value of an inventory remains greater than cost, no change is made in the

reported balance until a sale occurs. True; Easy 98. Both the purchase value and the sales value of an inventory can be its market value.

True; Easy 99. There is no difference in U.S. GAAP and IFRS concerning lower of cost or market inventory

valuation. False; Easy 100. One reason an inventory’s sales value may decrease is technological innovation.

True; Easy

Hoyle, Financial Accounting 2.0

101. For inventory, net realizable value is its probable sales price less the original cost of the

inventory. False; Moderate Multiple Choice Questions 102. Traditionally, inventory is reported in the financial statements at:

a. historical cost. b. selling price. c. selling cost. d. replacement cost. e. market value. a; Easy 103. Youth Inc. has inventory with original cost of $30. Currently, Youth could purchase the

same inventory for $35. Youth believes the inventory could be sold for $45 after spending $14 for repairs. At what amount should this piece of inventory be reported? a. $30 b. $35 c. $45 d. $31 e. $14 a; Moderate 104. The lower-of-cost-or-market rule is an example of _____ principle of accounting.

a. matching b. revenue recognition c. going concern d. consistency e. conservatism e; Easy 105. Pacific Corporation, an equipment-manufacturing company, has equipment in its inventory

that was purchased for $32,000. However, this equipment can be purchased now for $31,000. Pacific expects this equipment can be sold for $56,000. What loss should Pacific report on its income statement with respect to equipment? a. $-0b. $1,000 c. $24,000 d. $25,000 e. $32,000 b; Moderate

Hoyle, Financial Accounting 2.0

106. Which of the following concerning lower-of-cost-or-market is true?

a. Lower-of-cost-or-market is an example of the revenue recognition principle. b. Inventory should be recorded at its fair value. c. If inventory’s replacement cost is higher than its cost, inventory will be recorded at its replacement cost irrespective of its market price. d. If an inventory’s market value exceeds its cost, a gain should be recorded on the income statement. e. Inventory’s sales value can be independent of replacement cost. e; Easy 107. FIFA Company has inventory with original cost of $450. The inventory would cost $420 if

FIFA purchased it today. The company expects to sell the inventory for $600 after spending $30 to fix some scratches on it. What is the net realizable value of the inventory? a. $450 b. $420 c. $600 d. $570 e. $390 d; Moderate 108. Which of the following is true of International Financial Reporting Standards related to

inventory? a. Replacement cost is equal to the selling price of a product. b. Increase in the market value of an inventory should be recognized as a gain on the income statement. c. Inventories must be valued at lower of cost or net realizable value. d. The cost incurred by a company to procure inventory is its net realizable value. e. It doesn’t allow reversals of previous write-downs. c; Moderate 109. _____ is defined as the anticipated sales price of the item reduced by the estimated costs to

complete the item and any estimated costs needed to make the sale. a. Replacement cost b. Market value c. Selling price d. Net realizable value e. Estimated original price d; Easy

Hoyle, Financial Accounting 2.0

110. If the value of inventory falls below cost, the reporting company should:

a. not make any change in the reported balance until a sale occurs. b. report at its cost because of the principle of conservatism. c. recognize a loss on its income statement. d. remove the inventory from its balance sheet. e. recognize a gain on the income statement. c; Easy Fill in the blanks 111. Inventory should be reported at its lower of _____ or_____.

cost, market; Easy 112. If the value of inventory has decreased, a ______ should be reported on the income

statement. loss; Easy 113. The two possible ways of determining market values are _____ value and _____ value.

purchase, sales; Easy Short Answer Questions 114. Explain the reporting of inventory if its value falls below cost and if its market value

remains greater than cost. If the value of inventory falls below cost, it must be reported at its market value because of the principle of conservatism. If an inventory’s market value remains greater than cost, no change is made in the reported balance until a sale occurs. In contrast, if its value drops so that inventory’s worth is less than its cost, a loss is recognized immediately. Whenever inventory appears to have lost value for any reason, the accountant compares the cost of the item to its market value and the lower figure then appears on the balance sheet. Moderate Problems 115. The Xavier Company has three products in its inventory. The following information is

valid as of December 31, 2014.

Unit Product Quantity Cost A 1,000 $ 10 B 800 15 C 600 3

Unit Replacement Cost $ 12 11 3

Hoyle, Financial Accounting 2.0

Using lower of cost or market, calculate the value of the inventory.

Product A B C

Unit Quantity Cost 1,000 $ 10 800 15 600 3

Unit Replacement Cost $ 12 11 3

Lower of Cost or Market Value $10 11 3

Total Cost $10,000 8,800 1,800 $20,600

Hard 116. Baker Company manufactures and sells four products. Its inventories are priced at the

lower of cost or market. Assume one unit of inventory for each product. The following information is valid as of December 31, 2014.

Product A B C D

Original Cost $40.00 47.50 17.50 45.00

Estimated Cost to Replace $42.00 45.00 16.00 —

Net Realizable Value____ — — — $44.00

Determine the value of the inventory using lower of cost or market.

Original Impaired Product Cost Market Value A $40.00 $42.00 B 47.50 45.00 C 17.50 16.00 D 45.00 44.00 Total

Lower of Cost or Market Value $40.00 45.00 16.00 44.00 $145.00

Moderate

Hoyle, Financial Accounting 2.0

Section 5 True/False Questions 117. Irrespective of the inventory system a company uses, it should perform a physical

inventory count. True; Easy 118. The physical inventory count is limited to be performed at the end of a year.

False; Easy 119. When the physical count does not agree with the inventory T-account, an adjustment is

necessary. True; Easy 120. An accounting error is one of the reasons for a difference between an inventory count and

the balance in the inventory T-account. True; Easy 121. If the cause of a discrepancy between the physical count and the inventory T-account is

theft, cost of goods sold should be debited. False; Easy 122. If the cause of a discrepancy between the physical count and the inventory T-account is

damage, a loss should be recognized. True; Easy 123. If the cause of a discrepancy between the physical count and the inventory T-account is an

error, cost of goods sold should be adjusted. True; Easy; 124. Forensic accounting is a branch of accounting which specializes in investigations where

information is unavailable. True; Easy 125. It is harder to estimate the value of inventory destroyed when a company uses a periodic

system than if a company uses a perpetual system. True; Easy 126. In order to estimate the value of inventory lost when a disaster hits, an accountant must be

able to estimate a company’s gross profit percentage. True; Easy

Hoyle, Financial Accounting 2.0

Multiple Choice Questions 127. After doing its physical count, Roof Hut Inc. realized that it had lost $4,200 due to a leaky

roof. Which account should Roof Hut debit? a. Inventory b. Cost of Goods Sold c. Purchases d. Loss on Inventory Shortage e. Damage Expense d; Easy 128. Fiona Corporation found its inventory in its ledger was $7,000 more than the amount

physical count indicated. Fiona believed this was due to theft. To record this, Fiona’s accountant debited cost of goods sold and credited inventory. Which of the following is true? a. Net income is overstated. b. Gross profit is understated. c. Assets are understated. d. Retained earnings are overstated. e. Net income is understated. b; Hard 129. Which of the following is the branch of accounting which specializes in investigations

where information is limited? a. Audit b. Tax c. Estate planning d. Bookkeeping e. Forensic e; Easy 130. At the beginning of April, Foster Inc. had $158,000 of inventory on hand. During the first

two weeks of April, Foster purchased additional $28,000 in inventory and made sales of $190,000. On April 16, a hurricane hit Foster’s warehouse and its entire inventory was destroyed. Foster has an average gross profit percentage of 30 percent. What was the estimated value of the inventory destroyed? a. $4,000 b. $53,000 c. $32,000 d. $28,000 e. $60,200 b; Moderate

Hoyle, Financial Accounting 2.0

131. Michelson performed an inventory count and determined that $200 of inventory was short

due to an accounting error. Which account should Michelson credit? a. Purchases b. Inventory c. Loss on Inventory Shortage d. Cost of Goods Sold e. Accounts Payable b; Easy 132. Salisbury Company performed an end-of-the-year count and found that it had $9,670

inventory on hand. The inventory balance in the ledger was $10,200. What journal entry should Salisbury make if the discrepancy was due to an accounting error? a. Loss on Inventory Shortage 530 Inventory 530 b. Inventory 530 Accounts Payable 530 c. Inventory 530 Cost of Goods Sold 530 d. Cost of Goods Sold 530 Inventory 530 e. Loss on Inventory Shortage 530 Cost of Goods Sold 530 d; Easy 133. Salisbury Company performed an end-of-the-year count and found that it had $9,670

inventory on hand. The inventory balance in the ledger was $10,200. What journal entry should Salisbury make if the discrepancy was due to theft? a. Loss on inventory shortage 530 Inventory 530 b. Inventory 530 Accounts payable 530 c. Inventory 530 Cost of goods sold 530 d. Cost of goods sold 530 Inventory 530 e. Loss on inventory shortage 530 Cost of goods sold 530 a; Easy

Hoyle, Financial Accounting 2.0

134. At the beginning of October 2016, Michael Company had $65,000 worth of inventory in

the store. During the month, the company purchased $250,000 of inventory. Sales for the month amounted to $320,000. At the end of October 2016, due to floods, the entire inventory of Michael was lost. Michael uses a periodic inventory system. Assuming that Michael’s gross profit percentage is 30 percent, estimate the amount of inventory lost. a. $5,000 b. $219,000 c. $96,000 d. $91,000 e. $135,000 d; Moderate Fill in the blanks 135. _____ accounting is a branch of accounting which specializes in situations where little

information is available. Forensic; Easy 136. When a discrepancy exists in the inventory balance in the ledger and the inventory found in

a physical count due to accounting error, _____ should be debited. cost of goods sold; Easy 137. When a discrepancy exists in the inventory balance in the ledger and the inventory found in

a physical count due to breakage, _____ should be debited. loss on inventory shortage; Easy Problems 138. At the beginning of August 2012, Ashton Company had $30,000 worth of inventory in the

store. During the month, the company purchased $160,000 of inventory. Sales for the month amounted to $200,000. At the end of August 2012, due to an accidental fire, the entire inventory of Ashton was lost. Ashton uses a periodic inventory system. Assuming that Ashton’s gross profit percentage is 40 percent, estimate the amount of inventory lost. Inventory, Beginning of August Purchases Inventory Available For Sale

$ 30,000 160,000 $190,000

Sales Cost of Goods Sold % Cost of Goods Sold

$200,000 60% $120,000

Inventory Available for Sale Cost of Goods Sold Inventory Lost

$190,000 (120,000) $70,000

Hoyle, Financial Accounting 2.0 Moderate 139. On March 1, 2013, Source Company had inventory of $230,000. During the month, the

company purchased additional $573,000 in inventory. Sales for the month amounted to $990,000. On March 23, 2013, the company experienced a loss of inventory when a tornado swept through its warehouse. A physical count shows that $89,000 in inventory survived the tornado. Source uses a periodic inventory system and its cost of goods sold is typically 53 percent of its sales. Determine the value of the inventory lost in the tornado. Inventory, Beginning of Month Purchases Inventory Available for Sale

$230,000 573,000 $803,000

Sales Cost of Goods Sold % Cost of Goods Sold

$990,000 53% $524,700

Inventory Available for Sale Cost of Goods Sold Inventory on Hand before Tornado Inventory Remaining after Tornado Inventory Lost Moderate

$803,000 (524,700) $278,300 ( 89,000) $189,300

140. Glow Company sells lights of all types. In September, it purchased 140 specialty lights at a

cost of $30 each. It sold all 140 for $75 each. In October, it purchased 100 more at a cost of $30 each. In October, it sold 90 at $75 each. Glow Company uses a perpetual inventory system. a. Record the purchases of lights in September. Inventory Accounts Payable

4,200 4,200

b. Record the sales of lights in September. Accounts Receivable Sales

10,500

Cost of Goods Sold Inventory

4,200

10,500

4,200

c. Record the purchase of lights in October. Inventory Accounts Payable

3,000 3,000

Hoyle, Financial Accounting 2.0

d. Record the sale of lights in October. Accounts Receivable Sales

6,750

Cost of Goods Sold Inventory

2,700

6,750

2,700

e. During its physical inventory count in December, Glow discovers that 3 of the remaining lights have been broken. Make an appropriate journal entry. Loss on Inventory Shortage Inventory Moderate

90 90

Hoyle, Financial Accounting 2.0

Chapter 9 Why Does a Company Need a Cost Flow Assumption in Reporting Inventory? Section 1 True/False Questions 1. Standardization of accounting standards helps decision makers compare results from one year to the next and from one company to another. True; Easy 2. Cost flow assumptions are relevant only if the cost of inventory changes. True; Easy 3. For most companies, the informational benefit of using the specific identification method outweighs its costs. False; Moderate 4. Investors and creditors cannot properly analyze the financial statements of a company, without knowing the cost flow assumption that has been utilized. True; Easy 5. Companies selling perishable goods like food and drugs are most likely to use the specific identification method for its inventory valuation. False; Easy 6. In specific identification, the average cost of the units purchased is assigned to all units available for sale. False; Easy 7. In periods of inflation, FIFO is associated with higher reported net income and ending inventory. True; Easy 8. The FIFO assumption assumes that the most recently purchased inventory is sold first. False; Easy 9. For a firm to use FIFO, it must be able to demonstrate that it usually sells its oldest items first. False; Moderate

Hoyle, Financial Accounting 2.0

10. On January 2, 2013, Leather Company purchased a wallet costing $5. On January 5, it purchased an identical wallet costing $5.25. The company sold one of the wallets on January 10 for $8.95. Under FIFO, the company would assume that the wallet purchased on January 2 was sold first. True; Easy 11. The LIFO assumption assumes that the oldest purchase of inventory is sold first. False; Easy 12. LIFO provides a better matching of current inventory costs with revenues. True; Easy 13. The average cost method is thought to be better in line with the matching principle than the other cost flow assumptions. False; Easy 14. In the LIFO method, the most recent costs of inventory are moved to cost of goods sold as sales are made. True; Easy 15. In a period of rising prices, LIFO will yield a higher ending inventory than the other costing methods. False; Easy 16. Great Buys purchased a computer costing $450 on March 11, 2013, and an identical one costing $470 on March 24. It sold one computer on March 31. Under LIFO, Great Buys would transfer $450 to cost of goods sold. False; Easy 17. Phillips Corporation began the year with one chair costing $45 and purchased an identical chair during January for $46. On January 31, it sold one chair for $63. If Phillips uses LIFO, the value of Phillips ending inventory on January 31 would be $45. True; Easy 18. Price Company purchases a hat on April 2 for $30 and an identical one on April 6 for $32. The company sold one of the hats on April 24. If Price assumes the average cost assumption, it would transfer $31 to its cost of goods sold. True; Easy 19. Anderson Corporation uses the FIFO assumption. At the beginning of the year, it had one set of steak knives in inventory with a cost of $200. During the year, it purchased another set for $210. Later, it sold a set for $250. If Anderson’s accountant debited Cost of Goods Sold for $210, net income would be overstated. False; Moderate

Hoyle, Financial Accounting 2.0

Multiple Choice Questions 20. Which of the following statements is true? a. The FIFO assumption is more in line with the matching principle. b. In inflationary times, the LIFO assumption is associated with a higher reported net income. c. The FIFO assumption is often used to reduce income tax costs. d. The average method assumes most recent costs are transferred first to cost of goods sold. e. The specific identification method physically identifies its remaining inventory. e; Easy 21. Which of the following cost flow assumptions will yield the highest net income in a period of rising prices? a. Specific identification b. FIFO c. LIFO d. Weighted averaging e. Moving averaging b; Easy 22. Which of the following cost flow assumptions will yield the lowest amount of ending inventory in a period of rising prices? a. FIFO b. Weighted averaging c. Specific identification d. LIFO e. Moving averaging d; Easy 23. In a period of rising prices, averaging yields a cost of goods sold that is: a. between those yielded by FIFO and LIFO. b. greater than the amount yielded by LIFO. c. lesser than the amount yielded by FIFO. d. equal to the amount yielded by FIFO. e. equal to the amount yielded by LIFO. a; Easy

Hoyle, Financial Accounting 2.0

24. Which of the following assumes that the most recent costs are transferred first from the inventory to cost of goods sold? a. LIFO b. FIFO c. Specific identification d. Weighted averaging e. Moving averaging a; Easy 25. In which of the following methods, the most recent costs of purchasing inventory remains in the ending inventory? a. Moving averaging b. FIFO c. Specific identification d. Weighted averaging e. LIFO b; Easy 26. At the beginning of that year 2013, Trannik had 50 units in its inventory, each costing $4. In January, Trannik purchased 30 units for $5 each. On January 31, Trannik sold 20 units. Assuming a LIFO cost flow assumption, what would be Trannik’s cost of goods sold? a. $200 b. $100 c. $150 d. $120 e. $80 b; Easy 27. At the beginning of the year 2013, Trannik had 50 units in its inventory, each costing $4. In January, Trannik purchased 30 units for $5 each. On January 31, Trannik sold 20 units. Assuming a FIFO cost flow assumption, what would be Trannik’s cost of goods sold? a. $200 b. $100 c. $150 d. $120 e. $80 e; Easy

Hoyle, Financial Accounting 2.0

28. Hammond Company started the year with 500 units costing $65 each. On January 15, the company purchased 450 units for $72 each. 650 units were sold for $95 each on January 28. During March, additional 700 units were purchased for $76 each. At the end of March, 800 units were sold for $105. Hammond decided to use the FIFO cost flow assumption, but mistakenly applied LIFO. Which of the following statements is true? a. Ending inventory is understated by $1,315. b. Cost of goods sold is understated by $2,200. c. Gross profit is understated by $2,200. d. Ending inventory is overstated by $2,200. e. Gross profit is overstated by $1,315. c; Hard 29. Vision Company started the year with 4,000 units costing $105 each. On January 9, the company purchased 2,000 units for $115 each. 4,200 units were sold for $150 each on January 23. During March, additional 4,000 units were purchased for $120 each. At the end of April, 4,800 units were sold for $162. Vision decided to use the averaging method, but mistakenly applied FIFO. Which of the following statements is true? a. Ending inventory is understated by $15,000 b. Gross profit is understated by $7,000 c. Cost of goods sold is overstated by $15,000 d. Gross profit is overstated by $15,000 e. Ending inventory is overstated by $7,000 e; Moderate 30. At the beginning of the year, Delight Company had 100 units in its inventory at $50 each. On January 17, the company purchased 100 units for $60 each and at the end of the month sold 150 units for $95 each. During March, the company made two purchases of 200 units and 300 units for $70 and $80 each respectively. In the month of April, the company sold 450 units for $105 each. If the company is applying averaging, what would be the amount of gross profit? a. $18,500 b. $20,500 c. $19,500 d. $17,500 e. $19,000 c; Moderate

Hoyle, Financial Accounting 2.0

31. At the beginning of the year, Delight Company had 100 units in its inventory at $50 each. On January 17, the company purchased 100 units for $60 each and at the end of the month sold 150 units for $95 each. During March, the company made two purchases of 200 units and 300 units for $70 and $80 each respectively. In the month of April, the company sold 450 units for $105 each. If the company is applying averaging, what would be the amount of ending inventory? a. $8,000 b. $7,000 c. $5,000 d. $6,000 e. $6,500 b; Moderate 32. On June 1, Felix Company purchased 10 umbrellas for $5 each. On June 11, the company purchased additional 10 umbrellas for $7 each. On June 20, it sold 9 umbrellas for $20 each. If Felix is using the FIFO method, what would be its ending inventory on June 20? a. $45 b. $57 c. $66 d. $77 e. $75 e; Moderate 33. On June 1, Felix Company purchased 10 umbrellas for $5 each. On June 11, the company purchased additional 10 umbrellas for $7 each. On June 20, it sold 9 umbrellas for $20 each. If Felix is using the LIFO method, what would be its ending inventory on June 20? a. $63 b. $75 c. $66 d. $57 e. $50 d; Moderate 34. On June 1, Felix Company purchased 10 umbrellas for $5 each. On June 11, the company purchased additional 10 umbrellas for $7 each. On June 20, it sold 9 umbrellas for $20 each. If Felix is using the averaging method, what would be its ending inventory on June 20? a. $55 b. $57 c. $66 d. $75 e. $50 c; Moderate

Hoyle, Financial Accounting 2.0 35. Comfort Company began the month of September with 120 units, each costing $30. On September 7, it purchased 80 units for $40 each. On September 17, it purchased 100 units for $40 each. At the end of the month, the company sold 270 units for $55 each. Assuming Comfort uses FIFO, determine its gross profit for the month. a. $5,130 b. $4,950 c. $5,700 d. $5,250 e. $8,100 d; Moderate 36. Comfort Company began the month of September with 120 units, each costing $30. On September 7, it purchased 80 units for $40 each. On September 17, it purchased 100 units for $40 each. At the end of the month, the company sold 270 units for $55 each. Assuming Comfort uses LIFO, determine its gross profit for the month. a. $4,950 b. $5,700 c. $5,250 d. $5,130 e. $8,100 a; Moderate 37. Comfort Company began the month of September with 120 units, each costing $30. On September 7, it purchased 80 units for $40 each. On September 17, it purchased 100 units for $40 each. At the end of the month, the company sold 270 units for $55 each. Assuming Comfort uses averaging, determine its gross profit for the month. a. $8,100 b. $4,950 c. $5,700 d. $5,250 e. $5,130 e; Moderate 38. Charlie Corporation began the year with 100 units, each costing $15. It made two purchases of 50 units for $18 each and 125 units for $20 each on February 20 and February 26 respectively. On April 4, the company sold 200 units for $32 each. Assuming Charlie uses FIFO, the entry to record cost of goods sold will include a: a. debit to Cost of Goods Sold and credit to Inventory for $3,775. b. debit to Cost of Goods Sold and credit to Inventory for $3,564. c. debit to Cost of Goods Sold and credit to Inventory for $3,400. d. debit to Inventory and credit to Cost of Goods Sold for $3,400. e. debit to Inventory and credit to Cost of Goods Sold for $3,564. c; Moderate

Hoyle, Financial Accounting 2.0

39. Charlie Corporation began the year with 100 units, each costing $15. It made two purchases of 50 units for $18 each and 125 units for $20 each on February 20 and February 26 respectively. On April 4, the company sold 200 units for $32 each. Assuming Charlie uses LIFO, the entry to record cost of goods sold will be: a. debit to Cost of Goods Sold and credit to Inventory for $3,775. b. debit to Cost of Goods Sold and credit to Inventory for $3,564. c. debit to Cost of Goods Sold and credit to Inventory for $3,400. d. debit to Inventory and credit to Cost of Goods Sold for $3,400. e. debit to Inventory and credit to Cost of Goods Sold for $3,564. a; Moderate 40. Which of the following is true of the FIFO cost flow assumption? a. In a period of rising prices, FIFO yields a higher cost of goods sold than other costing methods. b. In a period of falling prices, FIFO yields a higher ending inventory than other costing methods. c. In a period of falling prices, FIFO yields a higher net income than other costing methods. d. In a period of rising prices, FIFO yields a lower net income than other costing methods. e. In a period of rising prices, FIFO yields a higher ending inventory than other costing methods. e; Moderate 41. Which of the following cost flow assumptions is most likely to be used by a company selling yachts? a. FIFO b. Specific identification c. Weighted averaging d. LIFO e. Moving averaging b; Easy 42. Which of the following inventory methods are most likely to be used by automobile dealers, jewelers, and art galleries? a. Weighted averaging b. FIFO c. Specific identification d. LIFO e. Moving averaging c; Moderate

Hoyle, Financial Accounting 2.0

43. Which of the following inventory methods should be used during inflationary periods to reduce income tax costs? a. LIFO b. Specific identification c. Weighted averaging d. Moving averaging e. FIFO a; Moderate 44. Which of the following statements is true of inflationary periods? a. FIFO reports a higher gross profit than LIFO. b. LIFO reports a higher inventory balance than FIFO. c. Averaging reports a higher inventory balance than FIFO. d. LIFO reports a higher net income than FIFO. e. Averaging reports a higher net income than FIFO. a; Easy 45. Which of the following statements is true of the LIFO cost flow assumption? a. LIFO yields a higher net income than FIFO and averaging in a period of rising prices. b. LIFO provides a better matching of current costs and expenses. c. LIFO yields a higher cost of goods sold than other costing methods, in periods of falling prices. d. LIFO yields a lower ending inventory than other costing methods, in periods of falling prices. e. LIFO puts the earliest costs into cost of goods sold. b; Moderate

Fill in the blanks 46. LIFO stands for _____. last-in, first-out; Easy 47. The cost flow assumption which uses the average cost of the goods available for sale is called _____. averaging; Easy 48. FIFO stands for _____. first-in, first-out; Easy 49. The inventory costing method most likely to be used during inflationary periods to reduce the income tax cost is _____. LIFO; Easy

Hoyle, Financial Accounting 2.0

50. A _____ must be chosen by a company as inventory prices keep changing. cost flow assumption; Easy Problems 51. Texas Corporation began the year with 56 units, each costing $9. On January 4, it purchased 18 units for $10 each. On January 15, it purchased 24 units for $11 each. On January 26, the company sold 31 units for $24 each. Assuming Texas uses LIFO, determine its cost of goods sold. Cost of goods sold = $334; Easy 52. Texas Corporation began the year with 56 units, each costing $9. On January 4, it purchased 18 units for $10 each. On January 15, it purchased 24 units for $11 each. On January 26, the company sold 31 units for $24 each. Assuming Texas uses FIFO, determine its cost of goods sold. Cost of goods sold = $279; Easy 53. Texas Corporation began the year with 56 units, each costing $9. On January 4, it purchased 18 units for $10 each. On January 15, it purchased 24 units for $11 each. On January 26, the company sold 31 units for $24 each. Assuming Texas uses averaging, determine its cost of goods sold. Cost of goods sold = $299.88; Easy 54. Virginia Corporation began the month of August with 65 units, each costing $4. On August 2, it purchased 23 units for $5 each. On August 14, it purchased 12 units for $7 each. On August 24, the company sold 67 units for $17 each. Assuming Virginia uses LIFO, determine its ending inventory. Ending Inventory = $132; Easy 55. Virginia Corporation began the month of August with 65 units, each costing $4. On August 2, it purchased 23 units for $5 each. On August 14, it purchased 12 units for $7 each. On August 24, the company sold 67 units for $17 each. Assuming Virginia uses FIFO, determine its ending inventory. Ending Inventory = $189; Easy

Hoyle, Financial Accounting 2.0

56. Virginia Corporation began the month of August with 65 units, each costing $4. On August 2, it purchased 23 units for $5 each. On August 14, it purchased 12 units for $7 each. On August 24, the company sold 67 units for $17 each. Assuming Virginia uses averaging, determine its ending inventory. Ending Inventory = $151.47; Easy Section 2 True/False Questions 57. Specific identification is difficult to apply unless easily distinguishable differences exist between similar inventory items. True; Easy 58. In a period of rising prices, FIFO reports a higher gross profit than LIFO. True; Easy 59. LIFO remains in use in the United States primarily because of the LIFO conformity rule. True; Easy 60. As prices rise, FIFO reduces the amount of taxes a company owes to the government. False; Easy 61. The LIFO conformity rule states that if a company uses LIFO for income tax reporting, they must use LIFO for financial reporting also. True; Easy 62. The FIFO inventory costing method is preferred by companies because they reduce the taxable income of the company. False; Easy 63. Income tax laws enable the government to help regulate the health of the economy. True; Easy Multiple Choice Questions 64. Which of the following states that companies must use LIFO for financial reporting if they use it for tax reporting? a. Cost Flow Assumption Act b. FIFO consistency rule c. FIFO Tax Act d. LIFO conformity rule e. Costing method standards rule d; Easy

Hoyle, Financial Accounting 2.0

65. When preparing a tax return, a company must follow the rules of: a. U.S. GAAP. b. SEC. c. PCAOB. d. IFRS. e. Internal Revenue Code. e; Easy 66. In periods of inflation, LIFO reports a higher: a. gross profit. b. inventory balance. c. income taxes cost. d. net income. e. cost of goods sold. e; Easy 67. Which of the following costing methods is used primarily because it provides tax benefits to companies? a. LIFO b. FIFO c. Weighted averaging d. Specific identification e. Moving averaging a; Easy 68. Which of the following is a reason for companies to voluntarily choose LIFO? a. LIFO reduces the income taxes cost. b. LIFO makes the company look financially strong. c. LIFO increases the reported net income. d. LIFO increases the amount reported as inventory balance. e. LIFO increases the working capital. a; Easy 69. Which of the following yields a higher gross profit for companies in period of rising prices? a. LIFO b. Moving average c. Specific identification d. FIFO e. Moving averaging d; Easy

Hoyle, Financial Accounting 2.0

70. Which of the following would report the highest amount of ending inventory in periods of inflation? a. FIFO b. Weighted averaging c. Moving averaging d. LIFO e. Specific identification a; Easy 71. Which of the following is true of LIFO conformity rule? a. During periods of inflation, companies must apply LIFO cost flow assumption. b. If LIFO is used for income tax purposes, companies must also use LIFO for financial reporting. c. It is an accounting principle. d. During periods of deflation, companies must apply FIFO cost flow assumption. e. Companies can apply LIFO for income tax purposes and apply FIFO for financial reporting. b; Moderate 72. In United States, external reporting of financial statements is governed by: a. U.S GAAP. b. IRS. c. NYSE. d. AICPA. e. IFRS. a; Easy 73. Why does a company voluntarily choose LIFO approach that reduces reported income and total assets when prices rise? a. It leads to lower income tax costs. b. It yields higher return on assets. c. It reduces the dividend payout ratio. d. It shows an overall healthier position of the company. e. It reduces the debt to equity ratio. a; Easy Fill in the blanks 74. The _____ states that if a company uses LIFO for income tax purposes, it must also use LIFO for financial reporting. LIFO conformity rule; Easy 75. Companies follow the rules of the _____ when preparing their tax returns. Internal Revenue Code; Easy

Hoyle, Financial Accounting 2.0 76. In a period of rising prices, _____ provides a lower net income, thus giving companies a lower tax bill. LIFO; Easy Short Answer Questions 77. Explain the LIFO conformity rule and its implications for cost flow assumption choice by U.S. companies. As prices rise, companies prefer to apply LIFO for tax purposes because this assumption reduces the reported income and, hence, the required cash payments to the government. However, if LIFO is used on a company’s income tax return, it must also be applied on the financial statements. This is the LIFO conformity rule. This requirement has not stopped companies from using LIFO. For many companies, the savings in income tax dollars more than outweigh the problem of having to report numbers that make the company look a bit weaker. That is a choice that company officials must make. Moderate 78. Explain why the information presented by a company on its tax return is not identical to that presented on its financial statements. In filing income taxes with the U.S. government, a company must follow the regulations of the Internal Revenue Code. Those laws have several underlying objectives that influence their development, such as raising money for the federal government. In contrast, financial reporting for decision makers must abide by the guidance of U.S. generally accepted accounting principles. GAAP seeks the fair presentation of accounting information. That is the reason for its existence. Because this goal is entirely different than that of the tax code, there is no particular reason for resulting financial statements to correspond to the tax figures submitted to the IRS. Moderate Section 3 True/False Questions 79. Because LIFO is prohibited in many countries, U.S. companies with foreign subsidiaries may have to use a different cost flow assumption for those subsidiaries. True; Easy 80. LIFO liquidations can artificially inflate a company’s earnings. True; Easy

Hoyle, Financial Accounting 2.0

81. In a LIFO liquidation, costs from an earlier period are matched with current earnings. True; Easy

Multiple Choice Questions 82. A company uses the LIFO cost flow assumption. When costs from an earlier period are reported with current revenues, it is known as a: a. LIFO transfer. b. LIFO liquidation. c. LIFO allocation. d. LIFO conformity rule. e. LIFO release b; Easy 83. Which of the following is an obvious problem associated with LIFO cost flow assumption? a. LIFO results in lower profit during period of falling prices. b. LIFO presents a balance sheet figure that is out-of-date and completely useless. c. LIFO increases the income taxes cost in periods of inflation. d. LIFO assumption is not in line with the matching principle e. LIFO increases the amount of ending inventory with the company in periods of inflation. b; Moderate 84. Which of the following is called LIFO liquidation? a. Cost from the oldest purchase are transferred first to cost of goods sold b. Using LIFO for both income tax purposes and financial reporting c. Changing from FIFO assumption to LIFO assumption d. Using LIFO for income tax purposes and FIFO for financial reporting e. Inventory costs from an earlier period being matched with revenues of the present year e; Moderate 85. Which of the following is true of LIFO liquidation? a. Its information should not be disclosed in the notes to the financial statement. b. It indicates that a company is financially strong. c. It presents an inventory balance which truly represents the market. d. It occurs when costs from an earlier period are matched with revenues of the present year. e. It is a cost flow assumption used only during inflationary periods. d; Moderate Fill in the blanks 86. _____ occurs when costs from an earlier period are transferred to cost of goods sold to be reported with current revenues. LIFO liquidation; Easy

Hoyle, Financial Accounting 2.0 87. _____ rules prohibits the use of LIFO for reporting inventory cost. IFRS; Easy Short Answer Questions 88. What is LIFO liquidation? What is the financial impact of this event? A decrease in the quantity of inventory on hand when LIFO is applied so that costs incurred in a previous period are mismatched with revenues of the current period. In situations of inflation, it can cause a significant increase in the reported net income. To warn decision makers of the impact that a LIFO liquidation has on reported net income, disclosure in the notes to the financial statements is needed whenever costs are mismatched in this manner. Moderate Section 4 True/False Questions 89. Under a periodic system, a cost flow assumption is applied only when a physical inventory account is taken. True; Easy 90. In a perpetual system, each time a sale is made, the cost flow assumption used by the company must be used to identify the cost to be reclassified. True; Easy 91. Purchases and revenue remain the same, regardless of the cost flow assumption applied. True; Easy 92. Ending inventory is higher under perpetual FIFO than under periodic FIFO. False; Easy 93. Cost of goods sold will be the same regardless of whether perpetual or periodic LIFO is used. False; Easy 94. Cost of goods sold will be the same regardless of whether perpetual or periodic FIFO is used. True; Easy

Hoyle, Financial Accounting 2.0

Multiple Choice Questions 95. Fray Company began the month of March with 70 units in inventory, each with a cost of $3.00. It sold 50 units on March 6 for $6.50 each and purchased 60 units on March 21 for $3.10 each. On March 27, the company sold 70 units for $6.60 each. Assuming Fray uses a periodic FIFO system; determine the cost of goods sold for the month? a. $366 b. $365 c. $780 d. $787 e. $350 b; Moderate 96. Fray Company began the month of March with 70 units in inventory, each with a cost of $3.00. It sold 50 units on March 6 for $6.50 each and purchased 60 units on March 21 for $3.10 each. On March 27, it sold 70 units for $6.60 each. Assuming Fray uses a perpetual FIFO system; determine the cost of goods sold reported for the month? a. $366 b. $365 c. $780 d. $787 e. $350 b; Moderate 97. Dennis Company began the month of July with 500 units in inventory, each costing $58. On July 14, it purchased 300 units for $60 each. On July 21, the company sold 600 units for $75 each. Additional 200 units were purchased on July 23 for $62 each. At the end of the month, the company sold 100 units for $78 each. Dennis uses a periodic FIFO system, but mistakenly applied a periodic LIFO system. Which of the following is true? a. Ending inventory is understated by $400. b. Cost of goods sold is understated by $1,000. c. Sales are overstated by $5,000. d. Gross profit is understated by $1,000. e. Cost of goods sold is overstated by $400. d; Moderate

Hoyle, Financial Accounting 2.0

98. Tank Corporation had the following transaction during the month of July: 7/1 Beginning Inventory 7/5 Sold 7/12 Purchased 7/20 Sold 7/25 Purchased

150 units @ $5 each 100 units @ $9 each 70 units @ $5.10 each 100 units @ $9 each 80 units @ $5.20 each

Tank Corporation uses a perpetual FIFO system. What is the cost of goods sold for the month of July? a. $750 b. $1,023 c. $1,005 d. $518 e. $1,000 c; Moderate 99. Tank Corporation had the following transaction during the month of July: 7/1 Beginning Inventory 7/5 Sold 7/12 Purchased 7/20 Sold 7/25 Purchased

150 units @ $5 each 100 units @ $9 each 70 units @ $5.10 each 100 units @ $9 each 80 units @ $5.20 each

Tank Corporation uses a perpetual FIFO system. What is the amount of ending inventory for the month of July? a. $750 b. $1,023 c. $1,005 d. $518 e. $500 d; Moderate

Hoyle, Financial Accounting 2.0

100. Robinson Corporation had the following transaction during the month of February: 2/1 Beginning Inventory 2/6 Purchased 2/15 Sold 2/21 Purchased 2/28 Sold

50 units @ $10 each 60 units @ $10.50 each 80 units @ $20 each 90 units @ $11 each 70 units @ $20 each

Robinson Corporation uses a perpetual FIFO system. Robinson’s accountant debited cost of goods sold for $1,600. Which of the following is true? a. Cost of goods sold is correctly stated. b. Retained earnings is overstated. c. Gross profit is overstated. d. Sales are understated. e. Net income is understated. e; Moderate 101. The following events pertain to Hawkins Company that occurred during the month of August: 8/1 Beginning Inventory 8/2 Purchased 8/7 Purchased 8/14 Sold 8/19 Purchased 8/28 Sold

20 units @ $6 each 70 units @ $6.20 each 20 units @ $6.50 each 80 units @ $11 each 30 units @$6.70 each 20 units @ $11 each

Hawkins Company uses a periodic FIFO system. Determine the cost of goods sold and ending inventory for the month of August. a. Cost of goods sold $619; Ending inventory $266 b. Cost of goods sold $641; Ending inventory $244 c. Cost of goods sold $632; Ending inventory $253 d. Cost of goods sold $637; Ending inventory $248 e. Cost of goods sold $625; Ending inventory $260 a; Moderate

Hoyle, Financial Accounting 2.0

102. The following events pertains to Hawkins Company that occurred during the month of August: 8/1 Beginning Inventory 20 units @ $6 each 8/2 Purchased 70 units @ $6.20 each 8/7 Purchased 20 units @ $6.50 each 8/14 Sold 80 units @ $11 each 8/19 Purchased 30 units @$6.70 each 8/28 Sold 20 units @ $11 each Hawkins Company uses a perpetual FIFO system. Determine the cost of goods sold and ending inventory for the month of August. a. Cost of goods sold $619; Ending inventory $266 b. Cost of goods sold $641; Ending inventory $244 c. Cost of goods sold $632; Ending inventory $253 d. Cost of goods sold $637; Ending inventory $248 e. Cost of goods sold $625; Ending inventory $260 a; Moderate Fill in the blanks 103. _____ remains the same, regardless of the type of cost flow assumption used. Revenue; Easy 104. Companies applying the FIFO assumption often use a _____ system to keep track of units but not of costs. perpetual; Moderate 105. A _____ inventory system begins by computing the cost of ending inventory at the end of each year and then uses that figure to calculate cost of goods sold. periodic LIFO; Easy

Hoyle, Financial Accounting 2.0

Problems 106. The following events pertains to Flattery Company that occurred during the month of September: 9/1 Beginning Inventory 9/5 Purchased 9/17 Sold 9/22 Purchased 9/30 Sold

400 units @ $50 each 100 units @ $51 each 250 units @ $91 each 75 units @$52 each 200 units @ $92 each

Flattery Company uses a periodic FIFO system. Determine the cost of goods sold and ending inventory for the month of September. Cost of goods sold = $22,550 Ending inventory = $6,450 Moderate 107. The following events pertains to Flattery Company that occurred during the month of September: 9/1 Beginning Inventory 9/5 Purchased 9/17 Sold 9/22 Purchased 9/30 Sold

400 units @ $50 each 100 units @ $51 each 250 units @ $91 each 75 units @$52 each 200 units @ $92 each

Flattery Company uses a perpetual FIFO system. Determine the cost of goods sold and ending inventory for the month of September. Cost of goods sold = $22,550 Ending inventory = $6,450 Moderate Section 5 True/False Questions 108. Averaging cannot be used in a perpetual system. False; Easy 109. Both perpetual and periodic LIFO yield the same cost of goods sold. False; Easy

Hoyle, Financial Accounting 2.0 110. Ending inventory under periodic LIFO will differ from ending inventory under perpetual LIFO. True; Easy 111. A moving average inventory system determines a single average for the entire period and applies that to both ending inventory and cost of goods sold. False; Easy 112. Perpetual and periodic averaging systems yield different costs of goods sold. True; Easy 113. In a periodic averaging system, a new average is computed every time a purchase is made. False; Easy 114. In a perpetual averaging system, a new average is computed every time a purchase is made. True; Moderate Multiple Choice Questions 115. Which of the following differ between periodic and perpetual LIFO system? a. Cost of goods sold b. Total purchases c. Total revenues d. Units in ending inventory e. Selling price a; Easy 116. Which of the following cost flow assumptions determines a single average for the entire period and applies that to both ending inventory and the cost of goods sold? a. LIFO b. Moving averaging c. Weighted averaging d. FIFO e. Specific identification c; Easy

Hoyle, Financial Accounting 2.0

117. Gorton Company began the month of March with 70 units in inventory, each with a cost of $3.00. It sold 50 units on March 6 for $6.50 each and purchased 60 units on March 21 for $3.10 each. On March 27, the company sold 70 units for $6.60 each, and purchased 20 units for $3.15 on March 30. Assuming Gorton uses a periodic LIFO system; determine the cost of goods sold reported for the month. a. $369 b. $365 c. $780 d. $787 e. $350 a; Moderate 118. Gorton Company began the month of March with 70 units in inventory, each with a cost of $3.00. It sold 50 units on March 6 for $6.50 each and purchased 60 units on March 21 for $3.10 each. On March 27, the company sold 70 units for $6.60 each, and purchased 20 units for $3.15 on March 30. Assuming Gorton uses a perpetual LIFO system; determine the cost of goods sold reported for the month. a. $369 b. $366 c. $780 d. $365 e. $350 b; Moderate 119. Gorton Company began the month of March with 70 units in inventory, each with a cost of $3.00. It sold 50 units on March 6 for $6.50 each and purchased 60 units on March 21 for $3.10 each. On March 27, the company sold 70 units for $6.60 each, and purchased 20 units for $3.15 on March 30. Assuming Gorton uses a periodic averaging system; determine the cost of goods sold reported for the month. a. $369.00 b. $365.40 c. $334.50 d. $787.00 e. $367.20 e; Moderate

Hoyle, Financial Accounting 2.0

120. Gorton Company began the month of March with 70 units in inventory, each with a cost of $3.00. It sold 50 units on March 6 for $6.50 each and purchased 60 units on March 21 for $3.10 each. On March 27, the company sold 70 units for $6.60 each, and purchased 20 units for $3.15 on March 30. Assuming Gorton uses a perpetual averaging system; determine the cost of goods sold reported for the month. a. $369.00 b. $365.25 c. $334.50 d. $787.00 e. $367.20 b; Moderate 121. Mark Company began the month of October with 700 units in inventory, each costing $32. On October 5, it purchased 450 units for $35 each. On October 11, the company sold 900 units for $48 each. Additional 300 units were purchased on October 17 for $38 each. At the end of the month, the company sold 250 units for $50 each. Mark uses a periodic LIFO system, but mistakenly applied a periodic FIFO system. Which of the following statements is true? a. Ending inventory is understated by $5,400. b. Cost of goods sold is understated by $4,800. c. Sales are overstated by $12,500. d. Gross profit is understated by $4,800. e. Cost of goods sold is overstated by $5,400. b; Moderate 122. Marble Corporation had the following transaction during the month of July: 7/1 Beginning Inventory 7/5 Sold 7/12 Purchased 7/20 Sold 7/25 Purchased

200 units @ $7 each 150 units @ $11 each 90 units @ $8 each 130 units @ $12.50 each 70 units @ $8.30 each

Marble Corporation uses a perpetual LIFO system. What is the cost of goods sold for the month of July? a. $2,061 b. $2,050 c. $1,023 d. $2,141 e. $2,037 b; Moderate

Hoyle, Financial Accounting 2.0

123. Marble Corporation had the following transaction during the month of July: 7/1 Beginning Inventory 7/5 Sold 7/12 Purchased 7/20 Sold 7/25 Purchased

200 units @ $7 each 150 units @ $11 each 90 units @ $8 each 130 units @ $12.50 each 70 units @ $8.30 each

Marble Corporation uses a perpetual LIFO system. What is the ending inventory for the month of July? a. $630 b. $560 c. $664 d. $640 e. $651 e; Moderate 124. Marble Corporation had the following transaction during the month of July: 7/1 Beginning Inventory 7/5 Sold 7/12 Purchased 7/20 Sold 7/25 Purchased

200 units @ $7 each 150 units @ $11 each 90 units @ $8 each 130 units @ $12.50 each 70 units @ $8.30 each

Marble Corporation uses a perpetual averaging system. What is the cost of goods sold for the month of July? a. $1,007.68 b. $1,023.00 c. $2,043.57 d. $2,050.00 e. $1,015.33 c; Moderate Fill in the blanks 125. A _____ computes a new average cost each time an additional merchandise is acquired. moving average system; Easy 126. Ending inventory balance reported by periodic and perpetual LIFO are _____. different; Easy

Hoyle, Financial Accounting 2.0

Problems 127. The following events pertains to Deccan Company that occurred during the month of August: 8/1 Beginning Inventory 8/2 Purchased 8/7 Purchased 8/14 Sold 8/19 Purchased 8/28 Sold

50 units @ $8.10 each 80 units @ $8.20 each 40 units @ $8.50 each 130 units @ $15.00 each 50 units @$9.00 each 40 units @ $15.00 each

Deccan Company uses a periodic LIFO system. Determine the cost of goods sold and ending inventory for the month of August. Cost of goods sold = $1,446 Ending inventory = $405 Easy 128. The following events pertains to Deccan Company that occurred during the month of August: 8/1 Beginning Inventory 8/2 Purchased 8/7 Purchased 8/14 Sold 8/19 Purchased 8/28 Sold

50 units @ $8.10 each 80 units @ $8.20 each 40 units @ $8.50 each 130 units @ $15.00 each 50 units @$9.00 each 40 units @ $15.00 each

Deccan Company uses a perpetual LIFO system. Determine the cost of goods sold and ending inventory for the month of August. Cost of goods sold = $1,437 Ending inventory = $414 Moderate

Hoyle, Financial Accounting 2.0

129. The following events pertains to Deccan Company that occurred during the month of August: 8/1 Beginning Inventory 8/2 Purchased 8/7 Purchased 8/14 Sold 8/19 Purchased 8/28 Sold

50 units @ $8.10 each 80 units @ $8.20 each 40 units @ $8.50 each 130 units @ $15.00 each 50 units @$9.00 each 40 units @ $15.00 each

Deccan Company uses a periodic averaging system. Determine the cost of goods sold and ending inventory for the month of August. Cost of goods sold = $1,430.32 Ending inventory = $420.68 Moderate 130. The following events pertains to Deccan Company that occurred during the month of August: 8/1 Beginning Inventory 8/2 Purchased 8/7 Purchased 8/14 Sold 8/19 Purchased 8/28 Sold

50 units @ $8.10 each 80 units @ $8.20 each 40 units @ $8.50 each 130 units @ $15.00 each 50 units @$9.00 each 40 units @ $15.00each

Deccan Company uses a perpetual averaging system. Determine the cost of goods sold and ending inventory for the month of August. Cost of goods sold = $1,417.86 Ending inventory = $433.14 Moderate Section 6 True/False Questions 131. An increase in net sales will decrease gross profit margin. False; Moderate 132. Gross profit percentage is computed by dividing the gross profit for the period by net sales. True; Easy

Hoyle, Financial Accounting 2.0 133. Gross profit is the difference between the amount paid to buy inventory and the amount received from an eventual sale. True; Easy 134. Shayene Company finished the year with sales of $4,000 and cost of goods sold of $2,500. Shayene’s gross profit percentage for the year is 62.5%. False; Moderate 135. Rayson Corporation’s inventory had a beginning balance of $2,500 and an ending balance of $5,500. Cost of goods sold for the year was $146,000. On an average Rayson holds the inventory for 20 days. False; Moderate 136. Inventory turnover measures a company’s ability to purchase inventory in a timely manner. False; Moderate 137. Elijay Company’s inventory turnover is 10 times. Whereas, Coach Company’s inventory turnover is 13 times. Coach sells its inventory faster than Elijay. True; Easy 138. Rayson Corporation’s inventory had a beginning balance of $2,500 and an ending balance of $5,500. Cost of goods sold for the year was $146,000. Rayson’s inventory turnover is 36.5 times. True; Easy Multiple Choice Questions 139. Foster James Company uses the LIFO cost flow assumption. According to its notes to the financial statements, its ending inventory for the past two years is as follows, both using LIFO and if it had used FIFO:

End of 2012 End of 2013

LIFO inventory $1,800 $1,756

FIFO inventory $2,050 $1,940

If Foster’s cost of goods sold using LIFO was $28,900 in the year 2013, what would be Foster’s cost of goods sold under FIFO? a. $28,746 b. $28,966 c. $29,054 d. $28,834 e. $28,790 b; Easy

Hoyle, Financial Accounting 2.0

140. Inventory turnover is computed by dividing: a. cost of goods sold per day by average inventory. b. cost of goods sold by average inventory. c. net sales by average inventory. d. average inventory by net sales. e. average inventory by gross profit. b; Easy 141. Kane Company had cost of goods sold of $3,650,000 and an average inventory of $100,000 for the year 2013. Compute the average number of days inventory is held. a. 36.5 days b. 20 days c. 10 days d. 365 days e. 100 days c; Easy 142. Kane Company had cost of goods sold of $3,650,000 and an average inventory of $100,000 for the year 2013. What is Kane’s inventory turnover? a. 36.5 times b. 10 times c. 365 times d. 3.65 times e. 100 times a; Easy 143. During the year, Eloise Corporation sold 50,000 units, costing $3,000,000 for $5,900,000. Determine the gross profit percentage for the year. a. 49.2% b. 50% c. 50.8% d. 60% e. 40% a; Easy 144. Kelly and Company began the year with $3,000 in inventory. During the year, it purchased inventory worth $20,000, and made sales of $35,000. The company’s year-end inventory balance was $4,000. Compute Kelly’s gross profit for the year. a. $20,000 b. $15,000 c. $14,000 d. $35,000 e. $16,000 e; Moderate

Hoyle, Financial Accounting 2.0 145. Perry Corporation began the year with $1,755 in inventory. During the year, it purchased inventory worth $9,000. At the end of the year, the inventory balance was $900. Determine the average number of days inventory was held during the year. a. 53.83 days b. 66.88 days c. 52.00 days d. 49.17 days e. 65.00 days d; Moderate 146. Perry Corporation began the year with $1,755 in inventory. During the year, it purchased inventory worth $9,000. At the end of the year, the inventory balance was $900. Calculate inventory turnover for the year. a. 5.62 times b. 7.42 times c. 6.78 times d. 5.13 times e. 10.95 times b; Moderate 147. Berry Company made sales of $750,000 during the year. Cost of goods sold amounted to $625,000. The company’s inventory had a beginning balance of $31,000 and an ending balance of $23,000. What is the inventory turnover for the year? a. 23.15 times b. 20.16 times c. 27.17 times d. 32.61 times e. 24.19 times a; Moderate Fill in the blanks 148. _____ measures the speed by which a company sells inventory. Inventory turnover; Easy 149. _____ reflects the average markup on each sale. Gross profit percentage; Easy

Hoyle, Financial Accounting 2.0

Problems 150. In the year 2013, Peterson Company sold goods costing $365,000 for $660,000. The company’s inventory had a beginning balance of $12,000 and an ending balance of $14,000. Calculate Peterson’s gross profit percentage and inventory turnover for the year. Gross profit percentage; 44.7% Inventory turnover; 28.08 times Moderate 151. In the year 2013, Peterson Company sold goods costing $365,000 for $660,000. The company’s inventory had a beginning balance of $12,000 and an ending balance of $14,000. Determine the average number of days inventory was held during the year. 13 days Easy

Hoyle, Financial Accounting 2.0

Chapter 10 In a Set of Financial Statements, What Information Is Conveyed about Property and Equipment? Section 1 True/False Questions 1. Most of the time, property and equipment are initially reported at historical cost. True; Easy 2. The conservative nature of accounting states that the historical cost of an asset must be expensed over its estimated life. False; Easy 3. Accounting for property and equipment is identical to that of prepaid expenses. False; Moderate 4. The equipment account balance reduces with the passage of time. False; Easy 5. Accumulated depreciation account measures the cost of an asset expensed to date. True; Easy 6. An asset’s book value is its original cost less its accumulated depreciation to date. True; Easy 7. Fixed assets is another name for property and equipment. True; Easy 8. U.S. GAAP and IFRS agrees that property and equipment should not be reported at its fair value. False; Easy 9. Reporting assets at fair value supports the going concern assumption. False; Moderate

Hoyle, Financial Accounting 2.0

Multiple Choice Questions 10. Which of the following accounts shows the cost of an asset expensed to date? a. Equipment b. Allowance for doubtful accounts c. Depreciation expense d. Accumulated depreciation e. Land d; Easy 11. Which of the following is another name for property and equipment? a. Fixed assets b. Current assets c. Land assets d. Movable assets e. Intangible assets a; Easy 12. Which of the following accounting principles dictates that an asset’s cost should be expensed over its useful life? a. Matching b. Conservatism c. Consistency d. Going concern e. Revenue recognition a; Easy 13. Which of the following accounting principles supports the use of historical cost for reporting fixed assets? a. Matching b. Conservatism c. Consistency d. Going concern e. Revenue recognition d; Easy 14. What type of an account is accumulated depreciation? a. Equity b. Contra asset c. Liability d. Expense e. Loss b; Easy

Hoyle, Financial Accounting 2.0

15. Which of the following is used to gauge the fair value of a business as a whole? a. Fair value capitalization b. Market capitalization c. Market rationalization d. Fair value rationalization e. Market depreciation b; Easy 16. King Corporation purchased machinery on January1, 2012. The annual depreciation expense of machinery was $5,000. The book value of machinery at the end of 2013 was $85,000. What is the original cost of machinery? a. $85,000 b. $90,000 c. $95,000 d. $100,000 e. $105,000 c; Moderate 17. Seventh Heaven, a multi-cuisine restaurant, started its operations in 2012. Its fixed assets had a book value of $1,200,000 in 2013. The hotel did not purchase any fixed assets in 2013. The annual depreciation expense on fixed assets was $100,000 and the accumulated depreciation account had a balance of $200,000 on December 31, 2013. What is the original cost of fixed assets owned by the restaurant in 2012 when it started its operations? a. $1,200,000 b. $1,000,000 c. $1,400,000 d. $1,100,000 e. $1,300,000 c; Moderate 18. Property and equipment is reported at its: a. fair value. b. historical cost. c. book value. d. depreciation cost. e. market value. b; Easy

Hoyle, Financial Accounting 2.0

19. Which of the following accounts will be shown on the balance sheet with accumulated depreciation account? a. Prepaid rent b. Building c. Land d. Cash e. Goodwill b; Easy 20. If the value of an asset is impaired, the asset is shown at its: a. fair value. b. book value. c. cash flow value. d. historical cost. e. depreciable value. a; Easy Fill in the blanks 21. The account used to show the cost of an asset that has been expensed is _____. accumulated depreciation; Easy 22. Accumulated depreciation is a(n) _____ account. contra asset; Easy 23. The _____principle states that the cost of an asset should be expensed over its expected useful life. matching; Easy 24. Land does not have a finite life and therefore is always reported at _____ cost. historical; Easy Short Answer Questions 25. Provide two reasons for reporting property and equipment at its historical cost. 1) The fair value of property and equipment is a reporting alternative preferred by some decision makers, but only if the amount is objective and reliable. Historical cost is both an objective and a reliable measure, determined through a transaction between a willing buyer and a willing seller. In contrast, any gathering of “experts” could assess the value of a large building or an acre of land at widely differing figures with equal certitude. 2) The use of fair value does not support the going concern assumption. Officials expect operations to continue for the years required to fulfill the goals that serve as the basis for their decisions. They do not plan to sell property and equipment

Hoyle, Financial Accounting 2.0 prematurely but rather to utilize these assets for their entire lives. Consequently, financial statements are constructed assuming that the organization will function until all of its assets are consumed. Unless impaired or a sale is anticipated in the near future, the fair value of property and equipment is not truly of significance to the operations of a business. Hard Section 2 True/False Questions 26. An asset must have tangible physical substance and be expected to help generate revenues for longer than a single year to be classified as property and equipment. True; Easy 27. A building used as a warehouse would be classified as property and equipment. True; Easy 28. Land held for speculative purposes would be classified as property and equipment. False; Easy 29. All normal and necessary costs to get a fixed asset into condition to begin generating revenues should be capitalized. True; Easy 30. Legal fees to acquire title to a land should be capitalized to the land account. True; Easy 31. When a piece of equipment is purchased, the related transportation charges should be expensed. False; Easy 32. Depreciation expense is recorded each period to satisfy the matching principle. True; Easy 33. An asset’s residual value is the amount it could be sold for at the time the financial statements are prepared. False; Easy 34. An asset’s depreciable base is its historical cost less its fair value. False; Easy 35. Straight-line depreciation is calculated as an asset’s depreciable base divided by its estimated useful life. True; Easy

Hoyle, Financial Accounting 2.0 36. A company purchases a machine for $90,000 with a salvage value of $10,000. The accountant should debit the machine account for $80,000 to record the purchase. False; Easy 37. When a company records depreciation on a building, depreciation expense should be debited and the building account should be credited. False; Easy 38. Alfalfa Corporation acquired a piece of equipment for $30,000. It has no salvage value and an estimated life of 10 years. Assuming company is using straight-line depreciation, depreciation expense is $3,000 per year. True; Easy Multiple Choice Questions 39. Which of the following is considered in computing depreciation expense using the straight-line method? a. Asset’s historical cost b. Cost of inventory produced by equipment c. Asset’s fair value d. Balance in accumulated depreciation e. Net income of the company a; Easy 40. Which of the following would be capitalized to equipment account? a. Discount received on the purchase of the equipment b. Cost of training employees on the proper use of equipment c. Depreciation cost d. Inventory produced by the equipment e. Interest paid on loan borrowed to purchase the equipment b; Moderate 41. Which of the following would be considered property and equipment? a. Land held for speculative purposes b. Machine held as inventory c. Land held as future plant site d. Building purchased by a realtor for resale e. Building purchased to be a warehouse facility e; Easy

Hoyle, Financial Accounting 2.0

42. Laster Company purchases land as an investment and increases its property and equipment account. Which of the following is true? a. Total Assets are overstated b. Property and equipment is overstated c. Total Assets are understated d. Investments are overstated e. Property and equipment are understated b; Easy 43. Uganda Corporation estimates the life of its building to be 30 years. It originally cost $300,000 and was given a residual value of $30,000. Depreciation expense per year should be: a. $10,000. b. $90,000. c. $9,000. d. $100,000. e. $300,000. c; Easy 44. Western Corporation purchased a machine for $20,000 with no residual value and a life of 4 years. What is the book value of the machine at the end of Year 4? a. $20,000 b. $16,000 c. $5,000 d. $4,000 e. $0 e; Easy 45. Clark Company acquired a desk for $500. The estimated salvage value is $50 and the estimated life is 5 years. What journal entry should Clark make to record depreciation expense? a. Depreciation Expense 90 Accumulated Depreciation 90 b. Depreciation Expense 90 Desk 90 c. Depreciation Expense 100 Desk 100 d. Accumulated Depreciation 90 Depreciation Expense 90 e. Depreciation Expense 100 Accumulated Depreciation 100 a; Moderate

Hoyle, Financial Accounting 2.0 46. Jacobs Company estimates that its new equipment will last 6 years and have a residual value of $3,000. The original cost of the equipment was $39,000. What would be the balance in the accumulated depreciation account at the end of year 4? a. $0 b. $6,000 c. $24,000 d. $26,000 e. $39,000 c; Moderate 47. Depreciation expense is usually recorded by passing a(n): a. opening entry. b. closing entry. c. reversing entry. d. adjusting entry. e. correcting entry. d; Easy 48. The difference between the cost of an asset and its salvage value is its: a. historical cost. b. depreciation expense. c. fair value. d. depreciable base. e. book value. d; Easy 49. Karbon Corporation determined depreciation expense of its building for 2014 to be $450,000. The company omitted to pass an adjusting entry to record depreciation expense. Which of the following is true? a. Building account is understated. b. Accumulated depreciation account is overstated. c. Gross income is understated. d. Net income is overstated. e. Total assets are understated. d; Moderate 50. Which of the following is capitalized to land account? a. Cost of building a warehouse on the land obtained b. Interest on loan borrowed to construct a work place c. Cost incurred to obtain legal title of the land d. Fees paid to architects on constructing a building on the land e. Depreciation expense of the land c; Easy

Hoyle, Financial Accounting 2.0

51. During 2016, Angel Company purchased a piece of land for $900,000 that is qualified as property and equipment. It spent $5,000 in legal fees associated with the land and another $50,000 grading and readying the land for its purpose. Determine the value in the land account at the end of 2016. a. $905,000 b. $950,000 c. $855,000 d. $945,000 e. $955,000 e; Easy 52. Which of the following is true of property and equipment category? a. They should have tangible physical substance to be classified under this category. b. They will generate revenue for a single year. c. They will not be used within normal operating activities of a business. d. They include assets held for resale. e. They include land acquired to construct a future plant. a; Easy 53. Which of the following methods of depreciation allocates an equal expense to each period in which the asset is used to generate revenue? a. The double-declining balance method b. The straight-line method c. The units-of-production method d. The sum-of-years’ digits method e. The activity depreciation method b; Easy Fill in the blanks 54. Costs which are _____ and _____ to get a fixed asset ready to generate revenue are capitalized to that asset account. normal, necessary; Easy 55. An asset’s _____ is the amount it will be worth at the end of its useful life. salvage or residual value; Easy 56. _____ depreciation allocates an equal expense to each period in which the asset is used to generate revenue. Straight-line; Easy

Hoyle, Financial Accounting 2.0

Problems 57. Farrow Company purchases a building with a cost of $200,000 and an estimated salvage value of $20,000. It is expected to last for 10 years. Straight-line depreciation is being applied. Determine the annual depreciation expense of the building. $18,000 Easy 58. Hasta Corporation acquires a piece of equipment for $10,000. It has a residual value of $400 and an estimated life of 2 years. Record all necessary journal entries to record and depreciate this asset over its life. Equipment Cash

10,000 10,000

Depreciation Expense 4,800 Accumulated Depreciation 4,800 Depreciation Expense 4,800 Accumulated Depreciation 4,800 Easy 59. Clemmons Company purchases a machine for $5,000 with a residual value of $800 and a useful life of 4 years. What is the book value of the machine at the end of year 2? Cost $5,000 Accumulated Depreciation (2,100) Book value $2,900 Moderate Section 3 True/False 60. When an asset is sold, depreciation must be recorded for the period since the last preparation of financial statements. True; Easy 61. The cost of an asset as well as its accumulated depreciation is removed when an asset is sold. True; Easy

Hoyle, Financial Accounting 2.0

62. If a company receives more than the net book value for an asset when it is sold, the company should debit gain on sale of asset. False; Easy 63. A loss on sale of equipment for $2,000 is debited when a company sells equipment with a net book value of $45,000 for $43,000. True; Easy 64. Companies normally record a full year’s depreciation for an asset even if it was purchased or sold during the year. False; Easy 65. A company buys equipment on January 1, Year One, for $100,000 that should last for 10 years and then be worthless. On January 1, Year Four, the company sold the equipment for $82,000 and, as a result, recorded a sales revenue of $12,000. Due to this the company’s net income is overstated by $12,000. False; Easy 66. Rounding depreciation expense to the nearest month when an asset is bought or sold is a violation of U.S. GAAP. False; Easy 67. The half-year convention holds that an asset purchased in the first half of the year receives a full year’s depreciation, but an asset purchased in the last half of the year receives none. False; Moderate 68. A company buys equipment on January 1, Year One, for $300,000 that should help generate revenues for 10 years and then be worthless. On December 31, Year Three, the company sold the equipment for $220,000 and correctly recorded all entries. On its Year Three financial statements, the company will report Depreciation Expense on its income statement but not Accumulated Depreciation on its balance sheet. True; Moderate Multiple Choice Questions 69. Which of the following asserts that a company can recognize 6 months of depreciation on all assets bought or sold during the year? a. Straight-line depreciation b. Partial-year convention c. Property and equipment rule d. Depreciation convention e. Half-year convention e; Easy

Hoyle, Financial Accounting 2.0 70. Phyllis Company purchases an asset on December 14, 2014 for $3,000. The estimated life is 5 years with no salvage value. Under the half-year convention, what depreciation expense should be recorded in 2014? a. $3,000 b. $600 c. $50 d. $300 e. $1,000 d; Moderate 71. Phyllis Company purchases an asset on December 14, 2014 for $3,000. The estimated life is 5 years with no salvage value. The company does not apply the half-year convention, but rounds depreciation to the nearest month when assets are bought and sold during the year. What depreciation expense should be recorded in 2014? a. $3,000 b. $600 c. $50 d. $500 e. $1,000 c; Moderate 72. Florence Corporation sells a piece of equipment on April 1, 2016 for $21,000. It was originally purchased on July 1, 2014 for $46,000. On that date it was assigned a residual value of $4,000 and a life of 3 years. The company rounds depreciation to the nearest month when assets are bought and sold during the year. What gain or loss should be recorded on the sale? a. $500 loss b. $3,000 gain c. $10,500 gain d. $500 gain e. $3,000 loss a; Moderate 73. On January 1, 2012, an asset is obtained for $60,000 cash that allows the use of a piece of equipment for four years and then it will be worthless. However, the accountant was misinformed and thought the equipment had only been rented. The accountant accounted for depreciation expense as rent expense. How did the accountant’s mistake impact the company’s financial reporting? a. At the end of 2013, the company’s net income will be overstated. b. At the end of 2014, the company’s net income will be understated. c. At the end of 2013, the company’s retained earnings will be overstated. d. At the end of 2014, the company’s retained earnings understated. e. At the end of 2013, the company’s retained earnings will be correctly stated. e; Hard

Hoyle, Financial Accounting 2.0 74. Tetra Inc. buys equipment on January 1, 2012 for $200,000 with estimated life of 10 years and no salvage. On January 1, 2014, the company sold the equipment for $210,000 and debited cash for that amount, credited equipment for $200,000, and recorded a gain of $10,000. No other entry was made. Which of the following statement is true of Tetra? a. The equipment account is understated by $30,000. b. The accumulated depreciation account is overstated by $50,000. c. The net income of the company is understated by $40,000. d. The assets of the company are overstated by $210,000. e. The net income of the company is understated by $50,000. c; Moderate 75. Dew Watch Corporation sold an asset having a net book value of $89,000 for $45,000. The original cost of the asset was $100,000. Which of the following is true of Dew Watch Corporation? a. Net income of the company increased by $44,000. b. Net income of the company decreased by $44,000. c. Net income of the company decreased by $55,000. d. Net income of the company increased by $11,000. e. Net income of the company decreased by $11,000. b; Moderate 76. Atlas Company sold a machine with a net book value of $8,000 for $12,000. Atlas’ accountant debited gain on sale of machine for $4,000. Which of the following is true of Atlas Company? a. The net income is understated. b. The loss on sale of machine is understated. c. The net income is correctly stated. d. The net income is overstated. e. The gain on sale of machine is overstated. a; Easy 77. Utra Inc. purchased a building on January 1, 2012. The original cost of building is $250,000 and it had an estimated life of 25 years with no salvage value. On January 1, 2015, the company sold the building for $250,000, and credits sales revenue account for $30,000. Other accounts are correctly entered. Identify the correct statement from the following. a. Net income is correctly stated b. The company's revenue is understated c. The retained earnings are understated d. The accumulated depreciation account is overstated e. Net income is understated a; Moderate

Hoyle, Financial Accounting 2.0

Fill in the blanks 78. The _____ assumes that all assets purchased and sold during a year receive 6 months depreciation. half-year convention; Easy Problems 79. Alex Company purchases a car on January 1, 2014, for $29,000. It has a residual value of $1,000 and estimated life of 7 years. On December 31, 2016, Alex sells the car for $20,000. Assuming Alex uses straight-line depreciation, record the entry for this sale. Cash 20,000 Accumulated Depreciation—Car 12,000 Car 29,000 Gain on Sale of Car 3,000 Moderate 80. Alex Company purchases a car on April 1, 2014, for $29,000. It has a residual value of $1,000 and estimated life of 7 years. On July 1, 2016, Alex sells the car for $20,000. Assuming Alex rounds depreciation expense to the nearest month, record the entry for this sale. Cash 20,000 Accumulated Depreciation—Car 9,000 Car 29,000 Moderate 81. Alex Company purchases a car on April 1, 2014, for $29,000. It has a residual value of $1,000 and estimated life of 7 years. On July 1, 2016, Alex sells the car for $20,000. Alex applies the half-year convention. Record the entry for this sale. Cash 20,000 Accumulated Depreciation—Car 8,000 Loss on sale of car 1,000 Car 29,000 Moderate Section 4 True/False Questions 82. Straight-line method is the only depreciation method allowed by U.S. GAAP. False; Easy

Hoyle, Financial Accounting 2.0 83. Double-declining balance method is an example of an accelerated depreciation method. True; Easy 84. Accelerated depreciation records a larger expense in an asset’s later years. False; Easy 85. Accelerated depreciation violates the matching principle. False; Easy 86. The most common accelerated depreciation method is double-declining balance method. True; Easy 87. The double-declining balance method leads to higher depreciation in the early years of an asset’s life. True; Easy 88. A company buys equipment with a ten-year life. After two years, the equipment is sold. If the company uses double-declining balance depreciation method, it is more likely to report a higher amount of gain on the sale than if it uses straight-line depreciation method. True; Moderate 89. The units-of-production method violates the matching principle. False; Easy 90. It is unlikely that a company will guess exactly the number of units a machine can produce when it is using the units-of-production method. True; Easy 91. Shelby Company purchased a piece of equipment that was expected to produce 800,000 units. Once production reaches 800,000 units, depreciation of the equipment should stop. True; Moderate 92. Mines are an example of a wasting asset. True; Easy 93. Wasting assets are reduced through depletion. True; Easy 94. The journal entry to record depletion is a debit to Depletion Expense and a credit to Accumulated Depletion. False; Easy 95. When reporting for wasting assets, no depletion expense is recorded until the wasting asset is sold. True; Easy

Hoyle, Financial Accounting 2.0

Multiple Choice Questions 96. Which of the following is an example of an accelerated depreciation method? a. The straight-line method b. The units-of-production method c. The half-year convention method d. The double-declining balance method e. The fixed assets turnover method d; Easy 97. Which of the following is an example of a wasting asset? a. Land b. Copyrights c. Goodwill d. Timber e. Fixtures d; Easy 98. Which of the following is true concerning the double-declining balance method? a. It recognizes high depreciation in later years of an asset’s life. b. It is the most commonly used accelerated method. c. Salvage value is considered in the initial calculation of depreciation. d. Depreciation expense does not fluctuate from year to year. e. The estimated life of the asset under double-declining balance and differs from the straight-line method. b; Moderate 99. Mannow Company uses the units-of-production depreciation method. Mannow purchased a machine for $80,000 with no salvage value. Mannow believes the machine will produce 400,000 units. In the first year, 90,000 units are produced. In the second year, 70,000 units are produced. What is the balance in accumulated depreciation at the end of year two? a. $32,000 b. $14,000 c. $16,000 d. $18,000 e. $10,000 a; Easy

Hoyle, Financial Accounting 2.0

100. Opine Company uses the double-declining-balance method of depreciation. It purchases a building with a cost of $560,000, a salvage value of $32,000 and a useful life of 16 years. What is the depreciation expense for the second year? a. $70,000 b. $61,250 c. $66,000 d. $57,750 e. $60,000 b; Moderate 101. Braden Corporation uses the units-of-production method of depreciation. It purchased an automobile costing $63,000 with a salvage value of $3,000. The car is expected to last for 300,000 miles. In the first year, the automobile is driven 70,000 miles. In the second year, the automobile is driven 75,000 miles. Which of the following is true? a. Depreciation expense in the first year is $14,700. b. The depreciation rate is $.21 per mile. c. Accumulated depreciation at the end of the second year is $29,000. d. Depreciation expense in the second year is $16,000. e. The estimated life of the automobile is 8 years. c; Moderate 102. Lamber Company has a piece of equipment which costs $10,000 and has a residual value of $400. The estimated life of the equipment is 6 years. Which of the following is true? a. Annual depreciation expense under straight-line method is $3,333. b. Annual depreciation expense under double-declining balance method is $3,200. c. Accumulated depreciation under double-declining balance method will be $10,000 at the end of Year 6. d. Accumulated depreciation under double-declining balance method will be $5,500 at the end of Year 2. e. Accumulated depreciation under straight-line method will be $1,600 at the end of Year 1. e; Moderate

Hoyle, Financial Accounting 2.0

103. Timeton Inc. and Roseton Inc. purchases identical assets for $850,000 each. The assets of both the companies are estimated to have same life. However, Timeton estimates the residual value to be $6,000 and Roseton estimates the residual value to be $10,000. Both the companies use double-declining balance method of depreciation. Which of the following is true of these companies? a. The book value of the asset of Timeton Inc. will be greater than Roseton Inc. at the end of first year b. Net income of the first year of Timeton Inc. will be lesser than that of Roseton Inc. c. The depreciation expense of Timeton Inc. will be lesser than that of Roseton Inc. d. Timeton and Roseton assets will have same book value at the end of first year e. Roseton will have higher taxable income than Timeton. d; Hard 104. Depreciation expense of an asset using unit-of-production method is based on: a. the asset’s expected useful life. b. the company's turnover. c. the asset’s residual value. d. the company's current assets. e. the asset’s expected production. e; Easy 105. Kraton Corporation purchases a machine that is expected to produce 400,000 units over its life. The machine cost $72,000 and the cost to transport it to Kraton’s shop was $2,500. The depreciation rate Kraton uses is: a. $5.56 per unit. b. $0.19 per unit. c. $0.16 per unit. d. $0.17 per unit. e. $5.37 per unit. b; Easy 106. Quinton Company owns a mine. During the year 2012, 40,000 tons of ore was removed, leading to depletion of $380,000. Quinton’s accountant debited depletion expense for $380,000 and credited accumulated depletion. No ore was sold. Which of the following statements is true? a. Quinton's assets are understated. b. Quinton's assets are overstated. c. Quinton's net income is overstated. d. Quinton's assets are correctly stated. e. Quinton's net income is correctly stated. a; Moderate

Hoyle, Financial Accounting 2.0

107. On January 1, 2017, Atlantic Company purchased a new warehouse for $840,000 with a salvage value of $40,000 and an estimated useful life of 40 years. Atlantic has chosen to use the double-declining balance method of depreciation. The journal entry to record the depreciation expense of 2018 would include: a. a debit to Depreciation Expense for $42,000. b. a debit to Depreciation Expense for $39,900. c. a credit to Accumulated Depreciation for $42,000. d. a debit to Accumulated Depreciation for $39,900. e. a credit to Accumulated Depreciation for $21,900. b; Moderate 108. Which of the following is true of the Modified Accelerated Cost Recovery System (MACRS)? a. It is useful for companies to show lower taxable income. b. Each depreciable asset must be placed into one of 2 classes based upon its life. c. Residual value is very important in MACRS. d. This system discourages acquisition of depreciable assets. e. Greater depreciation expense is allowed especially in the earlier years of use. e; Moderate 109. Under the double-declining balance method, the net book value of an asset drops when: a. the historical cost of the asset drops. b. the fair value of the asset decreases. c. the depreciation expense remains constant. d. the depreciation expense increases. e. the depreciation expense decreases. d; Moderate 110. Which of the following depreciation methods calculates depreciation expense using estimated production rather than its expected useful years? a. Double-declining method b. Straight-line method c. Units-of-production method d. Sum-of-years’ digits method e. Group depreciation method c; Easy

Hoyle, Financial Accounting 2.0

111. A method of allocating the cost of a wasting asset (such as a gold mine or an oil well) to expense over the periods during which the value is removed from the property is termed as: a. depreciation. b. amortization. c. depletion. d. wastage. e. impairment. c; Easy Fill in the blanks 112. _____ recognizes more depreciation in the early years of an asset life. Accelerated depreciation or double-declining balance method; Easy 113. Double-declining balance calculates depreciation by multiplying the ___________ of the asset by two and dividing by the expected useful life. net book value; Easy 114. Double declining balance does not take into account an asset’s ____________ at the beginning of depreciation calculation, but straight line and units-of-production do. salvage or residual value; Easy Problems 115. On April 1, 2017, Atlantic Company purchased a new warehouse for $840,000 with a salvage value of $40,000 and an estimated useful life of 40 years. Atlantic has chosen to use the double-declining balance method of depreciation. Record the journal entries Atlantic would make at the end of 2017 and 2018, assuming that Atlantic does not use the half-year convention. 12/31/17

12/31/18

Depreciation expense Accumulated depreciation

31,500

Depreciation expense Accumulated depreciation

40,425

Moderate

31,500

40,425

Hoyle, Financial Accounting 2.0

116. On April 1, 2017, Atlantic Company purchased a new warehouse for $840,000 with a salvage value of $40,000 and an estimated useful life of 40 years. Atlantic has chosen to use the double-declining balance method of depreciation. Record the journal entries Atlantic would make at the end of 2017 and 2018, assuming that Atlantic uses the halfyear convention. 12/31/17

12/31/18

Depreciation expense Accumulated depreciation

21,000

Depreciation expense Accumulated depreciation

40,950

21,000

40,950

Moderate 117. On January 1, 2015, Umer Corporation purchased a new car for $25,000 with a salvage value of $1,000. The car is expected to last through 200,000 miles. In Year 1, the car was driven 30,000 miles and in Year 2, the car was driven 26,000 miles. Record the journal entries for depreciation that Umer would make on December 31, 2015 and December 31, 2016. 12/31/15

12/31/16

Depreciation expense Accumulated Depreciation—Car

3,600

Depreciation expense Accumulated Depreciation—Car

3,120

3,600

3,120

Moderate 118. On January 1, 2016, Harrison Mining Industries purchased a piece of land for mining. The land cost $500,000, including all costs to ready the land for the operation. Harrison expects 250,000 tons to be removed from the ground. During 2016, 40,000 tons of ore were mined. Three quarters of the 40,000 tons were sold in 2017 for $137,000. Make journal entries to record the purchase of the land, depletion and the sale of the ore. 1/1/16

12/31/16

Year 2017

Land with Mining Rights Cash

500,000

Inventory of Ore Accumulated Depletion

80,000

Cash

137,000

500,000

80,000

Sales of Ore Cost of Goods Sold Inventory of Ore

137,000 60,000

Moderate

60,000

Hoyle, Financial Accounting 2.0 Section 5 True/False Questions 119. Exchanges of assets are always recorded at the book value of the asset received. False; Easy 120. No gain or loss is recognized on an exchange of asset. False; Easy 121. Basket purchase value allocations can be biased. True; Easy 122. A company spends $40,000 on oil changes for its vehicles and debits the Vehicle account for $40,000. This will overstate assets. True; Easy 123. Kingston Company installed new engines in its trucks for a cost of $230,000, extending their lives by 2 years. Kingston’s accountant should credit accumulated depreciation by $230,000. False; Moderate 124. An expenditure, which increases the productivity of an asset, should be debited to that asset account. True; Easy Multiple Choice Questions 125. When an asset is acquired through an exchange of another asset, and the fair value and book value of both assets is known, the asset acquired should be recorded at the: a. fair value of asset surrendered. b. book value of asset surrendered. c. fair value of asset received plus cash paid, if any. d. book value of asset received. e. amount of cash paid only. a; Easy

Hoyle, Financial Accounting 2.0

126. On January 1, 2013, O’Neil Company buys equipment for $70,000 with a ten-year life and a $10,000 expected residual value. Depreciation is applied using the doubledeclining balance method. The half-year convention is not being used. On April 1, 2015, when this equipment is worth $44,000, it is traded for a truck that is worth $74,000. O’Neil pays $30,000 in cash to make up the difference. What gain or loss is recognized on this exchange? a. $1,440 gain b. $1,000 gain c. $1,000 loss d. $2,440 loss e. $1,440 loss a; Moderate 127. On January 1, 2013, Hilton Inc. buys equipment for $80,000 with a ten-year life and no expected residual value. Depreciation is applied using the units-of-production method. The equipment is expected to produce 4,000,000 units. Units produced during 2013 total 500,000. On December 31, 2013, when this equipment is worth $69,000, it is traded for a truck that is worth $78,000. Hilton also gives cash of $9,000. What gain or loss is recognized on this asset exchange? a. $3,000 loss b. $4,000 gain c. $1,000 loss d. $4,000 gain e. $9,000 loss c; Moderate 128. Wingate Corporation purchases a piece of equipment and a warehouse for a total price of $210,000. The fair value of the equipment is $50,000, while the fair value of the warehouse is $200,000. At what amount should the equipment be recorded on Wingate’s books? a. $210,000 b. $50,000 c. $52,500 d. $200,000 e. $42,000 e; Moderate

Hoyle, Financial Accounting 2.0

129. Which of the following should be recorded with a debit to accumulated depreciation? a. Tyson, Inc. spent $120 to routine change of spark plugs in its vehicle. b. Height Company increased the life of its machine by spending $2,000 in upgrades. c. Isthmus Corporation performed routine maintenance on its fleet of aircraft at a cost of $45,000. d. Todd Company increased the productivity of its equipment by installing new programs at a cost of $28,000. e. Rene Corporation increased the efficiency of its production process by spending $38,000 on a consultant. b; Easy 130. Fisher Enterprises increased the productivity of its machines with an expenditure of $300,000 on January 1, 2019. The machines were originally purchased on January 1, 2016 for $1,600,000 and had an expected salvage value of $100,000 and a useful life of 15 years. If Fisher uses the straight-line method, depreciation expense recorded on December 31, 2019 would be: a. $100,000. b. $125,000. c. $200,000. d. $150,000. e. $75,000. b; Moderate 131. In which of the following situations basket purchase occurs? a. When an asset is sold at less than fair value b. When two assets are exchanged to acquire an asset c. When an asset is sold for more than its fair value d. When an asset is impaired e. When two or more assets are acquired in a single transaction e; Easy 132. The cost assigned to each asset in a basket purchase is based on: a. the relative values of the assets. b. the historical cost of the assets. c. the usage of the assets. d. the useful life of the assets. e. the depreciation expense of the assets. a; Easy

Hoyle, Financial Accounting 2.0

133. Hercules Company purchased a land and a building for $350,000. The fair value of the land was $240,000 and the fair value of the building was $160,000. Determine the amount at which Hercules will record the land. a. $210,000 b. $140,000 c. $240000 d. $160,000 e. $350,000 a; Moderate 134. Hercules Company purchased land and a building for $350,000. The fair value of the land was $240,000 and the fair value of the building was $160,000. Determine the amount at which Hercules will record the building. a. $210,000 b. $140,000 c. $240000 d. $160,000 e. $350,000 b; Moderate 135. Fairfield Corporation purchased land and a store for $530,000 on December 31, 2015. The store had a fair value of $110,000 on that date, but the fair value of the land was not determinable. The journal entry to record the above transaction would include a: a. debit to cash for $110,000. b. credit to land for $110,000. c. credit to store for $420,000. d. debit to land for $110,000. e. debit to store for $110,000. e; Moderate Fill in the blanks 136. A _____ is defined as a transaction where more than one asset is acquired in a single transaction. basket purchase; Easy 137. An _____ occurs when one asset is traded for another and net book value of the old asset is removed from the records while the new asset is recorded at the fair value surrendered. asset exchange; Easy 138. Asset exchanged should be valued at the _____when known. fair value of the asset surrendered; Easy

Hoyle, Financial Accounting 2.0

139. An expenditure which increases the productivity of an asset should be _____. capitalized; Easy Problems 140. Von Helsing Company buys equipment on January 1, 2017 for $90,000 with an expected residual value of $10,000 and an eight-year expected life. The company uses straight-line method of depreciation. On December 31, 2019, this equipment along with $10,000 cash was traded for a big new truck with a fair value of $87,000. The old equipment had a fair value of $77,000 on that date. Record the appropriate journal entry for this exchange. Big new truck Accumulated depreciation Equipment Cash Gain on exchange Moderate

87,000 30,000 90,000 10,000 17,000

141. On January 1, Year One, a company buys equipment for $40,000 with a ten-year life and a $5,000 expected residual value. Depreciation is applied using the double-declining balance method. The half-year convention is not being used. On April 1, Year Three, this equipment is worth $30,000 and cash of $1,000 is traded for a truck that is worth $31,000. What gain or loss is recognized on this exchange? Gain of $5,680 Moderate 142. Fairfield Corporation purchased a piece of land and a store for $530,000 on December 31, 2015. The store had a fair value of $110,000 and the land had a fair value of $440,000 on that date. Record the appropriate journal entry for this transaction. Store Land

106,000 424,000 530,000

Cash Moderate Section 6 True/False Questions 143. The cost of land is not depreciated. True; Easy

Hoyle, Financial Accounting 2.0

144. Land improvements are not depreciated because land is not depreciated. False; Easy 145. Land improvements with finite lives should be depreciated. True; Easy 146. A decrease in the value of property and equipment, no matter how temporary, must be recorded as a loss. False; Easy 147. The fair value test is performed to ascertain if fixed assets have been impaired. False; Moderate 148. The recoverability test compares an asset’s net book value to the value of its expected future cash flows. True; Moderate 149. If a fixed asset has a market value greater than its book value, a gain should be recorded. False; Easy 150. Interest is expensed no matter whether the asset it relates to is being purchased or built. False; Easy 151. Interest on a constructed asset is capitalized to the asset account until revenues are generated and depreciated with the rest of the asset. True; Easy Multiple Choice Questions 152. Which of the following is an example of a land improvement? a. Fence b. Wages paid to watchman c. Store d. Lighting charges of building e. Construction charges of a building a; Easy

Hoyle, Financial Accounting 2.0

153. Ajax Company had fixed assets on January 1 of $87,000 and fixed assets on December 31 of $93,000. Sales revenue for the year totaled $720,000. Which of the following is Ajax’s fixed asset turnover? a. 8.3 times b. 7.7 times c. 9.0 times d. 8.0 times e. 8.5 times d; Easy 154. Walters Enterprises decides to construct a warehouse on January 1, 2019. It borrows $590,000 at an annual interest rate of 7%. Walters completes the warehouse and begins using it on October 1, 2019. Compute the amount of interest Walters can capitalize to the warehouse account in 2019. a. $0 b. $30,975 c. $41,300 d. $34,417 e. $40,000 b; Moderate 155. A company buys a retail store on January 1, 2012 with a ten-year life and a cost of $800,000 and no residual value. Straight-line depreciation is used. The company expects to generate positive cash flows of $93,000 per year. On January 1, 2015, a new road is built which takes traffic away from the store so—for the remainder of its life—it will only generate positive cash flows of $82,000 per year. An appraisal is made and the building has a fair value of $480,000. What recording, if any, is made on January 1, 2015? a. No change is made. b. A loss of $77,000 is recognized. c. A loss of $80,000 is recognized. d. A loss of $82,000 is recognized. e. A loss of $90,000 is recognized. a; Hard 156. Any asset that is attached to land but has a finite life is referred to as a: a. asset attachment. b. land attachment. c. asset improvement. d. land improvement. e. finite land. d; Easy

Hoyle, Financial Accounting 2.0

157. Which of the following is recorded on property and equipment if its book value exceeds its expected future cash flows? a. Depreciation b. Depletion c. Impairment d. Amortization e. Gain c; Easy 158. A company buys a building on January 1, 2012, to rent out to customers. The building had a cost of $900,000 and no expected residual value and an expected life of 10 years. The straight-line depreciation method is used. On December 31, 2014, after all adjustments have been made, an expert claims that the building is only worth $400,000 and is, therefore, impaired. The company expects net cash inflows generated by this building for the remaining seven years of its life to be $80,000 per year. What is the impairment loss? a. $400,000 b. $70,000 c. $230,000 d. $160,000 e. $80,000 c; Moderate Fill in the blanks 159. Interest expense can be ____________ to an asset account while the asset is under construction. capitalized; Easy Problems 160. It’s January 1, 2018 and Klein Corporation is trying to decide whether to purchase or construct its new headquarters. Regardless, it will need to borrow $1,000,000 at an annual interest rate of 5% for one year. If it purchases, the building will ready to use. If it constructs, the building will be complete on December 31, 2018. The building will be depreciated using straight-line with no residual value over 10 years. Determine the impact on net income in 2018 of purchasing versus constructing. Purchasing:$50,000 (Interest expense) + $100,000 (Depreciation) = $150,000 Constructing: $0 (Interest expense) + $0 (Depreciation) = $0 Therefore, purchasing will decrease net income by $150,000. However, it is important to consider the revenue that could be generated from putting the asset to immediate use. Moderate

Hoyle, Financial Accounting 2.0 Short Answer Questions 161. Explain why interest may be capitalized to an asset under construction, but not one that is purchased. If a building is purchased, the asset can be used immediately to generate revenue. Borrowing the money and paying the interest allows the company to start generating sales at the beginning of that year. The matching principle requires this cost to be reported as interest expense. Expense is matched with the revenue it helps to create. In contrast, if a company chooses to construct the asset, no revenue is generated until it is completed. Without any corresponding revenues, expenses are not normally recognized. Choosing to build the asset means that the interest paid during construction is a normal and necessary cost to get the building ready to use. Thus, if the asset is constructed, all interest up to completion is capitalized rather than expensed. Easy

Hoyle, Financial Accounting 2.0

Chapter 11 In a Set of Financial Statements, What Information Is Conveyed about Intangible Assets? Section 1 True/False Questions 1. An intangible asset is one that lacks physical substance. True; Easy; 2. Intangible assets are typically reported at their fair value. False; Easy 3. If an intangible asset has a finite life, the cost of that asset is reclassified to expense over that estimated period through a process called amortization. True; Easy 4. Copyright is the grant of a property right to the inventor. False; Easy 5. An intangible asset represents a legal right which helps its owner to generate revenues. True; Easy 6. Alpha Company purchases a copyright for $5,500 on January 1. It has a legal life of 5 years and no salvage value. At the end of Year 1, Alpha’s accountant debited amortization expense and credited copyright for $1,100. As a result, assets will be understated at the end of the year. False; Easy 7. Copyrights last for 80 years beyond the creator’s life. False; Easy 8. Amortization of an intangible asset’s cost to an expense should be over the shorter of the asset’s estimated useful life or its legal life. True; Easy 9. The cost of a successful defense is also capitalized and then amortized over the shorter of the remaining legal life or the estimated useful life of the asset. True; Easy 10. Aye Company offers Italic Company $20,000 for a trademark owned by Italic. The trademark is reported on Italic’s books at $600. If Italic refuses to sell the trademark, it can now report the trademark on its balance sheet at $20,000. False; Easy

Hoyle, Financial Accounting 2.0

11. The reported amount for intangible assets can include legal and registration fees. True; Easy 12. Legal fee to defend the right to an intangible asset is capitalized to that asset, even if the defense was unsuccessful. False; Easy Multiple Choice Questions 13. Which of the following is a category of intangible assets as determined by U.S.GAAP? a. Artistic-related b. Business-related c. Revenue-related d. Investment-related e. Stock-related a; Easy 14. Which of the following is an intangible asset? a. Accounts Payable b. Retained Earnings c. Equipment d. Accounts Receivable e. Franchise e; Easy 15. Which of the following is true of intangible assets? a. They have physical substance. b. They are expected to provide future benefits for longer than one year. c. They are reported at their fair value. d. They are usually not amortized. e. They are usually an obligation. b; Easy 16. Which of the following is the right to use literary, dramatic, musical, artistic, and certain other intellectual works? a. Copyright b. Patent c. Franchise d. Trademark e. Goodwill a; Easy

Hoyle, Financial Accounting 2.0

17. Which of the following is the grant of a property right to the inventor? a. Copyright b. Patent c. Franchise d. Trademark e. Goodwill b; Easy 18. On January 1, 2013 Williams Company purchased a copyright for $220,000. The copyright has a useful life of 4 years and a legal life of 12 years. The entry to record the acquisition of copyright will include a: a. debit to cash and credit to copyright for $220,000. b. debit to copyright and credit to cash for $220,000. c. debit amortization expense and credit to copyright for $55,000. d. debit to goodwill and credit to cash for $55,000. e. debit to cash and credit to purchases for $220,000. b; Easy 19. Reclassifying the cost of an intangible asset to expense over a time period is termed as: a. depreciation. b. depletion. c. amortization d. appreciation. e. allowance. c; Easy 20. The intangible assets are amortized over: a. the shorter of the legal life or estimated useful life. b. the longer of the legal life or estimated useful life. c. the economic life of the asset. d. 10 years from the date of its purchase or creation. e. 15 years from the date of its purchase or creation. a; Easy 21. As per U.S. GAAP, which of the following is capitalized and amortized during the life of an intangible asset? a. Legal cost for successful defense b. Revenue earned from giving permission to use copyright c. Difference between book value and fair value d. Research costs e. Development costs a; Easy

Hoyle, Financial Accounting 2.0 22. In 2013, Book Creations Company published a management book and got it copyrighted in the same year. The legal life of the book is 15 years and estimated useful life is 10 years. For how many years should the cost of copyright be amortized? a. 70 years b. 15 years c. 10 years d. 12.5 years e. 0 year c; Easy 23. On January 1, 2013 Frank Company purchased a copyright for $90,000 that gives it the right to use a certain photograph in its ads for the next three years. Determine the balance in the copyright account at the end of 2014? a. $90,000 b. $30,000 c. $50,000 d. $60,000 e. $-0b; Easy 24. Hastings Company created a product and filed for a patent, spending $12,000 to do so. The patent was given a legal life of 6 years. In Year 3, Hastings is sued by an inventor claiming that the patent is hers. On January 1, Year 4, Hastings receives notice that it has won the lawsuit, but it spent $300,000 in legal fees. Assuming that the legal life of the patenty has not changed, which of the following would be the amortization expense calculated at the end of Year 4? a. $2,000 b. $120,000 c. $52,000 d. $102,000 e. $104,000 d; Moderate 25. Which of the following would be capitalized to an intangible asset account? a. Rise in the fair value of the intangible b. Legal fees to successfully defend the intangible c. The cost of an unsuccessful defense d. The amount a buyer offered to pay for an intangible e. Cost incurred to find new knowledge b; Easy

Hoyle, Financial Accounting 2.0

26. Which of the following statements is true of accounting for intangibles under IFRS, but not under U.S. GAAP? a. Intangible assets are carried at cost less accumulated amortization. b. Intangible assets can be adjusted to fair value. c. The cost of intangible assets also includes legal cost for successful defense. d. The cost of the asset is amortized for the shorter of legal life or estimated useful life. e. The accounting for recording the purchase of intangible asset is similar to purchase of land. b; Moderate Fill in the blanks 27. Intangible assets are reported at _____ less any accumulated amortization recognized to date. historical cost; Easy 28. ____. refers to the process of allocating the cost of an intangible asset to expense over the shorter of the legal life or estimated useful life amortization; Easy 29. _____ is the grant of a property right to the inventor. Patent; Easy Short Answer Questions 30. Explain the accounting for intangible assets when they are subject to lawsuit. Intangible assets sometimes become the subject of lawsuits if other parties assert claims to the same ideas and creations. The cost of a successful defense is capitalized and then amortized over the shorter of the remaining legal life or the estimated useful life of the asset. If the defense proves unsuccessful, the remaining asset balance is written off as a loss. Easy Problems 31. Fellows Corporation purchases a patent from Ying for $45,000 on January 1, 2013. Fellows expects the patent to last for 5 years and amortize it accordingly. During 2014, Fellows is sued by Ying, who claims it was cheated in this deal. At the end of 2014, Fellows receives word that it has won the lawsuit, but at a cost of $30,000. Record amortization expense for the patent on 12/31/14 assuming the life has not changed. 12/31/14

Amortization Expense Patent

16,500

Moderate

16,500

Hoyle, Financial Accounting 2.0

32. Fruitcake, Inc. develops a patent. On January 1, 2017, it registers the patent. Legal and registration fees amounted to $30,000. The patent is assigned a life of 6 years. Prepare journal entries to record the acquisition of patent and the amortization expense for 2017 and 2018. 1/1/17

12/31/17

12/31/18

Patent Cash

30,000

Amortization Expense Patent

5,000

Amortization Expense Patent

5,000

30,000

5,000

Moderate Section 2 True/False Questions 33. Historical cost is typically more objective and reliable than fair value. True; Easy 34. Fair value is less open to manipulation than historical cost. False; Easy 35. Acquiring assets like copyrights and patents from outside owners, instead of being internally developed results in intangible assets with large monetary balances. True; Easy 36. When one company purchases another, the purchasing company gains control of the assets of the acquired company. True; Easy Multiple Choice Questions 37. Which of the following is a reason for few decision makers to prefer fair value accounting? a. It reports any appreciation in value, thus, reflects the current market condition. b. It is useful even if the assets are not held for sale. c. It is based on an agreed-upon exchange price and reflects a resource allocation judgment made by management. d. It is not open to manipulation. e. It can be reliably and objectively determined. a; Easy

Hoyle, Financial Accounting 2.0

38. Which of the following is a reason for a company’s intangible assets figures to grow to incredible size? a. Internally developed copyrights and patents b. Increase in the fair value of the intangibles assets held by a company c. Copyrights and patents acquired from outside owners d. Purchase of intangible assets with legal life exceeding 15 years e. Increase in contingent liabilities in a year c; Easy 39. When one company purchases another company, acquired assets are reported at: a. lower of cost or fair value. b. book value of the asset in the subsidiary company. c. pre-determined value set by the management of parent company. d. fair value of those assets. e. historical cost of the asset. d; Easy 40. Which of the following is true of intangible assets? a. In accounting for a parent’s acquisition of a subsidiary, the amount paid for intangible assets is based on the cost at which the asset was originally acquired. b. U.S. GAAP requires companies to follow the historical cost principle in reporting its intangible assets. c. The balance reported for intangible assets represent the amount that an acquiring company will pay to buy those assets. d. Internally developed intangible assets increase a company’s intangible asset figures to grow to an incredible size. e. Any appreciation in the value of an intangible asset is adjusted by raising it to the fair value. b; Easy Fill in the blanks 41. At the time of acquisition, each intangible asset held by the subsidiary is identified and recorded by the parent at its _____. fair value; Easy 42. U.S. GAAP requires that companies follow the _____ principle in reporting many assets. historical cost; Easy

Hoyle, Financial Accounting 2.0

Short Answer Questions 43. Explain why intangible assets are typically reported at their historical cost rather than fair value. U.S. GAAP requires that companies follow the historical cost principle in reporting intangible assets. Historical cost can be reliably and objectively determined. It does not fluctuate from day to day throughout the year. Cost is not a guess so it is less open to manipulation. Although fair value may appear to be more relevant, various parties might arrive at significantly different estimates of worth. Also, if the asset is not going to be sold, fair value may not be as relevant. Easy 44. Give two reasons why intangible assets may be reported at such large amounts on a company’s balance sheet. Two possible reasons exist for a company’s intangible asset figures to grow to incredible size. First, instead of being internally developed, assets such as copyrights and patents are often acquired from outside owners. Reported asset balances then represent the historical costs of these purchases which were based on fair value at the time of the transaction. Second, one company could have bought one or more entire companies so that title a multitude of assets is obtained in a single transaction. Such acquisitions may occur when one company wants to gain valuable intangibles owned by another. Moderate Section 3 True/False Questions 45. Patents are recognized as intangible asset in a corporate takeover as legal rights are held for them. True; Easy 46. Intangibles that can be separated from a subsidiary and sold should be recognized by a parent at its fair value following an acquisition. True; Easy 47. Customer loyalty does not meet the criteria to be consolidated as an intangible asset. True; Easy 48. Some amount of goodwill is recorded in most corporate acquisitions. True; Easy

Hoyle, Financial Accounting 2.0 49. Any amount paid in excess of the total fair value of net identifiable assets and liabilities is recognized as a loss and reduced from the retained earnings. False; Moderate 50. Impairment refers to the drop in the value of an asset below its cost, so that the cost cannot be recovered. True; Easy 51. Goodwill is recorded if an excess of the fair value of a company’s assets is paid just to entice the owner of the other company to sell. True; Easy 52. Goodwill is amortized over its useful life. False; Easy 53. As goodwill is not attributable to a specific asset with a defined life, its life cannot be determined. True; Easy 54. As goodwill is not amortized, it will remain on the balance sheet of the acquiring company indefinitely. False; Easy 55. If goodwill is found to have appreciated in value over years, a gain is recognized. False; Easy 56. If goodwill is found to be impaired, an impairment loss is recorded. True; Easy 57. The testing of goodwill for impairment is similar to the testing for land, buildings, and equipment. True; Easy Multiple Choice Questions 58. Which of the following is one of the criteria required to recognize intangible assets? a. The intangible cannot be separated from the subsidiary and sold. b. Contractual or other legal rights have been gained. c. The intangible should have a minimum useful life of 10 years. d. Fair value of the intangible should be more than its book value. e. The intangible should not suffer from impairment. b; Easy

Hoyle, Financial Accounting 2.0

59. The amount that an acquiring company pays over and above the fair values of the net assets of the company being acquired is classified as a. Amortization b. Goodness c. Goodwill d. Excess e. Trademark c; Easy 60. If the value of a company decreases after it is acquired: a. retained earnings is decreased for the loss. b. goodwill is impaired. c. goodwill is amortized. d. no change is made until it is sold. e. allowance for goodwill is increased. b; Easy 61. Which of the following could be a reason for a company acquiring another to pay over and above its net asset value? a. The company had internally developed some copyright which were valued very low in their books of account. b. The company had land whose value after appraisal were very high. c. The company had trained and highly qualified employees. d. The company had trademark with a long useful life. e. The company had no liabilities at the time of acquisition. c; Moderate 62. Hyena Corporation pays $700,000 to acquire Quinton Company. Quinton has two assets. The first is a building with a book value of $200,000 and a fair value of $300,000. The second is a patent with a book value of $10,000 and a fair value of $250,000. Assume the company had no liabilities. What amount is reported as goodwill as part of this sale? a. $250,000 b. $390,000 c. $700,000 d. $150,000 e. $490,000 d; Moderate

Hoyle, Financial Accounting 2.0

63. Kremlin Corporation purchased Topham Corporation on January 1, 2013. As a result of the purchase, Kremlin recorded goodwill of $200,000. Which of the following is true concerning this purchase? a. Topham must have had a specific attribute which did not meet the definition of a separate intangible asset, but for which Kremlin was willing to pay. b. Kremlin paid $200,000 less than the fair value of Topham’s net assets. c. Kremlin has to amortize the $200,000 following the acquisition. d. The goodwill should be checked for impairment regularly. e. If Kremlin determines the goodwill has been impaired, it should record a gain. d; Moderate 64. Foster Company acquired Robert Corporation for $10 million on January 1, 2011. Included in this amount was goodwill of $500,000. Which of the following is true of consolidated statements prepared as of December 31, 2011? a. Goodwill will still be reported at $500,000 less any beginning balance. b. The amount of goodwill reported would be less than $500,000 because of amortization. c. The amount of goodwill reported may still be $500,000, but it also may be less than it if any impairment has occurred. d. The amount of goodwill reported may be more than $500,000 if Robert has had a profitable year. e. The amount of goodwill will be reported at $500,000 throughout the life of Foster Company even if impairment has occurred. c; Moderate 65. Igloo Corporation purchased Sunshine, Inc. for $800,000. Sunshine had three assets and one liability on the date of purchase. They are as follows: Account Book value Accounts Receivable $48,000 Land $20,000 Copyright $12,000 Accounts Payable $40,000

Fair value $ 40,000 $500,000 $300,000 $ 40,000

Which of the following is the amount of goodwill to be reported in this transaction? a. $-0b. $80,000 c. $40,000 d. $120,000 e. $760,000 a; Moderate

Hoyle, Financial Accounting 2.0

66. While recording acquisition transaction, goodwill account is debited when: a. the fair value of land is more than its book value. b. the fair value of intangible asset is more than its historical cost. c. the cash paid for acquisition is more than the fair value of net asset. d. the subsidiary company has no liabilities. e. the net asset value is more than the amount paid to the subsidiary. c; Easy 67. On January 1, 2012 Vision Corporation purchased Lite Inc. for $300,000. The company paid $50,000 over and above the net asset value to Lite. At the end of the year, the fair value of the goodwill was $60,000. Compute the amount of goodwill to be reported on the consolidated balance sheet of Vision Corporation. a. $300,000 b. $250,000 c. $60,000 d. $50,000 e. $10,000 d; Moderate 68. Regarding acquisition, FASB requires that: a. the parent company account for all acquired intangible assets at their historic cost. b. the parent company account for all acquired intangible assets at their book value. c. the parent company identifies all intangible assets held by a subsidiary on the date of acquisition. d. the fair value of intangibles is recorded by the parent as an asset even though the contractual or other legal rights have not been gained. e. the parent company report any excess amount paid above the net asset value of the subsidiary as copyright. c; Moderate 69. Hudson Corporation created a technology in the year 2008 and got it patented. The legal cost for getting the patent was $60,000. The useful life of the patent is 10 years. The company was acquired by Meditech on January 1, 2012. The fair value of the patent on the date on acquisition was $300,000. Determine the amount paid by Meditech towards patent on acquisition. a. $60,000 b. $24,000 c. $36,000 d. $300,000 e. $-0d; Easy

Hoyle, Financial Accounting 2.0

70. Saturn Inc. acquired Perrito Co. in January 2012. The company paid $50,000 in excess of the fair value of the net identifiable assets and liabilities. Perrito recorded $500,000 as goodwill. At the end of the year, the fair value of goodwill was $30,000. To record this, Perrito will debit: a. loss on impaired value of goodwill for $20,000. b. loss on acquisition for $20,000. c. loss on sale for $50,000. d. goodwill for $30,000. e. amortization of goodwill for $30,000. a; Moderate Fill in the blanks 71. The amount paid in excess of the fair value of a company’s net assets in order to acquire that company is _____. goodwill; Easy; 72. Goodwill must be periodically checked for _____, to see if its value has decreased. impairment; Easy Short Answer Questions 73. Explain why goodwill is not amortized and what check is performed on it instead. Goodwill cannot be attributed to an asset with a defined life. Without a defined life, amortization would be meaningless. Instead, goodwill is checked for impairment periodically, and if found to be impaired, is written down. Easy 74. Give two reasons why a company would be willing to pay more for another company than just the value of its net assets. A company would be willing to pay more for another company than just the value of its net assets for two reasons. First, the purchased company may have a specific attribute, such as good employees, which are valuable to the company but do not qualify for reporting as separate intangibles. Second, the excess payment may be necessary to make the deal happen, but not be applicable to any specific attribute. Easy

Hoyle, Financial Accounting 2.0

Problems 75. Price Corporation wants to purchase Tyson, Inc. for $200,000. Tyson refused this price, and eventually a price of $300,000 was agreed to by both. For this amount, Price gets the three assets owned by Tyson: a piece of equipment with a book value of $3,000 and a fair value of $3,500; a trademark with a book value of $0 and a fair value of $50,000; and a patent with a book value of $10,000 and a fair value of $100,000. Assume Tyson has no liabilities. Record the purchase of Tyson by Price. Equipment Trademark Patent Goodwill Cash Moderate

3,500 50,000 100,000 146,500 300,000

Section 4 True/False Questions 76. Research is any attempt made to find new knowledge. True; Easy 77. Most companies are able to identify which research costs will lead to successful products as the costs are incurred. False; Easy 78. Research and development costs are subject to uncertainty about whether they will lead to a saleable product or not. True; Easy 79. According to IFRS, research costs should be expensed as incurred, but development costs must be capitalized. True; Easy 80. The current accounting for research and development costs by U.S. GAAP virtually eliminates the ability of companies to manipulate the timing of the reporting of these costs. True; Easy 81. Companies’ use of the current accounting under U.S. GAAP for research and development costs makes it easier for users to compare these companies. True; Easy

Hoyle, Financial Accounting 2.0

82. IFRS accounting for research and development costs is the same as U.S. GAAP. False; Easy Multiple Choice Questions 83. The translation of new knowledge into actual products or services or into significant improvements in existing products or services is called: a. invention. b. research. c. development. d. up gradation. e. impairment. c; Easy 84. According to IFRS, development costs are: a. expensed in the period they help in generating revenue. b. depleted over the life of the asset. c. impaired over the life of the asset. d. capitalized in the period they are incurred. e. expensed in the period they are incurred. d; Easy 85. Which of the following is true of accounting for research and development costs under U.S. GAAP? a. All research and development costs must be expensed as incurred. b. Research costs are expensed, but some development costs may be capitalized. c. All research and development costs are capitalized. d. Research and development costs that lead to successful projects are capitalized. e. Development costs are expensed, but some research costs may be capitalized. a; Easy 86. Which of the following is true of accounting for research and development cost under IFRS? a. The possibility of manipulation of balance sheet is avoided. b. It adheres to the principle of conservatism. c. The development costs are amortized over the life of the asset. d. The accounting procedure for research costs and development costs are same as U.S. GAAP. e. Research costs are capitalized. c; Easy

Hoyle, Financial Accounting 2.0

87. Which of the following is true of accounting for research and development cost? a. Under U.S. GAAP, development costs are capitalized. b. U.S.GAAP adheres to the matching principle by expensing research and development costs. c. Accounting for research and development costs is same under U.S. GAAP and IFRS. d. The current accounting for research and development costs under U.S. GAAP avoids the probability of companies to manipulate their earnings. e. Under U.S. GAAP accounting for research and development costs violates the conservative principle. d; Easy 88. Which of the following principles is violated by expensing research and development costs in the period incurred? a. Matching principle b. Conservatism principle c. Monetary principle d. Cost principle e. Time period principle a; Easy 89. Under both U.S. GAAP and IFRS: a. research costs are expensed as incurred. b. research costs are capitalized and amortized over the anticipated useful life. c. development costs are expensed as incurred. d. development costs are capitalized and amortized over the anticipated useful life. e. both research and development costs are expensed as incurred. a; Moderate 90. Allen Corporation reported research and development costs for 2014 of $4,000,000. Which of the following is true concerning this balance? a. The $4,000,000 represents research and development costs for projects which did not prove successful. b. Allen had a choice between expensing the $4,000,000 or capitalizing it to an asset account and amortizing it. c. The $4,000,000 represents the amount spent on all research and development for 2014. d. Investors do not care how much Allen spent on research and development. e. If Allen uses IFRS, the research and development expense would have been higher than $4,000,000. c; Easy

Hoyle, Financial Accounting 2.0

91. During the year 2012, Librel Company spent $600,000 on research and $40,000 on development, formulating a new product. The company was not able to create a successful product at the end of the year.Determine the amount to be capitalized as per U.S.GAAP and IFRS. U.S.GAAP IFRS a. $-0$40,000 b. $640,000 $600,000 c. $640,000 $40,000 d. $-0 $-0e. $40,000 $600,000 a; Easy Fill in the blanks 92. _____ is an attempt made to find new knowledge. Research; Easy 93. According to U.S. GAAP, all research and development costs should be _____. expensed; Easy Short Answer Questions 94. Explain the current accounting for research and development costs as per U.S. GAAP and two reasons why it is done this way. Research and development costs are expensed as incurred according to U.S. GAAP. The probability for success is not viewed as relevant to this reporting. The total cost incurred each period for research and development appears on the income statement as an expense regardless of the chance for success. Two major advantages are provided by this approach. First, the amount spent by a company on research and development each period is easy to determine and then compared with previous years and with other similar businesses. Most decision makers are interested in the amount invested in the search for new ideas and products and that information is readily apparent. Second, the possibility for manipulation is virtually eliminated. No distinction is drawn between a likely success and a probable failure. No reporting advantage is achieved by maneuvering the estimation of a profitable outcome. Easy

Hoyle, Financial Accounting 2.0

Problems 95. During the years 2016 to 2018, Thompson Company spent $4,800,000 on research and development formulating a new product. It finally created a successful product at the end of 2018 and applied for a patent, which was granted on January 1, 2019. Filing and legal fees associated with the patent amounted to $24,000. The patent was given a life of 4 years. Assuming the company adheres to U.S. GAAP, record the patent on January 1, 2019 and amortization expense on December 31, 2019. 1/1/19

Patent

24,000 Cash

12/31/19

Amortization Expense Patent

24,000

6,000 6,000

Moderate Section 5 Please note: A present value of $1 table and a present value of an annuity due table will be needed to be provided to students in order for them to complete many of these questions. True/False Questions 96. Payments made for an asset over time have two components: interest and goodwill. False; Easy 97. Interest is the charge for the use of money over time. True; Easy 98. If interest is not explicitly stated in a contract to buy an asset over time, it can be ignored. False; Easy 99. The present value of future cash flows is the amount left to be paid after all future interest is removed. True; Easy 100. To determine the present value of future cash flows, a reasonable interest rate is needed. True; Easy 101. The present value of a future cash flow will always be less than the future payment. True; Moderate 102. Compounding is a series of equal payments made over time. False; Easy

Hoyle, Financial Accounting 2.0

103. There are two types of annuities: ordinary annuity and annuity due. True; Easy 104. An annuity due is one where payments are made at the end of the period. False; Easy Multiple Choice Questions 105. The present value of a payment of $4,000 at the end of 10 years with an assumed interest rate of 5 percent is: a. $6,515.61. b. $4,000. c. $2,483.68. d. $32,431.28. e. $2,455.64. e; Moderate 106. Winegold Company expects to receive a payment of $20,000 at the beginning of each year for the next 3 years. Assume an appropriate interest rate of 4 percent. Determine the present value of these payments. a. $77,677.60 b. $57,721.80 c. $60,000 d. $17,780 e. $173,165.4 b; Moderate 107. Which of the following refers to the process whereby a liability is increased each period by unpaid interest? a. Present value b. Ordinary annuity c. Compounding d. Annuity due e. Amortizing c; Moderate 108. Which of the following refers to an equal payment made at the beginning of each period over a period of time? a. Ordinary annuity b. Compounding c. Interest d. Annuity due e. Present value d; Moderate

Hoyle, Financial Accounting 2.0 109. Which of the following refers to an equal payment made at the end of each period over a period of time? a. Ordinary annuity b. Compounding c. Interest d. Annuity due e. Present value a; Moderate 110. Harowitz Company purchases a trademark for $60,000 on January 1, 2014 from Garrison Corporation, but will not pay for it until 2 years from that date. Interest is not explicitly stated in the contract, but Harowitz could borrow money at a rate of 6 percent per year currently. At what amount should the trademark be reported on January 1, 2014? a. $53,278 b. $60,000 c. $53,400 d. $55,200 e. $51,900 c; Moderate 111. Harowitz Company purchases a trademark for $60,000 on January 1, 2014 from Garrison Corporation, but will not pay for it until 2 years from that date. Interest is not explicitly stated in the contract, but Harowitz could borrow money at a rate of 6 percent per year currently. What amount of interest should be recorded on December 31, 2015? a. $3,204 b. $3,000 c. $3,600 d. $3,396 e. $4,000 d; Moderate 112. Harowitz Company purchases a trademark for $60,000 on January 1, 2014 from Garrison Corporation, but will not pay for it until 2 years from that date. Interest is not explicitly stated in the contract, but Harowitz could borrow money at a rate of 6 percent per year currently. At what amount should the note payable be reported on December 31, 2014? a. $60,000 b. $56,604 c. $55,000 d. $56,474 e. $55,732 b; Moderate

Hoyle, Financial Accounting 2.0

113. Fifle Company purchased a copyright from Filene Corporation on January 1, 2014. Fifle agreed to make payments of $10,000 per year for 5 years, with the first payment being made immediately. The copyright will also be amortized over 5 years. Assume an interest rate of 7 percent per year is appropriate. At what value will the copyright be recorded on January 1, 2014? a. $43,872 b. $50,000 c. $44,390 d. $60,757 e. $40,000 a; Moderate 114. Fifle Company purchased a copyright from Filene Corporation on January 1, 2014. Fifle agreed to make payments of $10,000 per year for 5 years, with the first payment being made immediately. The copyright will also be amortized over 5 years. Assume an interest rate of 7 percent per year is appropriate. What interest expense would be reported on December 31, 2015? a. $3,286 b. $3,500 c. $2,371 d. $2,571 e. $1,837 e; Moderate 115. Carren Inc. purchased a patent from Arsen Co. on January 2013 for $300,000. The company made an arrangement with Arsen to pay $100,000 per year for 3 years, with the first payment being made immediately. Assuming a reasonable rate of 8 percent per year. Compute the amount of liability reported by Carren at the end of 2014. a. $178,326 b. $278,326 c. $200,000 d. $92,593 e. $100,000 e; Easy 116. Gulliver Inc. purchased a patent from Scarlett Inc. and agreed to pay $50,000 at the end of the fourth year. Assuming the reasonable interest rate to be 9 percent per year, compute the amount of total interest expense. a. $5,000 b. $45,000 c. $14,579 d. $35,422 e. $15,891 c; Easy

Hoyle, Financial Accounting 2.0 Fill in the blanks 117. A(n)_____ is an equal payment made over time. annuity; Easy 118. _____ is an amount paid to borrow money over time. Interest; Easy 119. _____ occurs when a liability increases due to interest building over time. Compounding; Easy Problems 120. On January 1, 2013, Neptune Company purchased a copyright from Pluto Company for $600,000. Neptune will not make a payment for this copyright until January 1, 2016. The appropriate interest rate for this transaction is 5 percent per year. Give the journal entry needed to 1) record the purchase of the copyright and 2) record interest at the end of 2013. 1/1/2013

12/31/201 3

518,304

Interest Expense Note Payable

25,915

518,304

25,915

Moderate

Hoyle, Financial Accounting 2.0

121. On January 1, 2016, Venus Corporation purchased a patent from Mars Corporation by agreeing to make payments of $40,000 at the beginning of the period for the next seven years. Venus could borrow money from bank at a rate of 6 percent per year. The patent has a life of 9 years. Make the journal entry to 1) record the purchase of the patent and the first payment, 2) record interest expense at the end of 2016 and 3) record amortization expense on the patent at the end of 2016. 1/1/2016

12/31/201 6

Patent Cash Note Payable

236,693

Interest Expense

11,802

40,000 196,693

Note Payable 12/12/201 6

Amortization Expense Patent

11,802 26,299

Moderate

26,299

Hoyle, Financial Accounting 2.0

Chapter 12 In a Set of Financial Statements, What Information Is Conveyed about Equity Investments? Section 1 True/False Questions 1. The method of financial reporting used by the owner for investments in the ownership shares of another company depends on the purpose of the acquisition. True; Easy 2. Increase in the stock price is the only way for the value of an investment in stock to earn a return. False; Easy 3. If management intends to sell an investment shortly after buying them, it is classified as an investment in trading securities. True; Easy 4. A trading security is recorded at its historical cost on the date of acquisition. True; Easy 5. Dividends received from trading securities are reported on the statement of retained earnings. False; Easy 6. Trading securities are reported as assets on the balance sheet at their fair value with all changes in value affecting net income. True; Easy 7. A gain or loss recorded on a trading security before it is sold is called an “unreported” gain or loss. False; Easy 8. Unrealized gains and losses on trading securities are reported on the owner’s income statement. True; Easy 9. Unrealized losses are reported on trading securities, but not unrealized gains. False; Easy

Hoyle, Financial Accounting 2.0 10. On 11/25/2015 Fling Company purchased shares of Yuma Corporation for $800 and classifies it as a trading security. On 12/31/2015, it is selling for $780. Fling will report an unrealized loss of $20 on its 2015 income statement. True; Easy 11. No gain or loss is reported on sale of a trading security. False; Easy 12. Gains and losses reported on the sale of a trading security are labeled as “unrealized.” False; Easy 13. Henrich Company has an investment in Green, Inc. which qualifies as a trading security. The investment originally cost was $700. On December 31, when Henrich prepared financial statements, investment in Green was worth $900. If Henrich’s accountant credited Unrealized Gain in Trading Security for $200, net income would be overstated. False; Moderate Multiple Choice Questions 14. Which of the following is a reason for reporting trading securities at their fair value? a. Reporting securities at fair value improves its marketability b. To make the company look financially strong c. The value of the security may radically fluctuate d. The owner may plan to hold the security for a long period of time e. The fair value of the security can be objectively determined e; Easy 15. Which of the following is true concerning trading securities? a. They are expected to be held for a long period of time. b. They are recorded at historical cost on the acquisition date. c. Dividends are not paid on them. d. They are purchased to make the company look financially strong. e. Unrealized gains and losses are reported in the stockholders’ equity section of the balance sheet. b; Easy 16. Dividends received on trading securities are recorded with a: a. debit to Investment in Trading Securities and credit to Unrealized Gain—Trading Securities. b. debit to Cash and credit to Dividend Revenue. c. debit to Cash and credit to Investment in Trading Securities. d. debit to Cash and credit to Investment Income. e. debit to Investment in Trading Securities and credit to Investment Income. b; Easy

Hoyle, Financial Accounting 2.0 17. Gain or loss on sale of trading securities is calculated as a difference between the sales price and the: a. fair value or the original cost of the investment, whichever is greater. b. cost plus portion of investee income. c. cost less any dividends received. d. carrying amount of the investment on the date of sale. e. original cost of the investment. d; Easy 18. The amount of change in the fair value of an investment classified as trading securities is: a. reported as Investment Income or Investment Expense. b. is taken into account only at the time of sale. c. ignored unless permanent drop in value occurs. d. included within stockholders’ equity section. e. included in the net income. e; Easy 19. Ty Corporation has investment that qualifies as a trading security. The trading security cost $400 on the date of purchase and has a fair value of $380 at the end of the year. During the year, dividend of $120 was received. On the 12/31/2012 balance sheet, Ty should report investment at: a. $380. b. $400. c. $520. d. $220. e. $500. a; Easy 20. Grady Company purchases 400 shares of Terence Company for $4 each on May 1, 2016. The company classifies this as trading securities. On December 31, 2016, Terence stock is selling for $5 per share. Determine the amount of unrealized gain or loss reported by Grady Company? a. $500 loss b. $2,000 gain c. $400 loss d. $400 gain e. $100 gain d; Moderate

Hoyle, Financial Accounting 2.0

21. Grady Company purchases 400 shares of Terence Company for $4 each on May 1, 2016. The company classifies this as trading securities. On December 31, 2016, Terence stock is selling for $5 per share. At what amount will this investment be reported on Grady’s balance sheet? a. $400 b. $1,600 c. $2,000 d. $100 e. $500 c; Moderate 22. Fife Corporation purchased 800 shares of Legacy Company for $2 per share on June 8, 2012. On December 31, 2012, Legacy’s stock was selling for $5 per share. On May 16, 2013, Fife sold all of its shares of Legacy for $3 per share. What is the amount of gain or loss on the sale? a. $800 gain b. $1,600 loss c. $2,400 gain d. $100 gain e. $3,200 loss b; Moderate 23. Fife Corporation purchased 800 shares of Legacy Company for $2 per share on June 8, 2011. On December 31, 2011, Legacy’s stock was selling for $5 per share. On May 16, 2012, Fife sold all of its shares of Legacy for $3 per share. Which of the following would be the amount credited to the Investment in Trading Securities account on May 16, 2012? a. $1,600 b. $800 c. $2,400 d. $4,000 e. $1,000 d; Moderate

Hoyle, Financial Accounting 2.0

24. On January 1, 2017, Hammond Corporation purchased 2,000 shares of Jensen Corporation for $60 per share. The investment is classified as trading securities. During the year, $500 cash dividend is received from the Jensen shares. At the end of the year, Jensen’s stock is selling for $58 per share. The Jensen shares are sold by Hammond on February 24, 2018 for $70 per share. Which of the following statement is true? a. In 2017, Hammond’s investment in Jensen shares will be reduced by the amount of dividends received. b. In 2017, Hammond’s accumulated other comprehensive income will be increased by the amount of Unrealized Loss—Trading Securities. c. In 2018, Hammond will report a gain on sale of trading securities of $24,000. d. In 2018, Hammond will not report for change in the investment’s fair value. e. In 2017, Hammond will report a Unrealized Gain—Trading Securities of $4,000. c; Easy 25. On January 1, 2016, Stevenson Corporation purchased 700 shares of Ellison Corporation for $120 per share. The investment is classified as trading securities. During the year, $350 cash dividend is received from the Stevenson shares. At the end of the year, Ellison’s stock is selling for $110 per share. What would be the journal entry to adjust this investment to fair value at the end of the year? a. Debit Investment in Trading Securities and credit Unrealized Gain—Trading Securities for $7,000 b. Debit Investment in Trading Securities and credit Cash for $7,000 c. Debit Unrealized Loss—Trading Securities and credit Investment in Trading Securities for $7,000 d. Debit Cash and credit Investment Income for $7,000 e. Debit Investment Expense and credit Cash for $7,000 c; Moderate 26. Lucy Corporation purchased 1,000 shares of Marcy Company for $8 per share on August 15, 2017. On December 31, 2017, Marcy’s stock was selling for $10 per share. On November 8, 2018, Lucy sold all of its shares of Marcy for $7 per share. Determine the amount of unrealized gain or loss reported by Lucy Company on December 31, 2017? a. $8,000 gain b. $2,000 gain c. $10,000 loss d. $2,000 loss e. $1,000 loss b; Moderate

Hoyle, Financial Accounting 2.0

27. Lucy Corporation purchased 1,000 shares of Marcy Company for $8 per share on August 15, 2017. On December 31, 2017, Marcy’s stock was selling for $10 per share. On November 8, 2018, Lucy sold all of its shares of Marcy for $7 per share. Which of the following would have been the amount of investment in Marcy reported on the December 31, 2017 balance sheet? a. $10,000 b. $8,000 c. $7,000 d. $3,000 e. $2,000 a; Moderate 28. Perth Corporation purchased 2,000 shares of Rachael Company for $12 per share on September 12, 2013. On December 31, 2013, Rachael’s stock was selling for $14 per share. On October 28, 2014, Perth sold all of its shares of Rachael for $11 per share. Calculate the amount of gain or loss on the sale? a. $5,000 loss b. $12,000 gain c. $6,000 loss d. $6,000 gain e. $5,000 gain c; Moderate 29. Perth Corporation purchased 2,000 shares of Rachael Company for $12 per share on September 12, 2013. On December 31, 2013, Rachael’s stock was selling for $14 per share. On October 28, 2014, Perth sold all of its shares of Rachael for $11 per share. Which of the following would be the amount credited to the Investment in Trading Securities account on October 28, 2014? a. $28,000 b. $22,000 c. $24,000 d. $23,000 e. $26,000 a; Moderate Fill in the blanks 30. An investment in the stock of another company which is expected to be held for a short time is classified as a _____. trading security; Easy 31. When a trading security is revalued on the balance sheet date, the owner will recognize a(n)_____ on the investment. unrealized gain or loss; Easy

Hoyle, Financial Accounting 2.0 32. Trading securities are shown at their _____ on the balance sheet. fair value; Easy Short Answer Questions 33. Explain why trading securities are reported at fair value when most other assets are not. Trading securities are reported at their fair value because: 1) the shares sell on a stock exchange and, thus, their fair value can be objectively determined; 2) the stock can be sold immediately; and 3) a sale is anticipated in the near term. These facts are not true for most other assets. Moderate Problems 34. On July 1, 2016, Smash Corporation purchases 300 shares of Ben Corporation for $80 per share as a short-term investment. On December 31, 2016, Ben’s stock is selling for $78 per share. a. Prepare a journal entry to record this purchase. Investment in Trading Securities Cash

24,000 24,000

b. Prepare a journal entry to record any unrealized gain or loss. Unrealized Loss—Trading Securities 600 Investment in Trading Securities

600

Easy 35. On November 30, 2014, Jackson Company purchases 100 shares of Eel Company for $45 per share. This investment is classified as a trading security. On December 31, 2014, Eel’s stock is selling for $47 per share. On March 6, 2015, Eel pays a dividend of $3 per share. a. Prepare a journal entry to record this purchase. Investment in Trading Securities Cash

4,500 4,500

b. Prepare a journal entry to record any unrealized gain or loss. Investment in Trading Securities 200 Unrealized Gain—Trading Securities

200

Hoyle, Financial Accounting 2.0

c. Prepare a journal entry to record the receipt of the dividends. Cash

300 Dividend Revenue

300

Moderate 36. On March 5, 2017, Friedman, Inc. purchases 200 shares of Rickey Company for $8 per share as a trading security. On December 31, 2017, Rickey’s stock is selling for $9 per share. On January 14, 2018, Friedman sells 100 shares of Rickey when it is selling for $10 per share. a. Prepare a journal entry to record this purchase. Investment in Trading Securities Cash

1,600 1,600

b. Prepare a journal entry to record any unrealized gain or loss. Investment in Trading Securities 200 Unrealized Gain—Trading Securities

200

c. Prepare a journal entry to record the sale of Rickey’s stock on January 14, 2014. Cash

1,000 Investment in Trading Securities Gain on Sale of Trading Securities

900 100

Moderate Section 2 True/False Qusetions 37. An investment in shares that is expected to be held for an indefinite period should be classified on the balance sheet as an investment in available-for-sale security. True; Easy 38. Available-for-sale securities should be recorded at historical cost on the date of purchase. True; Easy 39. Unlike a trading security, an available-for-sale security is always reported at its historical cost. False; Easy 40. Unrealized gains and losses on available-for-sale securities are reported as part of stockholders’ equity. True; Easy

Hoyle, Financial Accounting 2.0

41. Accounting for trading securities and available-for-sale securities differs because the amount of stock held under each type differs. False; Easy 42. No differences exist in the accounting for trading securities and available-for-sale securities until the date of sale. False; Easy 43. The gain or loss on a sale of an available-for-sale security is the difference between the original purchase price and the selling price of the security. True; Moderate 44. Unrealized Gain/Loss on an Available-for-Sale Security is a permanent account, and thus, it must be removed when the security is sold. True; Easy 45. Comprehensive income should equal net income. False; Easy 46. Dividends received on available-for-sale securities are not reported as income, but rather as reductions in the investment balance. False; Easy 47. Unrealized Gains/Losses on available-for sale securities are reported within accumulated other comprehensive income. True; Easy Multiple Choice Questions 48. Which of the following is true about an available-for-sale security? a. It is expected to be held for a short-time. b. Unrealized gains/losses are reported on the income statement. c. It is accounted for exactly like a trading security. d. It is reported at fair value at the end of the year. e. It is purchased to make the company look financially strong d; Easy 49. Unrealized Gains/Losses on available-for-sale securities are reported as part of: a. net income. b. gross profit. c. comprehensive income. d. assets. e. liabilities. c; Easy

Hoyle, Financial Accounting 2.0 50. Tyler Company purchases 400 shares of West Company for $7 each on September 1, 2016. This investment is classified as an available-for-sale security. On December 31, 2016, West’s stock is selling for $5 per share. Determine the amount of unrealized gain or loss reported by Tyler Company? a. $3,500 loss b. $2,800 gain c. $800 loss d. $400 gain e. $2,000 gain c; Easy 51. Tyler Company purchases 400 shares of West Company for $7 each on September 1, 2016. This investment is classified as an available-for-sale security. On December 31, 2016, West’s stock is selling for $5 per share. At what amount will this investment be reported on Tyler’s balance sheet? a. $400 b. $2,800 c. $2,000 d. $800 e. $500 c; Moderate 52. Tyler Company purchases 400 shares of West Company for $7 each on September 1, 2016. This investment is classified as an available-for-sale security. On December 31, 2016, West’s stock is selling for $5 per share. If Tyler reported net income of $47,000 for the year, what would be Tyler’s comprehensive income? a. $43,500 b. $46,200 c. $49,800 d. $47,400 e. $49,000 b; Moderate

Hoyle, Financial Accounting 2.0

53. On January 1, Year One, Alba Company buys shares of Johnson and Johnson for $13,000. By the end of the year, the stock had risen in value to $16,000. In producing financial statements for Year One, the company incorrectly reported these shares as trading securities when they should have been classified as available for sale (they had already held them for 12 months). Which of the following is correct? a. Reported net income was correctly reported but comprehensive income was overstated by $3,000. b. Reported net income was overstated by $3,000 but comprehensive income was correctly stated. c. Reported net income was overstated by $3,000 and comprehensive income was also overstated by $3,000. d. Reported net income was correctly reported but comprehensive income was understated by $3,000. e. Reported net income was understated by $3,000 but comprehensive income was overstated. b; Hard 54. Dandy Corporation purchased 100 shares of Yankee Company for $3 per share on November 8, 2011 and accounts for it as an available-for-sale security. On December 31, 2011, Yankee’s stock was selling for $6 per share. On September 16, 2012, Dandy sold all of its shares of Yankee for $3 per share. What is the amount of gain or loss on the sale? a. $300 gain b. $600 loss c. $100 gain d. $300 loss e. No gain or loss is reported e; Moderate 55. Dandy Corporation purchased 100 shares of Yankee Company for $3 per share on November 8, 2011 and accounts for it as an available-for-sale security. On December 31, 2011, Yankee’s stock was selling for $6 per share On September 16, 2012 Dandy sold all of its shares of Yankee for $3 per share. Which of the following would be the amount credited to the Investment in Available-for-Sale Securities on September 16, 2012? a. $1,000 b. $100 c. $1,800 d. $600 e. $300 d; Moderate

Hoyle, Financial Accounting 2.0

56. Collins Company purchases 500 shares of Mike Company for $15 each on April 1, 2016. The company classifies this as trading securities. On December 31, 2016, Mike’s stock is selling for $25 per share. Collins accountant mistakenly accounted for the change in fair value as available-for-sale-securities. Which of the following is correct? a. Accumulated Other Comprehensive Income is correctly stated. b. Net Income is overstated by $5,000. c. Net Income is understated by $5,000. d. Accumulated Other Comprehensive Income is under stated by $5,000. e. Net Income is correctly stated. c; Moderate 57. On December 1, Year One, Ajax bought 100 shares of Johnson and Johnson for $38 per shares. The stock was worth $50 per share at the end of Year One and was then sold for $43 per share on April 11, Year Two. The investment was recorded by Ajax as availablefor-sale securities but should have been recorded as trading securities. What impact did this error have on the company’s reported net income for Year Two? a. No impact b. It was overstated by $700 c. It was understated by $700 d. It was overstated by $1,200 e. It was understated by $1,200 d; Hard 58. On January 1, 2016, Becky Corporation purchased 200 shares of Emily Corporation for $25 per share. The investment is classified as available-for-sale securities. During the year, $300 cash dividend is received from the Emily shares. At the end of the year, Emily’s stock is selling for $36 per share. What would be the journal entry to adjust the securities to fair value at the end of the year? a. Debit Investment in Available-for-Sale Securities and credit Unrealized Gain on Available-for-Sale Securities for $2,200 b. Debit Investment in Available-for-Sale Securities and credit Cash for $7,200 c. Debit Unrealized Gain on Available-for-Sale Securities and credit Investment in Available-for-Sale Securities for $2,200 d. Debit Cash and credit Investment Income for $300 e. Debit Investment Income and credit Unrealized Gain on Available-for-Sale Securities for $2,200 a; Easy

Hoyle, Financial Accounting 2.0

59. On January 1, 2016, Becky Corporation purchased 200 shares of Emily Corporation for $25 per share. The investment is classified as available-for-sale securities. During the year, $300 cash dividend is received from the Emily shares. At the end of the year, Emily’s stock is selling for $36 per share. Becky reported net income for the year of $22,000. What is the amount of comprehensive income reported by Becky for the year? a. $22,000 b. $22,300 c. $2,200 d. $24,200 e. $300 d; Easy 60. On January 1, 2016, Zinc Corporation purchased 1,000 shares of Nancy Corporation for $70 per share. The investment is classified as available-for-sale securities. During the year, $300 cash dividend is received from the Nancy shares. At the end of the year, Nancy’s stock is selling for $75 per share. Nancy shares are sold by Zinc on March 5, 2017 for $86 per share. Which of the following statement is true? a. Zinc’s investment in Nancy shares will be reduced by the amount of dividends received in 2016. b. Zinc’s accumulated other comprehensive income will be increased by $11,000 in 2017. c. Zinc will not report for change in the investment’s fair value in 2016. d. Zinc will report a gain on sale of available-for-sale securities of $11,000 in 2017. e. Zinc will report a gain on sale of available-for-sale securities of $16,000 in 2017. e; Easy 61. Charlie Corporation purchased 2,000 shares of Robbins Company for $5 per share on October 15, 2017 and accounts for it as an available-for-sale security. On December 31, 2017, Robbins was selling for $8 per share. On November 8, 2018, Charlie sold all of its shares of Robbins for $7 per share. Which of the following would have been the unrealized gain or loss reported on December 31, 2017? a. $8,000 gain b. $6,000 gain c. $5,000 loss d. $2,000 loss e. $2,000 gain b; Moderate

Hoyle, Financial Accounting 2.0

62. Charlie Corporation purchased 2,000 shares of Robbins Company for $5 per share on October 15, 2017 and accounts for it as an available-for-sale security. On December 31, 2017, Robbins’ stock was selling for $8 per share. On November 8, 2018, Charlie sold all of its shares of Robbins for $7 per share. Which of the following would have been the amount of the investment in available-for-sale securities reported on the December 31, 2017 balance sheet? a. $16,000 b. $10,000 c. $8,000 d. $5,000 e. $2,000 a; Moderate 63. Charlie Corporation purchased 2,000 shares of Robbins Company for $5 per share on October 15, 2017 and accounts for it as an available-for-sale security. On December 31, 2017, Robbins’ stock was selling for $8 per share. On November 8, 2018, Charlie sold all of its shares of Robbins for $7 per share. What is the amount of gain or loss on the sale? a. $2,000 loss b. $7,000 gain c. $4,000 gain d. $6,000 gain e. $1,000 loss c; Moderate 64. Charlie Corporation purchased 2,000 shares of Robbins Company for $5 per share on October 15, 2017 and accounts for it as an available-for-sale security. On December 31, 2017, Robbins’ stock was selling for $8 per share. On November 8, 2018, Charlie sold all of its shares of Robbins for $7 per share. Which of the following would be the amount credited to the Investment in Available-for-Securities account on November 8, 2018? a. $16,000 b. $14,000 c. $10,000 d. $2,000 e. $1,000 a; Moderate Fill in the blanks 65. An investment in the stock of another company which is expected to be held indefinitely is classified as a(n) _____. available-for-sale security; Easy 66. Unrealized gains and losses on available-for-sale securities should be reported in _____. comprehensive income or within the stockholders’ equity section; Easy

Hoyle, Financial Accounting 2.0 67. Dividends received on available-for-sale securities are included in the _____. net income, Easy 68. _____ is net income plus or minus any unrealized gains or losses on available-for-sale securities. Comprehensive income; Easy Short Answer Questions 69. Explain the difference in the accounting for available-for-sale securities and trading securities and explain why this difference exists. Changes in the value of trading securities create unrealized gains and losses which are reported in net income. While unrealized gains and losses also exist in availablefor-sale securities, they are not reported in net income. Because no sale is expected in the near term, the fair value of available-for-sale shares will possibly go up and down numerous times before being sold. Hence, the current gain is not viewed as “sure enough.” As a result of this uncertainty, a change in the owner’s reported net income is not considered appropriate. Instead, any unrealized gain (or loss) in the value of an investment that is classified as available-for-sale is reported within the stockholders’ equity section of the balance sheet. A few other unrealized gains and losses are usually combined and reported as “accumulated other comprehensive income.” Moderate Problems 70. On July 1, 2016, Rex Corporation purchases 100 shares of Hound Corporation for $50 per share as an investment to be held for an indefinite period. On December 31, 2016, Hound’s stock is selling for $46 per share. a. Record the purchase of shares of Hound. Investment in Available-for-Sale Securities Cash

5,000 5,000

b. Record any necessary entry on December 31, 2016. Unrealized Loss—Available-for-Sale Securities 400 Investment in Available-for-Sale Securities Moderate

400

Hoyle, Financial Accounting 2.0

71. On November 30, 2014, Feather Company purchases 100 shares of Stone Company for $25 per share. This investment is classified as an available-for-sale security. On December 31, 2014, Stone’s stock is selling for $28 per share. On March 6, 2015, Stone pays a dividend of $2 per share. a. Record the purchase of shares of Stone. Investment in Available-for-Sale Securities Cash

2,500 2,500

b. Record any necessary entry on December 31, 2014. Investment in Available for Sale Securities Unrealized Gain—Available-for-Sale

300 300

c. Record the receipt of the dividends on March 6, 2015. Cash

200 Dividend Revenue

200

Moderate 72. On March 5, 2017, Miles, Inc. purchases 500 shares of Davis Company for $10 per share as an available-for-sale security. On December 31, 2017, Davis is selling for $12 per share. On January 14, 2018, Miles sells all its shares of Davis when it is selling for $11 per share. a. Record the purchase of shares of Davis. Investment in Available-for-Sale Securities Cash

5,000 5,000

b. Record any necessary journal entry on December 31, 2017. Investment in Available-for-Sale Securities 1,000 Unrealized Gain—Available-for-Sale Securities 1,000 c. Record the sale of Davis on January 14, 20X8. Cash Unrealized Gain—Available-for-Sale Securities Investment in Available-for-Sale Securities Gain on Sale of Available-for-Sale Securities Moderate

5,500 1,000 6,000 500

Hoyle, Financial Accounting 2.0

Section 3 True/False Questions 73. An investment in shares which gives the owner significant influence over the investee should be accounted for by using the equity method. True; Easy 74. Under the equity method, an investor records dividends before they are received. False; Easy 75. Investor A holds 30% of stock of B Corporation. During the year, B Corporation earned net income of $10,000. Investor A should increase its Investment in B Corporation by $10,000. False; Easy 76. An investor, who has significant influence on the investee, immediately recognizes income of the investee in proportion to its ownership percentage. True; Easy 77. Recognizing dividend revenue under the equity method would double-count income. True; Easy 78. When using the equity method, dividends from the investee are accounted for by debiting Cash and crediting Dividend Revenue. False; Easy 79. An investor with significant influence over an investee may choose to report the investment as a trading security. False; Moderate 80. Equity method investments typically moves away from the historical cost of the investment as income is earned and dividends received. True; Easy 81. An investment where ownership is no more than 50% can be accounted for as a trading security, an available-for-sale security, or an equity method investment. True; Easy 82. The accounting for dividends is the same under available-for-sale securities and equity method investments, but differs with trading securities. False; Easy

Hoyle, Financial Accounting 2.0

83. Trading securities and available-for-sale securities are shown at their fair value, but equity method investments are reported at its historical cost. False; Easy 84. Utah Corporation owns 35% of Nevada, Inc., but has no ability to influence Nevada’s operations. Utah cannot account for stocks of Nevada using the equity method. True; Easy Multiple Choice Questions 85. Which of the following is true about an equity method security? a. It is expected to be held for a short-time. b. Dividends are not allowed to be paid on equity method investments. c. It is accounted for exactly like a trading security irrespective of the size of ownership. d. It is reported at historical cost during its life. e. Unless impaired, fair value is ignored in reporting an equity method investment. e; Easy 86. Which of the following is true of reporting investment using equity method? a. It is always reported at historical cost. b. It is always reported at fair value c. It is reported at original cost plus portion of income plus dividends d. It is reported at original cost plus portion of income less dividends. e. It is initially recorded at the cost of purchase and later adjusted for changes in fair value. d; Easy 87. Which of the following amounts are reported within investor’s net income under equity method? a. Dividends received b. Portion of income as earned by Investee c. Change in fair value d. Dividends received plus change in fair value e. Dividends received plus portion of income as earned by Investee b; Easy 88. An investment is usually accounted for by using the equity method if the ownership percentage is: a. more than 75%. b. between 50%-75%. c. more than 50%. d. between 20%-50%. e. 100%. d; Easy

Hoyle, Financial Accounting 2.0 89. On January 1, 2017, Joe Corporation purchases 35% of outstanding stock of Delight Corporation for $370,000 and accounts for the investment using the equity method. The shares of Delight were worth $450,000 on July 1, 2017. Delight reported a net income of $260,000 for the year 2017 and distributed a total cash dividend of $35,000 to its stockholders. At the end of the year Joe sold its investment in Delight for $500,000. Which of the following statements is true? a. Joe will adjust the investment for change in its fair value by crediting Unrealized Gain in Delight Investment. b. Joe will reduce the Investment in Delight account by $12,250 for dividends received. c. Joe will increase the Investment in Delight accounts by $260,000 for recognizing the income of Delight. d. Joe will record a gain on sales by comparing the original cost of the investment and the selling price. e. Joe will show its Investment in Delight account balance at its fair value of $450,000 on July 1, 2017. b; Easy 90. Speers Corporation owns 40% of Queens Company, which Speers originally purchased at the beginning of the year for $300,000. Queens earned $30,000 income for the year and distributed dividends of $5,000. If this investment is accounted for by means of the equity method, it should be reported on a year-end balance sheet at: a. $300,000. b. $310,000. c. $325,000. d. $330,000. e. $312,000. b; Moderate 91. Speers Corporation owns 40% of Queens Company, which Speers originally purchased at the beginning of the year for $300,000. Queens earned $30,000 income during the year and distributed cash dividends of $5,000. Determine the amount of investment income reported by Speers for the year. a. $5,000 b. $30,000 c. $14,000 d. $2,000 e. $12,000 e; Easy

Hoyle, Financial Accounting 2.0

92. On January 1, 2015, Mark Company purchases 30% of outstanding stock of Global Corporation for $95,000 and accounts for the investment using the equity method. Global reported a net income of $30,000 for the year 2015. What would be the journal entry to record the acquisition of stock? a. Debit Investment in Global and credit Cash for $95,000 b. Debit Investment in Global and credit Cash for $28,500 c. Debit Unrealized Loss and credit Investment in Global for $125,000 d. Debit Investment in Global and credit Investment Income–Global for $9,000 e. Debit Investment Income– Global and credit Cash for $30,000 a; Easy 93. On January 1, 2016, Ryan Corporation purchases 40% of outstanding stock of Spice Corporation for 560,000 and accounts for the investment using the equity method. Spice reported a net income of $120,000 for the year 2016 and distributed a total cash dividend of $15,000 to its stockholders. What is the entry recorded by Ryan for recognizing the income of Spice? a. Debit Investment in Spice and credit Cash for $560,000 b. Debit Cash and credit Dividend Revenue for $15,000 c. Debit Unrealized Loss and credit Investment in Spice for $6,000 d. Debit Investment in Spice and credit Investment Income–Spice for $48,000 e. Debit Investment Income–Spice and credit Cash for $15,000 d; Easy 94. Bell Company owns 25% of Duke Corporation and accounts for the investment using the equity method. At the beginning of the year, the balance in the investment account was $60,000. At the end of the year, the stock was worth $65,000. What would be the journal entry to adjust the shares of Duke to fair value at the end of the year? a. Debit Investment in Duke and credit Cash for $60,000 b. Debit Investment in Duke and credit Unrealized Loss for $5,000 c. Debit Cash and credit Investment in Global for $5,000 d. Debit Investment in Global and credit Investment Income–Global for $65,000 e. Change in fair value is ignored unless an impairment occurs. e; Easy 95. On January 1, 2017, Natural Food Corporation purchased 40% of Developers Corporation for $620,000. During the year, Developers earned $260,000 in income and distributed dividends of $60,000. At the end of the year, Natural food sold its investment in Developers for $800,000. Assume that Natural Food accounts for this investment using the equity method. The entry to record the sale will include a: a. debit to Cash for $320,000. b. credit to Gain on Sale of Equity Method Security for $100,000. c. credit to Investment in Developers for $620,000. d. credit to Gain on Sale of Equity Method Security for $180,000. e. credit to Investment in Developers for $748,000. b; Easy

Hoyle, Financial Accounting 2.0

96. Ferris Company received a dividend from an investment. Which of the following is true? a. If the investment is an equity method security, the dividend is recorded as investment income. b. If the investment is an available-for-sale security, net income is increased. c. If the investment is an equity method security, comprehensive income is increased. d. If the investment is a trading security, the investment account is decreased. e. If the investment is a trading security, comprehensive income is decreased. b; Easy 97. Which of the following investments are reported on the owner’s balance sheet at its fair value? a. Land b. Available-for-sale security c. Equity method security d. Common Stock e. Preferred Stock b; Easy 98. Kendall Company owns 20% of Lester Corporation and accounts for the investment using the equity method. At the beginning of the year, the balance in the investment account was $290,000. During the year, Kendall earned net income of $70,000 and distributed cash dividends of $14,000. Which of the following is true? a. The balance in the Investment in Lester account decreased this year. b. Kendall’s Investment Income for the year was $2,800. c. Kendall’s Accumulated Other Comprehensive Income for the year increased by $11,200. d. The balance in the Investment in Lester account at the end of the year was $304,000. e. Kendall had an increase in cash from this investment of $2,800. e; Moderate 99. Griffin Corporation owns 45% of an equity method investment in Watson Company. The balance in the Investment in Watson account at the beginning of the year was $500,000. During the year, Watson earned income of $60,000 and distributed dividends of $10,000. Calculate the ending balance in the Investment in Watson account. a. $522,500 b. $500,000 c. $550,000 d. $527,000 e. $531,500 a; Moderate

Hoyle, Financial Accounting 2.0

100. Griffin Corporation owns 45% of an equity method investment in Watson Company. The balance in the Investment in Watson account at the beginning of the year was $500,000. During the year, Watson earned income of $60,000 and distributed dividends of $10,000. Calculate the amount of investment income reported by Griffin. a. $22,500 b. $31,500 c. $27,000 d. $60,000 e. $4,500 c; Easy Fill in the blanks 101. The equity method should be applied when an owner can exert _____ over a company in which it has invested. significant influence; Easy 102. According to the equity method, income is recognized by the investor as soon as it is earned by the investee, which increases the Investment Income account and _____ account. Investment in Subsidiary; Easy 103. Unless _____ occurs, fair value is not taken into consideration in accounting for an equity method investment. impairment; Easy 104. The receipt of a _____ by an owner of an equity method security reduces the investment account. dividend; Easy Short Answer Questions 105. Explain how a company determines if an investment should be accounted for using the equity method. The equity method is applied when the investor has the ability to apply significant influence to the operating and financing decisions of the investee. Unfortunately, the precise point at which one company gains that ability is impossible to ascertain. Certain clues, such as membership on the board of directors and the comparative size of other ownership interests, can be helpful. Also, according to U.S. GAAP, an investor holding 20% or more but less than or equal to 50% of the shares of another company is assumed to possess the ability to exert significant influence. Moderate

Hoyle, Financial Accounting 2.0

Problems 106. Use the following abbreviations to indicate to which type of investment or investments the following apply. If the statement is true for more than one investment, put the abbreviation for all to which it applies. TS – Trading Security AFSS – Available-for-Sale Security EMS – Equity Method Security TS, AFSS :Investment reported at fair value TS, AFSS :Dividends received increases net income EMS :Dividends received decreases investment account TS :Investor plans to hold investment for short time EMS :Investor exerts significant influence over investee EMS :Net income of investee increases net income of investor TS, AFSS, EMS :Investment initially reported at historical cost AFSS :Unrealized gains/losses on investment reported in comprehensive income Easy 107. On January 1, 2013, Cavalier Company purchased 20% of Underridge, Inc. for $90,000. During the year, Underridge earned $13,000 in income and distributed dividends of $1,000. Assume that Cavalier accounts for this investment using the equity method. a. Record the purchase of Underridge, Inc. Investment in Underridge Cash

90,000 90,000

b. Record Cavalier’s share of Underridge’s income. Investment in Underridge 2,600 Investment Income—Underridge 2,600 c. Record Cavalier’s share of Underridge’s dividend payment. Cash

200 Investment in Underridge

Moderate

200

Hoyle, Financial Accounting 2.0

108. On January 1, 2017, Randolph Corporation purchased 25% of Founders Corporation for $780,000. During the year, Founders earned $100,000 in income and distributed dividends of $35,000. Assume that Randolph accounts for this investment using the equity method. a. Record the purchase of Founders Corporation. Investment in Founders Cash

780,000 780,000

b. Record Randolph’s share of Founder’s income. Investment in Founders Investment Income—Founders

25,000 25,000

c. Record Randolph’s share of Founder’s dividend payment.

Cash

8,750 Investment in Founders

8,750

Moderate Section 4 True/False Questions 109. Control is gained on another company only when a company owns 100% of the stock of another. False; Easy 110. A company must prepare consolidated financial statements when it owns over 50% of the other company’s outstanding stock. True; Easy 111. Oneida Corporation purchased 60% of the stock of Greenwich Company on June 1, 2015. When Oneida prepares a consolidated income statement for 2015, it should include all of the revenues and expenses earned by Greenwich during the year. False; Easy 112. On the date of acquisition, the parent company recognizes the subsidiary’s assets and liabilities at their fair values. True; Easy

Hoyle, Financial Accounting 2.0

113. If a parent company pays more for a subsidiary than the fair value of its assets less liabilities, the excess should be ignored while reporting the consolidated financial statements. False; Easy 114. The amount the parent pays for the subsidiary is shown as Investment in Subsidiary on the consolidated balance sheet. False; Easy 115. Goodwill continues to be reported in subsequent consolidated financial statements, as long as it is not impaired. True; Easy 116. A company’s total asset turnover is a measure of its liquidity. False; Easy 117. The higher a company’s total asset turnover, the more efficiently it is using its assets to generate sales. True; Easy 118. Return on assets is computed by dividing a company’s sales by its average total assets. False; Easy 119. Yugi Company ended this year with an ROA of 15%. It ended last year with an ROA of 16%. Yugi’s ROA has improved this year. False; Easy Multiple Choice Questions 120. Which of the following is true about consolidated financial statements prepared on the date of acquisition of a subsidiary? a. The subsidiary’s revenues and expenses from the entire year are included. b. The subsidiary’s assets and liabilities are reported at their historical cost. c. If a parent company owns less than 100% of a subsidiary, it can only consolidate the percentage of assets and liabilities that it owns. d. Goodwill is recorded if the parent company paid more than the fair value of net assets of the subsidiary. e. The parent company reports an investment in subsidiary separately on its balance sheet. d; Easy

Hoyle, Financial Accounting 2.0

121. What is the minimum percentage that a parent company must own of a subsidiary’s stock in order to present consolidated financial statements? a. 100% b. 75% c. 50% d. 20% e. 25% c; Easy 122. In the consolidated financial statement, the excess amount a parent company pays for a subsidiary over the fair value of its assets less liabilities is: a. reported as patent. b. reported as goodwill. c. included in the other comprehensive income. d. reported as loss. e. adjusted in the fair value of net assets. b; Easy 123. Patterson Corporation began the year with total assets of $7,000 and ended the year with assets of $9,000. During the year, Patterson earned sales revenue of $7,680, and incurred expenses of $5,680. Which of the following is Patterson’s total asset turnover for the year? a. 0.96 times b. 1.04 times c. 0.63 times d. 1.10 times e. 0.85 times a; Moderate 124. Patterson Corporation began the year with total assets of $7,000 and ended the year with assets of $9,000. During the year, Patterson earned sales revenue of $7,680, and incurred expenses of $5,680. Which of the following is Patterson’s return on assets for the year? a. 10% b. 26% c. 71% d. 25% e. 96% d; Moderate

Hoyle, Financial Accounting 2.0

125. Ben Corporation began the year with $350,000 in total assets and ended the year with $420,000 in total assets. Sales for the year were $500,000. Total expenses incurred during the year amounted to $435,000. Compute Ben’s total asset turnover for the year. a. 1.30 times b. 1.43 times c. 1.19 times d. 1.13 times e. 1.24 times a; Moderate 126. Ben Corporation began the year with $350,000 in total assets and ended the year with $420,000 in total assets. Sales for the year were $500,000. Total expenses incurred during the year amounted to $435,000. Compute Ben’s return on asset for the year. a. 13.00% b. 15.48% c. 18.57% d. 16.88% e. 15.25% d; Moderate 127. Both Daniel Company and Tulip Company deal in selling automobile spare parts. In the year 2016, Daniel made sales of $780,000 and net income for the year amounted to $65,000. Whereas, in the same year, Tulip made sales of 520,000 and net income for the year amounted to $37,000. Also Daniel and Tulip had average total assets of $620,000 and $280,000 respectively. Which of the following is true? a. Daniel Company is more efficient in using company resources. b. Tulip Company is more efficient at generating sales revenue. c. Daniel’s return on asset is same as Tulip’s. d. Tulip’s total asset turnover is less than Daniel’s. e. Tulip is less efficient in using company resources. b; Moderate 128. Total asset turnover indicates the management’s efficiency in: a. generating sales revenue. b. using company’s resources. c. reducing its operating expenses. d. maintaining liquidity. e. increasing dividend income. a; Easy

Hoyle, Financial Accounting 2.0 129. Sports Corporation purchases 100% of the outstanding stock of Geller Company for $600,000. Geller reports a single asset, land costing $500,000 (fair value $650,000) and a note payable of $320,000. Geller also owns a patent that has a book value of $35,000 and a fair value of $75,000. At what amount should the patent and goodwill be reported on the consolidated financial statements? a. Patent $75,000; Goodwill $385,000 b. Patent $35,000; Goodwill $195,000 c. Patent $35,000; Goodwill $385,000 d. Patent $75,000; Goodwill $195,000 e. Intangible assets are not reported on the consolidated financial statements. d; Moderate 130. Solutions Corporation purchases 80% of the outstanding stock of Dexter Company for $880,000. The assets and liabilities held by Dexter have a net fair value of $710,000. Dexter has earned revenues of $540,000 and incurred expenses of $390,000 till the date of acquisition. The patent held by Dexter was estimated to be worth $72,000. The book value of the patent was $45,000. Which of the following is true regarding consolidated financial statement? a. Both subsidiary’s revenue and expenses will be included. b. Only subsidiary’s revenues of $540,000 will be included, not the expenses. c. No goodwill will be recognized. d. Patent will be reported at $45,000. e. Solutions will report goodwill of $170,000. e; Moderate 131. Janus Corporation purchases all of the outstanding stock of Paula Company for $500,000. The net assets of Paula have a fair value of $350,000 which includes a copyright with a book value of $6,000 and a fair value of $80,000. Determine the amount of goodwill to be reported on consolidated financial statements on the date of purchase? a. $156,000 b. $144,000 c. $74,000 d. $70,000 e. $150,000 e; Moderate

Hoyle, Financial Accounting 2.0

132. James Company purchased 100% of the outstanding stock of Hardware Corporation on July 1, 2016 for $1,200,000. Hardware reports annual revenue of $225,000 and expenses of $180,000. The revenues and expenses were evenly spread throughout the year. What amount of revenues and expenses earned by Hardware, should James report on its consolidated income statement prepared on December 31, 2016subsequent to the date of acquisition? a. Revenues $225,000; Expenses $180,000 b. Revenues $157,500; Expenses $126,000 c. Revenues $67,500; Expenses $54,000 d. Revenues $112,500; Expenses $90,000 e. Revenues and expenses of subsidiary are not reported. d; Moderate 133. On 1/1/2014, Able Corporation purchased Frame, Inc. for $14,500,000. Frame had one asset, a patent, with fair value of $600,000 and a book value of $10,000. The patent has a remaining useful life of 10 years. Frame continued to operate after the purchase, and on 12/31/2014, Able is preparing consolidated statements for the year. At what amount should the patent be shown on Able’s consolidated balance sheet on 12/31/2014? a. $600,000 b. $540,000 c. $10,000 d. $9,000 e. $590,000 b; Easy Fill in the blanks 134. When a parent company owns more than 50% of a subsidiary, it must prepare ______ financial statements. consolidated; Easy 135. A company’s total asset turnover is its _____ divided by its average total assets. sales revenue; Easy 136. A company’s _____ is its net income divided by its average total assets. return on assets or ROA

Hoyle, Financial Accounting 2.0

Problems 137. Christina Corporation purchases Transition, Inc. on January 1, 2012.On this date, Transition had two assets, land with both book and fair values of $50,000 and $80,000 respectively and, a patent with a book value of $2,000 and a fair value of $100,000. The patent has a remaining useful life of 4 years. Christina paid $200,000 for Transition. a. At what value would Transition’s land be shown on a consolidated balance sheet on January1, 2012? $80,000 b. At what value would Transition’s patent be shown on a consolidated balance sheet on January1, 2012? $100,000 c. Calculate any goodwill created by this purchase. $20,000 d. At what value would Transition’s patent be shown on a consolidated balance sheet on December 31, 2012? $75,000 Moderate 138. In the year 2019, Marvin Corporation made sales of $75,000. Net income for the year amounted to $13,000. Marvin’s beginning total asset balance was $70,000 and its ending total asset balance was $60,000. Calculate Marvin’s total asset turnover for 2019. 1.15 times Easy 139. In the year 2019, Marvin Corporation made sales of $75,000. Net income for the year amounted to $13,000. Marvin’s beginning total asset balance was $70,000 and its ending total asset balance was $60,000. Calculate Marvin’s return on assets for 2019. 20% Easy

Hoyle, Financial Accounting 2.0

Chapter 13 In a Set of Financial Statements, What Information Is Conveyed about Current and Contingent Liabilities? Section 1 True/False Questions 1. A liability is an obligation owed to a party outside of the reporting organization.

True; Easy 2. Liabilities can be settled either with cash or by the conveyance of other assets or the

delivery of services. True; Easy 3. A debt that is expected to be settled within one year from the balance sheet date is

classified as a current liability. True; Easy 4. Bonds and capital stock are typically classified as current liabilities on the balance sheet.

False; Easy 5. Deferred income taxes are typically classified as noncurrent liabilities on the balance

sheet. True; Easy 6. A debt that is not expected to be settled within one year from the balance sheet date is

classified as a noncurrent liability. True; Easy 7. A liability is a probable future sacrifice of the reporting entity’s assets or services arising

from a present obligation that is the result of a past transaction or event. True; Easy 8. Current ratio measures an organization’s profitability by dividing total assets by current

assets. False; Easy

Hoyle, Financial Accounting 2.0

Multiple Choice Questions 9. Which of the following is a characteristic of a liability?

a. It arises from a present obligation. b. It is a probable future benefit. c. It is used to earn profit in a business. d. It includes only those obligations arising from passage of time. e. It is amortized over the life of the debt. a; Easy 10. Carter Co. placed an order for a machine on January 5. The company received the

machine on January 20. The company installed the machine on 29 January and started production from 1 February. The company paid the amount due for the machine on February 5. On which date will Carter recognize the liability for the purchase of machine? a. 5th January b. 20th January c. 29th January d. 1st February e. 5th February b; Moderate 11. Which of the following is most likely to be classified as a noncurrent liability?

a. Bonds Payable b. Accounts Payable c. Interest Payable d. Rent Payable e. Salaries Payable a; Easy 12. Which of the following is most likely to be classified as a current liability?

a. Long-term Leases b. Employee Pension c. Bonds Payable d. Notes Payable e. Unearned Revenue e; Easy 13. Which of the following will create a noncurrent liability?

a. Cash borrowed from a bank to be repaid in 3 years b. Goods sold on credit c. Interest on 12 percent, 5 year bonds due in 6 months d. Rent received in advance for 3 months e. Outstanding salaries for one month a; Easy

Hoyle, Financial Accounting 2.0

14. Which of the following measures do decision makers use to determine a company’s

ability to pay it short-term debts as they come due? a. Age of receivables b. Return on assets c. Current ratio d. Inventory turnover e. Receivables turnover c; Easy 15. Which of the following statements is true of liabilities?

a. It represents claims to a company’s equity. b. The smaller a liability total is in comparison to the reported amount of assets, the riskier the financial position. c. A lower percentage of current liabilities to current assets will result in a lower current ratio. d. It is an obligation owed to a party outside the reporting organization. e. It cannot be settled by the conveyance of other assets or the delivery of services. d; Easy 16. Current ratio measures a company’s:

a. profitability. b. liquidity. c. long-term solvency. d. return on capital. e. turnover. b; Easy 17. A current ratio of 0.6 to 1.0 means:

a. b. c. d. e.

current assets is 60 percent of current liabilities. current liabilities is 60 percent of current assets. current liabilities represent 40 percent of total liabilities. the company has more current assets than current liabilities. the company will be able to satisfy 40 percent of current liabilities by the end of the year. a; Easy

Hoyle, Financial Accounting 2.0

18. Rollins Corporation has the following assets and liabilities:

Cash $4,000 Accounts Receivable 5,000 Investment in Trading Securities 8,000 Equipment 7,000 Salaries Payable 2,000 Interest Payable 1,000 Unearned Revenue 3,000 Bonds Payable 9,000 Compute Rollins’ current ratio. a. 1.60 to 1 b. 4.00 to 1 c. 1.13 to 1 d. 2.83 to 1 e. 1.33 to 1 d; Easy Fill in the blanks 19. A _____ is a probable future sacrifice of economic benefits arising from present

obligations. liability; Easy 20. A _____ is a debt which will be satisfied within one year from the balance sheet date.

current liability; Easy 21. A _____ is a debt which will not be satisfied within one year from the balance sheet date.

noncurrent liability; Easy 22. A company’s _____ is equal to its current assets divided by its current liabilities.

current ratio; Easy Section 2 True/False Questions 23. The timing of recognition of accounts payable is based on the FOB point.

True; Easy 24. FOB shipping point indicates that ownership of inventory does not transfer to the buyer

until it reaches its warehouse. False; Easy

Hoyle, Financial Accounting 2.0

25. Gift card liability is an obligation arising when a business accepts cash and issues a card

that can be redeemed in the future for a specified amount of assets or services. True; Easy 26. Accrued liabilities refer to liabilities that grow gradually because of the passage of time.

True; Easy 27. Gift cards reflect a liability which is typically settled with cash.

False; Easy 28. When a gift card is redeemed, revenue account should be credited.

True; Easy 29. Unredeemed gift cards should always remain on the selling company’s books as a

liability. False; Easy 30. The value of gift cards which expire can be reclassified from unearned revenue to

revenue. True; Easy 31. Creighton Corporation sold $400 in gift cards. If Creighton’s accountant debited cash and

credited revenue to record this, its assets will be overstated. False; Moderate Multiple Choice Questions 32. When inventory is purchased on credit with terms FOB shipping point:

a. the buyer reports the liability when the goods leave the seller’s place of business. b. the buyer reports the liability when the goods reaches the buyer’s place of business. c. the buyer receives discount if payment is made before the goods leave the seller’s place of business. d. the seller bears the insurance expense of goods during transit. e. the seller reports the inventory after the goods reach the buyer’s place of business. a; Easy 33. On January 1, 2014, Franklin Corporation borrowed $40,000 at a 6 percent annual

interest rate for 3 years with payment to be made at the end of each year. On March 31, Franklin prepared its quarterly statements. Interest payable should be credited for: a. $2,400. b. $800. c. $400. d. $600. e. $200. d; Easy

Hoyle, Financial Accounting 2.0

34. Which of the following statements is true of accounting for gift cards?

a. Revenue is recognized at the time of sale. b. An expense is recognized at the end of the year towards unredeemed gift cards. c. Total liability balance increases at the expiration of gift cards. d. Revenue is recognized for the amount of gift cards that have been expired. e. Net income decreases at the expiration of a gift card. d; Easy 35. Robin Corporation begins the year with a balance of $300,000 in unearned revenue

related to unredeemed gift cards. During the year, $800,000 in gift cards expiring in 18 months are sold, of which $600,000 worth of gift cards have been redeemed in the same year. Another $50,000 in gift cards expired during the year and was transferred to revenue. At the end of the year, what is the balance in unearned revenue relating to unredeemed gift cards? a. $450,000 b. $500,000 c. $800,000 d. $1,100,000 e. $1,050,000 a; Moderate 36. Robin Corporation begins the year with a balance of $300,000 in unearned revenue

related to unredeemed gift cards. During the year, $800,000 in gift cards expiring in 18 months are sold, of which $600,000 worth of gift cards have been redeemed in the same year. Another $50,000 in gift cards expired during the year and was transferred to revenue. Which of the following is the amount of revenue Robin earned from gift cards during the period? a. $300,000 b. $500,000 c. $650,000 d. $800,000 e. $600,000 c; Moderate 37. Yates Company borrowed $20,000 from Eastern Bank on November 1, 2013 at an

interest rate of 6 percent. No entries related to interest on loan were made prior to December 31, 2013, when Yates Company prepared financial statements. On that date, Yates’ accountant debited interest expense and credited interest payable for $100. Which of the following is true of this transaction? a. Liabilities are overstated. b. Assets are understated. c. Net income is understated. d. Retained earnings are overstated. e. Revenues are understated. d; Moderate

Hoyle, Financial Accounting 2.0

38. Lollis, Inc. began the year with a balance of $20,000 in unearned revenue related to

unredeemed gift cards. Lollis sold gift cards in the amount of $48,000 during the year. During the year, 75 percent of the total card balance outstanding was redeemed. At the end of the year, $3,400 of the total card balance expired. How much revenue did Lollis recognize on gift cards during the year? a. $51,000 b. $36,000 c. $16,000 d. $38,400 e. $54,400 e; Moderate 39. Lollis, Inc. began the year with a balance of $20,000 in unearned revenue related to

unredeemed gift cards. Lollis sold gift cards in the amount of $48,000 during the year. During the year, 75 percent of the total card balance outstanding was redeemed. At the end of the year, $3,400 of the total card balance expired. Which of the following is the correct ending balance in unearned revenue related to gift cards? a. $20,000 b. $13,600 c. $17,000 d. $48,000 e. $68,000 b; Moderate 40. Production employees at Ellis Industries informed the purchasing department on

December 4 that they were getting low on Part XY-32. The purchasing department submitted an order for XY-32 to Felix Company on December 7. The inventory was shipped from Felix’s warehouse on December 20 with the designation FOB destination. The inventory arrived at Ellis’ receiving dock on December 27. Ellis prepares its financial statements on December 31 of each year. On which date should Ellis recognize a liability for this inventory purchase? a. December 4 b. December 7 c. December 20 d. December 27 e. December 31 d; Moderate

Hoyle, Financial Accounting 2.0

41. Hollis Company pays salaries to its employees on the fifth of every month for work done

in the previous month. Total payroll is $40,000 per month. On December 31, what entry should Hollis make if it is preparing year-end statements? a. Cash 40,000 Salaries Payable 40,000 b. Salaries Expense 40,000 Salaries Payable 40,000 c. Salaries Expense 40,000 Cash 40,000 d. Salaries Payable 40,000 Salaries Expense 40,000 e. Cash 40,000 Salaries Expense 40,000 b; Easy 42. Which of the following is the entry to record the sale of a gift card in the amount of $35?

a. Cash Revenue b. Unearned Revenue Revenue c. Cash Unearned Revenue d. Revenue Cash e. Revenue Unearned Revenue c; Easy

35 35 35 35 35 35 35 35 35 35

43. Ronald Inc. recognizes revenue from unused gift cards in proportion to the cards that are

actually redeemed. The company sold $50,000 gift cards to Friedo Co. Based on past experience, Ronald expects $24,000 of these gift cards will never be turned in. If 12 percent of $24,000 gift cards are redeemed this month, compute the amount of revenue recognized during the month from unused gift cards. a. $26,000 b. $24,000 c. $6,000 d. $3,120 e. $2,880 e; Moderate Fill in the blanks 44. A(n) _____ liability is one that grows in size over time.

accrued; Easy

Hoyle, Financial Accounting 2.0 45. When a gift card is sold, a company should credit _____.

unearned revenue; Easy 46. The timing for the recognition of a purchase is determined by the _____ designated in the

contract. FOB point; Easy Problems 47. Kristof Corporation produces laptop computers. During the month of April, the

following transactions occurred. Record any necessary journal entry for each transaction. a. Kristof purchased $250,000 of raw materials inventory on account. Inventory Accounts Payable

250,000 250,000

b. Customers paid Kristof $90,000 in advance for computers to be delivered within the next month. Cash

90,000 Unearned Revenue

90,000

c. Kristof owes employees $123,000 at the end of the month. Salaries Expense Salaries Payable

123,000 123,000

Easy 48. Halen Corporation is one of the leading coffee manufacturers. During the month of

August, the following transactions occurred. Record any necessary journal entry for each transaction as of August 31. a. Halen owes the IRS $1,200,000 in taxes. Taxes Expense Taxes Payable

1,200,000 1,200,000

b. Halen borrowed $1,000,000 at a rate of 6 percent at the beginning of August. No interest has been accrued. Interest Expense Interest Payable

5,000 5,000

Hoyle, Financial Accounting 2.0 c. Halen owes $590,000 in rent. Rent Expense Rent Payable

590,000 590,000

Easy 49. Doodle Corporation sells gift cards. On January 1, 2013, Doodle had a balance of

$320,000 in unearned revenue related to unredeemed gift cards. During 2013, Doodle sold an additional $1,000,000 in gift cards. During the year, customers redeemed $800,000 in gift cards, and an additional $100,000 expired. Determine the amount of revenue Doodle recognized on gift cards during the year. $800,000 + $100,000 = $900,000 Moderate 50. Doodle Corporation sells gift cards. On January 1, 2013, Doodle had a balance of

$320,000 in unearned revenue related to unredeemed gift cards. During 2013, Doodle sold an additional $1,000,000 in gift cards. During the year, customers redeemed $800,000 in gift cards, and an additional $100,000 expired. Determine the ending balance in unearned revenue that relates to gift cards. $320,000 + $1,000,000 – $800,000 – $100,000 = $420,000 Moderate Section 3 True/False Questions 51. A commitment is a potential gain or loss that might arise because of a past event.

False; Easy 52. Commitments do not require a liability to be reported at the present time.

True; Easy 53. An explanation about commitments is usually included in the notes to the financial

statements. True; Easy 54. The uncertainty surrounding a contingency is about the ultimate outcome of an action

which has already occurred. True; Easy 55. No specific guidelines exist in regards to recording a contingency; accountants should

just use their judgment. False; Easy

Hoyle, Financial Accounting 2.0 56. A contingent loss should be recorded if it is deemed to be probable and the amount of

that loss can be reasonably estimated. True; Easy 57. If the likelihood of a loss is reasonably possible rather than probable, it should be

disclosed in the notes to the financial statements. True; Easy 58. A loss whose likelihood is remote should also be recorded in the financial statements.

False; Easy 59. A contingency where the chance of loss is viewed as merely remote can be omitted

entirely from the financial statements. True; Easy 60. U.S. GAAP describes a probable loss as one that is likely to occur.

True; Easy 61. If an estimate of a contingent loss made in good faith turns out to be incorrect, the

financial statements in which the estimation was reported should be restated. False; Easy 62. If a company makes an estimate of a contingent loss that is fraudulent, the financial

statements in which the estimation was reported should be restated. True; Easy 63. U.S. GAAP requires gain contingencies to be reported in the financial statements if they

are probable and can be estimated. False; Easy Multiple Choice Questions 64. Which of the following conditions must be met for a contingent loss to be recorded in the

financial statements? a. The chance of loss must be remote. b. The amount of the loss must be unknown. c. The chance of loss must be probable and can be reasonably estimated. d. The occurrence of loss must be from a future event. e. The stock of the company must be a publicly-traded. c; Easy

Hoyle, Financial Accounting 2.0

65. Which of the following is an example of loss contingencies?

a. Increase in fair value of assets b. Enter into a capital lease c. Collectability of receivables d. Issue of shares at discount e. Loss from sale of copyright c; Easy 66. Gain contingencies are not recognized in an entity’s financial statements due to the:

a. matching principle. b. conservatism principle. c. monetary unit principle. d. accounting period principle. e. cost principle. b; Easy 67. Which of the following needs to be adjusted, if a restatement of a prior period financial

statement is necessary? a. Retained earnings b. Fixed Assets c. Long-term Liabilities d. Contingent Liabilities e. Revenue a; Easy 68. Tydings Corporation is being sued by a former employee. Tydings’ lawyer believes that

the chance of loss is remote. Which of the following is true of reporting this contingent loss? a. The loss should not be reported. b. The loss should be disclosed in the notes to the financial statements. c. The loss should be reported in the statement of cash flows. d. The loss should be reported on the balance sheet. e. The loss should be reported on the income statement.. a; Easy 69. Principle Company is suing a competitor for $400,000. Principle’s lawyer believes that

Principle will probably win and receive all $400,000. Which of the following is true of reporting this contingent gain under U.S. GAAP? a. The gain should be disclosed in the notes to the financial statements. b. The gain should not be reported. c. The gain should be reported in the statement of cash flows. d. The gain should be reported on the income statement. e. The gain should be reported on the balance sheet. b; Easy

Hoyle, Financial Accounting 2.0 70. Anderson Corporation has operations in a small country overseas that has a very unstable

government. At the end of 2014, it appears probable that a group of rebels will successfully overthrow the current government and expropriate all of Anderson’s assets, which amount to $46,700,000. Anderson correctly reports a contingent loss and liability of $46,700,000 in its 2014 financial statements. In 2015, Anderson discovers that the current government was not overthrown and the chance of loss of its assets is now remote. Which of the following shows the correct action for Anderson to take in 2015? a. Anderson should restate the 2014 financial statements to show no contingent loss or liability. b. Anderson should debit the contingent liability account and credit the contingent loss account for $46,700,000. c. Anderson should debit the contingent liability account and credit retained earnings for $46,700,000. d. Anderson should explain about the situation in its 2015 notes to financial statements. e. Anderson should report a contingent gain of $46,700,000 on its 2015 financial statement. c; Hard 71. Which of the following is an example of a commitment?

a. Conversion of bonds to equity b. Acquired patent at fair value c. Appreciation of equipment acquired on lease d. A contract to purchase truck e. Declared cash dividends d; Hard 72. In 2015, Opal Company was sued by the government for employee safety violations.

Opal’s lawyer believes it is probable Opal will lose and will have to pay $490,000 in fines. Which of the following describes the action Opal should take in 2015 in relation to this lawsuit? a. Opal should make the following journal entry: Loss from Lawsuit-Estimated 490,000 Estimated Liability from Lawsuit 490,000 b. Opal should report about the lawsuit in the notes to the financial statements. c. Opal should make the following journal entry: Estimated Liability from Lawsuit 490,000 Loss from Lawsuit-estimated 490,000 d. d. Opal should wait until the lawsuit is settled to report it in the financial statements. e. Opal should restate its previous year income statement. a; Moderate

Hoyle, Financial Accounting 2.0

73. If an initial estimation of a contingent loss is found to be fraudulent,:

a. b. c. d. e.

the financial statements in which the estimation was reported should be restated. the loss should be adjusted to the retained earnings of the current year. previous year’s notes to financial statement should be restated. current year financial statement should report the difference as an expense. the company should record a loss from contingent liability in the current year financial statement. a; Hard

74. Contingent gains are reported:

a. when it is probable. b. when the amount of the gain can be reasonably estimated. c. when the gain actually occurs. d. in the notes to the financial statement. e. as assets in the balance sheet. c; Hard 75. IFRS states that the amount recorded as contingent liability should be the best estimate of

the: a. expenditure required to settle the present obligation at the balance sheet date. b. historical cost of the obligation. c. present value of the obligation at the balance sheet date. d. fair value of the services to be delivered to settle the present obligation at the balance sheet date. e. future value of the obligation at the expected date of settlement. a; Hard 76. Which of the following statement is true of IFRS standard for accounting for

contingencies? a. Contingent loss should not be reported until it actually occurs. b. More contingent liabilities are likely to be reported under U.S.GAAP than IFRS. c. Remote contingent liabilities should be reported in the notes to financial statement. d. U.S.GAAP and IFRS have same standards for reporting contingent loss. e. If there is a range of possible losses but no best estimate exists within that range, the entity records the midpoint of the range. e; Hard Fill in the blanks 77. A _____ is an unexecuted contract.

commitment; Easy 78. Under U.S. GAAP, a _____ is a potential gain resulting from a past event that is not

recognized in an entity’s financial statements until it is certain. contingent gain

Hoyle, Financial Accounting 2.0

79. In order to be reported in an entity’s financial statements, a contingent loss should be

_____ and should be able to be _____. probable, estimated; Easy Short Answer Questions 80. Explain why contingent losses are potentially reported in a company’s financial

statements, but not contingent gains as per U.S. GAAP. This discrepancy is explained by the principle of conservatism. Contingent losses are reported if they are probable and able to be estimated. However, gains are not allowed to be reported until they are certain. Gains would make a company look better, so not reporting them until they are certain better protects those relying on the financial statements. Easy 81. In 2013, Lottie Company was sued for $100,000 by a customer who claims one of its

products caused her harm. Lottie’s lawyer believes it is probable that Lottie will lose and will have to pay $100,000. Lottie correctly records this contingency in 2013. In 2014, Lottie learns that it has lost the lawsuit, but will only have to pay $20,000. Explain how Lottie should account for this new information in 2014. Unless fraud was committed, and there’s no indication that it was, Lottie would not restate the 2013 statements. Instead it would reduce the liability by $80,000 and increase retained earnings by $80,000. Easy Section 4 True/False Questions 82. The likelihood of loss under a warranty is almost always probable.

True; Easy 83. Extended warranties are initially recorded as unearned revenue, and are reclassified as

revenue over the time of the obligation. True; Easy 84. Warranty expense should not be recorded until the amount of claims is known for sure.

False; Easy 85. If a change is made to an estimate of warranty expense, the company should restate the

number reported in prior periods. False; Easy

Hoyle, Financial Accounting 2.0 86. Extended and embedded warranties are accounted for in the same manner since both are

warranties. False; Easy 87. An extended warranty covers a product after an embedded warranty expires.

True; Easy 88. When an extended warranty is sold, the seller must credit unearned revenue.

True; Easy 89. Extended warranties can potentially increase revenue over time.

True; Easy 90. Age of accounts payable is calculated by dividing a company’s accounts payable by its

average cost of goods sold per day. False; Easy 91. Reflow Corporation purchased inventory of $7,300 during the year. It ended the year

with accounts payable of $600. Reflows’ age of accounts payable is 30 days. True; Easy Multiple Choice Questions 92. An obligation established by the sale of a product where the seller promises to fix or

replace the product if it proves to be defective is called: a. embedded product warranty. b. product benefits. c. gift card. d. redeemable vouchers. e. exchange coupons. a; Easy 93. When should warranty expense be recorded on the following two types of warranties?

Embedded warranty a. When product is repaired b. When product is repaired c. When cash is collected d. When product is sold e. When product is sold e; Easy

Extended warranty When cash is collected When product is sold When product is repaired When cash is collected When product is repaired

Hoyle, Financial Accounting 2.0

94. The accounting for extended warranties is similar to accounting for:

a. gift cards. b. depreciation. c. bad debts. d. prepaid insurance. e. donations. a; Easy 95. Which of the following account is debited when a product is sold with embedded

warranty? a. Warranty Payable b. Warranty Expense c. Inventory d. Unearned Revenue e. Accounts Payable b; Easy 96. Pushkin Corporation sells toasters with an embedded warranty. During 2011, Pushkin

sold toasters and correctly recorded $4,000 in warranty expense. During 2012, Pushkin spent $3,000 repairing toasters covered under warranty. At the end of 2012, Pushkin determines that the warranty payable account should have a final balance of $1,200.What change should be made to warranty expense? a. Debit of $100 b. Debit of $200 c. Credit of $400 d. Credit of $200 e. Debit of $500 b; Moderate 97. Hampton Sales sells washers with an embedded two year warranty. In 2014, Hampton

sold 10,000 washers at a cost of $800 each. Hampton estimates that 5 percent of those will need some sort of repair with an average cost of $50. Hampton correctly makes the entry to record the warranty in 2014 .In 2015, 200 washers are repaired under the warranty for a total cost of $800. Which entry below correctly records these repairs in 2015? a. Warranty expense 1,000 Warranty payable 1,000 b. Warranty payable 800 Cash 800 c. Warranty expense 800 Cash 800 d. Warranty payable 1,000 Cash 1,000 e. Warranty expense 800 Warranty payable 800

Hoyle, Financial Accounting 2.0 b; Moderate 98. Horace Company sells toaster ovens with an extended warranty which kicks in after the

embedded warranty expires after 2 years. During 2015, Horace sold 6,000 toaster ovens, out of which extended warranty was purchased for 2,000 for $5 each. Based on the past, Horace believes that 100 toaster ovens will have to be repaired at an average cost of $10 each. In 2015, Horace’s accountant correctly recorded warranty expense for the embedded warranty. The accountant also debited cash and credited revenue for $10,000 for the extended warranty sales. Which of the following is true? a. Revenue is understated b. Liabilities are understated c. Assets are overstated d. Retained earnings are understated e. Expenses are overstated b; Moderate 99. Brantley, Inc. reported cost of goods sold of $1,100,000 for the year 2014. Beginning

inventory was $200,000 and ending inventory was $195,000. Accounts payable at the end of the year amounted to $93,000. Determine Brantley’s age of accounts payable for 2014. a. 22.7 days b. 31 days c. 48.10 days d. 59 days e. 60.70 days b; Moderate 100. The following figures appeared on Blankenship, Inc.’s financial statements for

the year: Cost of Goods Sold $370,000 Beginning Inventory 39,000 Ending Inventory 34,000 Accounts Payable 28,000 What was Whazzit’s age of accounts payable? a. 27.6 days b. 13.2 days c. 27.3 days d. 10 days e. 28 days e; Moderate

Hoyle, Financial Accounting 2.0

101. Which of the following principles dictates that warranty expense should be recorded in

the same period as the revenues they help generate? a. Matching b. Conservatism c. Revenue recognition d. Consistency e. Monetary Unit a; Easy 102. Felice Corporation sells blenders with an extended warranty, which kicks in after the

embedded warranty expires after one year. During 2016, Felice sold 700 blenders and out of those, 300 were sold with the extended warranty. The extended warranty costs $10. In 2017, Felice made repairs under the extended warranty of $200. Felice recognizes revenue using a straight-line basis over 2 years. Which of the following journal entries records the sale of the extended warranties in 2016? a. Warranty Expense 3,000 Warranty Payable 3,000 b. Cash 3,000 Warranty Payable 3,000 c. Unearned Revenue 3,000 Revenue 3,000 d. Cash 3,000 Unearned Revenue 3,000 e. Warranty expense 3,000 Unearned Revenue 3,000 d; Moderate 103. Felice Corporation sells blenders with an extended warranty, which kicks in after the

embedded warranty expires after one year. During 2016, Felice sold 700 blenders and out of those, 300 were sold with the extended warranty. The extended warranty costs $10. In 2017, Felice made repairs under the extended warranty of $200. Felice recognizes revenue using a straight-line basis over 2 years. Which of the following journal entries records revenue earned from the extended warranties in 2017? a. Cash 1,500 Warranty Payable 1,500 b. Revenue from Extended Warranty 1,500 Warranty Expense 1,500 c. Unearned Revenue 1,500 Revenue from Extended Warranty 1,500 d. Cash 1,500 Unearned Revenue 1,500 e. Warranty Expense 1,500 Revenue from Extended Warranty 1,500 c; Easy

Hoyle, Financial Accounting 2.0 104. Felice Corporation sells blenders with an extended warranty, which kicks in after the

embedded warranty expires after one year. During 2016, Felice sold 700 blenders and out of those, 300 were sold with the extended warranty. The extended warranty costs $10. In 2017, Felice made repairs under the extended warranty of $200. Felice recognizes revenue using a straight-line basis over 2 years. Which of the following journal entries records the warranty expense incurred under the extended warranties in 2017? a. Warranty Expense 200 Cash 200 b. Cash 200 Warranty Payable 200 c. Unearned Revenue 200 Warranty Expense 200 d. Warranty Payable 200 Cash 200 e. Unearned Revenue 200 Cash 200 a; Easy Fill in the blanks 105. A(n) _____ warranty is an obligation established by the sale of a product where the

seller promises to fix or replace the product if it proves to be defective. embedded; Easy 106. A(n) _____ warranty is an obligation whereby the buyer of a product pays the seller for

the equivalent of an insurance policy to protect against breakage or other harm to the product for a specified period of time. extended; Easy 107. The age of accounts payable is calculated by dividing accounts payable by the _____.

average inventory purchases made per day; Easy

Hoyle, Financial Accounting 2.0

Problems 108. Kiefer Company sells refrigerators with an embedded 3-year warranty. During 2012,

Kiefer sold 15,000 refrigerators of which, 6 percent are estimated to need some sort of repair under the warranty period. The best estimate is that each repair will average $40. At the end of 2013, repairs under warranty totaled $14,000 and an analysis revealed that Kiefer may need to spend $25,000 (rather than $22,000) for repairs under the warranty. a. Record warranty expense in 2012. Warranty Expense Warranty Payable

36,000 36,000

b. Record the repairs performed in 2013. Warranty Payable Cash

14,000 14,000

c. Record the journal entry necessary to report the correct balance in warranty payable at the end of 2013. Warranty Expense Warranty Payable Moderate

3,000 3,000

109. Sawyer Appliances sells heaters with an embedded 1-year warranty as well as an

optional 2-year extended warranty. In 2017, Sawyer sold 50 heaters with the extended warranty, which costs $10 for each heater. In 2019, Sawyer spent $75 fixing heaters under the extended warranty. Sawyer recognized the revenue on the extended warranties using the straight-line method. a. Record the sale of the extended warranties in 2017. Cash

500 Unearned Revenue

500

b. Record the repairs performed under the extended warranties in 2019. Warranty Expense Cash

75 75

c. Record the revenue to be recognized on the extended warranties in 2019. Unearned Revenue Revenue from Extended Warranty Moderate

250

Hoyle, Financial Accounting 2.0

110. Ribbon Enterprises sells computers with an embedded 2-year warranty. In 2018, Ribbon

sold 3,000 computers for $400 each. It estimates that 4 percent will need to be repaired at an average cost of $20 each. In 2019, repairs in the amount of $500 were made. a. Record the journal entries to necessary at the time of sale of the computers. Cash

1,200,000 Sales of Inventory

Warranty Expense Warranty Payable b.

1,200,000 2,400 2,400

b. Record the journal entry necessary in 2019.

Warranty Payable Cash Moderate

500

Hoyle, Financial Accounting 2.0

Chapter 14 In a Set of Financial Statements, What Information Is Conveyed about Noncurrent Liabilities Such as Bonds? Section 1 True/False Questions 1. Interest is the cost of borrowing money. True; Easy 2. Companies which are unable to pay their debts can be forced into bankruptcy by their creditors. True; Easy 3. All bankruptcies end in the liquidation of the bankrupt company. False; Easy 4. Interest is a tax deductible expense. True; Easy 5. Financial leverage refers to a company’s ability to pay off its debts as they come due. False; Easy 6. A company is said to be employing financial leverage if the extra income generated from borrowed money is more than the cost of the related interest. True; Easy 7. A note is a written contract that specifies the payment of designated amounts of cash by the debtor on stated date. True; Easy 8. Bonds are typically sold to a group of people, often the general public. True; Easy 9. Debt instruments issued to the public are subject to the regulation of the SEC. True; Easy

Hoyle, Financial Accounting 2.0

Multiple Choice Questions 10. Which of the following is an advantage of financing with debt? a. It creates operating leverage. b. It reduces the risk of bankruptcy. c. Debt cannot be eliminated. d. Interest expense on the related debt is a tax deductible expense. e. Bondholders can maintain their position indefinitely. d; Easy 11. Which of the following is a disadvantage of financing with debt? a. Interest expense increases tax liability. b. It dilutes the ownership of a company. c. It carries the risk of bankruptcy. d. It reduces financial leverage. e. Creditors become the owners of the company in the long run. c; Easy 12. Which of the following is a court process which results in either the liquidation or reorganization of a company? a. Leverage b. Security agreements c. Bankruptcy d. Serial Debt e. Factoring c; Easy 13. Which of the following is a charge for using debt over time? a. Interest b. Leverage c. Bankruptcy d. Dividends e. Bond a; Easy 14. Which of the following refers to a company’s ability to earn more on borrowed funds than the cost of related interest? a. Covenants b. Financial leverage c. Turnover d. Liquidity e. Factoring b; Easy

Hoyle, Financial Accounting 2.0 15. When a company issues bonds to the general public, it becomes subject to the rules and regulations of the: a. IASB. b. EITF. c. PCAOB. d. SEC. e. AICPA. d; Easy 16. Which of the following is true of debt financing? a. Debt is free of cost. b. Debt does not financial leverage. c. It is mandatory for a company to have debt. d. Debt brings in risk. e. Debt always leads to bankruptcy. d; Easy 17. Which of the following is true of financial leverage? a. It refers to an organization’s ability to increase its reported net income by using equity financing. b. It refers to an organization’s ability to increase its reported net income by using debt financing. c. It refers to an organization's ability to collect receivables faster than paying its dues. d. A highly leveraged firm means that the company has a high dividend payout ratio. e. A highly leveraged company means that most of its funds come from retained earnings. b; Moderate 18. Which of the following is true of interest expense? a. It is added to operating profit of a company. b. It increases the tax liability of a company. c. It is a permanent expense of a company. d. It helps in creating financial leverage for a company. e. It is calculated based on the net income of a company. d; Moderate 19. Which of the following is a debt contract sold to public in general? a. Bonds b. Notes payable c. Sales d. Receivable account e. Interest expense a; Easy

Hoyle, Financial Accounting 2.0

20. Companies that have adopted a strategy of being highly leveraged will have most of their funds from: a. debt financing. b. equity financing. c. investment in subsidiary companies. d. retained earnings. e. sales revenue. a; Easy Fill in the blanks 21. A _____ is a debt contract between two parties. note; Easy 22. _____ is a formal court process which may end in either the liquidation or reorganization of a company. Bankruptcy; Easy 23. _____ is the use of debt to generate a higher rate of return than the interest cost. Leverage; Easy 24. _____ is the cost of borrowing money. Interest; Easy Short Answer Questions 25. Briefly explain the advantages and disadvantages of debt financing. The advantages of borrowing money are as follows: • The interest expense paid on the debt borrowed is tax deductible. • Debt can be eliminated. • Debt financing provides the benefit of financial leverage to a company. This refers to an organization’s ability to increase reported net income by earning more money on borrowed funds than the associated cost of interest. However, debt financing is associated with the following disadvantages: • Debt is associated with cost. A bank or other creditor financing debt will charge interest for the use of money borrowed. • A business must be able to generate enough surplus cash to satisfy its creditors as debts become due. • Debt financing is risky because it can lead to bankruptcy. Moderate

Hoyle, Financial Accounting 2.0

Section 2 True/False Questions 26. The terms written into a loan indenture are typically standard across all contracts. False; Easy 27. Serial debts require the entire face value to be repaid at the end of the contract time. False; Easy 28. A callable bond can be repaid prior to the due date of the bond at the discretion of the debtor. True; Easy 29. Mortgage agreements provide a lender with interest in identified property allowing the lender to repossess the property should the borrower fail to repay a loan. True; Easy 30. A debenture is a debt contract that is not callable. False; Easy 31. Covenants are agreements between the lender and borrower, usually made to protect the lender. True; Easy 32. A convertible debt refers to equity interest that can be converted to debt. False; Easy 33. It is common for bonds to be sold in between interest dates. True; Easy 34. Bonds are normally issued at a stated amount plus accrued interest when they are issued between interest payment dates. True; Easy 35. Hudson Company issued bonds on October 1, 2018, which pay interest semiannually. The first interest payment will be made on December 1, 2018. The bondholders will have to pay Hudson 2 months’ worth of interest when they purchase the bond. False; Moderate

Hoyle, Financial Accounting 2.0

Multiple Choice Questions 36. Which of the following is another name for face value? a. Security b. Covenant value c. Callable value d. Maturity value e. Serial debt d; Easy 37. Which of the following terms refer to a promise made by the debtor to help ensure that adequate money will be available to make required payments when they come due? a. Covenant b. Face value c. Serial debt d. Callable value e. Interest rate a; Easy 38. Which of the following terms indicates that a debt can be fully repaid before the due date at the discretion of the borrower? a. Convertible b. Serial c. Callable d. Perpetuities e. Security c; Easy 39. Which of the following terms refers to a right which allows the creditor to repossess the property or force its liquidation if the debtor fails to make payments in a timely manner? a. Convertible b. Security c. Swap d. Interest rate e. Callable b; Easy 40. Which of the following terms indicates that the lender can swap the debt for the capital stock of the debtor? a. Callable b. Convertible c. Covenant d. Serial e. Perpetuities b; Easy

Hoyle, Financial Accounting 2.0

41. Juniper borrowed $100,000 on April 1, 2011. Interest payments are made semiannually on April 1 and October 1, and the annual interest rate is 6%. Which of the following is the amount of cash Juniper will pay in interest on October 1, 2011? a. $4,000 b. $6,000 c. $2,000 d. $12,000 e. $3,000 e; Easy 42. Juniper borrowed $100,000 on May 1, 2011. Interest payments are made semiannually on May 1 and November 1, and the annual interest rate is 6%. Which of the following is the amount of interest expense Juniper will accrue on December 31, 2011? a. $500 b. $1,000 c. $1,500 d. $3,000 e. $6,000 b; Easy 43. Juniper borrowed $100,000 on May 1, 2011. Interest payments are made semiannually on May 1 and November 1, and the annual interest rate is 6%. The company will debit Interest Expense on May 1, 2012, for: a. $0. b. $500. c. $1,500. d. $2,000. e. $3,000. d; Easy 44. Champion Enterprises issued 10-year bonds in the amount of $120,000 on November 1, 2016. The bonds pay an annual rate of interest of 5%. Interest payments are made on June 1 and December 1 of each year. What is the amount of cash Champion would receive on November 1, 2016 upon the issuance of the bonds? a. $120,000 b. $126,000 c. $123,000 d. $122,500 e. $120,500 d; Moderate

Hoyle, Financial Accounting 2.0

45. Champion Enterprises issued 10-year bonds in the amount of $120,000 on November 1, 2016. The bonds pay an annual rate of interest of 5%. Interest payments are made on June 1 and December 1 of each year. Which of the following is the amount of interest expense Champion should record on December 1, 2016 when interest is paid? a. $0 b. $500 c. $1,000 d. $3,000 e. $6,000 b; Moderate 46. On July 1, 2015, Uganda Corporation issued 5-year debentures for their face value of $240,000 plus accrued interest. The bonds pay interest semiannually on April 1 and October 1. The interest rate is 8%. Uganda’s accountant correctly recorded the issuance of the bonds. On October 1, the accountant debited interest expense and credited cash for $9,600. Which of the following is true? a. Net income for 2015 is overstated. b. Assets are understated. c. Interest expense for 2015 is understated. d. Liabilities are overstated. e. Assets are overstated. d; Hard 47. Carlson Company borrowed $24,000 on June 1, 2014 at an annual interest rate of 10%. Interest payments are made each June 1 and December 1. Which of the following is the journal entry Carlson would make to record the payment of interest on December 1, 2014? a. Interest Expense 1,200 Interest Payable 1,200 b. Interest Expense 600 Interest Payable 600 Cash 1,200 c. Interest Payable 1,200 Cash 1,200 d. Interest Expense 1,200 Cash 1,200 e. Interest Expense 400 Interest Payable 800 Cash 1,200 d; Moderate

Hoyle, Financial Accounting 2.0

48. The amount to be repaid at the end of the contract is termed as: a. annual payment. b. face value. c. par value. d. term value. e. market value. b; Easy 49. Home mortgage is an example of a: a. bond. b. convertible debt. c. serial debt. d. callable debt. e. covenant. c; Easy 50. Specific terms related to a debt will be written into a(n): a. loan indenture. b. incorporation agreement. c. loan certificate. d. share certificate. e. maturity certificate. a; Easy 51. Lever Corporation borrowed $200,000 on November 1, 2017 agreeing to pay interest at 6% per annum. If the company repaid the debt on January 31, 2018, what will be the amount of interest expense recognized as of January 31, 2018? a. $6,000 b. $200,000 c. $206,000 d. $3,000 e. $12,000. d; Moderate 52. Which of the following is an unsecured long-term debt? a. Bonds b. Debentures c. Notes payable d. Bank overdraft e. Purchase discounts b; Easy

Hoyle, Financial Accounting 2.0

Fill in the blanks 53. A _____ bond is one which the debtor can repay prior to due date if it so chooses. callable; Easy 54. A _____provides a lender interest in the property of the borrower in case the borrower defaults on the loan. security; Easy 55. A _____ bond can be exchanged for something else of value. convertible; Easy 56. The _____ of debt is the amount which must be repaid. face value or maturity value; Easy 57. A _____ is a loan term inserted into a contract protect the lender. covenant; Easy Problems 58. Ionia Corporation borrowed $180,000 on February 1, 2017, at an interest rate of 6%. The loan requires interest to be paid on February 1 and August 1. a. Record the journal entry to pay interest on August 1, 2017. Interest Expense

5,400

Cash

5,400

b. Record the journal entry to accrue interest on December 31, 2017. Interest Expense

4,500

Interest Payable

4,500

c. Record the journal entry to pay interest on February 1, 2018. Interest Expense

900

Interest Payable

4,500

Cash

5,400

Moderate

Hoyle, Financial Accounting 2.0

59. Roxanna Company issues $1,200,000 in bonds on May 1, 2012, at an interest rate of 4%. Interest is paid on January 1 and July 1 of each year. a. Record the issuance of the bonds on May 1, 2012. Cash

1,216,000 Bonds Payable

1,200,000

Interest Payable

16,000

b. Record the payment of interest on July 1, 2012. Interest Expense

8,000

Interest Payable

16,000

Cash

24,000

c. Record the accrual of interest on December 31, 2012. Interest Expense

24,000

Interest Payable

24,000

Moderate Section 3 Please note: A present value of $1 table needs to be provided to students in order for them to complete many of these questions. True/False Questions 60. Zero-coupon bonds have a negotiated interest rate. True; Easy 61. Zero-coupon bonds are sold at their face value. False; Easy 62. The discount at which zero-coupon bonds are sold is the interest on the bonds. True; Easy 63. Determining the issuance price of a zero-coupon bond requires the use of a Present Value of Annuity Due table. False; Easy

Hoyle, Financial Accounting 2.0

64. The selling price of a zero-coupon bond is called the principal. True; Easy 65. The present value of a zero-coupon bond is the amount investors are willing to pay for it. True; Easy 66. Bond prices are often stated as a percentage of the present value. False; Easy 67. A zero-coupon bond which sells for “95” means that the bond’s price is 95% of its face value. True; Easy 68. U.S. GAAP prefers that companies use the straight-line method over effective interest method of calculating interest expense because it reports less interest expense in the initial years. False; Easy Multiple Choice Questions 69. Which of the following is true of a zero-coupon bond? a. Zero-coupon bonds have a stated rate of interest. b. Zero-coupon bonds pay interest once a year. c. Zero-coupon bonds are sold at a premium. d. Zero-coupon bonds pay no periodic interest. e. Zero-coupon bonds are sold at their face value. d; Moderate 70. Dallas Corporation issues $40,000 in 3-year zero-coupon bonds with a negotiated interest rate of 4%. How much cash does the company receive on the issue of each zero-coupon bond? a. $40,000 b. $37,200 c. $35,560 d. $38,100 e. $36,750 c; Moderate

Hoyle, Financial Accounting 2.0

71. Gershwin Corporation issues $100,000 in 2-year zero-coupon bonds with a negotiated interest rate of 5%. If Gershwin uses the effective interest rate method, which of the following is the interest expense Gershwin will accrue for the bonds at the end of Year Two? a. $4,762 b. $5,000 c. $4,535 d. $4,500 e. $4,673 a; Moderate 72. On January 1, 2017, Brown Company issues 4-year, $10,000 face value zero-coupon bonds with an interest rate of 6%. If Brown uses the effective interest rate method, what is the reported value of the liability on December 31, 2018? a. $10,000 b. $9,328 c. $8,396 d. $8,900 e. $9,245 d; Moderate 73. On January 1, 2017, Brown Company issues 4-year, $10,000 face value zero-coupon bonds with an interest rate of 6%. If Brown uses the straight-line method of calculating interest, what is the reported value of the liability on December 31, 2018? a. $10,000 b. $8,961 c. $9,481 d. $8,000 e. $8,900 b; Moderate

Hoyle, Financial Accounting 2.0

74. On January 1, 2018, Hasta Corporation issues 2-year, $200,000 face value zero-coupon bonds with a negotiated interest rate of 7%. If Hasta uses the effective interest rate method, which of the following is the correct journal entry for Hasta to make on December 31, 2018 to accrue interest? a. Interest Expense 12,228 Cash 12,228 b. Interest Expense 12,655 Bond Payable 12,655 c. Interest Payable 12,655 Cash 12,655 d. Interest Expense 12,655 Cash 12,655 e. Interest Expense 12,228 Bond Payable 12,228 e; Moderate 75. An investor paid $27,737 for a zero-coupon bond with a face value of $30,000. The negotiated interest rate for this zero-coupon bond was 4%. What is the interest expense for first year using effective interest rate method? a. $1,109 b. $1,155 c. $2,263 d. $1,200 e. $1,132 a; Moderate Fill in the blanks 76. The interest rate determined by negotiation and market forces used to set the price of a bond is termed as the _____. effective rate; Easy 77. The _____ method of calculating interest does not reflect the true interest rate of the bond. straight-line; Easy

Hoyle, Financial Accounting 2.0

Problems 78. McCormack Corporation issues $90,000 in zero-coupon bonds on January 1, 2018. The bonds end up with an interest rate of 5% and will be repaid in 3 years. McCormack uses the effective interest rate method. a. Record the issuance of the bonds. Cash

77,746 Bonds Payable

77,746

b. Record the interest accrual on December 31, 2018. Interest Expense Bond Payable Moderate

3,887 3,887

79. McCormack Corporation issues $90,000 in zero-coupon bonds on January 1, 2018. The bonds end up with an interest rate of 5% and will be repaid in 3 years. McCormack uses the straight-line method of calculating interest. a. Record the issuance of the bonds. Cash

77,746 Bonds Payable

77,746

b. Record the interest accrual on December 31, 2018. Interest Expense Interest Payable Moderate

4,085

Hoyle, Financial Accounting 2.0

80. On January 1, 2015, Reymond Corporation issued $30,000 in 2-year, zero-coupon bonds. The interest rate is 7% and Reymond uses the effective interest rate method. a. Record the issuance of the bonds. Cash

26,203 Bonds Payable

26,203

b. Record the interest accrual on December 31, 2015. Interest Expense Bonds Payable

1,834 1,834

c. Record the interest accrual on December 31, 2016. Interest Expense Bonds Payable Moderate

1,963 1,963

Section 4 Please note: A present value of $1 table and a present value of an ordinary annuity table needs to be provided to students in order for them to complete many of these questions. True/False Questions 81. If the stated rate of interest of a bond equals its effective rate of interest, the bond will be issued at face value. True; Easy 82. It is rare for the stated rate of interest and the effective rate of interest on a bond to differ. False; Easy 83. One reason that the effective rate of interest on a bond may differ from its stated rate is that a company’s bonds might be more or less risky than average. True; Easy 84. There are two types of cash flows associated with a term bond: interest and principal. True; Easy 85. Cash interest payments are determined by multiplying the effective interest rate of the bond with the principal. False; Easy

Hoyle, Financial Accounting 2.0 86. To determine the issue price of a term bond, the present value of the principal and interest payments must be found using the stated interest rate. False; Easy 87. In term bonds, interest payments are made at the end of each period and the face value is not repaid until the end of the term of the bonds. True; Easy 88. When term bonds are issued at an effective interest rate that is different from the stated interest rate, the cash interest payment will differ from each period’s interest expense. True; Moderate 89. When the effective interest rate exceeds the stated interest rate, the excess of accrued interest expense over the cash interest payment is compounded to the bond payable account. True; Moderate Multiple Choice Questions 90. Which of the following is true about a term bond? a. Term bonds do not have a stated interest rate. b. Term bonds pay interest at the end of each period over the life of the bond. c. Term bonds are always sold at face value. d. Term bonds have an effective interest rate that equals their stated rate. e. The face value of a term bond is repaid proportionately at the end of each year. b; Easy 91. Simmons Corporation issues $500,000 in term bonds with a stated interest rate of 4%. The effective interest rate is also 4%. The bonds have a term of 4 years. Which of the following is the correct issuance price for the bonds? a. $490,000 b. $489,389 c. $512,987 d. $500,000 e. $498,330 d; Easy 92. Simmons Corporation issues $500,000 in term bonds with a stated interest rate of 4%. The effective interest rate is 6%. The bonds have a term of 4 years. Which of the following is the correct issuance price for the bonds? a. $465,347 b. $500,000 c. $499,998 d. $475,890 e. $480,789 a; Moderate

Hoyle, Financial Accounting 2.0

93. On January 1, Year One, Big Company offers to sell a $100,000 bond coming due in exactly 10 years. According to the contract, this bond pays cash interest of 4% at the end of each year. A buyer is found who wants to earn 5% interest each year. After some negotiations, Big agrees to the 5% effective yield rate. What is the sales price for this bond? a. $92,278 b. $91,200 c. $91,600 d. $92,400 e. $100,000 a; Moderate 94. On January 1, 2013, Kleen Corporation issues $1,000,000 in term bonds with a stated rate of interest of 5% and an effective rate of interest of 7%. The term of the bonds is 5 years. Determine the total interest expense at the end of 2013. a. $50,000 b. $65,728 c. $70,000 d. $63,232 e. $64,260 e; Moderate 95. On January 1, 2013, Kleen Corporation issues $1,000,000 in term bonds with a stated rate of interest of 5% and an effective rate of interest of 7%. The term of the bonds is 5 years. Determine the change made to the bond payable account at the end of 2013. a. Credit of $20,000 b. Debit of $20,000 c. Credit of $14,260 d. Credit of $15,728 e. No change should be made to bond payable c; Moderate 96. On January 1, 2013, Kleen Corporation issues $1,000,000 in term bonds with a stated rate of interest of 5% and an effective rate of interest of 7%. The term of the bonds is 5 years. Determine the cash interest paid at the end of 2013. a. $70,000 b. $50,000 c. $64,260 d. $65,728 e. $63,232 b; Moderate

Hoyle, Financial Accounting 2.0

97. Fredrick Corporation issues a $1,000 bond with a stated rate of interest of 4% and an effective rate of interest of 5%. Which of the following statement is true of Fredrick Corporation? a. The buyer will pay more than the face value of bond. b. The company will collect only the face value of bond. c. The buyer will pay less than the face value of bond. d. The company will pay less than the face value of bond to buyer. e. The interest expense of the company will be reduced in the year of issue. c; Easy Fill in the blanks 98. On the maturity date, the liability balance should be equal to the _____ of the debt instrument. face value; Easy Problems 99. On January 1, 2018, Bracken Company issued $400,000 in term bonds with a 5-year term. The stated rate of interest was 6% and the effective rate of interest was 7%. a. Make the journal entry to record the bond issuance. Cash

383,601 Bonds Payable

383,601

b. Record the payment of interest on December 31, 2018. Interest Expense Cash

24,000 24,000

c. Record any additional interest expense necessary on December 31, 2018. Interest Expense Bonds Payable Moderate

2,852

Hoyle, Financial Accounting 2.0

100. On January 1, 2014, Thomas Company issued $90,000 in term bonds with a 4-year term. The stated rate of interest was 9% and the effective rate of interest was 10%. a. Make the journal entry to record the bond issuance. Cash

87,147 Bonds Payable

87,147

b. Record the payment of interest on December 31, 2014. Interest Expense Cash

8,100 8,100

c. Record any additional interest expense necessary on December 31, 2014. Interest Expense Bonds Payable Moderate

615 615

Section 5 Please note: A present value of $1 table and a present value of an ordinary annuity table needs to be provided to students in order for them to complete many of these questions. True/False Questions 101. The only difference between accounting for term bonds and accounting for serial bonds is that principal payments are made periodically with serial bonds. False; Easy 102. Interest expense will decrease each year on a serial bond. True; Easy 103. A serial bond with a stated interest rate of 4% is issued at an effective interest rate of 5%. The bond will be issued below face value. True; Easy 104. In accounting for a serial bond, the balance in the bonds payable account is reduced each period. True; Easy 105. When a serial bond is sold at an effective interest rate above the stated interest rate, bonds payable will increase each period due to compounding. False; Easy

Hoyle, Financial Accounting 2.0 Multiple Choice Questions 106. Which of the following is true of a serial bond? a. Serial bonds are typically sold at a stated interest rate. b. With serial bonds, principal is repaid at the maturity date. c. Interest expense increases each period with serial bonds. d. Total interest expense on a serial bond will typically be higher than on a term bond with the same terms. e. It is usually necessary to calculate present values when accounting for a serial bond. e; Easy 107. Simmons Corporation issues $300,000 in serial bonds with a stated interest rate of 4%. The effective interest rate is 6%. The bonds have a term of 3 years and $100,000 of principal is repaid at the end of each year. Which of the following is the correct issuance price for the bonds? a. $300,000 b. $283,962 c. $290,000 d. $294,602 e. $289,101 e; Moderate 108. On January 1, 2013, Jacey Corporation issues $1,000,000 in serial bonds with a stated rate of interest of 5% and an effective rate of interest of 7%. The term of the bonds is 2 years, so $500,000 in principal is repaid at the end of each year. Which of the following is the issuance price for these bonds? a. $1,000,000 b. $500,000 c. $972,575 d. $982,030 e. $893,018 c; Moderate 109. On January 1, 2013, Jacey Corporation issues $1,000,000 in serial bonds with a stated rate of interest of 5% and an effective rate of interest of 7%. The term of the bonds is 2 years, so $500,000 in principal is repaid at the end of each year. Determine the total interest expense recognized at the end of 2013. a. $50,000 b. $55,983 c. $70,000 d. $68,080 e. $66,729 d; Moderate

Hoyle, Financial Accounting 2.0

110. On January 1, 2013, Jacey Corporation issues $1,000,000 in serial bonds with a stated rate of interest of 5% and an effective rate of interest of 7%. The term of the bonds is 2 years, so $500,000 in principal is repaid at the end of each year. Determine the total interest expense recognized at the end of 2014. a. $68,080 b. $69,346 c. $50,000 d. $25,000 e. $34,346 e; Moderate 111. On January 1, 2013, Jacey Corporation issues $1,000,000 in serial bonds with a stated rate of interest of 5% and an effective rate of interest of 7%. The term of the bonds is 2 years, so $500,000 in principal is repaid at the end of each year. Determine the cash interest paid at the end of 2014. a. $25,000 b. $50,000 c. $70,000 d. $12,500 e. $34,346 a; Moderate Fill in the blanks 112. Cash interest payments will remain same for each period with a _____ bond. term; Easy

Hoyle, Financial Accounting 2.0

Problems 113. On January 1, 2018, Rain Company issued $400,000 in serial bonds with a 2-year term ($200,000 in principal is repaid at the end of each year). The stated rate of interest was 7% and the effective rate of interest was 8%. a. Make the journal entry to record the bond issuance. Cash

394,583 Bonds Payable

394,583

b. Record the payment of interest on December 31, 2018. Interest Expense Cash

28,000 28,000

c. Record any additional interest expense necessary on December 31, 2018. Interest Expense Bonds Payable Moderate

3,567 3,567

114. On January 1, 2014, Koher Company issued $80,000 in serial bonds with a 2-year term ($40,000 in principal is repaid at the end of each year). The stated rate of interest was 9% and the effective rate of interest was 10%. a. Make the journal entry to record the bond issuance. Cash

78,942 Bonds Payable

78,942

b. Record the payment of interest on December 31, 2014. Interest Expense Cash

7,200 7,200

c. Record any additional interest expense necessary on December 31, 2014. Interest Expense Bonds Payable Moderate

694

Hoyle, Financial Accounting 2.0

Section 6 Please note: A present value of $1 table and a present value of an ordinary annuity table needs to be provided to students in order for them to complete many of these questions. True/False Questions 115. When bond interest payments are made semiannually, both the stated and effective interest rates are affected. True; Easy 116. A company issues bonds with a stated interest rate of 6% and an effective interest rate of 7%. If interest is paid semiannually, the interest rate used to find the correct present value factors will be 3%. False; Easy 117. The accounting between a bond that pays interest once a year and a bond that pays interest twice a year does not differ. True; Easy Multiple Choice Questions 118. On January 1, 2019, Stella Corporation issues $300,000 in term bonds with a stated interest rate of 4%. The effective interest rate is 6%. The bonds have a term of 3 years and interest is paid twice a year, on June 30 and December 31. Determine the issuance price of the bonds. a. $300,000 b. $283,747 c. $290,000 d. $294,602 e. $289,101 b; Moderate 119. On January 1, 2013, Friday Corporation issues $1,000,000 in term bonds with a stated rate of interest of 5% and an effective rate of interest of 6%. The term of the bonds is 2 years and interest is paid semiannually, on June 30 and December 31. Determine the issuance price of these bonds. a. $1,000,000 b. $500,000 c. $972,575 d. $981,418 e. $893,018 d; Moderate

Hoyle, Financial Accounting 2.0 120. On January 1, 2013, Friday Corporation issues $1,000,000 in term bonds with a stated rate of interest of 5% and an effective rate of interest of 6%. The term of the bonds is 2 years and interest is paid semiannually, on June 30 and December 31. Determine the total interest expense recognized in 2013. a. $50,000 b. $59,018 c. $70,000 d. $58,080 e. $66,729 b; Hard 121. On January 1, 2013, Opie Corporation issues $200,000 in term bonds with a stated rate of interest of 7% and an effective rate of interest of 8%. The term of the bonds is 6 years and interest is paid every June 30 and December 31. Determine the interest expense recognized for the period ended June 30, 2014. a. $7,676 b. $7,000 c. $7,624 d. $7,650 e. $8,000 a; Moderate 122. On January 1, 2013, Opie Corporation issues $200,000 in term bonds with a stated rate of interest of 7% and an effective rate of interest of 8%. The term of the bonds is 6 years and interest is paid every June 30 and December 31. Determine the balance in the Bonds Payable account on June 30, 2013. a. $190,000 b. $191,889 c. $191,240 d. $200,000 e. $190,615 c; Moderate

Hoyle, Financial Accounting 2.0

Problems 123. On January 1, 2018, Rappahannock Company issued $600,000 in term bonds with a 5year term. The stated rate of interest was 4% and the effective rate of interest was 6%. Interest payments are made every June 30 and December 31. a. Make the journal entry to record the bond issuance. Cash

548,816 Bonds Payable

548,816

b. Record the payment of interest on June 30, 2018. Interest Expense Cash

12,000 12,000

c. Record any additional interest expense necessary on June 30, 2018. Interest Expense Bonds Payable Moderate

4,464 4,464

124. On January 1, 2014, May Company issued $50,000 in serial bonds with a 4-year term. The stated rate of interest was 9% and the effective rate of interest was 10%. Interest payments are made every June 30 and December 31. a. Make the journal entry to record the bond issuance. Cash

48,384 Bond Payable

48,384

b. Record the payment of interest on June 30, 2014. Interest Expense Cash

2,250 2,250

c. Record any additional interest expense necessary on June 30, 2014. Interest Expense Bond payable Moderate

169 169

Hoyle, Financial Accounting 2.0

Chapter 15 In a Set of Financial Statements, What Information Is Conveyed about Other Noncurrent Liabilities? Section 1 True/False Questions 1. From the lessee’s point of view, the two possible ways to record a lease are operating lease and capital lease. True; Easy 2. Both rent expense and interest expense are recorded by a lessee under a capital lease. False; Easy 3. Typically, more liability is recorded under an operating lease than a capital lease. False; Easy 4. Capital leases are an example of “off-balance sheet” financing. False; Easy 5. Off-balance sheet financing means that a company has larger obligations than it shows on its balance sheet. True; Easy 6. In accounting for an operating lease, the reported liability balance does not reflect the total obligation, just the current amount that is due. True; Easy 7. A lessee is most likely to be indifferent in structuring the lease as an operating lease or a capital lease. False; Easy 8. U.S. GAAP states that a lease which transfers substantially all of the benefits and risks of an asset to the lessee should be accounted for as an operating lease. False; Easy 9. A bargain purchase option gives the lessee the right to buy the leased property at a deep discount. True; Easy 10. If an asset transfers ownership to the lessee at the end of the lease term, the lease should be accounted for as an operating lease. False; Easy

Hoyle, Financial Accounting 2.0 11. One of the criteria for capitalizing a lease is that the lease term is at least 75 percent of the asset’s useful life. True; Easy Multiple Choice Questions 12. Which of the following underpins the idea of a capital lease? a. Matching b. Substance over form c. Revenue recognition d. Conservatism e. Consistency b; Easy 13. Which of the following is a criteria used to determine if a lease should be recorded as a capital lease or not? a. The lease contract allows the lessee to buy the property above its expected fair value at a future date. b. The lease term covers at least 90 percent of the asset’s life. c. The lessee gets ownership of the asset at the end of the lease. d. The lease payments must cover at least 80 percent of the value of the asset. e. The lease payments of the lessee will make for at least 75 percent of the amount asked for by the lessor. c; Easy 14. From a lessee’s point of view, the two possible way to record a lease are: a. operating and direct-financing. b. bargain and casual. c. capital and factor. d. sales-type and direct-financing. e. operating and capital. d; Easy 15. A lessee is working through the details of a lease with the lessor. Which of the following will the lessee prefer? a. The lessee will try to structure the lease so that it qualifies as an operating lease. b. The lessee is indifferent to structuring the lease either as operating or capital. c. The lessee will make sure all four criteria created by FASB for classifying lease are met so that the lease will qualify as a capital lease. d. The lessee will try to ensure that at least one criterion created by FASB for classifying lease is met so that the lease will qualify as a capital lease. e. The lessee will try to negotiate lease terms to pay as much as possible to the lessor during the lease period. a; Easy

Hoyle, Financial Accounting 2.0

16. A lessee generally prefers to record the lease as operating than capital because: a. it increases their debt-to-total equity ratio. b. it helps in reducing income tax expenses. c. it decreases the amount of liability reported. d. it increases the amount of total assets. e. it is easy and simple to report. c. Easy 17. Which of the following statements is true about accounting for leases? a. In financial accounting, the future payments on a capital lease are viewed as a commitment rather than a liability b. Reporting under a capital lease is equivalent to buying the leased asset. c. Under an operating lease, the present value of the entire amount of cash to be paid over the lease term is recorded as a liability. d. Under a capital lease, only the initial payment is recorded as a liability. e. In general, the lessee is inclined to report the lease as an operating lease . b; Easy 18. A capital lease: a. reports the lease as equivalent to renting the asset. b. records a liability only for the amount that is due immediately. c. is an example of off-balance sheet financing. d. provides the lessee with substantially all the benefits and risks of ownership. e. is an ordinary annuity. d; Easy 19. Under an operating lease: a. the lessee does not obtain substantially all the benefits and risks of ownership. b. the lease transaction is reported more like a purchase. c. the leased asset is depreciated by the lessee over its useful life. d. all lease payments are ordinary annuities. e. the initial liability recognized is equal to the present value of all the lease payments. a; Easy

Hoyle, Financial Accounting 2.0

20. On December 31, 2015, Edward Inc. leases equipment from Big House Company for six years requiring an annual payment of $30,000 on December 31 of each year. The first payment was made immediately. Edward’s incremental borrowing rate is 6 percent and uses straight-line method of depreciation. Which of the following statement is true? a. If the lease is recorded as an operating lease, Edward will report an initial lease liability of $1,800,000. b. Depreciation expense will be same irrespective of the lease being recorded as operating or capital. c. If the lease is recorded as a capital lease, Edward will initially report the leased asset at an amount equal to the present value of all the lease payments. d. Edward will recognize rent expense of $30,000 each period irrespective of the lease being recorded as operating or capital. e. In the year 2015, reported liability will be more under operating lease than under capital lease. c; Easy 21. On January 1, 2015, Bill Inc. leases equipment from Smart Class Inc. for six years requiring an annual payment of $40,000 on December 31 of each year. The first payment was made on December 31, 2015. Bill’s incremental borrowing rate is 8 percent and uses straight-line method of depreciation. Which of the following statements is true? a. If it’s an operating lease, Bill will report an initial lease liability equal to the present value of the entire lease payments. b. If it’s a capital lease, Bill will report prepaid rent of $40,000 on its December 31, 2015 balance sheet. c. Depreciation expense will be recorded irrespective of whether the lease is classified as operating or capital. d. Bill would prefer recording this lease as a capital lease. e. If it’s a capital lease, Bill will recognize interest expense each year over the term of the lease. e; Easy 22. A party that receives cash for granting the use of owned property through a lease contract is called a(n): a. lessee. b. debtor. c. licensee. d. lessor. e. franchisee. d; Easy

Hoyle, Financial Accounting 2.0

23. A party that pays cash for the use of an asset in a lease contract is called a(n): a. lessee. b. debtor. c. licensor. d. lessor. e. franchisor. a; Easy 24. Which of the following means that a company is obligated for more money than the reported debt? a. Bargain purchase option b. Off-balance sheet financing c. Capital lease d. Substance over form e. Leveraging b; Easy

Fill in the blanks 25. A _____ is an agreement made between two parties whereby one uses an asset owned by the other. lease; Easy 26. _____ is the principle that auditors typically use to assess items based on the accounting view and not the legal one. Substance over form; Moderate 27. _____ is a description used when company owes more than it reports. Off-balance sheet financing; Easy 28. A(n) _____ lease is accounted for as a rental agreement. operating; Easy 29. A(n) _____ lease is one in which the risks and benefits of ownership have been transferred to the lessee. capital; Easy

Hoyle, Financial Accounting 2.0

Short Answer Questions 30. Why does a lessee prefer to report an operating lease over capital lease? Officials for the lessee prefer to classify all leases as operating leases to reduce the reported debt total. If an option exists between reporting a larger liability (capital lease) or a smaller one (operating lease), officials for the lessee are inclined to take whatever measures necessary to classify each contract as an operating lease. However this is not a choice. The reporting classification is based on the nature of the agreement. Moderate 31. Explain the term “off-balance sheet financing”. The term “off-balance sheet financing” is commonly used when a company is obligated for more money than the reported debt. Operating leases are one of the primary examples of “off-balance sheet financing.” For an operating lease, the reported liability balance does not reflect the total cash obligation, just the current amount that is due. Moderate 32. Explain why operating and capital leases are accounted for differently. In form, all lease agreements are rental arrangements. However, in substance, a lease agreement may go beyond a pure rental agreement. Financial accounting has long held that a fairly presented portrait of an entity’s financial operations and economic health is only achieved by looking past the form of a transaction to report the actual substance of what is taking place. Over thirty years ago, U.S. GAAP was created (by FASB) to provide authoritative guidance for the financial reporting of leases. An official pronouncement released at that time states that if a lease transfers substantially all of the benefits and risks of ownership to the lessee, the lease should be accounted for as a purchase. When the transaction is more like a purchase, it is recorded as a capital lease. When the transaction is more like a rental, it is recorded as an operating lease. Moderate

Hoyle, Financial Accounting 2.0

Section 2 Please note: A present value of an annuity due table needs to be provided to students in order to complete many of these questions. True/False Questions 33. Rent expense is reported under an operating lease, but not under capital lease. True; Easy 34. A capital lease is reported just like a purchase. True; Easy 35. Lease payments are assumed to contain interest, irrespective of whether the lease is operating or capital. False; Easy 36. A lessee’s incremental borrowing rate is the interest rate at which the lessee can borrow the amount of lease from a bank or other lending institutions. True; Easy 37. Present value computations are necessary in a capital lease, but not under operating lease. True; Easy 38. The liability to be recorded under a capital lease is found by multiplying the payment per period by the number of periods covered by the lease. False; Moderate 39. A lessee will depreciate the leased asset under both operating and capital lease. False; Easy 40. Interest expense on the lease is only recorded under a capital lease. True; Easy 41. According to U.S. GAAP, a lessee should use its own incremental borrowing rate to compute the future value of cash payments made during the term of the debt. False; Moderate 42. Under an operating lease, the leased asset is depreciated over its useful life, just as if it were purchased. False; Moderate

Hoyle, Financial Accounting 2.0 Multiple Choice Questions 43. Which of the following expenses would be recorded by a lessee under a capital lease, but not under an operating lease? a. Accrued rent b. Interest expense c. Rent expense d. Insurance expense e. Prepaid rent b; Easy 44. Which of the following is a characteristic specific to an operating lease? a. The only asset reported in connection with the lease is the leased equipment. b. The amount of lease liability is calculated at the present value of the future cash flows. c. The only liability to be reported is the amount of rent expense that is currently due. d. The leased asset is depreciated by the lessee over its useful life. e. The interest expense is recorded in connection with the liability as time passes using the effective rate method. c; Easy 45. Which of the following is a characteristic of a capital lease but not an operating lease? a. The amount of lease liability is calculated at the present value of the future cash flows. b. The only asset reported in connection with the lease is prepaid rent, if payments are made in advance. c. The reporting of this type of lease is an example of off-balance sheet financing. d. The only liability to be reported is the amount of rent expense that is currently due. e. The lease agreement is more like a rent agreement. a; Easy

Hoyle, Financial Accounting 2.0

46. Callin Company signed a lease on February 1, 2019, which qualifies as an operating lease. Callin agrees to make a payment of $40,000 each on February 1, for 3 years. The first payment was made on February 1, 2019. Which of the following entry was made by Callin on February 1, 2019? a. Rent Expense 40,000 Rent Payable 40,000 b. Leased asset 120,000 Lease Liability 120,000 c. Prepaid Rent 40,000 Rent Expense 40,000 d. Rent Expense 120,000 Cash 120,000 e. Prepaid Rent 40,000 Cash 40,000 e; Easy 47. Fallon Corporation leases a piece of equipment for an annual payment of $6,000 for 4 years, with the first payment being made immediately. The useful life of the equipment is 5 years. Fallon’s incremental borrowing rate is 7 percent per year. Determine the annual depreciation expense recorded by Fallon on this asset. a. $6,000 b. $5,437 c. $4,349 d. $5,500 e. $5,143 b; Moderate 48. On January 1, Year One, Company A leases a truck from Ford for its entire life of 5 years, for an annual payment of $20,000 to be paid on December 31 of each year. The first payment was made on December 31, Year One. A reasonable interest rate is determined to be 10 percent per year. Determine the amount of lease liability reported by Company A on its December 31, Year One balance sheet. a. $62,700 b. $64,700 c. $63,398 d. $80,000 e. $100,000 c; Easy

Hoyle, Financial Accounting 2.0

49. On January 1, 2013, Christie Company entered into a capital lease agreement with Jones Corporation. Christie leased a machine for an annual payment of $5,000 for three years, with payments beginning immediately. Christie’s incremental borrowing rate is 4 percent per year. Compute the interest expense Christie will record relating to this lease on December 31, 2014 a. $192 b. $377 c. $400 d. $500 e. $203 a; Hard 50. On January 1, 2015, Jennifer Corporation leased equipment from Duplex Company for five years and an annual payment of $35,000 at the beginning of each year. The equipment has a useful life of six years. The first payment was made on January 1, 2015. Jennifer’s incremental borrowing rate is 6 percent per year. The entry made to record the initial lease liability will include a: a. debit to Leased Equipment and credit to Lease Liability for $175,000. b. debit to Rent Expense and credit to Rent Payable for $35,000. c. debit to Leased Equipment and credit to Lease Liability for $156,279. d. debit to Lease Liability and credit to Cash for $175,000. e. debit to Prepaid Rent and credit to Lease Liability for $35,000. c; Moderate 51. On January 1, 2014, Atlantic Company enters into an eight-year lease agreement for a machinery with Deccan Corporation which requires an annual payment of $65,000, beginning January 1, 2014. The useful life of the machine is ten years. Assuming an interest rate of 10 percent per year, determine the amount of interest on the lease liability from the lease for 2015. a. $52,000 b. $38,145 c. $28,309 d. $31,645 e. $24,640 c; Moderate

Hoyle, Financial Accounting 2.0

52. On December 31, 2014, Arleen Company enters into a ten-year lease agreement for an equipment with Rappel Corporation which requires an annual payment of $80,000, beginning December 31, 2014. The useful life of the machine is ten years. Arleen uses the straight-line depreciation method. Assuming an interest rate of 8 percent per year, determine the amount of depreciation expense recorded by Arleen on December 31, 2015. a. $64,000 b. $57,975 c. $53,608 d. $80,000 e. No depreciation expense will be recognized b; Moderate 53. On January 1, 2016, Lead Company leases a truck for four years, its entire useful life. Annual payment amounted to $110,000, beginning December 31, 2016. Depreciation is recorded using the straight-line method. The incremental borrowing rate is 7 percent per year. Which of the following is reported on its 2016 financial statements? a. A liability of $110,000 is reported for the current amount due. b. Rent expense is reported at $110,000. c. The leased asset is recorded at $440,000. d. Interest expense is equal to 26,082. e. Annual depreciation expense amounts to $110,000. d; Moderate 54. On January 1, 2011, Hanlin Corporation agrees to lease a piece of equipment for an annual payment of $3,000 with the first payment being made immediately. The lease will run for 4 years and the life of the equipment is 6 years. Hanlin’s incremental borrowing rate is 9 percent. No bargain purchase option exists, the ownership of the equipment will not be transferred to Hanlin at the end of the lease, and the payments do not approximate the fair value of the equipment. The entry made to record the payment of installment on January 1, 2011 will be: a. Rent Expense 3,000 Cash 3,000 b. Leased Asset 12,000 Lease Liability 12,000 c. Prepaid Rent 3,000 Cash 3,000 d. Leased Asset 10,594 Lease Liability 10,594 e. Rent expense 3,000 Rent Payable 3,000 c; Moderate

Hoyle, Financial Accounting 2.0

Fill in the blanks 55. Under an operating lease, amounts paid in advance are accounted for as _____. prepaid rent; Easy 56. To qualify as a capital lease, a lease agreement must meet _____ criterion out of four criteria created by FASB. any one; Easy Short Answer Questions 57. Explain why a lessee records depreciation and interest on a capital lease. A capital lease is in substance a purchase. Therefore, the lessee follows the recording of a purchase. If a lessee borrowed money to purchase the leased asset, it would depreciate it, as well as record interest on the loan. Easy Problems 58. Mason Corporation leased a piece of equipment on January 1, 2018, for an annual payment of $10,000 for the next 6 years. The first payment will be made immediately. The life of the equipment is 9 years and Mason’s annual incremental borrowing rate is 5 percent. Record the entry or entries made on January 1, 2018. Prepaid Rent Cash Moderate

10,000 10,000

59. Mason Corporation leased a piece of equipment on January 1, 2018, for an annual payment of $10,000 for the next 6 years. The first payment will be made immediately. The life of the equipment is 7 years and Mason’s annual incremental borrowing rate is 5 percent. Record the entry or entries made on January 1, 2018. Leased Asset Lease Liability

53,294

Lease Liability Cash Moderate

10,000

53,294

10,000

Hoyle, Financial Accounting 2.0

60. On January 1, 2017, Jackmon Company entered into a lease for a car with a payment of $13,000 per year for 4 years. The expected life of the car is 5 years, and the first payment will be made immediately. Jackmon could obtain a loan for a similar amount at a rate of 10% per year. a. Record the lease liability and first payment. Leased Asset Lease Liability

45,329

Lease Liability Cash

13,000

45,329

13,000

b. Record depreciation on the leased asset. Depreciation Expense 11,332 Accumulated Depreciation 11,332 c. Record interest for 2017 on the lease. Interest Expense Lease Liability Moderate

3,233 3,233

Section 3 True/False Questions 61. Accounting for both income tax and financial reporting purposes is governed by U.S. GAAP. False; Easy 62. Companies frequently exploit differences in the Internal Revenue Code and U.S. GAAP to defer tax payments. True; Easy 63. Businesses attempt to reduce current taxable income by increasing the amount of gains reported in the current period. False; Easy 64. A deferred income tax liability would be created when a business defers a revenue or gain for tax purposes but recognizes it immediately on its income statement. True; Easy

Hoyle, Financial Accounting 2.0

65. A deferred income tax liability would be created when a business defers an expense or loss for tax purposes but recognizes it immediately on its income statement. False; Easy 66. A gain that is recognized in one period on the income statement and in a different period for the tax return creates a temporary tax difference. True; Easy 67. A temporary difference which results in lower taxable income in the future leads to a deferred income tax liability. False; Easy 68. A business recognizes a $200 gain in the current year on its income statement. The gain will not appear on its tax return until next year. If the business’ tax rate is 30 percent, it should recognize a deferred tax liability of $60 in the current year. True; Easy 69. A deferred tax liability indicates that a company will be making a payment to the IRS at some point in the future. True; Easy Multiple Choice Questions 70. A gain that is recognized in one period for financial reporting and in a different period for tax purpose creates a: a. off-balance sheet financing. b. temporary tax difference. c. reporting mismatch. d. permanent disclosure. e. financial leverage. b; Moderate 71. Gillian Company reports a gain on its income statement in the current year, but will not report it on its tax return for 2 years. Which of the following is true of Gillian? a. Gillian will report a deferred income tax liability in the third year. b. Gillian will report tax expense on the gain in the current year. c. Gillian will still need to pay to the IRS in the current year for the tax due on the gain. d. Gillian will report gain, net of tax on Year Two income statement. e. Gillian will have a lower reported net income than taxable income in Year One. b; Easy

Hoyle, Financial Accounting 2.0

72. A deferred income tax liability on a balance sheet indicates: a. a company has delayed its current payment of income tax amount to a future date. b. a low debt-equity ratio. c. a company is highly leveraged. d. a company didn’t have enough funds to pay its income tax expense in that year. e. a company’s policy towards debt and tax payment. a; Easy 73. Which of the following governs income tax accounting in the United States? a. U.S. Generally Accepted Accounting Principles (GAAP) b. Securities and Exchange Commission (SEC) c. International Financial Reporting Standards (IFRS) d. Internal Revenue Code (IRC) e. Financial Accounting Standards Board (FASB) d; Easy 74. Ronald Corporation earns revenue of $35,000 in 2014 that is reported on the 2014 income statement, but it will not be reported on Ronald’s tax return until 2016. Ronald’s tax rate is 30 percent. Which of the following is true? a. $35,000 is referred to as a temporary tax difference. b. $35,000 will be reported for both financial reporting and tax purposes in the year 2014. c. Ronald will report a deferred income tax liability of $10,500 on its 2016 balance sheet. d. $10,500 of tax expense will be paid to the government in the year 2014. e. Any expense incurred to earn this revenue will be recorded in the financial statements of the year 2016. a; Moderate 75. Delta Company reported revenue of $150,000 on its 2014 income statement. This amount will not be subject to income tax until 2018. The effective tax rate is 40 percent. The entry made to record deferred income tax is: a. Income Tax Expense—Deferred 150,000 Deferred Income Tax Liability 150,000 b. Income Tax Expense—Deferred 60,000 Deferred Income Tax Liability 60,000 c. Deferred Income Tax Liability 200,000 Income Tax Expense—Deferred 200,000 d. Income Tax Expense—Deferred 60,000 Cash 60,000 e. Income Tax Payable 200,000 Cash 200,000 b; Moderate

Hoyle, Financial Accounting 2.0 76. Kricket Corporation earns revenue of $50,000 in 2015 and is reported on the 2015 income statement. The revenue will not be reported on Kricket’s tax return until 2017. Kricket’s tax rate is 30 percent. Kricket will recognize a deferred income tax liability of: a. $15,000 in 2015. b. $50,000 in 2017. c. $30,000 in 2017. d. $50,000 in 2015. e. $15,000 in 2017. a; Moderate 77. Watson Company buys 1,000 chairs for $100 each and sells them for $180 each during 2014. Payments will be collected evenly over this year and the next year. The entire gross profit on the chairs is recognized in the 2014 income statement. For tax purposes, the transaction qualifies as an installment sale and is not taxed until the cash is collected. Watson has a tax rate of 30 percent. What is the amount of deferred income tax liability recognized by Watson in 2014? a. $54,000 b. $27,000 c. $12,000 d. $24,000 e. $0 c; Hard 78. In the year 2014, Saturn Corporation buys equipment for $600,000. Later in the same year the equipment is sold for $800,000. However, the money will not be collected from the buyer until 2017. Saturn’s effective tax rate is 30 percent. Which of the following statements is true? a. $200,000 gain will be recognized in the year 2017, when payment is received. b. $200,000 will be recognized as income tax payable in the year 2014. c. $800,000 sales will be recognized in the year 2017. d. $60,000 income tax expense will be recorded in the year 2017. e. $60,000 will be recognized as deferred income tax liability in the year 2014. e; Easy

Hoyle, Financial Accounting 2.0

79. Davis Corporation made a gain of $500,000 on the sale of equipment which is reported on the current year’s income statement, but is deferred for tax purposes for 3 years. Davis’ tax rate is 40 percent. Which of the following journal entry is recorded by Davis in the current year? a. Income Tax Expense—Deferred 500,000 Deferred Income Tax Liability 500,000 b. Deferred Income Tax Liability 200,000 Income Tax Expense—Deferred 200,000 c. Income Tax Expense—Deferred 200,000 Cash 200,000 d. Income Tax Expense—Deferred 500,000 Income Tax Payable 500,000 e. Income Tax Expense—Deferred 200,000 Deferred Income Tax Liability 200,000 e; Moderate Fill in the blanks 80. U.S. income tax accounting is governed by the _____. Internal Revenue Code; Easy 81. A revenue or expense reported for both financial reporting and income tax accounting but in different time periods is called a _____. temporary tax difference; Easy 82. A deferred tax income liability is created when a revenue or gain is recognized _____ for financial reporting, but _____ for income tax purposes. immediately, later; Easy Short Answer Questions 83. Companies usually try to avoid reporting liabilities. Why is this not the case with deferred income tax liabilities? Deferred income tax liabilities indicate that a company has legally avoided paying taxes in the current period by taking advantage of differences in U.S. GAAP and the Internal Revenue Code. Although the company will have to pay the tax in the future, it allows organization to use its cash for a longer period of time and, hence, generate additional revenues. Moderate

Hoyle, Financial Accounting 2.0

Problems 84. Cook Corporation generated revenue of $1,000,000 which is reported on Cook’s income statement in the current period, but will not be reported on the tax return for the next five years. Cook’s tax rate is 40 percent. Make the necessary journal entry to record the deferred income tax liability relating to this revenue. Income Tax Expense—Deferred Deferred Income Tax Liability Moderate

400,000 400,000

85. Columbia Company purchased stock in Rafael Corporation for $25,000. Columbia classified this investment as a trading security. At the end of the year, Rafael’s stock was selling for more than it was on the date Columbia purchased it, resulting in an unrealized gain of $7,500. While the $7,500 unrealized gain will be reported on Columbia’s income statement in the current year, Columbia will not report the gain on its tax return until the investment in Rafael is sold. If Columbia has a tax rate of 40 percent, what would be the journal entry to record this deferred income tax liability? Income Tax Expense—Deferred Deferred Income Tax Liability Moderate

3,000 3,000

Section 4 True/False Questions 86. A postretirement benefit is a promise made by employers to eligible employees to be received after they reach a specified retirement age. True; Easy 87. Pension is an example of a postretirement benefit. True; Easy 88. Postretirement benefits are typically mandated by law. False; Easy 89. A company offers postretirement benefits to boost employee morale and retain talented employees. True; Easy 90. Actuaries are business professionals who compute the likelihood of future events. True; Easy

Hoyle, Financial Accounting 2.0

91. Postretirement benefits are reported at their present value. True; Easy 92. Unlike other long-term liabilities, no interest is calculated on postretirement benefits. False; Moderate 93. A company’s debt-to-equity ratio is an indication of its sources of finance for its assets. True; Easy 94. The higher the debt-to-equity ratio, the less debt a company is using to finance its assets. False; Easy 95. The times interest earned ratio helps users determine if a company is making its interest payments in advance or not. False; Easy 96. A times interest earned ratio of less than one indicates that a company cannot pay its current interest obligations through current operations. True; Moderate Multiple Choice Questions 97. Which of the following is a postretirement benefit provided by a company? a. Pension b. Paid sick leaves c. Profit-sharing d. Social security e. Sabbatical leave a; Easy 98. An expert who uses mathematics and statistics to estimate the impact of future events, especially those of concern to insurance and pension programs is called a(n): a. CPA. b. accountant. c. actuary. d. IRS agent. e. bookkeeper. c; Easy

Hoyle, Financial Accounting 2.0

99. Postretirement benefits: a. are reported as current liabilities. b. include bonuses and social security. c. are estimated and reported according to IRS. d. are recorded at their present value while employees work. e. help in measuring the employee’s productivity. d; Easy 100. Which of the following statement is true of debt-to-equity ratio? a. It is calculated by dividing non-current liabilities by owners’ equity. b. It indicates a company’s policy toward debt. c. It helps decision makers evaluate the risk of rising interest rate on debt. d. It helps in measuring management’s efficiency in generating revenue from debt. e. It indicates how easily a company has been able to meet its debt obligations through current operations. b; Easy 101. Times interest earned ratio is calculated by dividing: a. gross income by interest expense. b. interest expense by total liabilities. c. earnings before interest and taxes by interest expense. d. net income by income tax expense. e. total liabilities by interest expense. c; Easy 102. Times interest earned ratio indicates: a. a company’s ability to meet its interest obligations through current operations. b. the availability of sufficient cash with the company to pay its interest expense. c. whether most of the company’s assets have come from borrowing or from its own operations. d. a management’s efficiency at borrowing at a lower cost (interest expense). e. how efficiently the debt was used to generate income. a; Easy 103. Venus Corporation reported the following balances for the year 2015: land, $200,000; equipment, 65,000; cash, $40,000; prepaid expenses, $8,000; inventory, $15,000; and owners’ equity $115,000. Determine debt-equity ratio for the year. a. 1.7 to 1 b. 0.5 to 1 c. 1.9 to 1 d. 0.6 to 1 e. 0.7 to 1 c; Easy

Hoyle, Financial Accounting 2.0 104. Atlantis Corporation ended the year with assets of $400,000 and owners’ equity of $160,000. Compute Atlantis’ debt-to-equity ratio. a. 2.5 to 1 b. 1.5 to 1 c. 0.4 to 1 d. 0.6 to 1 e. 1.7 to 1 b; Easy 105. At the beginning of the year, Florida Company had liabilities of $660,000 and total assets of $1,000,000. During the year, a liability of $50,000 was paid off. The debt-toequity ratio: a. at the beginning of the year was 1.79 to 1. b. increased to 1.94 to 1 at the end of the year. c. remained at 1.79 to 1 throughout the year. d. decreased to 1.79 to 1 at the end of the year. e. at the end of the year was 2.09 to 1. d; Moderate 106. Seattle Company began the year with liabilities of $500,000 and owners’ equity of $300,000. During the year, Seattle borrowed $40,000 and sold stock of $40,000. Compute Seattle Company’s debt-to-equity ratio at the end of the year. a. 1.67 to 1 b. 1.59 to 1 c. 0.62 to 1 d. 2.5 to 1 e. 0 .60 to 1 b; Moderate 107. Modern Company reported a net income of $280,000 for the year 2015. Income tax expense and interest expense for the year amounted to $56,000 and $63,000 respectively. The company had assets worth $1,200,000 and liabilities of $890,000. Calculate the times interest earned ratio for the year. a. 3.6 times b. 6.3 times c. 4.4 times d. 2.9 times e. 2.3 times b; Moderate

Hoyle, Financial Accounting 2.0

108. In 2019, Fire Company had earnings before interest and taxes of $900,000 and interest expense of $180,000. Which of the following is Fire’s times interest earned during the year? a. 5.0 times b. 0.2 times c. 0.8 times d. 1.2 times e. 2.0 times a; Moderate Fill in the blanks 109. A _____ is a promise made by employers to eligible employees to be received after they reach a specified retirement age. postretirement benefit; Easy 110. A(n) _____ is a professional who mathematically computes the likelihood of future events. actuary; Easy 111. The _____ ratio indicates how a company finances its assets. debt-to-equity; Easy 112. A company’s times interest earned ratio is found by dividing its _____ by its interest expense. EBIT or earnings before interest and taxes; Easy Short Answer Questions 113. Explain why postretirement benefits are so difficult to estimate. Postretirement benefits are estimated and reported according to U.S. GAAP while employees work. Because of the length of time involved and the large number of variables, a precise determination of this liability is impossible. Some of the variables which must be estimated include future health care costs, life spans, the average length of time workers will live, the likelihood workers will quit before becoming eligible for postretirement benefits, and future interest rates. Easy

Hoyle, Financial Accounting 2.0

Problems 114. Leike Corporation’s net income for the year amounted to $200,000. Interest expense totaled $50,000 and taxes were $75,000. Determine Leike’s times interest earned ratio. 6.5 times Moderate 115. At the end of 2018, Peterson Corporation had assets of $900,000 and liabilities of $500,000. What is Peterson’s debt-to-equity ratio? 1.25 to 1 Easy

Hoyle, Financial Accounting 2.0

Chapter 16 In a Set of Financial Statements, What Information Is Conveyed about Shareholders’ Equity? Section 1 True/False Questions 1. The sole proprietorship form of business is not legally separate from its owner. True; Easy 2. A corporation can sell ownership shares to raise money for capital expenditures and operations. True; Easy 3. It is easier to establish a partnership than a corporation. True; Easy 4. A corporation can have any number of owners. True; Easy 5. A corporation must be incorporated in every state in which it wants to do business. False; Easy 6. To begin a corporation, the owner files articles of incorporation with the federal government. False; Easy 7. Limited liability is a feature of a partnership firm that does not exist with a corporation. False; Easy 8. Unlike proprietorships and partnerships, a corporation is deemed to be a separate legal entity from its owner. True; Easy 9. Proprietorships and partnerships typically cease operations when the original owner(s) is (are) unable and unwilling to continue being actively involved in an organization. True; Easy 10. Shareholders in a corporation do not have personal liability for the debts of the corporation. True; Easy 11. The owners of a partnership do not have a personal liability for debts of the business. False; Easy

Hoyle, Financial Accounting 2.0

12. Incorporation is a relatively easy and quick process. False; Easy 13. The income of corporations is double taxed, but this is not true for proprietorships and partnerships. True; Easy 14. Dividends paid by a corporation are typically taxed at a lower rate than other income. True; Easy Multiple Choice Questions 15. Which of the following is a common feature of proprietorship, partnership, and corporation? a. Separate legal entity b. Mutual agency c. Limited liability d. Legal form of business e. Double taxation of income d; Easy 16. Which of the following is the legal characteristic of a corporation which states that owners cannot lose more than their investment? a. Mutual agency b. Incorporation c. Limited liability d. Separate legal entity e. Double taxation c; Easy 17. Ernie Miller wishes to start a business where he will be the sole owner. He wishes to choose the easiest form to start up and is not concerned about liability. Which of the following forms would be the best choice for Ernie? a. Proprietorship b. Partnership c. Corporation d. Co-operative society e. Non-profit organization a; Easy

Hoyle, Financial Accounting 2.0

18. Which of the following is true of partnership? a. A partnership is more difficult to form than a corporation. b. A partnership must have at least three owners. c. Partners are liable for the debts of the business. d. Partnership is subject to double taxation. e. Partnership can sell capital stock to raise money. c; Easy 19. Which of the following is a disadvantage of incorporation? a. A corporation cannot sell capital stock to raise money. b. The income of a corporation is double taxed. c. Owners of corporations are liable for the business’ debts. d. Corporations cease to exist when an owner passes away. e. An owner must file for incorporation in every state in which it wishes to operate. b; Easy 20. Which of the following is an advantage of a proprietorship form of business? a. Proprietorships can raise money through the sale of capital stock. b. Proprietorships will continue even after the death of the owner. c. A proprietor is shielded from the debts of the business. d. A proprietorship is fairly easy and inexpensive to start. e. The business will have a separate legal entity than the proprietor. d; Easy 21. Which of the following is true of a corporation? a. A corporation does not file its own tax return. b. A corporation has a limited life. c. A corporation is relatively quick and easy to start. d. A corporation must have at least 10 owners. e. A corporation can raise money through the sale of capital stock. e; Easy 22. Which of the following is a characteristic of a partnership which states that a partner can obligate other partners to an agreement without their direct consent? a. Double taxation b. Mutual agency c. Limited liability d. Incorporation e. Proprietorship b; Easy

Hoyle, Financial Accounting 2.0

23. Which of the following is a reason for corporations to be more popular than ownership of proprietorships or partnerships? a. Income is taxed only once when earned by the corporation. b. Corporations enjoy the feature of mutual agency. c. Incorporation is a relatively easy and quick process. d. Shareholders have no personal liability for the debts of the corporation. e. The owners need not file separate tax return for the entity. d; Moderate 24. Limited liability means: a. owners are personally liable for all of the business debts. b. a separation exists between the business and the ownership. c. the owner can quantify the amount of risk they face. d. the income of the entity will be subject to double taxation. e. any owner can obligate the business and other owners for any unpaid debt. c; Moderate 25. Double taxation of income: a. increases net income. b. decreases the amount in disposal income. c. increases retained earnings. d. increases the amount of taxable income. e. reduces the liability of a shareholder. b; Moderate 26. A partnership firm files its tax return on Form 1065: a. for information purpose. b. for receiving tax rebate. c. to avoid double taxation of income. d. after deducting dividends paid to shareholders. e. separately from the tax return of the partners. a; Easy 27. The income of Minion Corporation is taxed at a 40 percent rate. Dividends are taxed at a rate of 15 percent. During 2017, Minion earned income of $100,000 and paid taxes on it. It distributed the remainder entirety to its owner. Once the owner has paid tax on the dividend, how much money remains? a. $40,000 b. $6,000 c. $9,000 d. $34,000 e. $51,000 e; Moderate

Hoyle, Financial Accounting 2.0 28. Assuming a proprietorship, partnership, and corporation earns equal amount of income and it is distributed evenly among owners, the amount collected by government toward tax will be: a. highest for proprietorship. b. highest for partnership. c. highest for corporation. d. equal for all three entities. e. least for partnership. c; Moderate Fill in the blanks 29. A _____ is a legal form of business created by one person who is liable for the debts of the business. proprietorship; Easy 30. _____ is a legal characteristic granted to owners in a corporation which restricts their loss to the amount of their investment. Limited liability; Easy 31. A _____ is a legal form of business which has been formerly recognized by a state government as separate entity from its owner. corporation; Easy 32. A _____ is a legal form of business started and owned by at least two individuals, which is not legally separate from its owners. partnership; Easy 33. A negative feature of corporations where income is subject to tax when a corporation files its tax return, and then again when owner receives dividends is called _____. double taxation; Easy Short Answer Questions 34. Give three reasons why an owner would wish to start a corporation rather than a proprietorship or partnership. 1) A corporation is a legal entity separate from its owners. As a result of the legal separation of business from its owners, shareholders have no personal liability for the debts of the corporation. This is not true for a proprietorship or partnership. 2) Ownership of a corporation is physically represented by shares of stock that are issued to raise funds. This allows a corporation to raise more money than a partnership or proprietorship. 3) A corporation is able to continue in existence even after owners die or decide to switch to other investments. This is not true for a partnership or proprietorship. Easy

Hoyle, Financial Accounting 2.0

35. Give two reasons why an owner would prefer to form his or her business as a proprietorship or partnership, rather than a corporation. 1) Incorporation is often a time consuming and costly legal process. However, in most states, proprietorships and partnerships can be created informally with little effort. 2) Income of corporations is subject to double taxation. Proprietorships and partnerships are not deemed to be separate entities. Therefore, the owners (but not the business) must pay a tax when any income is generated. However, the income is taxed only that one time, when earned by the business. Easy Section 2 True/False Questions 36. Common stock represents the basic ownership of a corporation. True; Easy 37. The owners of common stock do not have voting rights. False; Easy 38. Dividends paid on common stock are shared by all the stockholders proportionately. True; Easy 39. The number of authorized shares indicates the number of shares of stock the corporation has sold to the public. False; Easy 40. At the time of liquidation, the common stock shareholders are entitled to share proportionally in any assets that remain after all liabilities and other claims are settled True; Easy 41. The number of shares a company has issued and are outstanding should always be the same. False; Easy 42. Outstanding shares refer to the number of shares of stock that are currently in the hands of the public. True; Easy 43. Par value is the minimum amount of money that owners must legally leave in the business. True; Easy

Hoyle, Financial Accounting 2.0 44. Traditionally, corporations set the par value of stock at an arbitrarily high number. False; Easy 45. Wilmington Corporation had issued 4,000 shares of common stock. 1,000 shares are now held in the treasury, so the number of shares of common stock that Wilmington has outstanding is 5,000. False; Easy 46. No gain, loss, or other income effect is reported by an organization as a result of transactions occurring in its own stock. True; Easy 47. Common stock can only be exchanged for cash. False; Easy 48. Terence Company issued 500 shares of its $.50 par value common stock with a fair value of $13 per share in exchange for a plot of land with a fair value of $7,000. Terence should debit land for $6,500. True; Easy Multiple Choice Questions 49. Which of the following represents the legal rights normally held by the owners of a corporation’s common stock? a. Right to vote on few specified issues b. Right to receive dividends before the owners of preferred stock c. Right to decide the proportion in which dividends have to be distributed to common stockholders d. Right to receive a share in assets at the time of liquidation before any liability is settled. e. Right to decide the list of stockholders who are eligible to receive dividends a; Easy 50. Which of the following is true of common stock? a. Common stock can be exchanged only for cash. b. Common stockholders are the last beneficiary during the liquidation of the company. c. The par value of a common stock is usually set very high. d. The dividends on common stock are not taxed. e. Common stock carries a coupon rate. b; Easy

Hoyle, Financial Accounting 2.0

51. Which of the following statements is true of board of directors? a. The board of directors is elected by the common stockholders. b. The board of directors manages a company on a day-to-day basis. c. The board of directors decides the fair value of a stock. d. The board of directors can reward some common stockholders while ignoring others. e. The board of directors is appointed by the SEC. a; Easy 52. Haney Corporation is authorized to sell 50,000 shares of stock. Over the years, it has sold 2,000 to the public. In 2010, it repurchased 500. Which of the following correctly shows the number of shares of stock Haney has issued and are outstanding at the end of 2010? Issued Outstanding a. 30,000 29,500 b. 50,000 1,500 c. 2,000 1,500 d. 2,000 2,000 e. 50,000 49,500 c; Easy 53. The maximum number of shares which a company can issue over its life is its: a. authorized shares. b. treasury shares. c. common shares. d. outstanding shares. e. issued shares. a; Easy 54. Amount collected over and above the par value of common stock is recorded as: a. treasury stock. b. capital in excess of par value c. gain on issue. d. comprehensive income. e. retained earnings. b; Easy 55. A company has 500,000 authorized shares, 30,000 issued shares and 20,000 outstanding shares. How many shares could the company potentially buy back as treasury shares at the end of the year? a. 500,000 shares b. 470,000 shares c. 30,000 shares d. 20,000 shares e. 10,000 shares d; Easy

Hoyle, Financial Accounting 2.0 56. A number printed on the stock certificate to indicate the minimum amount owners must legally leave in the business is known as: a. fair value. b. par value. c. current value. d. market value. e. historical value. b; Easy 57. When common stock of a publicly-traded company is exchanged for an asset like land, the asset is recorded at: a. the par value of the stock exchanged. b. the fair value of the stock exchanged. c. the historical cost of the asset exchanged. d. the fair value of the asset exchanged. e. the book value of the asset exchanged. b; Easy 58. When common stock of a company whose stock is not listed on any stock exchange is exchanged for an asset like land, the asset is recorded at: a. the par value of the stock exchanged. b. the fair value of the stock exchanged. c. the historical cost of the asset exchanged. d. the fair value of the asset exchanged. e. the book value of the asset exchanged. d; Easy 59. Carroll Corporation began business in 2016. It issued 3,000 shares of $1 par value common stock for $10 per share. Later that year, it issued another 2,000 shares of its $1 par value stock for $12 per share. Which of the following is the balance in the common stock account at the end of 2016? a. $54,000 b. $50,000 c. $49,00 d. $5,000 e. $3,000 d; Easy

Hoyle, Financial Accounting 2.0

60. Carroll Corporation began business in 2016. It issued 3,000 shares of $1 par value common stock for $10 per share. Later that year, it issued another 2,000 shares of its $1 par value stock for $12 per share. Which of the following is the balance in the capital in excess of par value account at the end of 2016? a. $54,000 b. $50,000 c. $49,000 d. $5,000 e. $3,000 c; Easy 61. Gilligan Corporation issued 2,000 shares of $.50 par value common stock for a patent held by an inventor. The market value of patent is not available, but Gilligan’s common stock is currently selling for $6 per share. Gilligan should debit the patent account for: a. $-0-. b. $1,000. c. $2,000. d. $11,000. e. $12,000. e; Easy 62. Yates Corporation issued 400 shares of $1 par value common stock for $5 per share. Yates’ accountant credited common stock for $2,000. Which of the following statements is true of this transaction? a. Yates’ stockholders’ equity is overstated. b. Yates’ assets are overstated. c. Yates’ common stock is understated. d. Yates’ stockholders’ equity is correctly stated. e. Yates retained earnings is understated. d; Moderate Fill in the blanks 63. The maximum number of shares of stock a corporation may issue over its life is its _____ shares. authorized; Easy 64. The _____ of common stock is the minimum amount which must be left by common stockholders in the corporation. par value; Easy 65. _____ shares indicate the number of shares of stock that a corporation has sold over its life. Issued; Easy

Hoyle, Financial Accounting 2.0 66. _____ shares indicate the number of shares of stock of a corporation that are currently in the hands of the public. Outstanding; Easy Problems 67. At the beginning of 2015, Jacoby Corporation had the following contributed capital balances: Common stock, $.25 par value Capital in excess of par value Total contributed capital

5,000 95,000 $100,000

In June of 2015, Jacoby Corporation issued 10,000 shares of common stock for $8 per share. In September of 2015, Jacoby issued 7,000 more shares of common stock for $10 per share. Determine the balances in Jacoby’s contributed capital account at the end of 2015. Common stock, $.25 par value Capital in excess of par value Total contributed capital Moderate

9,250 240,750 $250,000

68. Toni Corporation enters into an agreement with an individual who owns a plot of land, which Toni wishes to use for expansion purposes. Toni agrees to issue 100 shares of its $.50 par value stock in exchange for the land. The stock is currently selling for $50 and the land has a fair value of $5,100. Record the exchange from Toni’s perspective. Land

5,000

Common Stock Capital in Excess of Par Value Moderate

50 4,950

69. Kason Corporation began business in 2014 with 100,000 authorized shares of $1 par value common stock. In May 2014, Kason issues 5,000 shares of common stock for $19 per share. Record this issuance of stock. Cash Common Stock Capital in Excess of Par Value Easy

95,000 5,000 90,000

Hoyle, Financial Accounting 2.0

Section 3 True/False Questions 70. The rights of preferred stockholders are set by the state of incorporation. False; Easy 71. One reason preferred stock is called “preferred” is because preferred shareholders may have additional voting rights than common shareholders. True; Easy 72. Oman Corporation issues one share of $200 par value 7% preferred stock $210 in cash. The annual dividend paid on this stock is $14.70. False; Easy 73. It is illegal for a corporation to use treasury shares for compensation purpose. False; Easy 74. Anderson Corporation believes that its stock is undervalued on the market. One way Anderson might increase the fair value of its stock is to repurchase some of it. True; Easy 75. U.S.GAAP allows only the cost method of accounting for treasury stock. False; Easy 76. The balance in Treasury Stock account is shown as a negative amount in stockholders’ equity section of the balance sheet. True; Easy 77. Dividends are not paid on treasury shares. True; Easy 78. Preppy Company purchased 400 shares for its treasury at $5 per share. It resold the shares for $8 per share. Preppy should report a gain on the reissuance. False; Easy 79. When treasury stock is reissued at a price lower than its original cost, retained earnings should be credited for the difference. False; Easy

Hoyle, Financial Accounting 2.0

Multiple Choice Questions 80. Which of the following is a feature of preferred stock? a. The issuance of preferred stock is accounted for in the same way as bond. b. Amount collected in excess of par value of preferred stock is reported in the income statement. c. They dividends on preferred stock are paid before common stock dividends. d. Rights on preferred stock are set by state law. e. Preferred stock cannot be repurchased. c; Easy 81. Treasury stock refers to: a. the maximum number of shares a corporation can sell to public. b. the number of share issued till date. c. the number of shares currently held by public. d. the number of shares repurchased by corporation. e. the number of share issued by company but not subscribed by the public. d; Easy 82. Which of the following is true concerning treasury stock? a. Treasury stock can be reissued. b. Dividends are paid on treasury stock. c. Treasury stock increases stockholders’ equity. d. A company repurchases its own stock to lower its stock price. e. Corporation uses treasury stock as a means to attract investors for mergers. a; Easy 83. Which of the following decisions can a company take to avoid a hostile takeover? a. Issue preferred stock b. Declare stock dividend c. Declare stock split d. Repurchase its stock e. Reissue treasury stock d; Moderate 84. Capital in excess of par value account records the: a. excess amount collected from reissuance of treasury stock. b. increase in market price of common stock over its par value due to repurchase of its own stock. c. reissuance of treasury stock below cost. d. excess amount collected over the par value of common stock. e. excess amount paid over the par value for repurchasing common stock. d; Easy

Hoyle, Financial Accounting 2.0 85. During the current year, a company reports $10,000 in net income and total stockholders’ equity of $200,000. However, during the year, the company reacquires 1,000 shares of $10 par value common stock for $23 per share. Later, during the year, 200 shares of its treasury stock were sold to the public for $25 per share. In recording this sale, the company recorded a $400 gain on treasury stock that was shown as an “other income or expense” item on its income statement. Which of the following is true of this transaction? a. Net income for the year is correctly stated. b. Retained earnings is understated. c. Stockholders’ equity is correctly stated. d. The treasury stock account is understated. e. Contributed capital is overstated. c; Hard 86. On February 2, Alfred Corporation issues 900 shares of $75 par value preferred stock for $80 per share. The stock has a dividend rate of 5 percent. On April 5, Alfred issues 500 more shares of this stock for $82 per share. Alfred pays dividends on October 9. Which of the following is the total amount of dividends paid by Alfred on its preferred stock? a. $5,000 b. $5,250 c. $5,650 d. $6,000 e. $7,500 b; Moderate 87. The entry made to record the repurchase of company’s own common stock includes a debit to: a. retained earnings. b. cash. c. common stock. d. treasury stock. e. loss on reacquisition– common stock. d; Easy

Hoyle, Financial Accounting 2.0

88. Haverty Company repurchases 350 shares of its common stock on November 10 for $20 per share. On December 19, it resells 200 shares for $18 per share. Which of the following is the journal entry made to record the sale of treasury stock, assuming Haverty has repurchased shares for the first time on November 10? a. Cash 3,600 Treasury Stock 3,600 b. Cash 3,600 Capital in excess of cost – treasury stock 400 Treasury Stock 4,000 c. Cash 4,000 Treasury Stock 4,000 d. Cash 3600 Common Stock 3,600 e. Cash 3,600 Retained Earnings 400 Treasury Stock 4,000 e; Moderate 89. A company has 100,000 shares of $10 par value of common stock authorized. The company sells 10,000 shares for $22 per share. Later, the company buys back 1,000 shares for $25 per share. The company reissues 100 of these repurchased shares for $26. What amount is reported by the company as Capital in Excess of Par Value and Capital in Excess of Cost – Treasury Stock? Capital in Excess of Par Value Capital in Excess of Cost - Treasury Stock a. $100,000 $-0b. $120,000 $100 c. $100,000 $25,000 d. $220,000 $25,000 e. $120,000 $-0b; Moderate 90. Terrance Company reported $20,000 retained earnings at the beginning of the year. The company repurchased 200 shares at $50 per share during the year for the first time. Later, during the year the company sold 100 shares of these treasury shares for $45 per share. Terrance earned $15,000 net income during the year. The company also declared and paid dividends on 500 outstanding 4% preferred stock with $100 par value. Based on this information alone, compute the retained earnings balance at the end of the year. a. $32,000 b. $32,500 c. $34,500 d. $35,000 e. $37,500 b; Moderate

Hoyle, Financial Accounting 2.0

Fill in the blanks 91. _____ represents the issued shares of a corporation’s own stock which have been reacquired. Treasury stock; Easy 92. _____ represents the shares which receive dividends and other preferences over common stock. Preferred stock; Easy Problems 93. Montgomery Corporation issues 700 shares of preferred stock on January 8, 2019 for $200 per share. The stock has a par value of $150 and a dividend rate of 7 percent. a. Record the issuance of the preferred stock. Cash

140,000 Preferred Stock Capital in Excess of Par Value

105,000 35,000

b. Determine the dividend payment to be made in 2019 on preferred stock. $7,350 Moderate

Hoyle, Financial Accounting 2.0

94. Saterwine Company began 2017 with 30,000 shares of stock issued. In March, Saterwine repurchased 1,000 of its own shares for $47 per share. In August, it reissued 300 shares of treasury stock for $50 per share. In December, it reissued the remaining 700 shares for $45 per share. a. Record the repurchase of 1,000 of its shares by Saterwine in March. Treasury Stock Cash

47,000 47,000

b. Record the reissuance of 300 shares in August. Cash

15,000 Treasury Stock Capital in Excess of Cost—Treasury Stock

14,100 900

c. Record the reissuance of 700 shares in December. Cash Capital in Excess of Cost—Treasury Stock Retained Earnings Treasury Stock Moderate

31,500 900 500 32,900

Section 4 True/False Questions 95. Dividends are typically taxed at a lower rate than most other types of income. True; Easy 96. Cumulative preferred stock indicates that any unpaid dividends on these shares must be met before dividends can be distributed to the owners of common stock. True; Easy 97. A dividend of $30,000 declared and paid will reduce net income by $30,000. False; Easy 98. The date of record is the date on which a corporation mails checks for the amount of dividend to stockholders. False; Easy 99. The ex-dividend date is the first date after a dividend declaration when a new investor will not be eligible for a dividend. True; Easy

Hoyle, Financial Accounting 2.0 100. A journal entry for dividend is required on the date of record, but not on the date of declaration. False; Easy 101. A journal entry for dividend is required on both the date of declaration and date of payment. True; Easy 102. Hamilton Corporation holds non-cumulative preferred stock. If Hamilton has not paid dividend to the preferred shareholders in 2 years, the preferred dividends are said to be “in arrears.” False; Easy 103. A stock dividend increases the number of shares of stock held by each individual stockholder. True; Easy 104. Issuance of stock dividends are recorded as a debit to common stock and a credit to retained earnings. False; Easy 105. The issuance of a stock dividend by a corporation does not impact its assets or liabilities. True; Easy 106. Arnold Corporation issues a 10% stock dividend on its $2 par value common stock when the stock’s market value is $10 per share. Arnold had 1,000 shares issued prior to the dividend. To record the issuance of stock dividend, retained earnings should be debited for $1,000. True; Moderate Multiple Choice Questions 107. The date on which a liability is recorded for a dividend payment is the: a. date of declaration. b. date of record. c. ex-dividend date. d. date of payment. e. date of balance sheet. a; Easy

Hoyle, Financial Accounting 2.0

108. Other things being constant, the market price of a stock decreases on the: a. date of declaration. b. date of income statement. c. ex-dividend date. d. date of payment. e. date of balance sheet. c; Easy 109. Dividend in arrears are reported in the: a. statement of retained earnings. b. statement of stockholders equity. c. income statement. d. notes to financial statement. e. liability section of balance sheet. d; Easy 110. On January 1, 2018, the board of directors of XYZ declared a $1.00 per share cash dividend with the date of record being January 16 and the date of payment being January 29. Payment checks are actually received by the owners on February 9. On January 1, 2018, the company has 100,000 shares authorized, 30,000 shares issued and 25,000 shares outstanding. On a statement of retained earnings for 2018, how much should the company show as “Dividends?” a. $100,000 b. $25,000 c. $30,000 d. $33,000 e. $8,000 b; Moderate 111. At the end of Year One, a company has 100,000 shares authorized and 22,000 shares issued and outstanding. The same company has 20,000 shares of authorized preferred stock and 7,000 shares issued and outstanding. The preferred stock has a $2 per share per year noncumulative dividend. The dividend is paid on the preferred stock in Year One. However, no dividend is paid in Year Two or Year Three. Assume no additional shares were issued during that period. What liability does the company report on its balance sheet as of December 31, Year Three? a. $-0b. $14,000 c. $28,000 d. $58,000 e. $116,000 a; Moderate

Hoyle, Financial Accounting 2.0

112. Fredrick Corporation has 1,000 shares of $100 par value preferred stock outstanding with a dividend rate of 5 percent. In addition, the company has 20,000 shares of $1 par value common stock outstanding. Fredrick did not pay dividends in 2014, but is planning to pay a dividend of $18,000 in 2015. If the preferred stock is non-cumulative, what amount of the dividend will be distributed to the preferred shareholders in 2015? a. $5,000 b. $10,000 c. $18,000 d. $9,000 e. $4,000 a; Moderate 113. Fredrick Corporation has 1,000 shares of $100 par value preferred stock outstanding with a dividend rate of 5 percent. In addition, the company has 20,000 shares of $1 par value common stock outstanding. Fredrick did not pay dividends in 2014, but is planning to pay a dividend of $18,000 in 2015. If the preferred stock is cumulative, what amount of the dividend will be distributed to the preferred shareholders in 2015? a. $5,000 b. $10,000 c. $18,000 d. $9,000 e. $4,000 b; Moderate 114. A stock split: a. decreases the number of shares outstanding. b. decreases the par value of share. c. increases the par value of share. d. increases retained earnings balance. e. increases market price of stock. b; Easy 115. Which of the following is a reason for companies to declare stock dividend? a. To avoid hostile takeover b. To raise money from public c. To reduce debt equity ratio d. To increase return on equity e. To reduce market price of the stock e; Easy

Hoyle, Financial Accounting 2.0

116. Under which of the following circumstances the percentage ownership of a shareholder will remain same? a. Reacquired common stock b. Exchanged land for common stock c. Issued cumulative preferred stock d. Declared stock dividend e. Reissued treasury stock d; Moderate 117. Which of the following balances is affected by stock dividend? a. Retained Earnings b. Treasury Stock c. Capital in Excess of Cost—Treasury Stock d. Revenue e. Cash a; Moderate 118. The journal entry to record stock dividend will require a debit to: a. cash. b. common stock. c. dividend payable. d. retained earnings. e. treasury stock. d; Easy 119. U.S. GAAP requires companies to record stock dividend at par value when: a. stock dividend is in excess of 20–25 percent of the authorized shares. b. stock dividend is in excess of 20–25 percent of the outstanding shares. c. stock dividend is in excess of 50-55 percent of the outstanding shares. d. stock dividend is declared to avoid hostile takeover. e. stock dividend is declared to increase the stock’s market price. b; Easy

Hoyle, Financial Accounting 2.0

120. A company has 20,000 shares of common stock issued and outstanding. These shares have a par value of $10 per share but were issued for $17 per share. When the fair market value of the shares is $21 per share, the company declares and issues a 50% stock dividend. The company reported this stock dividend as a small stock dividend when it should have been reported as a large stock dividend. At the end of the year, the company reports total assets of $800,000, total liabilities of $200,000 total retained earnings of $50,000, and total stockholders’ equity of $600,000. Which of the following statements is true? a. Assets are overstated by $110,000 b. Stockholders’ equity is understated at $140,000 c. Common stock should have been credited for $110,000 d. Retained earnings should have been $160,000 e. Capital in excess of par value is overstated by $250,000 d; Hard Fill in the blanks 121. If preferred stock is _____, then dividend payments that are missed must be made up before dividends can be paid to common stockholders. cumulative; Easy 122. A small stock dividend is debited to retained earnings at the _____ value of the common stock. market or fair or current; Easy 123. A large stock dividend is debited to retained earnings at the _____ value of the common stock. par; Easy 124. A company’s board of directors approves to pay dividend on date of _____. declaration; Easy 125. After the _____ date, an investor is ineligible to participate in a dividend. ex-dividend; Easy

Hoyle, Financial Accounting 2.0

Problems 126. Zephyr Company declares a $2.00 per share dividend on its $.30 par value common stock. There are 17,000 shares of common stock issued and 2,000 shares in the treasury on both the date of declaration and the date of record. a. Record the journal entry needed on the date of declaration. Retained Earnings Dividends Payable b. Record the payment of the dividend. Dividends Payable Cash

30,000 30,000

Easy Section 5 True/False Questions 127. Return on equity reflects the profitability of a business based on the size of the owners’ claim to net assets. True; Easy 128. Return on equity is calculated by dividing net income by average stockholders’ equity. True; Easy 129. Knight Industries began the year with stockholders’ equity of $980,000 and ended the year with $1,000,000 in stockholders’ equity. Net income for the year totaled $100,000. Knight’s return on equity is 10.1%. True; Easy 130. Return on equity is used to help predict future stock prices. False; Easy 131. A company’s price-earnings ratio is computed by dividing the current price of a company’s stock by its earnings per share. True; Easy 132. Basic EPS is computed by dividing a company’s net income less any preferred dividends paid by the weighted average number of outstanding shares of common stock. True; Easy 133. All publicly traded companies must disclose basic EPS. True; Easy

Hoyle, Financial Accounting 2.0 134. Diluted EPS reflect the possible decrease in EPS if outstanding convertible items are actually turned into common stock. True; Easy 135. Diluted EPS is typically a larger number than basic EPS. False; Easy Multiple Choice Questions 136. Which of the following is deducted from net income while computing basic EPS? a. Common stock dividend b. Preferred stock dividend c. Interest on bonds d. Tax expense e. Capital in excess of par b; Easy 137. Which of the following is considered while computing basic EPS? a. Convertible bonds b. Treasury stock c. Common stock d. Preferred stock e. Non-convertible bonds c; Easy 138. A company has 100,000 shares of common stock outstanding on January 1 and issued 40,000 more common shares on October 1. Net income for the year is reported as $600,000. During the year, a $65,000 dividend was paid on common stock while a $105,000 dividend was paid on preferred stock. The market price of the common stock was $27.00 per share at the end of the year. What is the P/E ratio as of December 31? a. 6.91 b. 4.95 c. 6.31 d. 6.00 e. 7.63 d; Moderate

Hoyle, Financial Accounting 2.0

139. A company has 200,000 shares of authorized common stock and 40,000 shares outstanding on January 1, Year One. The company issues 10,000 more shares of common stock on April 1 and another 25,000 shares on July 1. Net income for the year is reported as $600,000. What is the earnings per share? a. $8 b. $10 c. $12 d. $13 e. $7 b; Moderate 140. A company ends Year One with 100,000 shares of common stock and 30,000 shares of preferred stock outstanding. Net income for the year is reported as $400,000. During the year, the company paid a $1 per share cash dividend on its common stock and a $2 per share cash dividend on its preferred stock. The number of preferred shares and common shares outstanding did not change during the year. Determine the company’s basic earnings per share. a. $2.13 per share b. $2.50 per share c. $3.40 per share d. $4.00 per share e. $4.84 per share c; Moderate 141. A company ends Year One with 100,000 shares of common stock and 30,000 shares of preferred stock outstanding. Net income for the year is reported as $400,000. During the year, the company paid a $1 per share cash dividend on its common stock and a $2 per share cash dividend on its preferred stock. The number of preferred shares did not change during the year. The number of common shares at the beginning of the year was 80,000 and an additional 20,000 shares were issued on July 1. Determine the company’s basic earnings per share. a. $3.78 per share b. $3.84 per share c. $4.00 per share d. $4.44 per share e. $5.00 per share a; Moderate

Hoyle, Financial Accounting 2.0

142. A company should report diluted EPS if it: a. reissues treasury stock. b. has non-cumulative preferred stock. c. declares stock dividend. d. has any convertibles outstanding. e. declares a stock split. d; Easy 143. Pointer Inc. reported a net income of $60,000 during 2013. The company has a weighted average of 40,000 common shares outstanding. The company also had 10,000 convertible preferred stock. Compute the basic earnings per share. a. $1.09 per share b. $1.33 per share c. $1.20 per share d. $1.50 per share e. $4.00 per share d; Moderate 144. Investors anticipate movements in the market value of a stock using: a. return on equity. b. dividends per share. c. debt equity ratio. d. P/E ratio. e. dividend payout ratio. d; Easy Fill in the blanks 145. Return on equity is calculated by dividing a company’s _____ by its average stockholders’ equity. net income; Easy 146. A company only computes _____ earnings per share if it has certain instruments such as stock options. diluted; Easy

Hoyle, Financial Accounting 2.0

Problems 147. Hamilton Corporation ended the year with net income of $700,000. At the beginning of the year, Hamilton had common stock outstanding of 70,000 shares. On July 1, it issued 30,000 additional shares. During the year, Hamilton paid dividends to its preferred stockholders of $50,000. Calculate Hamilton’s Basic EPS. $7.65 per share Moderate 148. Ron Corporation reported a net income of $96,000 for 2015. On January 1, 2015, it had 35,000 shares of common stock outstanding. On April 1, 2015, it repurchased 4,000 of those shares. It has no preferred stock. On December 31, 2015, Ron’s stock was selling for $33 per share. Calculate Ron’s price-earnings ratio on 12/31/15? 11 Moderate 149. Wesley Corporation ended the year with revenues of $90,000 and expenses of $70,000. Its average stockholders’ equity for the year was $400,000. Calculate Wesley’s return on equity for the year? 5% Easy

Hoyle, Financial Accounting 2.0

Chapter 17 In a Set of Financial Statements, What Information Is Conveyed by the Statement of Cash Flows? Section 1 True/False Questions 1. Unlike other financial statements, numbers presented on the statement of cash flows do not come directly from ending T-account balances found in a general ledger. True; Easy 2. The statement of cash flows shows users how a company’s management acquired and used cash during a period. True; Easy 3. The presentation of a statement of cash flows is optional under U.S. GAAP. False; Easy 4. The income statement and statement of cash flows connect the beginning and ending balance sheets of a period. True; Easy 5. Cash equivalents include bank deposits and money orders. False; Easy 6. Operating activities typically involve the day-to-day operations of a company. True; Easy 7. A dry-cleaning company would show cash paid for purchasing land under operating activity section of the statement of cash flows. False; Easy 8. A company’s cash flow from operations is viewed as a good measure of its ability to prosper. True; Easy 9. Investing activities involve transactions surrounding liabilities and stockholders’ equity such as issuing common stock. False; Easy 10. A healthy, growing company is most likely to expect a negative cash flow from investing activities. True; Easy

2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0 11. A manufacturing company purchases a copyright for a song, which it wishes to use in its new advertising campaign, is an example of an investing activity. True; Easy 12. Paying back a long-term loan is an example of a financing activity. True; Easy 13. Both paying and receiving dividends is an example of a financing activity. False; Easy 14. A transaction which does not involve cash is typically not of interest to financial statement users. False; Easy 15. Appleforth Company buys equipment by signing a note payable. This transaction can either be shown in a separate schedule attached to the statement of cash flows or in the notes to the financial statements. True; Easy Multiple Choice Questions 16. Which of the following is an example of cash equivalents? a. Saving accounts b. Currencies c. Bank drafts d. Money orders e. Treasury bills e; Easy 17. Which of the following is true of statement of cash flows? a. It is not required to be presented under U.S. GAAP. b. It connects income statement and balance sheet. c. It is considered to be the least important financial statement by the investors. d. It classifies cash flows into three different activities. e. It uses ending T-account balances to determine the cash flows. d; Easy

2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

18. Which of the following statements is true? a. Stock dividends and stock splits are included in the financing activities section of the statement of cash flow. b. Growing companies normally expect cash flows from investing activities to be negative. c. Investing activities section activities result from the primary function of the business. d. Investors prefer to see a net outflow of cash from operating activities from year to year. e. In years when a large dividend is distributed or debt is settled, the net figure for financing activities is more likely to be positive. b; Easy 19. Rufus Corporation manufactures and sells bicycles. During the year, Rufus sold bicycles to customers and collected $8,000,000 in cash. Which type of activity does this transaction represents on a statement of cash flows? a. Operating b. Investing c. Selling d. Significant non-cash e. Promotion a; Easy 20. Rufus Corporation manufactures and sells bicycles. During the year, Rufus sold $500,000 worth of its $1 par value common stock to the public. Which type of activity does this transaction represents on a statement of cash flows? a. Equity b. Investing c. Financing d. Significant non-cash e. Operating c; Easy 21. Venus Corporation, a multi-designer store paid income tax of $100,000 during the year 2014. Under which section of the statement of cash flows will this amount appear? a. Operating activities b. Investing activities c. Financing activities d. Significant non-cash activities e. Contingent activities a; Easy

2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

22. Which of the following would be an operating activity for a grocer? a. Repaying a loan b. Borrowing money to buy inventory c. Buying a vehicle for personal use d. Selling a bag of sugar e. Whitewashing the shop d; Easy 23. In the year 2015, Ben Smith Corporation declared and paid $20,000 cash dividends to its preferred stockholders. In the statement of cash flows, Ben Smith will show this amount as an outflow for a(n): a. operating activity. b. investing activity. c. financing activity. d. contingent activity. e. brand building activity. c; Easy 24. In the year 2016, Suzie Corporation purchased a new building for its corporate headquarters. Where will the cash paid for this purchase appear on the statement of cash flows? a. Operating activities section b. Investing activities section c. Financing activities section d. Significant non-cash activities section e. Diversification activities section b; Easy 25. DreamWorks Corporation acquired a trademark in exchange for 3,000 shares of $1 par value common stock. Which of the following best describes this transaction? a. Operating activity b. Investing activity c. Financing activity d. Significant non-cash activity e. Intangible activity d; Easy 26. Which of the following is an example of a financing activity? a. Selling goods to customers for cash b. Issuing stock to the public c. Purchasing a franchise d. Received dividends from investments e. Paying interest on loan b; Easy

2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0 27. Which of the following is an example of an operating activity? a. Paying salaries to employees b. Distributing cash dividends c. Issuing common stock d. Repaying a loan e. Declaring a stock-split a; Easy 28. Which of the following is an example of an investing activity? a. Repurchasing common stock b. Retiring short-term debt c. Paying taxes d. Receiving interest e. Selling patents e; Easy 29. Which of the following would be considered a cash equivalent? a. Bank deposits b. Money orders c. Bank drafts d. Money market funds e. Currencies d; Easy 30. Which of the following are excluded while creating a statement of cash flows? a. Repaying long-term debt b. Issuing common stock c. Purchasing equipment d. Declaring a stock splits e. Borrowing money on a note c; Easy 31. Olsen Company sells paper products to restaurants and stores across the country. Recently Olsen purchased a new machine for $100,000 by paying cash of $20,000 and signing a note payable for the remainder. How is this transaction reported on the statement of cash flows? a. Financing activity—outflow of $100,000 b. Financing activity—outflow of $20,000 c. Operating activity— inflow of $20,000 d. Investing activity—outflow of $100,000 e. Investing activity—outflow of $20,000 e; Easy

2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

Fill in the blanks 32. _____ are short-term, highly liquid investments with a maturity of 90 days or less that are readily convertible into known amounts of cash. Cash equivalents; Easy 33. _____ involve cash receipts and disbursements arising from transactions involving assets that are not part of the day-to-day operations of the reporting organization. Investing activities; Easy 34. _____ involve cash receipts and disbursements arising for the primary activities of the reporting organization. Operating activities; Easy 35. _____ involve cash receipts and disbursements arising from transactions involving liabilities and owners’ equity that are not part of day-to-day operations of the reporting organization. Financing activities; Easy 36. The _____ presents the cash receipts and disbursements of an organization to explain the changes in cash that occurred during the year. statement of cash flows; Easy Short Answer Questions 37. Explain the importance of a statement of cash flows. Examination of a statement of cash flows is necessary to complete the portrait presented of a reporting entity by financial accounting and the rules of U.S. GAAP. Some decision makers view it as the most important of the financial statements. They are able to see how corporate officials managed to get and then make use of the ultimate asset: cash. The acquisition of other assets, the payment of debts, and the distribution of dividends inevitably leads back to a company’s ability to generate sufficient amounts of cash. Consequently, presentation of a statement of cash flows is required by U.S. GAAP for every period in which an income statement is reported. The purpose of the statement of cash flows is virtually self-evident: It reports the cash receipts (cash inflows) and the cash disbursements (cash outflows) to explain the changes in cash that took place during the year. Easy

2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

38. Define “cash” and “cash equivalents.” Cash consists of coins, currencies, bank deposits (both checking accounts and savings accounts) and some negotiable instruments (money orders, checks, and bank drafts). Cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash. They are so near their maturity date that significant changes in value are unlikely. Only securities with original maturities of ninety days or fewer are classified as cash equivalents. Cash equivalents held by most companies include treasury bills, commercial paper, and money market funds. Easy 39. What are the three categories of a statement of cash flow? Explain the type of transactions that are reported under each of them. The three categories of a statement of cash flows are: 1. Operating activities: It is used to disclose cash receipts and disbursements arising from the primary activities of the reporting organization. 2. Investing activities: It is used to disclose cash receipts and disbursements arising from an asset transaction other than one relating to the primary activities of the reporting organization. 3. Financing activities: It is used to disclose cash receipts and disbursements arising from a liability or stockholders’ equity transaction other than one relating to the primary activities of the organization. Moderate Section 2 True/False Questions 40. FASB prefers companies to use the indirect method of determining cash flows from operations. False; Easy 41. A majority of companies calculate their cash flows from operations using the indirect method. True; Easy 42. Under direct method, noncash items like depreciation are not included when an income statement is converted to the cash flows from operating activities. True; Easy

2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0 43. Nonoperating gains must be turned into its cash component and subtracted from net income when using the direct method. False; Easy 44. Timing differences occur between recording a transaction and the collection or disbursement of cash because of the rules of accrual accounting. True; Easy 45. Connector accounts are income statement accounts used to bridge the gap between accrual and cash accounting. False; Easy 46. If a connector account is an asset and its balance increases during the year, the business will have more cash. False; Easy 47. Inventory is an example of a connector account. True; Easy 48. If sales for the year totaled $3,000 and accounts receivable increased by $200 during the year, then cash collected from customers would be $2,800. True; Easy 49. When rent expense for the year totals $90,000 and rent payable increases by $5,000 during the year, cash paid for rent will be $95,000. False; Easy Multiple Choice Questions 50. Which of the following is true of the method used to determine the cash flows from operating activities? a. FASB prefers the indirect method over the direct method. b. Under direct method, the calculation starts with the amount of net income. c. Noncash expenses are considered in the calculation when using direct method. d. The procedures involved in direct method can be used to calculate the cash flows from financing activities. e. Both direct and indirect method arrives at the same total of operating cash flow. e; Easy

2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

51. Which of the following would appear in cash flows from operations prepared using the direct method? a. Cash received from issuance of stock b. Cash paid for depreciation c. Cash paid for inventory purchases d. Cash dividends paid to shareholders e. Cash paid to repurchase common stock c; Easy 52. Merlin Corporation reported revenue of $95,000 for 2019. Accounts receivable on 1/1/2019 were $20,000 and accounts receivable on 12/31/2019 were $14,000. Determine the amount of cash collecting by Merlin during 2019. a. $89,000 b. $95,000 c. $115,000 d. $81,000 e. $101,000 e; Easy 53. Sewlyn Company incurred tax expense of $45,000 during 2016. Sewlyn reported taxes payable of $7,000 on 1/1/2016 and taxes payable of $10,000 on 12/31/2016. In reporting its statement of cash flows for the year, which of the following amounts should Sewlyn show as its cash paid for taxes? a. $42,000 b. $35,000 c. $48,000 d. $52,000 e. $55,000 a; Easy 54. Which of the following is a connector account? a. Bond Payable b. Common Stock c. Prepaid Rent d. Retained Earnings e. Accumulated Depreciation c; Easy

2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

55. Which of the following would cause cash received from customers to be greater than the sales revenue? a. Increase in interest expense b. Increase in accounts payable c. Decrease in accounts receivable d. Decrease in noncash transaction e. Decrease in the discount received c; Easy 56. Lira Company reported the following account balances on its income statement: cost of goods sold—$320,000, rent expense—$30,000, and salary expense—$90,000. During the year, prepaid rent went up by $5,000, accounts payable went down by $4,000, salary payable went up by $3,000, and inventory went down by $2,000. Determine the amount of cash paid for purchasing inventory during the year. a. $322,000 b. $326,000 c. $318,000 d. $320,000 e. $314,000 a; Moderate 57. Lira Company reported the following account balances on its income statement: cost of goods sold—$320,000, rent expense—$30,000, and salary expense—$90,000. During the year, prepaid rent went up by $5,000, accounts payable went down by $4,000, salary payable went up by $3,000, and inventory went down by $2,000. Determine the amount of cash paid for rent. a. $25,000 b. $28,000 c. $35,000 d. $30,000 e. $31,000 c; Easy 58. Lawrence Company reported the following account balances on its income statement: cost of goods sold—$500,000, rent expense—$48,000, and salary expense—$75,000. During the year, prepaid rent went down by $10,000, accounts payable went down $22,000, salary payable went up $18,000, and inventory went up by $14,000. Determine the amount of cash paid for salaries. a. $93,000 b. $57,000 c. $75,000 d. $18,000 e. $92,000 b; Easy

2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0 59. A company reports its cash flows from operating activities using the direct method. On its income statement, the company reports rent expense of $60,000. This relates to two different buildings. On Building One, prepaid rent went down by $9,000, while on Building Two, rent payable went up by $5,000 during the year. How much total cash did the company pay for rent during the year? a.$46,000 b.$56,000 c.$64,000 d.$74,000 e. 60,000 a; Moderate 60. A company reported the following account balances on its income statement: revenues— $500,000, cost of goods sold—$300,000, depreciation expense on equipment—$50,000, and gain on sale of equipment—$23,000. The balance sheet has accounts including noncurrent notes payable going up by $23,000, accounts payable going down by $6,000, accounts receivable going down by $17,000, and inventory going up by $3,000. Determine cash flows from operating activities for the year. a. $174,000 b. $223,000 c. $158,000 d. $231,000 e. $208,000 e; Moderate 61. James Corporation began the year with $745,000 in accounts receivable. Sales for the year amounted to $3,490,000. The company ended the year with $890,000 in accounts receivable. Determine the amount of cash James collected from its customers during the year. a. $4,235,000 b. $3,490,000 c. $3,635,000 d. $3,345,000 e. $2,600,000 d; Moderate 62. During the year, Frieda Company sold goods costing $33,000. During the year, Frieda’s inventory increased by $6,000, while, its accounts payable decreased by $2,000. Determine the amount of cash Frieda paid for purchases during the year. a. $37,000 b. $41,000 c. $29,000 d. $25,000 e. $33,000 b; Moderate

2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0 63. Xander Company began the year with $100,000 in inventory and $210,000 in accounts payable. During the year, Xander incurred cost of goods sold of $1,200,000. Xander ended the year with $105,000 in inventory and $200,000 in accounts payable. How much cash did Xander pay for purchases during the year? a. $1,205,000 b. $1,195,000 c. $1,215,000 d. $1,200,000 e. $1,210,000 c; Moderate Fill in the blanks 64. The _____ converts the individual items on an income statement into the amount of cash received or spent on operating activities. direct method; Easy 65. _____ are used to convert accrual accounting figures to the change taking place in the cash balance as a result of these transactions. Connector accounts; Easy Problems 66. Krelon Corporation reported the following account balances on its income statement for 2012: revenue—$23,000; cost of goods sold—$12,000; interest expense—$1,000; depreciation expense—$3,000. During the year, Krelon’s accounts receivable decreased by $9,000; inventory increased by $2,000; interest payable decreased by $500; and accounts payable increased by $400. Prepare the operating section of Krelon’s statement of cash flows using the direct method. Krelon Company Statement of Cash Flows for 2016, Operating Activities Reported by Direct Method Cash Collected from Customers Cash Paid to Acquire Inventory Cash Paid for Interest Cash Generated by Operating Activities Hard

$ 32,000 (13,600) (1,500) $16,900

2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

67. Kristin Company presented the following income statement for 2013: Sales Revenue Salary Expense Insurance Expense Depreciation Expense Loss on Sale of Equipment Net Income

$900,000 (500,000) (160,000) (70,000) (14,000) $156,000

Other information • Accounts receivable went down during the year by $12,000. • Salary payable went up during the year by $7,000. • Prepaid insurance went up during the year by $4,000. Prepare the cash flows from operating activities for the statement of cash flows as presented by the direct method. Kristin Company Statement of Cash Flows for 2013, Operating Activities Reported by Direct Method Cash Collected from Customers Cash Paid to Employees Cash Paid for Insurance Cash Generated by Operating Activities Hard

$ 912,000 (493,000) (164,000) $255,000

Section 3 True/False Questions 68. The indirect method of determining cash flows from operating activities begins with net income for the period. True; Easy 69. Depreciation is subtracted from net income to arrive at cash flows from operations using the indirect method. False; Easy 70. Nonoperating gains and losses are ignored when computing cash flows from operations using the indirect method. False; Easy 71. An increase in an asset connector account is subtracted from net income when determining cash flows from operations using the indirect method. True; Easy 2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

72. In the year 2014, Abbott Company generated net income of $8,000. During the year, Abbott’s accounts receivable decreased by $400. Abbott’s cash flows from operations would be $8,400. True; Easy 73. An increase in a liability connector account is a subtracted from net income when determining cash flows from operations using the indirect method. False; Easy 74. Foster Corporation’s interest payable account decreased by $600 this year. Foster should subtract this $600 from net income when preparing its cash flows from operating activities using the indirect method. True; Easy 75. Dividends received, like dividends paid, are classified under financing activities section of the statement of cash flow. False; Easy 76. Under U.S. GAAP, cash receipt from interest and dividends is considered an investing activity. False; Easy Multiple Choice Questions 77. Which of the following is true of the indirect method used to determine the cash flow from operating activities? a. The indirect method results in a greater amount of cash flow than the direct method. b. FASB prefers the use of indirect method. c. The indirect method starts with the amount of net income. d. Majority of the reporting companies in U.S. uses the direct method. e. Nonoperating gains and losses are ignored while computing cash flows from operations. c; Easy 78. Which of the following would be subtracted from net income when computing cash flows from operating activities using the indirect method? a. An increase in rent payable for the year b. Depreciation expense c. A decrease in inventory for the year d. An increase in prepaid rent for the year e. A loss on the sale of equipment d; Easy

2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

79. Which of the following would be added to net income when computing cash flows from operating activities using the indirect method? a. An increase in accounts receivable b. A decrease in insurance payable c. A gain on the sale of land d. An increase in prepaid rent e. Depreciation expense e; Easy 80. In the year 2015, Finlay Company reported net income of $925,000. Net income includes loss on the sale of equipment of $21,000 and depreciation expense of $32,000. Accounts payable increased by $29,000 during the year. What amount of cash did the company generate from its operating activities? a. $943,000 b. $965,000 c. $1,007,000 d. $949,000 e. $907,000 c; Moderate 81. Westlake Corporation reported net income of $30,000 for 2012. The beginning balance of accounts receivable and accounts payable was $2,000 and $1,900 respectively. The ending balance of accounts receivable and accounts payable was $1,400 and $2,100 respectively. Determine Westlake’s cash flows from operating activities using the indirect method? a. $30,800 b. $28,200 c. $30,600 d. $29,600 e. $30,000 a; Moderate 82. Steve Company reported net income of $109,000 for 2016. Taxes payable and prepaid rent had a beginning balance of $17,000 and $4,000 respectively. The ending balance of taxes payable and prepaid rent was $10,000 and $4,500 respectively. Determine Steve’s cash flows from operating activities using the indirect method? a. $116,500 b. $102,500 c. $109,000 d. $115,500 e. $101,500 e; Moderate

2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

83. Which of the following is an operating activity? a. Paying dividends b. Issuing common stock c. Paying interest d. Repurchase of common stock e. Proceeds from long-term debt c; Easy 84. The Hamster Company uses the indirect method to determine its cash flows from operating activities. Hamster reported net income of $400,000 for the year. Depreciation expense is $60,000 and gain on sale of equipment is $20,000. During the year, accounts receivable went up by $2,000 and accounts payable fell by $7,000. Determine the amount of cash generated by operating activities? a. $449,000 b. $435,000 c. $445,000 d. $431,000 e. $400,000 d; Easy 85. Andrew Company uses the indirect method to determine its cash flows from operating activities. Andrew reported net income of $300,000 for the year. Depreciation expense is $30,000 and gain on sale of equipment is $50,000. Determine the amount of cash generated by operating activities? a. $220,000 b. $280,000 c. $320,000 d. $380,000 e. $330,000 b; Easy 86. Edgar Corporation reported net income of $380,000 for the year. This figure included gain on sale of copyright of $22,000. During the year, Edgar’s accounts payable increased by $19,000 and its prepaid rent increased by $10,000. Determine Edgar’s cash flows from operating activities for the year using the indirect method. a. $349,000 b. $393,000 c. $373,000 d. $411,000 e. $367,000 e; Easy

2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

87. Bulmer Company generated revenues of $1,000,000 and incurred expenses of $850,000 in the year 2016. Depreciation expense for the year was $40,000. During the year, accounts payable went up by $6,000, taxes payable fell by $4,000, accounts receivable fell by $11,000, and inventory went up by $5,000. Determine the cash flows from operating activities. a. $206,000 b. $128,000 c. $198,000 d. $104,000 e. $208,000 c; Moderate 88. Kenya Company reported net income of $83,000 for 2011. During the year, Kenya’s rent payable increased by $2,000 and its accounts receivable increased by $5,000. Calculate Kenya’s cash flows from operation using the indirect method. a. $85,000 b. $81,000 c. $86,000 d. $80,000 e. $90,000 d; Moderate Fill in the blanks 89. Under indirect method, all _____ and nonoperating items within net income are eliminated to arrive at the cash flow from operating activities. noncash; Easy 90. The indirect method follows the same procedures as the direct method except that it begins with _____ rather than the business’s entire income statement. net income; Easy

2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

Problems 91. Creole Corporation reported net income of $25,000 for 2017. Depreciation expense for the year is $1,200. During the year, Creole’s accounts receivable increased by $1,000; inventory increased by $800; salary payable increased by $300; and accounts payable decreased by $1,200. Prepare the operating section of Creole’s statement of cash flows using the indirect method.

Creole Corporation Statement of Cash Flows for 2017, Operating Activities Reported by Indirect Method Net income $25,000 Eliminate: Depreciation Expense +1,200 Adjust Revenues and Expenses from Accrual Accounting to Cash: Increase in Accounts Receivable (1,000) Increase in Inventory (800) Decrease in Accounts Payable (1,200) Increase in Salary Payable +300 Cash Generated by Operating Activities $23,500 Moderate

2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

92. Axa Company prepared its income statement for Year 2016: Sales Revenue Salary Expense Insurance Expense Depreciation Expense Gain on Sale of Equipment Net Income

$900,000 (600,000) (70,000) (90,000) 14,000 $154,000

Other information: • Accounts receivable went up during the year by $13,000 • Salary payable went down during the year by $8,000 • Prepaid Insurance went down during the year by $5,000 Prepare the cash flows from operating activities for the statement of cash flows using the indirect method. Axa Company Statement of Cash Flows for 2016, Operating Activities Reported by Indirect Method Net income Eliminate: Depreciation Expense Gain on sale of Equipment Adjust Revenues and Expenses from Accrual Accounting to Cash: Increase in Accounts Receivable Decrease in Prepaid Insurance Decrease in Salary Payable Cash Generated by Operating Activities Moderate

$154,000 +90,000 (14,000)

(13,000) 5,000 (8,000) $214,000

Section 4 True/False Questions 93. An accountant can use the direct or indirect method to calculate cash flows from investing activities. False; Easy 94. To determine cash flows from investing activities, an accountant will usually start with the ledger balance of assets and liabilities (that are not operating) and investigate the individual transactions which occurred in the account during the year. True; Easy 2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

95. Amount received from selling land for cash would be a cash inflow from an investing activity. True; Easy 96. Accountants may have to replicate journal entries to determine the cash activity which occurred in an asset account (that is nonoperating asset) during the year. True; Easy 97. Selling building for a gain would be shown as a cash outflow for investing activity in the statement of cash flow. False; Easy 98. The primary reason for a decrease in accumulated depreciation would be the disposal of the related asset. True; Easy 99. Purchasing a patent would be shown as a cash inflow from investing activity in the statement of cash flow. False; Easy 100. Financing activities are not part of an organization’s central activities and involve either an asset or a liability account. False; Easy 101. Paying off bonds payable would be shown as a cash outflow for financing activity in the statement of cash flow. True; Easy 102. During the year, Wigandt Company paid dividends of $10,000. This would be classified as an outflow for financing activity. True; Easy

Multiple Choice Questions 103. Which of the following would be an outflow for financing activity? a. Purchasing treasury stock b. Receiving dividends c. Purchase of a patent d. Purchasing inventory e. Paying interest on a note payable a; Easy

2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

104. Equipment with an original cost of $80,000 and a book value of $60,000 is sold at a loss of $6,000. What is the amount of cash received on the sale of the equipment? a. $54,000 b. $60,000 c. $74,000 d. $80,000 e. $66,000 a; Easy 105. A building was bought on October 1, 2013 for $500,000 and is depreciated using the straight-line method over a life of 20 years with an expected residual value of $20,000. On May 1, 2015, the building is sold for a loss of $17,000. Determine the amount of cash inflow from investing activities from this transaction. a. $415,000 b. $445,000 c. $448,000 d. $452,000 e. $409,000 b; Moderate 106. Which of the following is an outflow for an investing activity? a. Purchase of treasury stock b. Payment of dividends c. Repayment of a loan d. Purchase of equipment e. Payment to employees d; Easy 107. Goins Company began the year with a notes payable balance of $29,000. During the year, Goins borrowed an additional $10,000 and repaid $3,000 of the original amount. It also paid interest of $2,000. Which of the following is reported as inflows and outflows from financing activities relating to notes payable? a. Inflows: $10,000; Outflows: $3,000 b. Inflows: $12,000; Outflows: $3,000 c. Inflows: $10,000; Outflows: $5,000 d. Inflows: $12,000; Outflows: $5,000 e. Inflows: $10,000; Outflows: $2,000 a; Easy

2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

108. The following account balances appear on Martin Company’s balance sheet at the beginning and end of 2012: 1/1/2012 $ 30,000 380,000

Dividends Payable Retained Earnings

12/31/2012 $ 45,000 760,000

Net income for the year amounted to $450,000. Determine the amount of cash paid for dividends. a. $70,000 b. $45,000 c. $15,000 d. $55,000 e. $40,000 d; Easy 109. The following account balances appear on Logan Company’s balance sheet at the beginning and end of 2012:

Bonds Payable Treasury Stock Capital in Excess of Cost-Treasury Common Stock Capital in Excess of Par-Common Loss on Early Extinguishment of Bonds Payable

1/1/2012 12/31/2012 $100,000 $90,000 4,000 2,000 0 200 13,000 16,000 92,000 119,000 0 3,000

2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

110. The following account balances appear on Logan Company’s balance sheets at the beginning and end of 2012:

Bonds Payable Treasury Stock Capital in Excess of Cost-Treasury Common Stock Capital in Excess of Par-Common Loss on Early Extinguishment of Bonds Payable

1/1/2012 12/31/2012 $100,000 $ 90,000 4,000 2,000 0 200 13,000 16,000 92,000 119,000 0 3,000

During the year, bonds payable were repaid, but no new bonds were issued. Treasury stock was reissued and common stock was issued, both for cash. On the statement of cash flows, what amount should be reported as cash received from reissuance of treasury stock? a. $6,000 b. $2,000 c. $4,000 d. $2,200 e. $1,800 d; Easy 111. The following account balances appear on Logan Company’s balance sheets at the beginning and end of 2012:

Bonds Payable Treasury Stock Capital in Excess of Cost-Treasury Common Stock Capital in Excess of Par-Common Loss on Early Extinguishment of Bonds Payable

1/1/2012 12/31/2012 $100,000 $ 90,000 4,000 2,000 0 200 13,000 16,000 92,000 119,000 0 3,000

During the year, bonds payable were repaid, but no new bonds were issued. Treasury stock was reissued and common stock was issued, both for cash. On a statement of cash flows, what amount should be reported as cash received from the issuance of common stock? a. $27,000 b. $30,000 c. $28,000 d. $32,000 e. $3,000 b; Easy

2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0 112. Glider Corporation began the year with $200,000 in retained earnings. During the year, Glider reported net income of $36,000 and ended the year with $229,000 in retained earnings. Which of the following is the amount of cash dividends paid during the year? a. $9,000 b. $65,000 c. $36,000 d. $7,000 e. $10,000 d; Easy 113. The following account balances appear on Jenkins Company’s balance sheets at the beginning and end of 2017: 1/1/2017 12/31/2017 Equipment $540,000 $478,000 Accumulated depreciation 230,000 202,000 Jenkins sold a piece of equipment with an original cost of $109,000 for a gain of $2,000. The equipment had associated accumulated depreciation of $64,000. On a statement of cash flows, what amount should be reported as cash received on sale of equipment? a. $50,000 b. $43,000 c. $47,000 d. $45,000 e. $49,000 c; Moderate 114. The following account balances appear on Jenkins Company’s balance sheets at the beginning and end of 2017: 1/1/2017 12/31/2017 Equipment $540,000 $488,000 Accumulated depreciation 230,000 202,000 Jenkins sold a piece of equipment with an original cost of $109,000 for a gain of $2,000. The equipment had associated accumulated depreciation of $64,000. On the statement of cash flows, what amount should be reported as cash paid for equipment? a. $50,000 b. $57,000 c. $59,000 d. $60,000 e. $52,000 b; Moderate

2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

115. The following accounts appear on Jenkins Company’s balance sheets at the beginning and end of 2017: 1/1/17 12/31/17 Equipment $540,000 $478,000 Accumulated depreciation 230,000 202,000 Jenkins sold a piece of equipment with an original cost of $109,000 for a gain of $2,000. The equipment had associated accumulated depreciation of $64,000. On the statement of cash flows, what amount should be deducted from the net income as depreciation expense to arrive at cash flow from operating activities? a. $24,000 b. $34,000 c. $38,000 d. $28,000 e. $36,000 e; Moderate 116. The Tudor Company began 2019 with bonds payable of $55,000. Loss on the extinguishment of bonds payable of $3,000 was reported on Tudor’s income statement. During the year, new bonds were issued at their face value of $10,000. The ending balance in bonds payable was $20,000. Determine the amount of cash that was paid for the bonds that were extinguished. a. $32,000 b. $45,000 c. $42,000 d. $28,000 e. $22,000 c; Moderate Fill in the blanks 117. Reacquisition of treasury stock is classified under _____ section of the statement of cash flows. financing activities; Easy 118. Proceeds from sale of investments are classified under _____ section of the statement of cash flows. investing activities; Easy

2012 Flat World Knowledge, Inc.

Hoyle, Financial Accounting 2.0

Problems 119. Colgon Company reported retained earnings of $56,000 on January 1, 2017. During the year, treasury stock was reissued. The shares had originally been purchased for $10,000 but were reissued for $8,000. No “excess of capital over cost—treasury stock” account existed at the beginning of the year. Net income for the year amounted to $18,000. A cash dividend was declared and paid during the year. Retained earnings had a balance of $69,000 on December 31, 2017. How much should Colgon report on the statement of cash flows as an outflow for dividends paid? $3,000 Hard 120. Kennedy Company has a Building account that starts the year with a balance of $900,000 and ends the year with a balance of $1,200,000. The related Accumulated Depreciation account starts the year with a balance of $200,000 and ends the year with a balance of $180,000. The company has a Notes Payable account that started the year with a balance of $300,000 and ended with a balance of $400,000. You are given the following information: • A payment is made on a note payable during the year. • A building is bought for $200,000 cash and a note payable of $280,000. • Depreciation expense for the period is $60,000. • A building was sold during the year at a loss of $30,000. a. Determine cash flows from financing activities (indicate whether each is an inflow or an outflow). Outflow – Payment on Note Payable

$180,000

b. Determine cash flows from investing activities (indicate whether each is an inflow or an outflow). Inflow – Sale of Building Outflow – Purchase of Building Hard

$70,000 $200,000

2012 Flat World Knowledge, Inc.